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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
------ OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: SEPTEMBER 30, 1997
------ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-20179
RECYCLING INDUSTRIES, INC.
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(Exact Name of Registrant as Specified in its Charter)
COLORADO
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(State or Other Jurisdiction of Incorporation or Organization)
84-1103445
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(I.R.S. Employer Identification Number)
9780 S. MERIDIAN BLVD, SUITE 180,
ENGLEWOOD, CO 80112
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(Mailing Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (303) 790-7372
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act: COMMON STOCK, $.001
PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period as the
Registrant was required to file such reports) and, (2) has been subject to such
filing requirements for the past 90 days.
(1) Yes X No
---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of voting common equity held by
non-affiliates of the Registrant was approximately $87,713,226. This
calculation is based upon the closing price of the stock on December 31, 1997
of $6.00, and the number of shares held by non-affiliates, which was
14,618,871 shares on December 31, 1997.
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The number of shares of the Registrant's $.001 par value Common Stock
that was outstanding as of December 31, 1997 was 18,006,974.
Documents Incorporated by Reference: None
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TABLE OF CONTENTS
PART I PAGE
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Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . .12
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . .13
Item 4. Submission of Matters to a
Vote of Security Holders . . . . . . . . . . . . .13
Special Considerations Effecting the Company. . . . . .13
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters. . . . . . . . . .14
Item 6. Selected Financial Data . . . . . . . . . . . . . . . .15
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . .19
Item 8. Financial Statements and Supplementary Data . . . . F-1 - F-30
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . . .26
PART III
Item 10. Directors and Executive Officers of the Registrant. . .27
Item 11. Executive Compensation. . . . . . . . . . . . . . . . .30
Item 12. Security Ownership of Certain Beneficial
Owners and Management. . . . . . . . . . . . . . .32
Item 13. Certain Relationships and Related Transactions. . . . .33
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K. . . . . . . . . . . . . . . .34
Signatures . . . . . . . . . . . . . . . . . . . . . . . . .41
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STATEMENTS AND INFORMATION PRESENTED WITHIN THIS ANNUAL REPORT ON FORM 10-K FOR
THE YEAR ENDED SEPTEMBER 30, 1997 FOR RECYCLING INDUSTRIES, INC. AND ITS
SUBSIDIARIES (COLLECTIVELY THE "COMPANY") CONTAIN "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED. THESE FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY THE USE OF
PREDICTIVE, FUTURE-TENSE OR FORWARD LOOKING TERMINOLOGY, SUCH AS "BELIEVES,"
"ANTICIPATES," "EXPECTS," "ESTIMATES," "MAY," "WILL" OR SIMILAR TERMS.
FORWARD-LOOKING STATEMENTS ALSO INCLUDE PROJECTIONS OF FINANCIAL PERFORMANCE,
STATEMENTS REGARDING MANAGEMENT'S PLANS AND OBJECTIVES AND STATEMENTS CONCERNING
ANY ASSUMPTIONS RELATING TO THE FOREGOING. CERTAIN IMPORTANT FACTORS REGARDING
THE COMPANY'S BUSINESS, OPERATIONS AND COMPETITIVE ENVIRONMENT WHICH MAY CAUSE
ACTUAL RESULTS TO VARY MATERIALLY FROM THESE FORWARD-LOOKING STATEMENTS ARE
DISCUSSED BELOW UNDER THE CAPTION "SPECIAL CONSIDERATIONS."
PART I
ITEM 1 - BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
The Company, a Colorado corporation organized in 1988, is a full-service metals
recycler primarily engaged in the collection and processing of various ferrous
and non-ferrous metals for resale to domestic and foreign steel producers and
other metals producers and processors through its subsidiaries, Nevada
Recycling, Inc., Recycling Industries of Texas, Inc., Recycling Industries of
Missouri, Inc., Recycling Industries of Iowa, Inc., Recycling Industries of
Georgia, Inc. and Recycling Industries of South Carolina, Inc. The Company
operates seven metals recycling facilities in Nevada, Southern Texas, Missouri,
Georgia, Iowa, and South Carolina. The Company commenced its metals recycling
operations in May 1994 and has increased its revenues from approximately $4.8
million for the year ended September 30, 1994 to $62.4 million for the year
ended September 30, 1997.
During the fiscal year ended September 30, 1997, the Company completed two
acquisitions. In April 1997, Recycling Industries of Georgia, Inc. acquired
substantially all the assets of Addlestone Recycling, Inc., a metals recycling
company located in Georgia ("ARC"). In June 1997, Recycling Industries of South
Carolina, Inc. acquired substantially all the assets of Addlestone
International, Inc., a metals recycling company located in South Carolina
("AIC").
As described under the caption "Business-Events Subsequent to September 30,
1997," below. In December 1997, the Company acquired six additional scrap metals
recycling facilities and completed approximately $220 million in financing.
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DESCRIPTION OF BUSINESS
The Company recycles and processes ferrous and non-ferrous metals through a
process of sorting purchased metals according to their grade and quality and
using shredding or other methods to reduce and then selling the recycled or
processed metal to its customers.
MARKETS
THE FERROUS SCRAP MARKET
The largest portion of the Company's operations involves the collection,
processing and sale of prepared ferrous scrap to regional and local steel
mills operating electric arc furnaces ("EAFs") and to a lesser degree
integrated steel manufacturers who utilize ferrous scrap in their blast
furnace operations. All of the Company's facilities process ferrous scrap.
Demand for ferrous scrap is expected to increase as a number of new EAFs come
on line in the next several years. According to industry estimates, the
anticipated continuing increase in EAF production to an estimated 50 million
net tons by the year 2000 may cause ferrous scrap shortages, resulting in
further increases in processed ferrous scrap prices.
The geographic market for prepared ferrous scrap, tends to be within a 100 to
150 mile radius of the metals recycler, but may include shipments to Asian
markets via deep water port facilities located on the west coast of the
United States. The primary limitation on the geographic size of the supply
and resale markets in the metals recycling industry are the transportation
costs of raw and processed ferrous scrap. For this reason, metal scrap
processing facilities tend to be located on or near key rail, interstate
highway or water transportation routes.
The price for processed ferrous scrap is dependent upon the uniformity of the
processed material, its cleanliness and the non-ferrous content of the
processed material. The Company has established relationships with regional
steel producers for the sale of processed ferrous scrap and anticipates that
its national strategy will improve these relationships. Most steel producers
purchase processed ferrous scrap on a 30-day basis at the beginning of each
month, thereby locking in the price and quantity purchased for such period.
Net sales of processed ferrous scrap accounted for 67% of the Company's total
net sales for the year ended September 30, 1997.
THE NON-FERROUS SCRAP MARKET
The non-ferrous scrap market is less fragmented than the ferrous scrap market
due to the higher intrinsic values of the non-ferrous metals and the
available commodity market prices for these metals. The higher value of these
metals makes the shipment of prepared non-ferrous scrap economical over
longer distances, both domestically and internationally, than prepared
ferrous scrap. The primary consumers of prepared non-ferrous scrap are
domestic and foreign secondary smelters. Non-ferrous scrap is sold on a spot
market basis and includes copper, aluminum, brass, stainless steel, high
temperature alloys and other exotic metals. All of the Company's facilities
process non-ferrous scrap.
Sales prices for prepared non-ferrous scrap are cyclical in nature and are
driven by demand for finished non-ferrous metal goods and by levels of
general economic activity. Secondary smelters, utilizing processed
non-ferrous scrap as raw material, can produce non-ferrous metals at a lower
cost than primary smelters producing such metals from ore due to significant
savings in energy consumption, environmental compliance and labor costs.
These cost advantages and the long lead-time necessary to construct new
non-ferrous primary smelting capacity result in sustained demand and strong
prices for processed non-ferrous scrap during periods of high demand for
finished non-ferrous metal products. Net sales of non-ferrous materials
accounted for 23% of the Company's total net sales for the year ended
September 30, 1997.
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OPERATIONS
RAW SCRAP PURCHASING (SOURCE AND AVAILABILITY OF RAW MATERIALS)
Raw scrap metal is purchased by the ton from local sources, including
industrial plants, auto wreckers, demolition sites, military bases and
individual collectors. Typically the Company's raw materials are acquired in
the form of industrial waste steel, automobiles, structural steel from
demolition sites, appliances and other goods fabricated from steel and other
metals. The radius of the Company's supply area is approximately 100-150
miles from each facility. As of September 30, 1997, the Company operates its
own fleet of heavy trucks, which collect most of the purchased scrap
materials from industrial sources and auto wreckers.
Industrial and governmental sources of supply are pursuant to long term
contracts obtained through competitive bidding. Retail sources of supply are
paid spot prices for their obsolete items, such as appliances, at the
Company's facilities. The Company employs a full-time buyer at each facility
to manage existing and secure new industrial and governmental supply
accounts.
In purchasing raw materials, the Company inspects and rejects items that are
hazardous or contain hazardous materials, such as PCBs and automobile
batteries, although there can be no assurance that all hazardous materials
contained in the Company's raw materials will be discovered and rejected upon
inspection.
The continued availability of raw scrap is dependent upon, among other
things, the local economy, the level of demolition activity and the ability
to maintain supply relationships with local industrial and governmental
sources and automobile wreckers. Consistent with industry practice, the
Company has long-term supply arrangements with certain suppliers, although
none of these arrangements is material to the Company's operations.
SCRAP PROCESSING
Raw scrap metal is prepared for resale by sorting, cleaning, shearing and
shredding the metal into various sized pieces according to customer
specifications and market demand. Metal scrap that is ready for shipment to
the Company's customers is referred to as "prepared scrap."
The Company's sorting operations prepare the raw scrap for further processing
by a variety of methods according to the nature of the material (i.e.,
ferrous or non-ferrous), size and composition. Raw scrap is handled within
the Company's facilities using conveyor systems, front-end loaders, and
crane-mounted electromagnets. Through the sorting process, the Company
determines whether particular items require preliminary preparation before
being shredded.
The Company's processing operations at each of its subsidiaries are primarily
based upon the use of heavy-duty automotive shredders, which are capable of
shredding an entire automobile body into fist-sized pieces of metal within 45
seconds. Through the operation of shredders, ferrous and non-ferrous items
such as automobiles, appliances and vending machines are shredded into
various sized pieces according to customer specifications. The shredded
material is then magnetically separated into ferrous
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and non-ferrous metals and non-metallic items. The non-ferrous metals are
further separated utilizing "eddy current separators." The prepared ferrous
scrap is then sold to the Company's customers. The prepared non-ferrous
scrap is recovered as a mixture of aluminum, zinc die-cast, stainless steel
and copper and sold to the Company's customers who further process and
separate the mixture into constituent metals for resale. The non-metallic
portion of the shredded materials, referred to as shredder fluff, is disposed
of off site. The Company currently operates seven heavy-duty automotive
shredders with a monthly output capacity of approximately 44,750 tons of
prepared ferrous scrap.
Items which are too large or too heavy to be introduced into the shredder,
are reduced by either torching or shearing, utilizing crane-mounted alligator
or stationary guillotine shears, into smaller pieces according to customer
specifications or to a size and weight that may be further processed by
shredding. Generally, non-ferrous items prepared by these methods are sold to
the Company's customers without further processing.
Many non-ferrous metals, such as copper, brass, aluminum, stainless steel,
zinc die-cast, and insulated wire (aluminum and copper), are purchased by the
Company in a form that is not capable of being processed through a shredder.
Each of the Company's facilities processes these items through a variety of
methods, including manual and automatic sorting, shearing, torching, baling,
wire stripping or a combination of these methods. Prepared non-ferrous items
are either sold in their separated form or, copper refineries and smelters,
brass and bronze ingot manufacturers and other baled into low-density bales
in accordance with customer specifications.
SIGNIFICANT CUSTOMERS
Three of the Company's customers, The David J. Joseph Company, John Deere and
Aceros D.M., S.A. de C.V., accounted for approximately 49% of the Company's
revenues (19%, 12% and 11% respectively) for the year ended September 30,
1997. The loss of any one of these customers would have a material adverse
effect on the Company's business.
TRANSPORTATION
Transportation cost is a significant factor in the sale of processed scrap
and limits the geographic market in which processed ferrous scrap may be
sold. The Company ships processed ferrous and non-ferrous scrap to its
customers by truck, rail car and barges. The Company competes for available
shipping space on each of these methods of transportation. The Company has
not entered into any long-term contracts for transportation and the
unavailability of transportation may have a material adverse effect on the
Company's business.
COMPETITION
The scrap market is regionally competitive both in the purchase of raw scrap
and the sale of processed scrap. The Company competes for purchases of raw
scrap with numerous independent recyclers as well as with smaller scrap
yards. The Company's primary competition for processed scrap sales to its
customers are other regional or local metals recyclers.
The primary competitive factors in both the purchase and sale of scrap are
price, shipping costs and availability. In addition, the sale of processed
scrap is affected by the reliability of the metals recycler
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as a source of supply and the quality of its processed scrap. The Company
believes that its professional management team, quality of processed scrap
and emphasis on customer service enable it to compete favorably in its
markets. In addition, the Company believes that its national growth strategy
will increase its market exposure to large purchasers of processed scrap,
thereby giving it a competitive advantage relative to independent local and
regional metals recyclers.
The Company believes that, because of the economic, environmental and zoning
impediments to establishing a new metals recycling facility, few new
facilities will be constructed in the foreseeable future. In addition, the
Company does not believe that substitutes for processed ferrous scrap, such
as pre-reduced iron pellets, will have a significant impact on the demand for
ferrous scrap in the foreseeable future.
COMPLIANCE WITH ENVIRONMENTAL REGULATIONS
In the course of processing ferrous and non-ferrous metals, the Company
inspects all inbound material several times prior to and during processing to
screen out matter that may be considered "hazardous materials" under various
environmental laws. Such materials may be contained in unprocessed items
such as automobile bodies, light fixtures, construction debris, industrial
machinery and other items manufactured or fabricated primarily out of ferrous
or non-ferrous metals that are acquired and processed by the Company through
its shredder operations (the "feed stream"). While the Company screens the
feed stream for hazardous materials and rejects high-risk items such as
transformers and batteries, certain items in the feed stream may
inadvertently contain hazardous materials that end up in shredder fluff, the
by-product of shredder operation. The Company disposes shredder fluff at
municipal or private landfills on a truckload basis. Such disposal is not
pursuant to long-term contracts. To avoid classification as a hazardous
waste, shredder fluff must pass toxic leaching tests under certain
environmental laws. Because of the Company's screening of the feed stream and
periodic independent testing of the Company's facilities, it believes that
the shredder fluff produced from its operations does not contain hazardous
materials in excess of allowable limits and is suitable for disposal in
municipal or private landfills. Changes in the environmental laws or testing
methods with respect to shredder fluff, however, may change the
classification and availability of suitable disposal sites for shredder
fluff, resulting in significant additional expense to the Company. In
addition, hazardous materials through inadvertent spillage or improper
disposal may contaminate the premises upon which shredder operations are
conducted, although the Company believes that such contamination is unlikely.
The facilities and equipment of the Company are believed to be in substantial
compliance with the current requirements of all-applicable environmental laws
and regulations. There are no capital expenditures planned for new
environmental control equipment, although changes in environmental laws may
require such expenditures in the future. The Company cannot predict the
amount of such expenditures, if any, to comply with future changes in
environmental laws or whether such costs can be passed on to its customers
through increases in the price of processed scrap. Accordingly, there can be
no assurance that such costs will not have a material adverse effect on the
Company.
In addition to the costs of compliance, certain environmental laws may result
in liability arising out of the past operations of the Company's facilities,
whether or not such operations were lawful at the time, and create public
rights of action against the Company for environmental contamination.
Generally, if the Company's past or present operations cause environmental
damage, the Company may be subject to fines and may be required to remediate
the damage. Such costs may have a material adverse effect on the Company.
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The Company has implemented extensive procedures to ensure compliance with
applicable environmental laws. These procedures include screening all raw
scrap for hazardous materials prior to purchase and acceptance. Any
hazardous materials found in this process, such as automobile batteries,
suspected PCB contaminated transformers and equipment containing Freon, are
segregated and rejected. The Company refuses to accept any sealed or
closed-end barrels of material which may have contained a hazardous material.
In addition to the screening process, the Company retains environmental
engineering firms to perform periodic independent site reviews and sampling
to ensure continued operational compliance and detect any contamination that
may have occurred on the Company's facilities.
Prior to and as a condition to the consummation of any acquisition, the
target company's facilities will be tested and evaluated under the American
Society for Testing and Materials ("ASTM") standards for Phase I and Phase II
environmental site assessments to ascertain compliance with all environmental
laws and regulations. In addition, as many metals recyclers may be subject
to remediation liability with respect to their current or former sites as
well as off-site disposal of hazardous materials, the Company also performs
an ASTM Transaction Screen Process and regulatory action review to determine
the operating history of each target company and whether such companies have
been or are subject to any pending regulatory action for environmental
contamination.
SEASONALITY
The Company believes that its operations can be adversely affected by
protracted periods of inclement weather, which could reduce the volume of
material processed at its facilities. In addition, periodic maintenance
shutdowns by the Company's larger customers may have a temporary adverse
impact on the Company's operations.
EMPLOYEES
At September 30, 1997 the Company has approximately 271 full-time employees;
most of who are employed by the Company's wholly-owned subsidiaries.
Weissman has 45 employees of which 22 are represented by the International
Union, United Automobile, Aerospace and Agricultural Implement Workers of
America (the "UAW") under a four-year collective bargaining agreement which
expires on November 30, 2000.
The Company believes its relationship with its employees and the UAW is good.
EVENTS SUBSEQUENT TO SEPTEMBER 30, 1997
On December 5, 1997, the Company acquired for $3.7 million certain assets of
Grossman Bros. Company ("Grossman") located in Milwaukee, Wisconsin and
assumed $0.3 million of trade payables. The purchase price was financed in
part from the proceeds of the Credit Facility, Subordinated Debt and Sale of
Common Stock described below. In connection with the acquisition, the
Company entered into a net lease agreement and commercial offer to purchase
certain equipment and real estate owned by Grossman. The net lease expires on
December 5, 1999. Terms of the net lease call for the Company to pay a base
rent, plus additional pro rata occupancy costs such as building operating
costs, taxes and utilities. The commercial offer to purchase provides the
Company with a two-year option to purchase real property, leasehold
improvements and equipment for $4 million in the form of cash, stock or a
combination of both. The Company will continue the metals recycling
operations of Grossman.
On December 5, 1997, the Company acquired substantially all the assets of
Money Point Land Holding Corporation and Money Point Diamond Corporation
doing business as Jacobson Metal Company ("Jacobson"), headquartered in
Chesapeake, Virginia, for an aggregate purchase price of approximately
$19.9 million.
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The purchase price was financed with $16.9 million of proceeds in part from
the Credit Facility, Subordinated Debt and Sale of Common Stock and $3
million or 10,000 shares of the Company's Series E Redeemable Convertible
Preferred Stock (the "Series E Preferred"). The Series E Preferred are
subject to automatic conversion provisions at the earlier of a consolidation
or merger of the Company or on December 5, 2000. The Series E Preferred will
convert into the number of shares of the Company's Common Stock as determined
by dividing $3 million by the average market price for the ten trading days
preceding the date of conversion. Holders of the Series E Preferred are not
entitled to dividends. At any time prior to conversion, the Company shall
have the right to redeem the outstanding shares of Series E Preferred Stock,
in whole or in part, at a cash redemption price equal to $300 per share. The
company will continue the metals recycling operations of Jacobson.
On December 5, 1997, the Company acquired for $23.8 million substantially all
the assets of Brenner Companies Inc. (Brenner) located in Winston-Salem,
North Carolina. The purchase price was financed with $15.7 million of
proceeds in part from the Credit Facility, Subordinated Debt and Sale of
Common Stock, 14,000 shares of the Company's Series F 6 1/2% Redeemable
Convertible Preferred Stock (the "Series F Preferred"), valued at $3.5
million and 14,000 shares of the Company's Series G 6 1/2% Redeemable
Convertible Preferred Stock (the "Series G Preferred"), valued at $3.5
million and the assumption of $1.1 million in deferred compensation
liabilities. The Series F Preferred are subject to mandatory and automatic
conversion provisions at the earlier of a consolidation, merger or share
exchange of the Company or on December 5, 2000. The Series F Preferred will
convert into the number of shares of the Company's Common Stock as determined
by dividing $3.5 million plus an amount in cash equal to all accrued and
unpaid dividends to the date of conversion by the average market price for
the ten trading days preceding the date of conversion. The Series G Preferred
is subject to mandatory and automatic conversion provisions at the earlier of
a consolidation, merger or share exchange of the Company or on December 5,
2000. The Series G Preferred will convert into the number of shares of the
Company's Common Stock as determined by dividing $3.5 million plus an amount
in cash equal to all accrued and unpaid dividends to the date of conversion
by the greater of the average market price for the ten trading days preceding
the date of conversion or 2.5 times the average market price for the ten
trading days preceding the date of issuance. At any time prior to conversion,
the Company shall have the right to redeem the outstanding shares of Series F
and G Preferred Stock, in whole or in part, at a cash redemption price equal
to $250 per share plus all accrued and unpaid dividends to the date of
redemption. The company has agreed to register on or before December 5, 2000
the shares of Common stock received upon conversion of the Series F and G
Preferred, unless such shares may be sold by the holder thereof pursuant to
rule 144(k) promulgated under the Securities Act or any equivalent provision
then in effect. The company will continue the metals recycling operations of
Brenner.
On December 5, 1997, the Company acquired for $42 million substantially all
the assets of United Metals Recyclers, a North Carolina general partnership,
headquartered in Greensboro, North Carolina ("UMR"). The purchase price was
financed with $36 million in proceeds in part from the Credit Facility,
Subordinated Debt and Sale of Common Stock and 12,000 shares of the Company's
Series H 6% Secured Redeemable Convertible Preferred Stock (the "Series H
Preferred"), valued at $6 million. The Series H Preferred is subject to
mandatory and automatic conversion provisions at the earlier of a
consolidation, merger or share exchange of the Company or on December 5,
2000. Dividend payments on the Series H Preferred are secured by the Company's
50% interest in a scrap metals facility located in Smithfield, North
Carolina. The Series H Preferred will convert into the number of shares of
the Company's Common Stock as determined by dividing $6 million plus an
amount in cash equal to all accrued and unpaid dividends by the average
market price for the ten trading days preceding the date of conversion.
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At any time prior to conversion, the Company shall have the right to redeem
the outstanding shares of Series H Preferred Stock, in whole or in part, at a
cash redemption price equal to $500 per share plus all accrued and unpaid
dividends to the date of redemption. If the sale of the Series H Conversion
shares yields net proceeds of less than $5,689,000, the Company will pay the
difference to United. The Company has agreed to register on or before
December 5, 2000 the Series H Conversion shares, unless such shares may be
sold by the holder thereof pursuant to Rule 144(k) promulgated under the
Securities Act or any equivalent provision then in effect. The Company will
continue the metals recycling operations of United.
On December 5, 1997, the Company acquired for $31 million substantially all
the assets of Central Metals Company, Inc. (Central) located in Atlanta,
Georgia. The purchase price was financed with $20.7 million of proceeds in
part from the Credit Facility, Subordinated Debt, and Sale of Common Stock,
the issuance of 800,000 shares of the Company's Common Stock having an agreed
value of $12.50 per share or $10 million, and the assumption of $0.3 million
of current liabilities. The Company has guaranteed that the aggregate market
value of the 800,000 shares of Common Stock issued to Central will be at
least $10,000,000 on December 4, 1999. If the market value of the Common
Stock is less than $10,000,000, the Company will issue shares of Common Stock
to Central having a market value equal to the difference between $10,000,000
and the market value of the 800,000 shares of Common Stock initially issued
to Central. In connection with the acquisition, Central was issued warrants
to acquire up to 200,000 shares of the Company's common stock for $15.00 per
share, exercisable upon satisfaction of certain financial performance
conditions related to the operations of Recycling Industries of Atlanta, Inc.
(the "Contingent Warrants"). The exercise price per share of the Contingent
Warrants is subject to adjustment at the time of exercise so that the
aggregate spread between the exercise price of all Contingent Warrants and
the market value of the Common Stock received upon exercise of the Contingent
Warrants is not less than $1,000,000. The Company also granted "piggyback"
registration rights to the holders of the Contingent Warrants with respect to
the shares of Common Stock received upon their exercise. The Company will
continue the metals recycling operations of Central.
On December 8, 1997, the Company acquired for $25.5 million all the
outstanding Capital Stock of Wm. Lans Sons' Co. Inc., (Lans) and
substantially all of the real property and personal property of Idal Realty
Company (Idal), both entities located in South Beloit, Illinois. The
purchase was financed with $22 million of proceeds in part from the Credit
Facility, Subordinated Debt and Sale of Common Stock and Series I Redeemable
Convertible Preferred Stock (the "Series I Preferred") valued at $3.5
million. The Series I Preferred is subject to automatic and mandatory
conversion provisions in the event of a consolidation or merger, to provide
funding for indemnification liabilities, to provide funding for remediation
costs or on December 8, 1999. The Series I Preferred will convert into the
number of shares of the Company's Common Stock as determined by dividing
$3.5 million, plus all accrued and unpaid dividends, to the date of
conversion by the lesser of the average market price for the ten trading days
preceding the date of conversion or $15.00. For a period of 25 days prior to
December 3, 1999, the Company shall have the right to redeem the outstanding
shares of Series I Preferred Stock, in whole or in part, at a cash redemption
price equal to the Share Liquidation Value, provided that the market price of
the Company's Common Stock is greater than $15.00 per share. The Company has
agreed to register on or before December 5, 2000 the shares of Common Stock
received upon conversion of the Series I Preferred. The Company will continue
the metals recycling operations of Lans.
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The Company believes these acquisitions will have a positive impact on its
future results of operations. The historical results of operations do not
fully reflect the operating efficiencies and improvements that are expected
to be achieved by integrating the acquired businesses into the Company's
operations. See "Special Consideration's Effecting the Company".
In December 1997, the Company entered into a $150 million Senior Credit
Facility ("Credit Facility") with General Electric Capital Corporation and
BankBoston, N.A. as agent for the lenders. The Credit Facility is comprised
of a $45 million revolving credit facility, a $40 million term loan due
December 5, 2003, with interest and principal payable quarterly, a $40
million term loan due on the earlier of December 5, 2005 or six months prior
to the maturity of the Subordinated Notes discussed below with interest and
principal payable quarterly and a $25 million acquisition line of credit due
December 5, 2003, with interest and principal payable quarterly. The notes
bear interest at either (I) the higher of (a) prime plus .75% or (b) the
Federal Funds rate plus 50 basis points per annum plus .75%, or (II) at the
option of the Company upon certain conditions, the LIBOR rate plus 2.25%.
The proceeds from the Credit Facility are secured by substantially all of the
Company's assets and are to be used for acquisitions, repayment of existing
indebtedness and general corporate purposes.
In December 1997, the Company issued $60 million in Senior Subordinated Notes
(the "Subordinated Debt") to various lenders, the proceeds of which are to be
used for acquisitions, repayment of existing indebtedness and general
corporate purposes. The notes bear interest at 13% and mature in December
2005.
In connection with the Credit Facility and the issuance of the Subordinated
Debt, the Company sold 1,666,666 shares of its Common Stock for an aggregate
of $10 million to various accredited investors in transaction exempt from the
registration requirements of the Securities Act.
9
<PAGE>
ITEM 2 - DESCRIPTION OF PROPERTY
The Company's metals recycling facilities generally are comprised of
administrative offices, warehouses for the storage of repair parts and
certain types of raw and processed scrap, covered and open storage areas for
raw and processed scrap, a machine or repair shop for the maintenance and
repair of the facility's vehicles and equipment, scales for the weighing of
scrap, and loading and unloading facilities. Each facility has specialized
equipment for the processing of all grades of raw scrap which may include a
heavy duty automotive shredder to process both ferrous and non-ferrous scrap,
crane-mounted alligator or stationary guillotine shears to process large
pieces of heavy scrap, wire stripping and chopping equipment, baling
equipment and torch cutting facilities. The Company believes its facilities
are adequate for its anticipated production. The following is a summary of
the processing capabilities at each of the Company's facilities based on a
single shift:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
FACILITY SIZE MONTHLY SHREDDING
FACILITY LOCATION (ACRES) MATERIALS PROCESSED CAPACITY (TONS)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Las Vegas, Nevada 13 Ferrous and non-ferrous scrap 6,250
Brownsville, Texas 7 Ferrous and non-ferrous scrap (1)
Harlingen, Texas 7 Ferrous and non-ferrous scrap 6,000
McAllen, Texas 1 Ferrous and non-ferrous scrap (1)
San Juan, Texas 8 Ferrous and non-ferrous scrap (1)
Ste. Genevieve, Missouri 32 Ferrous and non-ferrous scrap 3,500
Waterloo, Iowa (2) 34 Ferrous and non-ferrous scrap 6,500
Metter, Georgia 22.5 Ferrous and non-ferrous scrap 11,500
Georgetown, S. Carolina 12.5 Ferrous and non-ferrous scrap 9,000
Warrenton, Georgia 5.5 Ferrous and non-ferrous scrap 2,000
- ----------------------------------------------------------------------------------------------------------------------------
Totals 142.5 Ferrous and non-ferrous scrap 44,750
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company's four Texas facilities are an integrated operation
serving the markets of southern Texas and northern Mexico. All shredding of
raw scrap purchased by these facilities occurs at the Harlingen, Texas
location.
(2) Subject to a deed of trust granted to the former owner of Weissman
to secure the Company's guarantee the $1.5 million value of the 363,636
shares of Common Stock issued in connection with the acquisition of Weissman.
See Management's Discussion and Analysis of Financial Conditions and Results
of Operations - Liquidity and Capital Resources.
Due to the nature of the items handled by the Company and the operation of
shredding equipment, each of the Company's facilities maintains a
comprehensive maintenance program. To reduce costs, each facility has its
own maintenance and repair personnel. The Company also has the ability to
fabricate certain parts of its operating equipment tailored to meet the needs
of a particular facility.
Periodically, the Company may be required to shut down its shredding
operations for maintenance. If these shutdowns occur for an extended period
of time, they may have an adverse impact on the Company's operations.
10
<PAGE>
ITEM 3 - LEGAL PROCEEDINGS
BEEBER, ET AL., PLAINTIFFS, V. JOHN J. SILVIA, JR., ET AL., DEFENDANTS;
United States District Court for the District of Massachusetts, Case No.
96-12416-JLT;
Plaintiffs have asserted a variety of claims based upon common allegations
that the Company is vicariously liable for the alleged misrepresentations
made by Caside Associates ("Caside"), by and through its managing general
partner, John Silvia, Jr., that purportedly induced Plaintiffs to purchase
from Caside 108,000 shares of the Company's common stock that were owned or
under an option to purchase by Caside on the basis that the investments
were "no risk." Based on the allegations their complaint, the amount of
the Plaintiffs' total claim is approximately $308,000. The Company
believes the plaintiff's claims to be without merit and is vigorously
defending this matter.
MITCHELL, ET AL., PLAINTIFFS V. RECYCLING INDUSTRIES, INC., DEFENDANT; United
States District Court for the District of Massachusetts, Case No. C9700845
Plaintiffs have asserted a variety of claims based upon common allegations
that Caside and Silvia were agents of the Company for the purpose of
raising money for the Company for which shares of the Company or its former
subsidiary, Environmental Recovery Systems of Somerset, Inc., would
eventually be issued to them. The Compliant seeks damages in excess of
$2,000,000. The Company believes the plaintiff's claims to be without
merit and is vigorously defending this matter
DWIGHT SILVIA, ET AL., PLAINTIFFS V. RECYCLING INDUSTRIES, INC.; Bristol County
Superior Court, Case No. A97-01068 (removed to and now pending in United States
District Court for the District of Massachusetts, Civil Action no.
97-12015-JLT).
The complaint is a literal copy (except for the named plaintiffs) of the
MITCHELL action discussed above. The complaint does not seek any specific
damages. The Company believes the plaintiff's claims to be without merit
and is vigorously defending this matter
FERREIRA, ET AL., PLAINTIFFS, V. RECYCLING INDUSTRIES, INC.; Bristol County
Superior Court, Case No. B97-01400 (this case will be removed to United States
District Court for the District of Massachusetts on or before December 1, 1997).
On November 11, 1997, Recycling was served with an unsigned copy of the
complaint, dated October 2, 1997. The complaint is a literal copy (except
for the named plaintiffs) of the MITCHELL and DWIGHT SILVIA actions
discussed above. The complaint seeks damages of approximately $1,000,000.
The Company believes the plaintiff's claims to be without merit and is
vigorously defending this matter
Although the Company has denied all liability and is vigorously
defending against the above actions, the Company has entered into a
Stipulation of Settlement (the "Stipulation") with the trustees in
bankruptcy and the debtor in possession (the other named defendants on
the above actions). The Stipulation terms provide for the Company on or
before July 1, 1998 to rescind the sale of approximately 560,000 shares
of the Company's Common Stock to be obtained by the bankruptcy trustee
from individual investors or creditors to be identified.
For return of such shares the Company will pay $7,000,000 and any and all
actions initiated against the Company and the other defendants will be
permanently enjoined by an order of the Bankruptcy Court. In accordance
with the terms of the Stipulation, the Company has provided the trustees
with a $7,000,000 letter of credit. However, the Stipulation contains
various provisions requiring the trustee to deliver a minimum number of
shares. If the trustee is not able to deliver the minimum (500,000 shares)
and the trustee does not exercise his right to deliver less than the
minimum, the Stipulation will be void. If the trustee exercises the right
to deliver less than the minimum, the Company will pay for the rescinded
shares the greater of $12.50 per share or the average closing price of the
Company's Common Stock on the last ten trading days before the date of
payment, upon delivery of the stock to the Company. At the option of the
trustees, payment for less than the minimum shares also constitutes full
satisfaction of the Stipulation.
The trustee has not yet filed the Stipulation with the Bankruptcy Court,
which must approve the Stipulation for it to become effective. The
Company's management and legal counsel have assessed that it is not
reasonably possible to conclude that the trustee will file the
Stipulation, or, if filed, that the Bankruptcy Court would approve it.
Also, it is not reasonably possible to assess that the trustee can
obtain and deliver the minimum number of shares and if the minimum
number is not obtained, whether the trustee would void the Stipulation.
Should the stipulation not proceed, the Company will continue to
vigorously defend the claims asserted against it.
The Company filed an action claim against Robert C. Rome ("Rome"),
principal of Anglo Metal, Inc. ("AMI"), in the United States District
Court for the District of Colorado. The Company and Recycling
Industries of Texas, Inc. ("RITI") are seeking actual and consequential
damages in an undetermined amount for fraud by misrepresentation, deceit
by nondisclosure and concealment and breach of contract in connection
with the acquisition of Anglo Iron & Metal in December 1995.
Alternatively, the complaint seeks specific performance of Mr. Rome's
obligations under his agreements with the Company. On February 21,
1997, the Company and RITI were served with a compliant filed by AMI in
the United States Bankruptcy Court for the Southern District of Texas.
The complaint alleges that the Company and RITI have failed to perform
certain obligations under their agreement to acquire Anglo Iron & Metal
in December 1995. The plaintiff seeks damages in excess of $3,255,000
for breach of contract, fraud and conversion. Alternatively, the
comoplaint seeks to rescind the agreements executed by the Company and
RITI to acquire Anglo Iron & Metal. On September 30, 1997, the Company,
Robert C. Rome and Anglo Metal, Inc. settled the two actions through
negotiations. The terms of the settlement includes the reimbursement by
AMI of $1.5 million in processing costs, legal expense and environmental
remediation expense incurred by the Company at its Southern Texas
facilities. The Company shall pay for any environmental remediation of
the real property located in Harlingen, Brownsville and the sub-leased
proeprty in San Juan, Texas upon which certain of its Southern Texas
facilities are located, to a level necessary to obtain approval under
the Texas Voluntary Cleanup Program. The Company shall pay to AMI $0.4
million and assign that number of shares of the Company's Common Stock
from the escrow account established at closing which, upon sale, will
yield net proceeds to AMI of $700,000. The proceeds from the sale of
these shares will be used for remediation of certain property and
related expenses.
<PAGE>
YARBROUGHS, INC., PLAINTIFF, V. RECYCLING INDUSTRIES OF TEXAS D/B/A ANGLO
IRON AND METAL, DEFENDANT; District Court, 35th Judicial District, Cameron
County, Texas, Cause No. 96-05-2929-E.
Plaintiff, owner of a parcel of real estate adjacent to the Company's
Harlingen, Texas facility, is seeking damages and a permanent injunction
prohibiting the Company's operations at it Harlingen, Texas facility
arising out of allegations that the operations of the facility throw
debris and scrap metal onto the Plaintiff's property. The Company
believes the plaintiff's claims to be without merit and is vigorously
defending this matter.
<PAGE>
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders during the
fourth fiscal quarter ended September 30, 1997.
SPECIAL CONSIDERATIONS AFFECTING THE COMPANY
In evaluating the Company, readers of this report should carefully consider the
following special considerations affecting the Company, its business, markets,
operations and competitive environment. Any one or a combination of these
considerations may have a material adverse effect on the Company and its
operations and management's beliefs or predictions about future performance.
LIMITED COMBINED OPERATING HISTORY
The Company commenced its metals recycling operations upon the acquisition of
its Nevada Facility in May 1994. Prior to May 1994, the Company generated
operating losses and negative cash flow as a development stage enterprise
pursuing the development of technology to recycle municipal solid waste (the
"MSW Technology"). Since May 1994, the Company has acquired metals recycling
facilities in Southern Texas, Missouri, Georgia, Iowa, South Carolina. The
Company has only a limited combined history for its current facilities and
there can be no assurance that the Company's existing operations or those of
any contemplated acquisitions, including those accrued subsequent to
September 30, 1997, will generate sufficient cash flow to fund the future
operations of the Company. See "Events Subsequent to September 30, 1997"
MARKET CONSIDERATIONS AND EXPOSURE TO SCRAP PRICE FLUCTUATIONS
Sales prices for processed scrap metal are cyclical in nature and are subject to
local, national and international economic conditions. The Company's operating
results are dependent upon the strength of the national economy and, in
particular, the domestic steel industry. A future downturn in the economy or in
steel production could adversely effect the financial performance of the
Company. The demand for processed ferrous and non-ferrous scrap is subject to
general economic, industry and market-specific conditions beyond the Company's
control which may result in periodic fluctuations in the sales prices of the
Company's products. Although the Company seeks to maintain its margins by
adjusting the purchase price for unprepared scrap, its ability to maintain these
margins during periods of falling prices may be limited by the adverse impact of
lower prices on the available supply of unprepared scrap. The Company is unable
to hedge against changes in scrap prices and attempts to minimize this risk by
maintaining low inventory levels of unprepared and processed scrap and by
establishing firm prices with its larger customers at the beginning of each
month.
DEPENDENCE ON SCRAP SUPPLIERS
The Company's scrap recycling operations are dependent upon the supply of scrap
materials from its suppliers. Few of such suppliers are bound by long-term
supply arrangements and, therefore, they have no obligation to supply scrap
materials to the Company. If substantial numbers of scrap suppliers cease
supplying scrap materials to the Company, the financial condition and results of
operations of the Company would be materially and adversely affected.
RISKS RELATED TO THE COMPANY'S ACQUISITION STRATEGY
The Company's objective is to increase its revenues and earnings and expand the
markets it serves through the acquisition of additional metals recycling
facilities. There can be no assurance that the Company will be able to
identify, acquire or profitably manage additional facilities or successfully
integrate their
<PAGE>
operations without substantial costs, delays or other unanticipated problems.
There can be no assurance that any companies which the Company acquires will
achieve sales and profitability that justify the Company's investment.
Acquisitions involve a number of risks, which may include: adverse short-term
effects on the Company's reported operating results and cash flows; diversion of
management's attention; dependence on retraining, hiring and training key
personnel; risks associated with environmental and legal liabilities; and the
affects of amortization of acquired intangibles, such as goodwill. Some of the
risks could have a material adverse effect on the Company's operations and
financial performance. As the Company continues to expand, the Company will be
required to supplement its existing management team in order to effectively
manage the acquired entities and successfully implement its acquisition and
operating strategies.
Financial instruments that potentially subject the Company to significant
concentrations of credit risk are primarily trade accounts receivable. The
Company sells its products primarily to scrap brokers and steel mills located in
the United States. Generally, the Company does not require collateral or other
security to support customer receivables. Historically, the Company's
wholly-owned subsidiaries have not experienced material losses from the
noncollectable of receivables, however, certain of the Company's subsidiaries
have significant balances owing from customers that operate in cyclical
industries and leveraged conditions which may impair the collection of such
receivables.
THE USE OF SCRAP ALTERNATIVES
The increased demand for scrap by the expanding mini-mill industry has caused an
unusual tightness in the supply and demand balance for steel scrap. The
relative scarcity of scrap, particularly the cleaner grades and its high price,
have created opportunities for producers of scrap alternatives, or scrap
substitutes. These are produced by reducing oxygen out of iron ore to produce a
metallic generally consisting of iron and carbon. Although scrap alternatives
have not been a major factor in the industry to date, there can be no assurance
that if the price of scrap continues to rise and if the levels of available
unprepared ferrous scrap continue to decrease, that the use of scrap
alternatives will proliferate. Any significant increase in production of scrap
alternatives could have a material adverse effect on the financial performance
of the Company.
<PAGE>
EXTENT OF LEVERAGE; POSSIBLE NEED FOR ADDITIONAL FINANCING
The Company is highly leveraged as of September 30, 1997 and continues to be
highly leveraged after consummation of the six acquisitions and $220 million of
financing in December 1997. See "Events Subsequent to September 30, 1997".
Based upon the Company's current level of operations and anticipated growth,
including the acquisitions and financing completed in December 1997, the Company
believes that cash flows from the current level of operations and availability
under its credit facilities, will be sufficient to enable the Company to satisfy
anticipated cash flow requirements for operating, investing and financing
activities, including debt service. However, if the Company is unable to
satisfy such requirements from these sources, the Company would be required to
adopt one or more alternatives, such as reducing or delaying acquisitions and
capital expenditures, refinancing or restructuring its indebtedness, or selling
material assets or operations. There can be no assurance that any such
alternatives would be available to the Company on terms reasonably acceptable to
it or at all.
RELIANCE ON KEY PERSONNEL
The Company's operations are dependent on a limited number of key personnel,
including the Company's Chairman and Chief Executive Officer, Thomas J. Wiens,
its Vice-Chairman, Luke F. Botica and its Vice President and Chief Operating
Officer, Harold Rouster. The Company has entered into employment arrangements
with Mr. Wiens and Mr. Botica and has entered into an employment letter with Mr.
Rouster. The Company has obtained a key-man life insurance policy in the amount
of $500,000 for Mr. Wiens. The Company expects to enter into an employment
agreement with Mr. Rouster in the near future and anticipates obtaining key-man
life insurance policies for both Mr. Botica and Mr. Rouster.
ENVIRONMENTAL MATTERS
Compliance with state and federal environmental regulations is a significant
factor in the metals recycling industry. Certain raw materials handled,
processed and disposed of in the metals recycling industry, such as automobiles
and appliances, may contain substances which are subject to a variety of
federal, state and local governmental regulations concerning the discharge of
hazardous materials into the environment. The
<PAGE>
Company has adopted standards and policies for accepting raw materials designed
to ensure compliance with applicable environmental regulations. The Company's
management does not believe that the costs associated with environmental
compliance will have a material adverse impact on the Company.
COMPETITION
The metals recycling business is highly competitive and subject to significant
changes in overall market conditions. Certain of the Company's competitors have
substantially greater financial, marketing and other resources. There can be no
assurance that the Company will be able to obtain its desired market share or
compete effectively in its markets.
<PAGE>
IMMEDIATE AND FUTURE CAPITAL REQUIREMENTS
Scrap metal processing companies such as the Company have substantial ongoing
working capital requirements, capital equipment requirements in order to
continue to operate and grow and capital requirements related to the increasing
costs to comply with more stringent environmental and governmental regulations.
In order to remain competitive, the Company must continue to make significant
investments in capital equipment. As a result, the Company may seek
additional equity or debt financing to fund future improvements and expansion
of the scrap metal processing business as well as to make other acquisitions
of scrap metal processing facilities. There can be no assurance that such
financing will be available when needed, or that, if available, it will be on
satisfactory terms. The failure to obtain financing would hinder the
Company's ability to make continued investments in capital equipment and
pursue expansions, which could materially adversely affect results of
operations.
<PAGE>
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock has been quoted on the NASDAQ National Market since
July 18, 1996 under the symbol "RECY." Prior to its approval for quotation on
the NASDAQ National Market, the Common Stock was quoted on the NASDAQ SmallCap
Market under the symbol "RECY."
The following table presents the high and low bid quotations for the Company's
Common Stock as reported on the NASDAQ National Market and, prior to July 18,
1996, the NASDAQ SmallCap Market, for each full quarterly period during the
fiscal years ended September 30, 1997 and 1996. These quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.
-----------------------------------------------------
-----------------------------------------------------
COMMON STOCK
HIGH LOW
-----------------------------------------------------
FISCAL 1997:
First Quarter $3.63 $1.44
Second Quarter 1.75 1.00
Third Quarter 2.06 1.28
Fourth Quarter 7.00 1.72
FISCAL 1996:
First Quarter $4.88 $2.88
Second Quarter 7.00 3.50
Third Quarter 5.63 4.25
Fourth Quarter 5.00 3.00
-----------------------------------------------------
-----------------------------------------------------
As of September 30, 1997, there were approximately 750 record holders of Common
Stock and, based upon the information available to it, the Company believes
there are approximately 2,000 beneficial owners of its Common Stock.
The Company has never paid cash dividends on its Common Stock and has no present
intention to pay any cash dividends on its Common Stock for the foreseeable
future. Instead, the Company intends to retain its earnings, if any, to support
the growth and future development of its business and for general corporate
purposes. The payment of any future dividends will be at the discretion of the
Company's Board of Directors and will be dependent upon the Company's earnings,
financial condition, capital requirements, level of indebtedness, contractual
restrictions with respect to the payment of dividends and other factors that the
Board of Directors deems relevant.
<PAGE>
RECENT SALES OF UNREGISTERED SECURITIES
On September 9, 1997, the Company sold 500,000 shares of its common stock for an
aggregate of $1,250,000 to 14 accredited investors. The common stock was sold
in a transaction not involving a public offering pursuant to Section 4(2) of the
Securities Act of 1933 and Rule 506 promulgated thereunder.
ITEM 6 - SELECTED FINANCIAL DATA
The following table sets forth the Selected Consolidated Financial Data for the
Company for each of the five years ended September 30 and is based on the
audited Consolidated Financial Statements of the Company and its subsidiaries.
Such data should be read in conjunction with the Company's Consolidated
Financial Statements and the notes thereto incorporated into this report in Item
8 and Management's Discussion and Analysis of Financial Condition and Results of
Operations. The earnings per share numbers set forth below have been adjusted to
reflect the Company's one-for-five reverse stock split effective June 27, 1995.
(Thousands of dollars except per share amounts)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
PRO PRO
FORMA FORMA
(2) (2)
1993 (1) 1994 (1) 1995 (3) 1996 (3) 1996 1997 (3) 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS:
- ---------------------------------------------------------------------------------------------------------------------
Net Sales $ - $ 4,831 $ 13,812 $ 27,619 $ 75,061 $ 62,424 $ 85,436
- ---------------------------------------------------------------------------------------------------------------------
Operating income
(loss) $ (2,802) $ (939) $ 664 $ (2,224) $ 3,254 $ 3,024 $ 3,794
- ---------------------------------------------------------------------------------------------------------------------
Earnings (loss)
from continuing operations
net of income taxes $ (2,958) $ (1,142) $ 1,009 $ (2,961) $ 1,149 $ 1,076 $ 1,285
- ---------------------------------------------------------------------------------------------------------------------
Earnings (loss) per
share from continuing
operations net of
income taxes $ (1.24) $ (0.46) $ 0.17 $ (0.29) $ .11 $ .04 $ .07
- ---------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA:
- ---------------------------------------------------------------------------------------------------------------------
Total Assets $ 1,147 $ 9,618 $ 10,297 $ 34,855 N/A $ 55,079 N/A
- ---------------------------------------------------------------------------------------------------------------------
Long-Term Debt $ - $ 519 $ 2,152 $ 12,018 N/A $ 29,456 N/A
- ---------------------------------------------------------------------------------------------------------------------
Total Liabilities $ 3,853 $ 6,852 $ 3,843 $ 19,192 N/A $ 36,904 N/A
- ---------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
(deficit) $ (2,706) $ 2,766 $ 6,454 $ 14,163 N/A $ 16,675 N/A
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
EBITDA $ (2,445) $ (547) $ 1,489 $ (1,023) $ 6,603 $ 5,619 $ 7,552
</TABLE>
(1) Prior to May 1994, the Company was engaged in the development of technology
to recycle municipal solid waste. For comparative purposes, financial data
prior to 1994 reflects the Company's efforts to develop such technology. The
Company's current operations commenced in May 1994 with the acquisition of its
Nevada facility. The financial information for fiscal 1994 reflects five months
of operating results of the Nevada facility. The financial information for
fiscal 1995 reflects 12 months of operating results of NRI and reflects the
efforts of the Company to acquire other metals recycling facilities.
(2) The pro-forma data gives effect to the acquisitions of Anglo Iron & Metal
(December 1995), Mid-America Shredding (April 1996) and Weissman (August 1996)
as if each had occurred at the beginning of the periods presented. In addition,
the pro forma information is based upon available information and certain
assumptions and adjustments.
(3) The historical operating results for the year ended September 30, 1997 are
not comparable to those of the corresponding periods ended September 30, 1996
and 1995 due to the acquisitions of Anglo Iron & Metal in December 1995,
Mid-America Shredding in April 1996, Weissman in August 1996, ARC in April 1997
and AIC in June 1997.
(4) EBITDA ("Earnings Before Interest, Taxes, Depreciation and
Amortization") represents operating income plus depreciation and
amortization. The Company has included EBITDA (which is not a measure of
financial performance under generally accepted accounting principles)
because it understands such data is used by certain investors to determine
the Company's ability to service its indebtedness. EBITDA is not a
substitute for income from continuing operations, net income or cash flows
presentation under generally accepted accounting principles.
<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
STATEMENTS REGARDING FUTURE ECONOMIC PERFORMANCE CONTAINED WITHIN
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, CONSTITUTE FORWARD-LOOKING STATEMENTS. FACTORS REGARDING THE
COMPANY'S BUSINESS, OPERATIONS AND COMPETITIVE ENVIRONMENT WHICH MAY CAUSE
ACTUAL RESULTS TO VARY MATERIALLY FROM THESE FORWARD-LOOKING STATEMENTS ARE
DISCUSSED ABOVE UNDER THE CAPTION "SPECIAL CONSIDERATIONS."
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
(DOLLARS IN MILLIONS) 1997 1996 1995
- --------------------------------------------------------------------------------
Current ratio 2.01:1 1.21:1 1.22:1
Working capital $ 7.6 $ 1.5 $ 0.4
Cash provided (used)
by operating activities $ (4.0) $ (1.5) $ 0.1
Capital expenditures $ 3.0 $ 1.6 $ 0.6
Long-term debt $ 29.5 $ 12.0 $ 2.2
Total capitalization * $ 46.1 $ 26.2 $ 8.6
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
* Total capitalization is defined as stockholders' equity and noncurrent
liabilities.
Cash used by operating activities for the year ended September 30, 1997, was $4
million, an increase of $2.5 million compared to the same period one year
earlier. Cash used in operating activities for the year ended September 30,
1996 increased by $1.6 million compared to the same period one year earlier.
The increase in cash used in operating activities was primarily related to
increases in accounts receivable and inventory resulting from newly acquired
businesses reaching normal operating levels.
The Company invested $3.0 million in property and equipment, not including
property and equipment acquired in business acquisitions, during the year ended
September 30, 1997, for expansion of the Company's ferrous and non-ferrous
processing capacity and general modernization and efficiency upgrades. Planned
capital expenditures during the next year for the Company's existing facilities
are estimated to be $3 million. Included in this amount are capital
expenditures for the Company's shredders and materials handling equipment
designed to increase capacity and improve operating efficiencies. Management
anticipates the capital expenditures will be paid with cash from operations and
long-term debt financing.
On April 7, 1997, the Company acquired for $5.7 million substantially all the
assets of Addlestone Recycling Corporation (ARC) located in Metter, Georgia.
The purchase was financed with $5.2 million of proceeds from the Company's
existing credit facility and $0.5 million or 10,000 shares of the Company's
Series D Convertible Preferred Stock (the "Series D Shares"). The Series D
Shares will automatically convert on April 1, 1999 into the number of shares of
the Company's Common Stock whose average market price for the ten trading days
preceding the date of conversion is equivalent to $0.5 million plus the amount
of all accrued and unpaid dividends on the Series D Shares to the date of
conversion. If
<PAGE>
a consolidation or merger of the Company with or into another company or entity
occurs and the Company is not the surviving entity, the Series D Shares will
convert immediately into the number of shares the Company's Common Stock whose
average market price for the ten trading days preceding the date of
consolidation or merger is equivalent to $0.5 million plus the amount of all
accrued and unpaid dividends on the Series D Shares to the date of conversion.
Holders of the Series D Shares are entitled to dividends on a cumulative basis
at an annual rate of eight percent, payable quarterly in cash. At anytime prior
to April 1, 1999, the Company shall have the right to redeem the outstanding
shares of Series D Preferred Stock, in whole or in part, at a cash redemption
price equal to the sum of $50 per share, and the amount of all accrued but
unpaid dividends on the Series D Preferred Stock. The Company has not assumed
or guaranteed any of the liabilities of ARC.
On June 25, 1997, the Company acquired for $6 million substantially all the
assets of Addlestone International Corporation (AIC) located in Georgetown,
South Carolina. The purchase was financed with the proceeds from a $7 million
short-term bridge loan. On December 5, 1997 the bridge loan was paid in full.
The Company has not assumed or guaranteed any of the liabilities of AIC.
Capital expenditures totaled $1.6 million in property and equipment for the year
ending September 30, 1996. The capital expenditures were for general
modernization and efficiency upgrades of existing facilities.
On December 11, 1995, the Company acquired for $6.1 million substantially all
the assets of Anglo Metals, Inc., d/b/a/ Anglo Iron & Metal (Anglo). The
purchase price was financed through $3.1 million of long-term debt, $1.8 million
through a sale-leaseback of certain purchased equipment, 227,693 shares of
Common Stock valued at $0.9 million and $0.3 million in cash.
On April 15, 1996, the Company acquired for $1.9 million substantially all the
assets of Mid-America Shredding, Inc., d/b/a/ Mid-America Shredding
(Mid-America). The purchase price was financed through the assumption of
outstanding bank debt of $1.2 million and $0.7 million in cash.
On August 5, 1996, the Company acquired for $12 million all of the outstanding
Common Stock of Weissman. The purchase price was funded with $5.8 million in
proceeds from a public offering of the Company's Common Stock, $4.7 million of
long-term debt and 363,636 shares of the Company's Common Stock valued at $1.5
million. Under the terms of a Share Price Guaranty Agreement ("the Agreement")
the Company has agreed to guaranty the $1.5 million value of 363,636 shares
("the Guaranteed Shares"). The Agreement grants the seller and its assign,
Weissman Financial, (Collectively "Weissman Financial") registration rights
effective for three years. If at any time during the three-year period
commencing on the effective date of the registration statement, Weissman
Financial sells the 363,636 shares of Common Stock at less than the guaranteed
amount, the Company is required to pay to the seller any shortfall in cash. In
addition, Weissman Financial has the right in its sole discretion to require the
Company, at any time during the two-year period commencing November 30, 1997, to
repurchase the Guaranteed Shares for $1.5 million. As a result of this
Agreement to purchase the Guaranteed Shares upon Weissman Financial's request,
the $1.5 million value of the Guaranteed Shares has been recorded as temporary
equity.
On December 31, 1996, the Company completed a private placement of $1 million of
Series C Convertible Preferred Stock ("Series C Preferred"). During the quarter
ending June 30, 1997, the Company redeemed the Series C Preferred for $1.3
million with a combination of existing cash and financing from the Company's
credit facility. Included in the redemption price was a dividend in the amount
of $0.3 million.
On September 9, 1997, the Company completed a private placement of 500,000
shares or $1.3 million of its Common Stock. The proceeds were used for general
corporate purposes.
<PAGE>
The Board of Directors of Recycling Industries, Inc. authorized the repurchase
of up to 700,000 shares of Common Stock in open market transactions. As of
September 30, 1997, the Company had acquired 66,000 shares for $0.1 million with
cash from operations.
At September 30, 1997 and 1996, $22.6 and $8.4 million, respectively, were
outstanding under a three year credit facility with a lending institution
totaling $25 million. Utilization of the credit facility is limited by existing
debt covenants. As described below under "Events Subsequent to September 30,
1997," the balance outstanding under the credit facility was paid in full in
December 1997. As a result, credit facility will no longer be maintained.
On July 17, 1996, the Company completed a public offering of its Common Stock,
receiving net proceeds, after deducting underwriting discounts and offering
expenses of $14.0 million (the "Public Offering"). These proceeds were used as
follows: $5.2 million to pay a portion of the cash purchase price for Weissman
on August 5, 1996; $5.5 million to repurchase 1,380,585 shares of Common Stock;
$2.4 million to redeem all of the Company's outstanding Series A Convertible
Preferred Stock and repurchase 120,000 shares of Common Stock on August 15,
1996. The remaining proceeds of approximately $900,000 were used for general
corporate purposes.
Management intends to continue seeking opportunities for expansion in the metals
recycling business and believes that the Company's liquidity, capital resources
and borrowing capabilities are adequate for its current operations. The
Company may, however, need to raise additional capital to fund the acquisition
and integration of additional metals recycling businesses, which is an integral
component of the Company's strategy. The Company may raise such funds through
warrant exercises, bank financing or public or private offerings of its
securities. There can be no assurance that the Company will be able to secure
such additional financing. If the Company is not successful in securing such
financing, the Company's ability to pursue its acquisition strategy may be
impaired and the results of operations for future periods may be adversely
affected.
EVENTS SUBSEQUENT TO SEPTEMBER 30, 1997
As described in Part 1, Item 1, "General Development of Business Events
Subsequent to September 30, 1997," In December 1997, the Company completed the
acquisitions of six metal recycling facilities for an aggregate purchase price
of approximately $146 million. The acquisitions will be accounted for using the
purchase method of accounting, as such, the purchase price will be allocated to
the acquired assets at their estimated fair value. The acquisitions were
financed in part with proceeds generated in December 1997 from a $150 million
Senior Credit Facility (Credit Facility), the sale of $60 million in Senior
Subordinated Notes and proceeds from the sale of the Company's Common Stock to
various accredited investors in connection with the Credit Facility. The
acquisitions were also financed in part from the issuance of the Company's
Preferred and Common Stock to the owners of the acquired facilities. The
Company will continue the metal recycling operations of the businesses acquired.
Subsequent to September 30, 1997, the Company received $1.7 million in proceeds
from the exercise of warrants into the Company's Common Stock.
In December 1997, the Company incurred $2.3 million in loan prepayment penalties
from refinancing existing debt before its schedule maturity with Senior and
Subordinated debt proceeds. In the first quarter of fiscal 1998, the Company
will recognize approximately $3.5 million of loan fees expense which includes
the prepayment penalty and $1.2 million of prepaid loan fees from early
extinguishment of debt.
RESULTS OF OPERATIONS
The Company's operating results depend in large part on its ability to
effectively manage the purchase, processing and sale of scrap metals. The
demand for processed ferrous and non-ferrous scrap is subject to
<PAGE>
general economic, industry and market-specific conditions beyond the Company's
control, which may result in periodic fluctuations in the sales prices of the
Company's products. The Company seeks to maintain its operating margins by
adjusting the purchase price for raw ferrous and non-ferrous scrap in response
to such fluctuations, subject to local market conditions. Although the Company
is unable to hedge against changes in market prices, it seeks to minimize this
risk by maintaining low inventory levels of raw and processed scrap.
The results of operations for the years ended September 30, 1997, 1996 and 1995
have been driven primarily by the Company's acquisition activity.
Net sales for the year ended September 30, 1997, were $62.4 million, an increase
of $34.8 million compared to the same period one year earlier. The increase is
primarily related to a full year's results of operations of Anglo, Mid America,
Weissman and the acquisition of ARC and AIC in April and June 1997,
respectively. The average sales price per ton of prepared ferrous material was
$132, an eight percent increase compared to the same period one year earlier.
The increase in the average selling price is primarily attributable to increased
demand for ferrous material. The average sales price of prepared non-ferrous
material was $0.33 per pound or a 30 percent decrease compared to the same
period one year ago. The decrease in the average sales price of non-ferrous
material resulted from a decline in the demand of the material and changes in
material mix.
Gross profit for the year ended September 30, 1997, was $7.2 million, an
increase of $6.2 million compared to the same period one year earlier. The
increase was primarily related to the acquisitions of Mid-America, Weissman,
ARC, and AIC, and increases in the average selling price of ferrous material.
Gross margin decreased in the fourth quarter compared to the preceding
quarter by 53% as a result of increased processing costs at the South Texas
facilities and Nevada in the fourth quarter and higher than normal repairs
and maintenance expense as discussed in operating income.
Operating income for the year ended September 30, 1997, increased by $5.2
million compared to the same period one year earlier. The increase was
primarily from the acquisitions of Mid-America, Weissman, ARC and AIC,
increases in the average selling price of ferrous material and continued
emphasis on productivity improvements. The Company recognized higher than
usual operating expenses during the fourth quarter of 1997. The increase for
the quarter was primarily related to $0.6 million of additional expense to
purchase and process unprepared non-ferrous material and excessive repairs and
maintenance resulting in significant shredder down time at both Texas and
Nevada facilities. Additionally, in anticipation of growth, the Company
incurred costs relating to staffing and other administrative expenses.
Partially offsetting the increase in expenses incurred during the quarter was
a $1.5 million litigation recovery to offset excess material processing costs,
legal expense and environmental remediation costs incurred in earlier periods.
The Company's Nevada and Texas facilities reported aggregated operating
losses of $0.7 million before a $1.5 million reduction of material processing
costs, legal expense and environmental remediation costs in settlement of a
lawsuit with Anglo Metals, Inc. for the year ended September 30, 1997.
Management is continuously monitoring the operations of the facilities and
has implemented certain cost cutting strategies in an attempt to improve
operating income without reducing net sales.
Net sales for the year ended September 30, 1996, increased by $13.8 million
compared to September 30, 1995 to total $27.6 million. The increase resulted
from the acquisitions of Anglo, Mid-America and Weissman. For the year ended
September 30, 1996, the average sales price per ton of prepared ferrous scrap
was $122, a 1.7% increase compared to $120 per ton for the year ended September
30, 1995. For the year ended September 30, 1996, the average sales price of
non-ferrous scrap was $0.47 per pound, representing a 27% decrease compared to
$0.64 per pound for the year ended September 30, 1995.
Gross profit for the year ended September 30, 1996, decreased by $1.9 million
compared to the same period one year earlier to total $1 million despite the
acquisition of Anglo, Mid-America and Weissman. The decline in gross profit was
primarily related to lower selling prices of non-ferrous material and increased
cost of raw material.
Operating income for the year ended September 30, 1996, declined by $2.9 million
as a result of lower selling prices of non-ferrous material and increases of raw
material costs.
Selling, general, and administrative (SG&A) expenses totaled $4.2 million for
the year ended September 30, 1997 an increase of $1 million compared to the same
period one year earlier. The increase was primarily the result of the
acquisitions of ARC, AIC and other facilities reaching normal operating
<PAGE>
capacity. Partially offsetting the increase in SG&A was a $1.5 million
litigation recovery in the fourth quarter of 1997 to offset excess material
processing costs, legal expense and environmental remediation costs pursuant
to a law suit filed by the Company to recover such costs. SG&A increased by
$1 million for the year ended September 30, 1996 compared to the same period
one year earlier to total $3.3 million. As a percent of sales, SG&A declined
by five percent for the years ended September 30, 1997 and 1996,
respectively, compared to the same periods one year earlier. The decline in
SG&A as a percent of net sales resulted primarily to the $1.5 litigation
recovery. As a result of continued emphasis on productivity improvements, the
Company has managed to achieve increases in sales without significant
increases in support costs as a percentage of sales.
Interest expense, net of capitalized interest of $0.1 million in 1997; totaled
$2.6 million, $0.7 million and $0.4 million for the years ended September 30,
1997, 1996 and 1995, respectively. The increases were primarily related to
increases in long-term debt to finance the acquisitions of Weissman, ARC, Anglo
and Mid-America Shredding.
The Company has generated a net loss carry forward totaling approximately $11.6
million, which expires at various amounts and dates through the year 2012. As a
result of a change in ownership, as defined by Section 382 of the Internal
revenue Code, approximately $8.7 million of the net loss carryforwards are
limited in use to approximately $2.6 million per year.
During fiscal 1997 and 1996 management determined that net operating losses
generated from prior years were more likely than not to be used in the near
future due to taxable income generated by acquired operations. Therefore a net
deferred tax asset has been recorded of $1.4 million at September 30, 1997 and
$0.8 million net of a $1.2 million valuation allowance at September 30, 1996.
Income tax benefit for the years ended September 30, 1997 and 1995 totaled $0.6
million and $0.7 million. There was no income tax benefit for the year ended
September 30, 1996. See Note 6 to the financial statements for further analysis
of income taxes.
Primary earnings (loss) per common share are computed by dividing net earnings,
after deducting preferred stock dividends, by the weighted average number of
common and dilutive common equivalent shares outstanding during the period.
Fully diluted computations assume the conversion of outstanding Convertible
Preferred Stock and the exercise of dilutive warrants and stock options.
Dilutive common equivalent shares consist of stock options and warrants. In
loss periods, dilutive common equivalent shares are excluded, as the effect
would be anti-dilutive.
The Company does not believe its businesses have been adversely affected by
general inflation.
Like any other company, advances and changes in available technology can
significantly impact the business and operations of the Company. For example, a
challenging problem exists as many computer systems worldwide do not have the
capability of recognizing the year 2000 or years thereafter. No easy
technological "quick fix" has yet been developed for this problem. The Company
is expending significant resources to assure that its computer systems are
reprogrammed in time to effectively deal with transactions in the year 2000 and
beyond. This "Year 2000 Computer Problem" creates risk for the Company from
unforeseen problems in its own computer systems and from third parties with whom
the Company deals on financial transactions. Such failures of the Company
and/or third parties' computer systems could have a material impact on the
Company's ability to conduct is business.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Company is required to implement Financial Accounting Standards ("FAS") No.
128, "Earnings per Share" and FAS No. 129 "Disclosure of Information About an
Entity's Capital Structure" in fiscal year 1998. FAS No. 128 provides a
different method of calculating earnings per share than is currently used in
accordance with Accounting Principles Board Opinion 15 "Earnings per Share".
FAS No. 128 provides for the calculation of "basic" and "diluted" earnings per
share. Basic earnings per share includes no dilution and is computed by
dividing income available to common shareholders by the weighted average number
of common shares outstanding for the period. Diluted earnings per share reflects
the potential dilution of securities that could share in the earnings of an
entity, similar to fully diluted earnings per share. FAS No. 129 establishes
standards for disclosing information about an entity's capital structure.
Their implementation is not expected to have a material effect on the
consolidated financial statements.
The Company is also required to implement FAS No. 130 "Reporting Comprehensive
Income" and FAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information" in fiscal 1998. FAS No. 130 establishes standards for reporting
and display of comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except those
resulting from investments by owners and distributions to owners. Among other
disclosures, FAS No. 130 requires that all items that are required to be
recognized under current accounting standards as
<PAGE>
components of comprehensive income be reported in a financial statement that
displays with the same prominence as other financial statements. FAS No. 131
supersedes FAS No. 14 "Financial Reporting for Segments of a Business
Enterprise". FAS No. 131 establishes standards on the way that public companies
report financial information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. FAS No. 131 defines operating segments as
components of a company about which separate financial information is available
that is evaluated regularly by the chief operating decision maker in deciding
how to allocate resources and in assessing performance. FAS 130 and 131 require
comparative information for earlier years to be restated. Because of the recent
issuance of these standards, management has been unable to fully evaluate the
impact, if any, the standards may have on the future financial statement
disclosures. Results of operations, financial position and cash flows, however,
will be unaffected by implementation of these standards.
<PAGE>
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the information set forth on pages F-1 through F-30.
ITEM 9 - CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS
CHANGE IN INDEPENDENT ACCOUNTANTS
On December 19, 1997, A.J. Robbins, P.C. was dismissed as the Registrant's
principal accountant for two of its wholly-owned subsidiaries, NR Holdings,
Inc. and Nevada Recycling, Inc. (the "Subsidiaries"). Statements of the
Subsidiaries for the past two years prepared by A.J. Robbins, P.C. did not
contain an adverse opinion, a disclaimer of opinion, or were qualified or
modified as to uncertainty, audit scope or accounting principles. The
decision to change accountants was approved by the Registrant's audit
committee. During the two most recent fiscal years and through December 19,
1997, there has been no disagreement with A.J. Robbins, P.C. on any matter of
accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreement, if not resolved to the
satisfaction of A.J. Robbins, P.C. would have caused it to make a reference
to the subject matter of the disagreement in connection with its report.
The Registrant engaged BDO Seidman, LLP as principal independent accountants for
Recycling Industries, Inc. and subsidiaries except NR Holding, Inc. and Nevada
Recycling, Inc. on March 25, 1996. This change in certifying accountants was
previously filed on Form 8-K dated March 30, 1996. The Registrant engaged BDO
Seidman, LLP as principal independent accountants for the Subsidiaries on
December 19, 1997. The Registrant has not consulted BDO Seidman regarding any
accounting principles or disagreements with the Subsidiaries' former principal
independent accountant, A.J. Robbins, P.C. prior to the engagement of BDO
Seidman, LLP.
<PAGE>
RECYCLING INDUSTRIES, INC.
AND SUBSIDIARIES
CONTENTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-3
FINANCIAL STATEMENTS:
CONSOLIDATED BALANCE SHEETS F-4 - F-5
CONSOLIDATED STATEMENTS OF OPERATIONS F-6
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY F-7 - F-9
CONSOLIDATED STATEMENTS OF CASH FLOWS F-10
SUMMARY OF ACCOUNTING POLICIES
AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-11 - F-30
F - 1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Recycling Industries, Inc.
Englewood, Colorado
We have audited the accompanying consolidated balance sheets of Recycling
Industries, Inc. and subsidiaries as of September 30, 1997 and 1996 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended September 30, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We did not audit the financial
statements of a subsidiary, which statements reflect total assets of $8,290,000
as of September 30, 1996, and total revenues of $11,310,000 for the year then
ended. Those statements were audited by another auditor whose report has been
furnished to us, and our opinion, insofar as it relates to the amounts included
for such subsidiary, is based solely on the report of the other auditor.
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 statements presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditor, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Recycling Industries, Inc. and
subsidiaries as of September 30, 1997 and 1996 and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1997 in conformity with generally accepted accounting principles.
BDO Seidman, LLP
Denver, Colorado
December 30, 1997
F - 2
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
NR holdings, Inc.
Las Vegas, Nevada
We have audited the accompanying consolidated balance sheet of NR Holdings, Inc.
and Subsidiary as of September 30, 1996 and the related statements of operations
and accumulated deficit 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 also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of NR Holdings, Inc.
and Subsidiary as of September 30, 1996 and the result of its operations and its
cash flows for the year ended, in conformity with generally accepted accounting
principles.
AJ. Robbins, PC.
Denver, Colorado
October 18, 1996
F - 3
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
ASSETS (Note 9)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SEPTEMBER 30, 1997 1996
- ----------------------------------------------------------------------
CURRENT ASSETS:
Cash $ 746 $ 1,450
Accounts receivable, net (Note 1) 8,820 4,379
Inventories (Note 3) 4,183 2,473
Deferred income taxes (Note 6) 810 -
Prepaid expenses and other 445 392
- ----------------------------------------------------------------------
TOTAL CURRENT ASSETS 15,004 8,694
- ----------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, NET (Note 4) 33,227 20,492
- ----------------------------------------------------------------------
OTHER ASSETS:
Notes receivable, related party (Note 10) 85 77
Deferred income taxes (Note 6) 585 800
Other assets, net of amortization (Note 5) 6,178 4,792
- ----------------------------------------------------------------------
TOTAL OTHER ASSETS 6,848 5,669
- ----------------------------------------------------------------------
TOTAL ASSETS $ 55,079 $ 34,855
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F - 4
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
SEPTEMBER 30, 1997 1996
- ----------------------------------------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term
debt (Note 9) $ 3,300 $ 1,707
Current maturities of long-term debt,
related parties (Note 9) - 2,075
Accounts payable 2,661 2,673
Accounts payable - related parties 438 61
Income taxes payable - 107
Other current liabilities 1,049 551
- ----------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 7,448 7,174
- ----------------------------------------------------------------------
LONG-TERM DEBT (Note 9):
Long-term debt, less current maturities 29,456 10,067
Long-term debt - related parties, less
current maturities - 1,951
- ----------------------------------------------------------------------
TOTAL LONG-TERM DEBT 29,456 12,018
- ----------------------------------------------------------------------
TOTAL LIABILITIES 36,904 19,192
- ----------------------------------------------------------------------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 12)
- ----------------------------------------------------------------------
Redeemable common stock, $.001 par value,
363,636 shares issued and outstanding
(Note 2) 1,500 1,500
- ----------------------------------------------------------------------
STOCKHOLDERS' EQUITY (Notes 7 and 11):
Preferred stock, no par value, 10,000,000
shares authorized Series D,
convertible, 10,000, and 0 shares
issued and outstanding 500 -
Common Stock, $.001 par value, 50,000,000
shares authorized, 14,149,780 and
13,430,793 shares issued and
outstanding 14 13
Additional paid-in capital 26,846 25,547
Accumulated deficit (10,685) (11,397)
- ----------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 16,675 14,163
- ----------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 55,079 $ 34,855
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F - 5
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Thousands of dollars except per share amounts)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
YEARS ENDED SEPTEMBER 30, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales (Note 8) $ 62,424 $ 27,619 $ 13,812
Cost of sales and operating expenses 55,179 26,590 10,869
- ---------------------------------------------------------------------------------------------------------
Gross profit 7,245 1,029 2,943
Selling, general and administrative expenses, net (Note 12) 4,221 3,253 2,279
- ---------------------------------------------------------------------------------------------------------
Operating income (loss) 3,024 (2,224) 664
- ---------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest expense (2,616) (732) (407)
Miscellaneous 73 4 41
- ---------------------------------------------------------------------------------------------------------
TOTAL OTHER INCOME (EXPENSE) (2,543) (728) (366)
- ---------------------------------------------------------------------------------------------------------
Earnings (loss) before extraordinary gain
and income tax benefit (expense) 481 (2,952) 298
Extraordinary gain on settlement of debt (Note 1) - - 806
- ---------------------------------------------------------------------------------------------------------
Earnings (loss) before income tax benefit (expense) 481 (2,952) 1,104
Income tax benefit (expense) (Note 6) 595 (9) 711
- ---------------------------------------------------------------------------------------------------------
Net earnings (loss) 1,076 (2,961) 1,815
Preferred stock dividends (Note 11) 364 - -
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
NET EARNINGS (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ 712 $ (2,961) $ 1,815
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
PRIMARY EARNINGS (LOSS) PER COMMON SHARE (Note 1):
Before extraordinary item $ .05 $ (.29) $ .17
Extraordinary item - - .13
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
PRIMARY EARNINGS (LOSS) PER COMMON SHARE $ .05 $ (.29) $ .30
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 14,138,000 10,212,000 6,100,000
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
FULLY DILUTED EARNINGS (LOSS) PER SHARE:
Before extraordinary item $ .04 $ (.29) $ .16
Extraordinary item - - .13
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
FULLY DILUTED EARNINGS (LOSS) PER COMMON SHARE $ .04 $ (.29) $ .29
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 17,608,000 10,212,000 6,352,000
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F - 6
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ADDITIONAL OTHER
YEARS ENDED SEPTEMBER 30, 1995, PREFERRED STOCK COMMON STOCK PAID-IN OPTION EQUITY ACCUMULATED
1996 AND 1997 SHARES AMOUNT SHARES AMOUNT CAPITAL TO CEO SECURITY (DEFICIT) TOTAL
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, September 30, 1994 629,333 $ 4,499 3,005,704 $ 3 8,269 $ - $ 246 $ (10,251) $ 2,766
Redemption of preferred stock
Series A (Note 11) (25,000) (2,300) - - - - - - (2,300)
Redemption of preferred stock
Series B and other equity for
option to CEO (Note 11) (291,333) (437) - - - 683 (246) - -
Common stock issued for acquisition
of MRI - - 120,000 - 1,200 - - - 1,200
Common stock issued during private
offering, net of offering
costs of $590 (Note 11) - - 3,746,400 4 2,778 - - - 2,782
Common stock issued to retire debt - - 166,666 - 150 - - - 150
Common stock issued for
renegotiation of payment terms
for a stockholder loan - - 10,000 - - - - - -
Common stock issued for services - - 10,000 - 25 - - - 25
Common stock issued for interest
on bridge loans - - 17,351 - 16 - - - 16
Common stock issued to CEO (Note 11) - - 1,319,445 1 682 (683) - - -
Common stock rounding due to stock
split - - 219 - - - - - -
Net earnings - - - - - - - 1,815 1,815
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCES, SEPTEMBER 30, 1995 313,000 $ 1,762 8,395,785 $ 8 13,120 $ - $ - $ (8,436) $ 6,454
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F - 7
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(THOUSANDS OF DOLLARS)
(CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ADDITIONAL
YEARS ENDED SEPTEMBER 30, 1995, PREFERRED STOCK COMMON STOCK PAID-IN ACCUMULATED
1996 AND 1997 SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, September 30, 1995 313,000 $ 1,762 8,395,785 $ 8 $ 13,120 $ (8,436) $ 6,454
Common stock issued for acquisition
of Anglo (Note 2) - - 227,693 - 925 - 925
Conversion of preferred stock
series B (300,000) (450) 12,000 - 450 - -
Common stock issued in private
offering, net of offering
costs of $548 (Note 11) - - 1,070,636 1 2,395 - 2,396
Conversion of bridge loans (Note 11) - - 413,523 - 1,138 - 1,138
Common stock issued on exercise
of warrants - - 816,822 1 314 - 315
Common stock issued in public
offering, net of offering
costs of $2,510 (Note 11) - - 3,994,652 4 13,964 - 13,968
Redemption of common stock - - (6,933) - (150) - (150)
Redemption of common stock and
preferred stock Series A
(Note 11) (13,000) (1,312) (120,000) - (1,088) - (2,400)
Redemption of common stock (Note 11) - - (1,373,385) (1) (5,521) - (5,522)
Net Loss - - - - - (2,961) (2,961)
- ---------------------------------------------------------------------------------------------------------
BALANCES, SEPTEMBER 30, 1996 - $ - 13,430,793 $ 13 $ 25,547 (11,397) $14,163
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F - 8
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(THOUSANDS OF DOLLARS)
(CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED ADDITIONAL
SEPTEMBER 30, 1995, PREFERRED STOCK COMMON STOCK PAID-IN ACCUMULATED
1996 AND 1997 SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, September 30, 1996 - $ - 13,430,793 $ 13 $ 25,547 $ (11,397) $ 14,163
Preferred stock Series C issued
for cash (Note 11) 10,000 1,000 - - - - 1,000
Redemption of preferrred stock
Series C (Note 11) (10,000) (1,000) - - - - (1,000)
Preferred stock Series D issued
for acquisitions (Note 11) 10,000 500 - - - - 500
Common Stock issued in private
offering (Note 11) - - 500,000 1 1,249 - 1,250
Common Stock issued on exercise
of options - - 150,000 - 135 - 135
Common stock issued on exercise
or conversion of Series I
warrants - - 133,800 - 27 - 27
Common Stock issued on excerise
or conversion of Dealer
warrants - - 1,187 - 7 - 7
Common stock repurchased (Note 11) - - (66,000) - (119) - (119)
Preferred dividends paid (Note 11) - - - - - (364) (364)
Net earnings - - - - - 1,076 1,076
- -------------------------------------------------------------------------------------------------------------------
BALANCES, SEPTEMBER 30, 1997 10,000 $ 500 14,149,780 $ 14 $ 26,846 $ (10,685) $ 16,675
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F - 9
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(THOUSANDS OF DOLLARS)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
YEARS ENDED SEPTEMBER 30, 1997 1996 1995
- -------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net earnings (loss) $ 1,076 $ (2,961) $ 1,815
Adjustments to reconcile net earnings
(loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 2,592 1,197 784
Deferred income taxes (595) - (800)
Other operating activities (1,472) 230 (781)
Changes in assets and liabilities:
Accounts receivable (4,355) (2,199) (3)
Inventories (1,498) 657 (254)
Prepaid expenses and other (53) (244) 7
Accounts payable (73) 1,531 (290)
Current liabilities, excluding
debt 391 240 (365)
- -------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (3,987) (1,549) 113
- -------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Capital expenditures, net (2,962) (1,561) (575)
Note receivable, related party - 146 (238)
Acquisitions (11,212) (11,568) (113)
Other assets (1,282) 19 -
- -------------------------------------------------------------------------------
NET CASH (USED IN) INVESTING ACTIVITIES (15,456) (12,964) (926)
- -------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from borrowings 26,867 10,215 321
Principal payments on borrowings (8,229) (2,614) (3,437)
Loans fees paid (835) (429) -
Dividends paid (364) - -
Net proceeds from issuance of stock 2,419 16,679 3,998
Redemption of stock (1,000) (8,072) -
Common stock repurchased (119) - -
- -------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 18,739 15,779 882
- -------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH (704) 1,266 69
CASH, BEGINNING OF YEAR 1,450 184 115
- -------------------------------------------------------------------------------
CASH, END OF YEAR $ 746 $ 1,450 $ 184
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F - 10
<PAGE>
RECYCLING INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS OF RECYCLING INDUSTRIES, INC. AND ITS SUBSIDIARIES
Recycling Industries, Inc. and subsidiaries (the "Company") is a full-service
metals recycler primarily engaged in the collection and processing of various
ferrous and non-ferrous metals for resale to domestic and foreign steel
producers and other metal producers and processors.
PRINCIPLES OF CONSOLIDATION AND INVESTMENTS IN AFFILIATES
The consolidated financial statements include the accounts of Recycling
Industries, Inc. and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
CONCENTRATION OF CREDIT RISK
Concentrations of credit risk with respect to trade receivables exist due to
large balances with a few customers. At September 30, 1997 and 1996, accounts
receivable balances from significant customers were $3.3 million and $1.8
million or 38% and 41%, of the total accounts receivable balance. Ongoing credit
evaluations of customers' financial condition are performed and, generally, no
collateral is required. The Company maintains an allowance for potential credit
losses and such losses, in the aggregate, have not exceeded management's
expectations. At September 30, 1997 and 1996 the allowance for doubtful accounts
was $4,000 and $10,000 respectively. Customers are located throughout the
Midwest, Southeast and Western regions of the United States and Mexico. Sales to
one customer in Mexico comprised 11.5% and 15.4% of sales for the years ended
September 30, 1997 and 1996. There were no significant sales in Mexico prior to
the acquisition of the Company's Southern Texas facilities in December 1995.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, accounts receivable, time deposits, accounts
payable, and accrued expenses approximate fair value because of the short
maturity of these items. The fair value of notes payable and amounts due to
factor were estimated based on market values for debt with similar terms.
Management believes that the fair value of that debt approximates its carrying
value.
INVENTORIES
The Company uses the lower of average cost on a first-in, first-out basis or
market for determining costs for ferrous and non-ferrous scrap metal.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost and are being depreciated on the
straight-line method over lives ranging from three to 40 years. Property, plant
and equipment leases, which are deemed to be installment purchase obligations,
have been capitalized and included in the property, plant and equipment
accounts. Maintenance, repairs and minor renewals are charged to operations
while major renewals and betterments are capitalized.
F-11
<PAGE>
RECYCLING INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED
The Company amortizes costs in excess of the fair value of net assets of
businesses acquired goodwill using the straight-line method over 20 years.
Recoverability is reviewed annually or sooner if events or circumstances
indicate that the carrying amount may exceed fair value. Recoverability is then
determined by comparing the undiscounted net cash flows of the assets to which
goodwill applies to the net book value including goodwill of those assets. The
analysis involves significant management judgment to evaluate the capacity of an
acquired business to perform within projections.
OTHER ASSETS
The Company capitalizes certain acquisition and financing costs into other
assets. Acquisition costs incurred on successful acquisitions are allocated to
net assets acquired and financing costs are amortized over the life of the
underlying agreement, and acquisition costs incurred on unsuccessful
acquisitions are charged to expense.
REVENUE RECOGNITION
The Company recognizes revenue on commercial exchanges at the time title to
goods transfers to the buyer. Brokerage income is recorded at the time materials
are received by the customer.
EARNINGS (LOSS) PER COMMON SHARE
Primary earnings (loss) per common share are computed by dividing net earnings,
after deducting preferred stock dividends, by the weighted average number of
common and dilutive common equivalent shares outstanding during the period.
Fully diluted computations assume the conversion of outstanding Convertible
Preferred Stock and the exercise of dilutive warrants and stock options.
Dilutive common equivalent shares consist of stock options and warrants. In loss
periods, dilutive common equivalent shares are excluded, as the effect would be
anti-dilutive.
CASH AND CASH EQUIVALENTS
For purposes of the Consolidated Statements of Cash Flows, the Company considers
all demand deposits and overnight investments as cash equivalents.
STOCK OPTIONS AND STOCK PURCHASE WARRANTS
Accounting Principles Board Opinion 25, "Accounting for Stock Issued to
Employees", is applied in accounting for all employee stock option and stock
purchase warrant arrangements. Compensation cost is recognized for all stock
options and stock purchase warrants granted to employees when the exercise price
is less than the market price of the underlying common stock on the date of
grant. Statement of Financial Accounting Standards 123, "Accounting for
Stock-Based Compensation" (Statement 123) requires pro forma disclosures
regarding earnings (loss) as if compensation cost for stock options and stock
purchase warrants had been determined in accordance with the fair value based
method prescribed in Statement 123. Estimates of the fair market value are made
for each stock option and stock purchase warrant at the date of grant by the use
of the Black-Scholes option-pricing model.
F-12
<PAGE>
RECYCLING INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
INCOME TAXES
The Company accounts for taxes on income under Statement of Financial Accounting
Standards No. 109, ACCOUNTING FOR INCOME TAXES. Under this method, deferred
income taxes are recorded to reflect the tax consequences in future years of
temporary differences between the tax basis of assets and liabilities and their
financial statement amounts at the end of each reporting period. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized. Income tax expense represents the tax payable
for the current period and the change during the period in deferred tax assets
and liabilities. Deferred tax assets and liabilities have been netted to reflect
the tax impact of temporary differences.
ENVIRONMENTAL MATTERS
Capital expenditures for ongoing environmental compliance measures are recorded
in the consolidated balance sheets 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. There were no amounts accrued at
September 30, 1997 and 1996.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates and assumptions.
EXTRAORDINARY ITEM
The Company recognized an extraordinary gain of $0.8 million in fiscal 1995 from
the extinguishment of $0.9 million of debt.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company is required to implement Financial Accounting Standards ("FAS") No.
128, "Earnings per Share" and FAS No. 129 "Disclosure of Information About an
Entity's Capital Structure" in fiscal year 1998. FAS No. 128 provides a
different method of calculating earnings per share than is currently used in
accordance with Accounting Principles Board Opinion 15 "Earnings per Share".
FAS No. 128 provides for the calculation of "basic" and "diluted" earnings per
share. Basic earnings per share includes no dilution and is computed by
dividing income available to common shareholders by the weighted average number
of common shares outstanding for the period. Diluted earnings per share reflects
the potential dilution of securities that could share in the earnings of an
entity, similar to fully diluted earnings per share. FAS No. 129 establishes
standards for disclosing information about an entity's capital structure. Their
implementation is not expected to have a material effect on the consolidated
financial statements.
F-13
<PAGE>
RECYCLING INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Company is also required to implement FAS No. 130 "Reporting
Comprehensive Income" and FAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information" in fiscal 1998. FAS No. 130 establishes
standards for reporting and display of comprehensive income, its components
and accumulated balances. Comprehensive income is defined to include all
changes in equity except those resulting from investments by owners and
distributions to owners. Among other disclosures, FAS No. 130 requires that
all items that are required to be recognized under current accounting
standards as components of comprehensive income be reported in a financial
statement that displays with the same prominence as other financial
statements. FAS No. 131 supersedes FAS No. 14 "Financial Reporting for
Segments of a Business Enterprise". FAS No. 131 establishes standards on the
way that public companies report financial information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments in interim financial statements issued
to the public. It also establishes standards for disclosures regarding
products and services, geographic areas and major customers. FAS No. 131
defines operating segments as components of a company about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in
assessing performance. FAS No. 130 and 131 require comparative information
for earlier years to be restated. Because of the recent issuance of these
standards, management has been unable to fully evaluate the impact, if any,
the standards may have on the future financial statement disclosures.
Results of operations and financial position, however, will be unaffected by
implementation of these standards.
RECLASSIFICATIONS
Certain balances in the 1996 and 1995 financial statements have been
reclassified to conform to the 1997 presentation. The reclassifications had no
effect on financial condition, results of operations, or cash flows.
2. ACQUISITIONS
On June 25, 1997, the Company acquired for $6 million substantially all the
assets of Addlestone International Corporation ("AIC") a metals recycler located
in Georgetown, South Carolina. The purchase was financed with $6 million of
long-term debt. The purchase price has been allocated to property and equipment
based on their fair market value. The operating results of AIC have been
included in the Company's consolidated financial statements since the date of
acquisition.
On April 7, 1997, the Company acquired for $5.7 million substantially all the
assets of Addlestone Recycling Corporation ("ARC") a metals recycler located in
Metter, Georgia. The purchase was financed with $5.2 million of long-term debt
and $0.5 million or 10,000 shares of the Company's Series D Preferred Stock.
The purchase price has been allocated to the assets based on their fair market
value and includes inventory, property and equipment. The operating results of
ARC have been included in the Company's consolidated financial statements since
the date of acquisition.
On August 5, 1996, the Company acquired for $12.1 million all of the outstanding
common stock of Weissman Industries, Inc., ("Weissman) a metals recycler located
in Waterloo, Iowa. The purchase price has been allocated to assets based on
their fair market value net of assumed liabilities. The assets consisted of
accounts receivable, inventories, property and equipment, covenant not to
compete and goodwill. The purchase price was funded with $10.6 million of cash
and 363,636 shares of the Company's common stock valued at $1.5 million.
Approximately $5.8 million of the cash portion of the purchase price was funded
through the proceeds of a pubic offering of the Company's Common Stock in July,
1996, operating cash reserves, and $4.8 million of long-term debt secured by the
equipment and real property acquired. Under the terms of a Share Price Guaranty
Agreement (the Agreement), the Company has agreed to guarantee at $1.5 million
the value of the 363,636 shares. The agreement grants the
F-14
<PAGE>
RECYCLING INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
seller registration rights effective for three years. If at any time during the
three year period commencing on the effective date of the registration
statement, the seller sells the 363,636 shares of common stock at less than the
guaranteed amount, the Company is required to pay to the seller any shortfall in
cash.
In addition, the seller has the right at his sole discretion to require the
Company, at any time during the two year period commencing November 30, 1997, to
redeem the Guaranteed Shares for $1.5 million. As a result of the Company's
agreement to redeem, if requested, such shares, the amount has been recorded as
temporary equity on the accompanying balance sheet. The results of operations of
Weissman are included in the accompanying financial statements from the date of
acquisition.
On April 15, 1996, the Company acquired for $1.9 million substantially all of
the assets of Mid-America Shredding, Inc. ("Mid-America) a metals recycler
located in Ste. Genevieve, Missouri. The purchase was financed through the
assumption of outstanding bank debt of $1.2 million and $0.7 million in cash.
The purchase price has been allocated to assets based on their fair market value
and includes inventories and property and equipment. The results of operations
of Mid-America are included in the accompanying financial statements from the
date of acquisition.
On December 11, 1995, the Company acquired for $6.1 million substantially all of
the assets of Anglo Metal, Inc., ("Anglo") a metal recycler located in Southern
Texas. The purchase price was financed through $3.1 million of long-term debt,
$1.8 million through a sale-leaseback of certain purchased equipment, 227,693
shares of common stock valued at $0.9 million and $0.3 million in cash. The
purchase price has been allocated to assets based on their fair market value and
includes inventories, property and equipment, covenant not to compete and
goodwill. The Company entered into a sublease agreement with Anglo for three
yard facilities for $2,500 a month through December 10, 2005. The results of
operations of Anglo are included in the accompanying financial statements from
the date of acquisition.
The following summarized unaudited pro forma results of operations assumes the
acquisition of ARC, AIC, Weissman, Mid-America and Anglo had occurred at the
beginning of the year acquired and the preceding year.
(THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
- ------------------------------------------------------------------------------
YEARS ENDED SEPTEMBER 30, 1997 1996 1995
- ------------------------------------------------------------------------------
Net sales $ 85,436 $ 75,061 $ 52,222
Earnings from continuing
operations, net of taxes 1,285 1,149 3,977
Earnings after
extraordinary items and
income taxes 1,285 1,149 4,783
Earnings from continuing
operations, net of taxes
per common share 0.09 0.11 0.59
Earnings after
extraordinary items and
income taxes per common share $ 0.07 $ 0.11 $ 0.71
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
The pro forma data is for informational purposes only and may not necessarily
reflect the results of operations of the Company had the acquired businesses
operated as part of the Company for the years ended September 30, 1997, 1996 and
1995.
F-15
<PAGE>
RECYCLING INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
In September 1996, the Company wrote off its 20% or $0.3 million minority
investment in The Loef Company, a metals recycler located in Athens, Georgia.
3. INVENTORIES
A summary of inventories at the end of each year is as follows:
(THOUSANDS OF DOLLARS)
- ------------------------------------------------------------------------------
SEPTEMBER 30, 1997 1996
- ------------------------------------------------------------------------------
Raw materials $ 2,590 $ 1,302
Finished goods 1,330 1,171
Other 263 -
- ------------------------------------------------------------------------------
Total $ 4,183 $ 2,473
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
4. PROPERTY AND EQUIPMENT
A summary of property and equipment at the end of each year is as follows:
(THOUSANDS OF DOLLARS)
- ------------------------------------------------------------------------------
SEPTEMBER 30, 1997 1996
- ------------------------------------------------------------------------------
Land $ 4,600 $ 2,692
Buildings and improvements 3,807 2,768
Machinery and equipment 25,849 14,808
Transportation equipment 2,077 1,728
Office equipment 450 121
- ------------------------------------------------------------------------------
Total 36,783 22,117
Less accumulated depreciation 3,556 1,625
- ------------------------------------------------------------------------------
Total $ 33,227 $ 20,492
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Included in machinery and equipment at September 30, 1997 and 1996 are capital
leases of $2.1 million and $1.9 million, respectively. Accumulated depreciation
on capital lease assets as of September 30, 1997 and 1996 was $0.2 and $0.1
million, respectively.
Depreciation expense on property and equipment was $1.9 million, $0.9 million
and $0.5 million for the years ended September 30, 1997, 1996 and 1995,
respectively.
Approximately $0.1 million of interest costs were capitalized as part of
property and equipment for the year ended September 30, 1997.
F-16
<PAGE>
RECYCLING INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
5. OTHER ASSETS
A summary of other assets at the end of each year is as follows:
(THOUSANDS OF DOLLARS)
- -------------------------------------------------------------------------------
SEPTEMBER 30, 1997 1996
- -------------------------------------------------------------------------------
Deferred acquisition costs $ 535 $ 38
Goodwill, net of accumulated
amortization of $283 and $141 2,749 3,016
Engineering plans, net of accumulated
amortization of $1,024 and $962 63 125
Non-compete agreements, net of accumulated
amortization of $364 and $147 886 1,103
Loan fees, net of accumulated
amortization of $288 and $48 976 381
Other 969 129
- -------------------------------------------------------------------------------
Total $ 6,178 $ 4,792
- -------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
6. TAXES ON INCOME
Pursuant to the terms of its acquisition of MRI, the Company included a $3.5
million capital gain realized prior to such acquisition on its consolidated 1994
tax return and utilized a portion of its net operating loss carryforward
generated in prior years to offset the capital gain. Management believes its
position has merit based on its interpretation of the Internal Revenue Code and
an opinion by its tax counsel. However, the Company has not obtained a prior
ruling from the Internal Revenue Service (IRS) and has no assurances that the
IRS will concur with its interpretation. If the IRS were to successfully
challenge the position taken on this issue, the Company could be required to pay
approximately $1.2 million in additional income taxes plus penalties and
interest, and the $3.5 million net operating loss utilized on its consolidated
1994 tax return would be available to offset future taxable income generated by
the Company.
Under the terms of the Weissman acquisition agreement, the Company has agreed to
indemnify the selling shareholders of Weissman for certain tax liabilities which
could result from an audit by the IRS of the final Weissman tax return.
During fiscal year 1997 and 1996 management determined that net operating losses
generated from prior years were more likely than not to be used in the near
future due to taxable income generated by acquired operations. Therefore, a net
deferred tax asset of $1.4 million and $0.8 million has been recorded as of
September 30, 1997 and 1996. Net operating loss carryforwards available for
future use through the year 2012 were approximately $11.6 million at
September 30, 1997. As a result of a change in ownership, as defined by Section
382 of the Internal Revenue Code, approximately $8.7 million of the net
operating loss carry forwards are limited in use to approximately $2.6 million
per year. If additional changes in ownership were to occur Section 382 could
further reduce the amount of net operating losses that would be available to
offset future taxable income.
F-17
<PAGE>
RECYCLING INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The components of deferred tax assets and (liabilities) are as follows:
(THOUSANDS OF DOLLARS)
- -------------------------------------------------------------------------------
SEPTEMBER 30, 1997 1996
- -------------------------------------------------------------------------------
Total deferred tax assets $ 5,753 $ 5,978
Less valuation allowance - (1,170)
- -------------------------------------------------------------------------------
5,753 4,808
Total deferred tax (liabilities) (4,358) (4,008)
- -------------------------------------------------------------------------------
Net deferred tax asset $ 1,395 $ 800
- -------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
The tax effects of temporary differences and net operating loss carryforwards
that give rise to deferred tax assets and (liabilities) are as follows:
(THOUSANDS OF DOLLARS)
- -------------------------------------------------------------------------------
SEPTEMBER 30, 1997 1996
- -------------------------------------------------------------------------------
TEMPORARY DIFFERENCES:
- ----------------------
Property and equipment $ (4,358) $ (4,008)
Net operating loss carryforwards 3,936 3,474
Goodwill and other assets 1,515 2,277
Valuation allowance - (1,170)
Alternative minimum tax credits 87 87
Other 215 140
- -------------------------------------------------------------------------------
Totals $ 1,395 $ 800
- -------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Income tax benefit (expense) consisted of the following:
(THOUSANDS OF DOLLARS)
- -------------------------------------------------------------------------------
YEARS ENDED SEPTEMBER 30, 1997 1996 1995
- -------------------------------------------------------------------------------
Current $ - $ (9) $ (89)
Deferred 595 - 800
- -------------------------------------------------------------------------------
$ 595 $ (9) $ 711
- -------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
F-18
<PAGE>
RECYCLING INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
A reconciliation of the effective tax rates to the federal statutory rate is
shown below:
(THOUSANDS OF DOLLARS)
- ------------------------------------------------------------------------------
YEARS ENDED SEPTEMBER 30, 1997 1996 1995
- -------------------------------------------------------------------------------
Federal income tax benefit
(expense) computed at federal
statutory rates $ (163) $ 1,004 $ (374)
Capital gains-MRI - - (1,190)
Change in valuation allowance 1,170 (928) 2,072
Change in net operating loss
carry forwards (408) - -
Other (4) (85) 203
- -------------------------------------------------------------------------------
Income tax benefit (expense) $ 595 $ (9) $ 711
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
F-19
<PAGE>
RECYCLING INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
7. STOCK OPTIONS AND STOCK PURCHASE WARRANTS
The following is a summary of changes in stock options and stock purchase
warrants outstanding during the years ended September 30, 1997, 1996 and 1995.
Each stock option and stock purchase warrant outstanding is exercisable to
purchase one share of the Company's $.001 par value Common Stock.
- ------------------------------------------------------------------------------
WEIGHTED AVERAGE
YEARS ENDED SEPTEMBER 30, NUMBER OF SHARES EXERCISE PRICE
- ------------------------------------------------------------------------------
STOCK OPTIONS:
Balance, October 1, 1994 202,000 $ 1.42
Granted - -
Exercised - -
Expired/cancelled - -
- ------------------------------------------------------------------------------
Balance, September 30, 1995 202,000 1.42
Granted 765,000 2.87
Exercised - -
Expired/cancelled (450,000) (2.87)
- ------------------------------------------------------------------------------
Balance, September 30, 1996 517,000 2.30
Granted 3,781,800 1.46
Exercised (150,000) (0.90)
Expired/cancelled - -
- ------------------------------------------------------------------------------
Balance, September 30, 1997 4,148,800 $ 1.59
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
STOCK PURCHASE WARRANTS:
Balance, October 1, 1994 818,497 $ 17.41
Granted 335,000 5.31
Exercised - -
Expired/cancelled - -
- ------------------------------------------------------------------------------
Balance, September 30, 1995 1,153,497 14.13
Granted 3,656,751 5.54
Exercised (816,822) (1.50)
Expired/cancelled - -
- ------------------------------------------------------------------------------
Balance, September 30, 1996 3,993,426 6.59
Granted 798,000 1.94
Exercised (134,987) (1.50)
Expired/cancelled - -
- ------------------------------------------------------------------------------
Balance, September 30, 1997 4,656,439 $ 5.80
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
F-20
<PAGE>
RECYCLING INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following information summarizes stock options outstanding at September 30,
1997:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
OUTSTANDING EXERCISABLE
- -----------------------------------------------------------------------------------------
YEARS OF NUMBER WEIGHTED AVERAGE RANGE OF NUMBER WEIGHTED AVERAGE
EXPIRATION OUTSTANDING EXERCISE PRICE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 6,000 $2.50 $2.50 6,000 $2.50
1999 46,000 2.99 0.90 - 6.25 46,000 2.99
2001 315,000 2.87 2.87 125,010 2.87
2002 747,979 1.52 1.25 - 5.56 611,513 1.56
2003 24,000 2.78 2.78 24,000 2.78
2007 3,009,821 1.44 1.25 - 2.43 3,009,821 1.44
- -----------------------------------------------------------------------------------------
4,148,800 $1.59 $0.90 - 6.25 3,822,344 $1.53
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
</TABLE>
The weighted average grant date fair value of stock options granted during the
year is summarized as follows:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
YEARS ENDED SEPTEMBER 30, 1997 1996
- --------------------------------------------------------------------------------
Market value equal to exercise price $ 0.52 $ 1.36
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The following information summarizes stock purchase warrants outstanding at
September 30, 1997:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
OUTSTANDING EXERCISABLE
- -----------------------------------------------------------------------------------------
YEARS OF NUMBER WEIGHTED AVERAGE RANGE OF NUMBER WEIGHTED AVERAGE
EXPIRATION OUTSTANDING EXERCISE PRICE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999 200,000 $7.00 $2.50 - 7.50 200,000 $7.00
2000 3,270,834 6.00 1.50 - 6.00 3,270,834 6.00
2001 341,667 5.43 3.75 - 5.57 341,667 5.43
2002 823,938 4.96 1.56 - 75.00 823,938 4.96
2005 20,000 1.25 1.25 20,000 1.25
- -----------------------------------------------------------------------------------------
4,656,439 $5.80 $1.25 - 75.00 4,656,439 $5.80
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
</TABLE>
The weighted average grant date fair value of stock purchase warrants granted
during the year is summarized as follows:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
YEARS ENDED SEPTEMBER 30, 1997 1996
Market value equal to exercise price $ 0.31 $ 1.57
Market value greater than exercise price $ - $ 2.63
Market value less than exercise price $ 0.34 $ 1.07
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
F-21
<PAGE>
RECYCLING INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Company applies Accounting Principals Board Opinion 25 in accounting for
stock options granted to employees. Had compensation expense been determined
based upon the fair value of the awards at the grant date and consistent with
the method under Statement of Financial Accounting Standards 123, the Company's
net earnings (loss) and net earnings (loss) per share would have been decreased
or (increased) to the pro forma amounts indicated in the following table.
(THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
YEARS ENDED SEPTEMBER 30, 1997 1996
- --------------------------------------------------------------------------------
Net earnings (loss) as recorded $ 1,076 $ (2,961)
Net earnings (loss) pro forma $ 100 $ (3,064)
Net earnings (loss) per share as reported $ .04 $ (0.29)
Net earnings (loss) per share pro forma $ .01 $ (0.30)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The fair value of each employee stock option granted during the years ended
September 30, 1997 and 1996 is estimated on the date of grant using the Black-
Scholes option-pricing model using the following factors: expected volatility,
34% to 44%; risk free interest rate, 7%; expected annual dividends, none; and,
estimated lives of the options of between one and five years.
The 1997 Executive Plan provides for the grant of stock options to existing and
future executives of the Company. An aggregate of 4,000,000 shares of Common
Stock is authorized for issuance under this plan. Options granted under the 1997
Executive Plan must have an exercise of not less than 100 percent of the fair
market value of Common Stock on the date of grant. The 1997 Executive Plan
terminates on April 18, 2007, and the term of any option granted under the 1997
Executive Plan may not exceed ten years.
The 1995 Non-Statutory Stock Option Plan (1995 Plan), the 1995 Non-Employee
Director Stock Option Plan (Director Plan) and the 1997 Executive Stock Option
Plan were approved by the Company's shareholders at the 1997 Annual Meeting of
Shareholders. The 1995 Plan provides for the grant of stock options to
employees, officers and employee directors of the Company. An aggregate of
2,000,000 shares of Common Stock is authorized for issuance under the 1995 Plan.
The 1995 Plan terminates on December 27, 2006. Options granted under the 1995
Plan must have an exercise price of not less than 80% of the fair market value
of the Common Stock on the date of grant, and their term may not exceed ten
years.
The Director Plan provides for the grant of stock options to existing and future
Independent Directors of the Company. These options and the Director Plan were
approved by the Company's shareholders at the 1996 annual meeting of
shareholders. The Director Plan terminates on December 27, 2006. Options granted
under the Director Plan will be exercisable commencing six months after the date
of grant and continuing for five years from the date of grant.
During 1992, the Company's Board of Directors adopted an incentive stock option
plan and a non-qualified stock option plan, which were both subsequently
approved by the stockholders. The stock option plans provide for 200,000 and
50,000 shares, respectively, to be reserved. Options under the non-qualified
stock option plan may be issued at such prices and at such terms as determined
by the Board of Directors.
F-22
<PAGE>
RECYCLING INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
8. MAJOR CUSTOMERS
The Company is economically dependent on major customers for annual sales. Such
customers comprised the following percentages of net sales:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
YEARS ENDED SEPTEMBER 30, 1997 1996 1995
- --------------------------------------------------------------------------------
Customer A 18.5% 22.5% 16.2%
Customer B 11.5% 5.2% -
Customer C (export sales to Mexico) 11.5% 15.4% -
Customer D 4.1% 9.6% 37.9%
Customer E 1.0% 5.6% 10.8%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
9. LONG-TERM DEBT
A summary of long-term debt at the end of each year is as follows:
<TABLE>
<CAPTION>
(THOUSANDS OF DOLLARS)
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
SEPTEMBER 30, 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Revolving Credit and Term Loan Agreement with interest rates
ranging from 2% to 2.25% plus prime (10.5% - 10.75% at
September 30, 1997), due April 2000 $ 22,611 $ 8,394
4.0% plus prime Bridge Note (12.5% at September 30, 1997),
due July 1998 7,000 -
Capital lease obligations with interest at 10.5% to 14% 1,482 1,612
Other, interest at 9% to 18% 1,663 1,768
Related party notes - 4,026
- ------------------------------------------------------------------------------------------
Total 32,756 15,800
Less current maturities 3,300 3,782
- ------------------------------------------------------------------------------------------
Net long-term debt $ 29,456 $ 12,018
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
</TABLE>
Capital lease obligations consist primarily of installment purchase obligations
for machinery and equipment. The Company has been in violation of certain
covenants under the capital lease, which require the obligation to be paid on
demand. The capital lease was paid in full in December 1997.
During the year the Company refinanced $1.7 million of certain related party
notes with proceeds from the Revolving Credit and Term Loan Agreement. Excess
proceeds of $0.8 million were retained by the Company for general corporate
purposes.
On April 7, 1997, the Company issued warrants to acquire up to 128,000 shares of
its Common Stock in connection with an increase in the Company's credit
facility. Each warrant is exercisable at a price of $1.5625 per share.
On June 23, 1997, the Company issued warrants to acquire 650,000 shares of its
common stock in connection with the $7 million bridge loan. The exercise price
for the warrants is $2.00 per share. On December 5, 1997, the bridge loan was
paid in full.
F-23
<PAGE>
RECYCLING INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
In December 1997, the Company entered into a $150 million Senior Credit Facility
("Credit Facility") with General Electric Capital Corporation as agent for the
lenders. The Credit Facility is comprised of a $45 million revolving credit
facility, a $40 million term loan due December 5, 2003, with interest and
principal payable quarterly, a $40 million term loan due on the earlier of
December 5, 2005 or six months prior to the maturity of the Subordinated Notes
discussed below with interest and principal payable quarterly and a $25 million
acquisition line of credit due December 5, 2003, with interest and principal
payable quarterly. The notes bear interest at either (I) the higher of (a)
prime plus .75% or (b) the Federal Funds rate plus 50 basis points per annum
plus .75%, or (II) at the option of the Company upon certain conditions, the
LIBOR rate plus 2.25%. The proceeds from the Credit Facility are secured
substantially all of the Company's assets and are to be used for acquisitions,
repayment of existing indebtedness and general corporate purposes.
In December 1997, the Company issued $60 million in Senior Subordinated Notes
and approximately one million warrants to various lenders, the proceeds of which
are to be used for acquisitions, repayment of existing indebtedness and general
corporate purposes. The notes bear interest at 13% and mature in December 2005.
The terms of the agreements to which the Credit Facility and Subordinated Notes
were issued require, among other terms, the maintenance of certain ratios and
other financial covenants, the most restrictive of which are the maintenance of
Minimum Consolidated Net Worth, Minimum Quarterly Earnings Before Interest,
Taxes, Depreciation and Amortization (EBITDA) and Minimum Funded Debt to Pro
Forma EBITDA. The first quarter for which the restrictive debt covenants apply
is March 31, 1998.
The Credit Facility and Subordinated Notes were used in part to refinance in
total the Company's consolidated debt primarily on a long-term basis. The
Company incurred $2.3 million in prepayment penalties and will incur a
$1.2 million expense on the write off of $1.2 million in prepaid loan fees
from refinancing the Revolving Credit and term Loan Agreement. Scheduled
maturities of long-term debt at September 30, 1997 based on the refinancing
is as follows: $3.3 million in 1998, $4.4 million in 1999, $5.9 million in
2000, $7.9 million in 2001, $8.4 million in 2002 and $2.9 thereafter.
10. RELATED PARTY TRANSACTIONS
During 1997, the Company loaned $0.1 million to the majority stockholder
maturing July 1, 2004. On December 5, 1997, the Company loaned an additional
$1.4 million to the majority stockholder with the same maturity date. The notes
bear interest at prime plus 2% adjusted on the last day of each quarter payable
in arrears on December 31 of each year commencing December 31, 1998.
During 1996 and 1995, the Company purchased raw materials from related entities
in the amounts of $1.2 million and $0.2 million, respectively. The purchase
price of the raw materials approximates the cost paid to other large bulk
suppliers.
11. STOCKHOLDERS' EQUITY
In December 1996, the Company completed a private placement of $1 million Series
C Convertible Preferred Stock ("Series C Preferred"). During the third quarter
of 1997, the Company redeemed the Series C Preferred for $1.3 million with a
combination of existing cash and financing from the Company's credit facility.
Included in the redemption price was a dividend in the amount of $0.3 million.
F-24
<PAGE>
RECYCLING INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
On April 7, 1997, the Company issued 10,000 shares of Series D Convertible
Preferred Stock (Series D Preferred) valued at $0.5 million. The Series D
Preferred will automatically convert on April 1, 1999, into that number of
shares of the Company's Common Stock whose average market price for the ten
trading days preceding the date of conversion is equivalent to $0.5 million plus
the amount of all accrued and unpaid dividends on the Series D Preferred to the
date of conversion. Holders of the Series D Preferred are entitled to dividends
on a cumulative basis at an annual rate of eight percent, payable quarterly in
cash.
On September 9, 1997, the Company sold 500,000 shares of Common Stock at an
offering price of $2.50 per share. The stock was issued pursuant to a
Subscription Agreement which netted proceeds of $1.3 million.
During the year, the Board of Directors authorized the Company to repurchase up
to 700,000 shares of Common Stock in open market transactions. The Company
acquired 66,000 shares of Common Stock for $0.1 million.
On August 15, 1996 the Company redeemed 13,000 shares of Series A Preferred
Stock and repurchased 120,000 shares of Common Stock for $2.4 million.
On July 17, 1996, the Company completed a public offering of 3,994,652 shares of
Common Stock at an offering price of $4.125 per share (the "Public Offering).
Net proceeds raised by the Company from the Public Offering were $14 million.
Out of the proceeds of the Public Offering, the Company repurchased 1,373,385
shares of Common Stock for $5.5 million.
On April 8, 1996, the Company received $2.4 million (net of offering costs of
approximately $0.5 million) from a private placement of 1,070,636 shares of
Common Stock and warrants (Series J Warrants) to acquire up to 727,078 shares of
Common Stock at $6.00 per share (the "January 1996 Private Placement"). In
addition $1.1 million in bridge loans (including accrued interest) were
converted into units offered under the January 1996 Private Placement. The
Series J Warrants are exercisable until December 27, 1999. The exercise price
of 686,418 Series J Warrants is $6.00 per share and the exercise price of 40,665
Series J Warrants is $4.00 per share. In connection with the offering, the
Company issued to the placement agent 69,945 warrants (placement agent warrants)
each to purchase two shares of Common Stock and one Series H Warrant, which are
exercisable for a three-year period commencing one year from the date of
issuance, at an exercise price of $2.75. Upon exercise of the placement agent
warrants, the Company will issue up to 69,945 Series H Warrants each to purchase
one share of Common Stock at an exercised price of $6.00 per share. The Series H
Warrants are exercisable for a three-year period commencing one year from the
date of issuance and are not redeemable by the Company.
In January 1996 notes payable - related parties of $1.1 million including
accrued interest were converted into 413,523 shares of Common Stock.
On January 25, 1995, the Company conditionally granted its Chief Executive
Officer a right to acquire shares of Common Stock valued at $1.2 million in
exchange for: 1) the purchase of certain technology owned by the Chief
Executive Officer and an affiliated entity, First Dominion Holdings, Inc.
("FD"); 2) 21,333 Series B preferred shares owned by FD; 3) the forgiveness of
$1.2 million of accrued salary, royalties and other amounts due to the Chief
Executive Officer of which $0.2 million was recorded as accrued salary payable
in equity security as of September 30, 1994. On August 8, 1995 the Chief
Executive Officer exercised that "W" Right and was issued 1,319,445 shares of
Common Stock
In January 1995, the Company exchanged 291,333 shares of Series B preferred
stock as partial consideration for the "W" right, and on November 9, 1995, the
remaining 300,000 shares were converted into 12,000 of Common Stock.
F-25
<PAGE>
RECYCLING INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
On April 17, 1995, the Company received $2 million net of offering costs of
approximately $0.2 million from the private placement of 1,946,400 shares of
Common Stock and warrants (Series G Warrants) to acquire up to 1,236,878 shares
of Common Stock (the "February 1995 Private Placement"), including $0.5 million
in bridge loans (including accrued interest) that were converted into units
offered under the February Private Placement. The Series G Warrants are
exercisable from the date of their issuance and expire on December 27, 1999. The
exercise price of 1,916,400 Series G Warrants is $6.00 per share and the
exercise price of 30,000 Series G Warrants is $4.00 per share. Under certain
conditions as set forth in the warrant agreement, the Company may redeem the
Series G Warrants prior to their expiration, at a redemption price of $.25 per
Series G Warrant upon not less than 30 days prior written notice to the warrant
holders. In connection with the offering, the Company issued to the placement
agent 139,828 warrants (placement agent warrants) each to purchase two shares of
Common Stock and one Series H Warrant, which are exercisable for a three-year
period commencing one year from the date of issuance, at an exercise price of
$1.80. Upon exercise of the placement agent warrants, the Company will issue up
to 139,828 Series H Warrants each to purchase one share of Common Stock at an
exercised price of $6.00 per share. The Series H Warrants are exercisable for a
three-year period commencing one year from the date of issuance and are not
redeemable by the Company.
On July 31, 1995, the Company received $1.2 million (net of offering costs of
approximately $0.3 million) from the private placement of 1,800,000 shares of
Common Stock and warrants (Series G Warrants) to acquire up to 900,000 shares of
Common Stock (the "May 1995 Private Placement"). The Series G Warrants are
exercisable from the date of their issuance through December 27, 1999. The
exercise price of the Series G Warrants is $6.00 per share. Under certain
conditions as set forth in the warrant agreement, the Company may redeem the
Series G Warrants prior to their expiration, at a redemption price of $.25 per
Series G Warrant upon not less than 30 days' prior written notice to the warrant
holders. In connection with the offering, the Company issued to the placement
agent 73,560 warrants (placement agent warrants) each to purchase two shares of
Common Stock and one Series H Warrant, which are exercisable for a three-year
period commencing one year from the date of issuance, at an exercise price of
$1.80. Upon exercise of the placement agent warrants, the Company will issue up
to 73,560 Series H Warrants each to purchase one share of Common Stock at an
exercised price of $6.00 per share. The Series H Warrants are exercisable for a
three-year period commencing one year from the date of issuance and are not
redeemable by the Company.
In 1995, the Company redeemed 25,000 shares of Series A Preferred Stock for $2.3
million.
12. COMMITMENTS AND CONTINGENCIES
The Company leases various facilities and equipment under non-cancelable
operating lease agreements. Rental expense for the operating leases amounted to
$0.4 million, $0.1 million and $0.1 million for the years ended September 30,
1997, 1996 and 1995, respectively. Minimum lease commitments under
noncancelable leases with initial terms greater than one year at September 30,
1997 were $0.5 million for 1998, $0.4 million for 1999, $0.4 million for 2000,
$0.3 million for 2001, $0.1 million for 2002 and $0.1 million thereafter. It is
expected that in the ordinary course of business, leases will be renewed or
replaced.
The Company is partially self insured for employee health benefits and coverage
is obtained for catastrophic exposure through independent insurance carriers.
The Company contracts with an independent insurance firm to provide claims
handling and adjustment services. Estimates with respect to claims are based on
internal evaluations of individual claims and by the Company's independent
insurance carrier. The method of making such estimates and establishing the
resulting accrued liability are reviewed frequently, and any adjustments are
reflected in current earnings.
F-26
<PAGE>
RECYCLING INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Substantially all of the labor force that work in the recycling operations yard
at the Weissman subsidiary work under a collective bargaining agreement which
expires in 2000.
On July 1, 1997, the Company entered into a five-year employment agreement with
its Chairman and Chief Executive Officer, Thomas J. Wiens (the "Wiens Employment
Agreement"). The Wiens Employment Agreement provides for an annual base salary
of $288,000 and annual bonuses in an amount to be determined by the Compensation
Committee. The Wiens Employment Agreement also provides that the Company will
loan Mr. Wiens up to $1,925,000, to be advanced in increments of $100,000
(increased by $15,000 for each advance) upon the closing of each acquisition of
a new operating facility subsequent to June 23, 1997 (the "Loan"). The amount
advanced upon the closing of each acquisition may be increased depending upon
the annual revenues of the business being acquired by the Company. The Loan
bears interest at prime plus 2% with interest payable annually on or before
December 31st of each year during the term of the Loan, commencing December 15,
1998. The Loan matures on July 1, 2004. As of September 30, 1997, the Company
had advanced Mr. Wiens $85,000 under the terms of the Loan and Mr. Wiens had the
right to request additional advances of up to $295,000 on or before October 1,
1997 Subsequent to September 30, 1997, in connection with the closing of six
acquisitions in December 1997, the Company advanced Mr. Wiens an additional
$1,440,000 under the terms of the Loan.
The Wiens Employment Agreement also provides that the Company will provide a $1
million life insurance policy on Mr. Wiens payable to his spouse or lineal
descendants.
If Mr. Wiens terminates his employment with the Company for "good reason" or is
terminated without cause, the Company shall pay to Mr. Wiens (i) the base salary
and bonus, if any, through the date of termination; (ii) the amount of base
salary that would have been paid through the expiration of the initial five-year
term of the Wiens Employment Agreement; and (iii) an amount equal to the pro-
rata portion of the prior year's annual bonus through the date of termination.
In addition, all amounts advanced to Mr. Wiens under the Loan shall be forgiven
by the Company and the Company shall pay to Mr. Wiens an amount equal to the
income taxes payable by him as a result of such forgiveness. For purposes of
the Wiens Employment Agreement, "good reason" generally means a material
diminishment in Mr. Wiens' duties, any material breach by the Company of any of
the provisions of the Wiens Employment Agreement, or any reduction, or attempted
reduction, at any time during the term of the Wiens Employment Agreement, of Mr.
Wiens' base salary unless: (i) such reduction is part of an overall proportional
reduction in the compensation of the Company's executive officers implemented by
the Board of Directors or, (ii) in his capacity as a Director, Mr. Wiens
recommends or approves the reduction.
If Mr. Wiens's employment is terminated within two years of a "hostile change in
control" of the Company, the Company will pay to Mr. Wiens an amount equal to
the greater of amount of base salary that would have been paid through the
expiration of the initial five-year term of the Wiens Employment Agreement or
2.99 times the sum of the base salary payable on the date of termination plus
the annual bonus paid to Mr. Wiens during the last full fiscal year. In
addition, all amounts advanced to Mr. Wiens under the Loan shall be forgiven by
the Company and the Company shall pay to Mr. Wiens an amount equal to the income
taxes payable by him as a result of such forgiveness. For purposes of the Wiens
Employment Agreement, a "hostile change in control" is defined as the completion
of a tender offer or exchange offer (other than an offer by the Company) which
by its terms could result in the acquisition by an entity, person or group of
30% or more of the Company's common stock, provided such tender offer is not
recommended for acceptance to the shareholders of the Company by the Board of
Directors.
F-27
<PAGE>
RECYCLING INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
On September 8, 1997, the Company entered into a four-year employment agreement
with its Vice-Chairman, Luke F. Botica (the "Botica Employment Agreement"). The
Botica Employment Agreement provides for an annual base salary of $100,000
increasing to $250,000 on September 8, 1998, an annual bonus of $150,000 payable
over the 12 month period commencing September 30, 1997 and annual bonuses in an
amount to be determined by the Compensation Committee.
The Botica Employment Agreement also provides that the Company will provide a
$500,000 life insurance policy on Mr. Botica payable to his spouse or lineal
descendants.
If Mr. Botica terminates his employment with the Company for "good reason" or is
terminated without cause, the Company shall pay to Mr. Botica (i) the base
salary and bonus, if any, through the date of termination; (ii) the amount of
base salary that would have been paid through the expiration of the initial
four-year term of the Botica Employment Agreement; and (iii) an amount equal to
the pro-rata portion of the prior year's annual bonus through the date of
termination. For purposes of the Botica Employment Agreement, "good reason"
generally means a material diminishment in Mr. Botica's duties, any material
breach by the Company of any of the provisions of the Botica Employment
Agreement, or any reduction, or attempted reduction, at any time during the term
of the Botica Employment Agreement, of Mr. Botica's base salary unless: (i) such
reduction is part of an overall proportional reduction in the compensation of
the Company's executive officers implemented by the Board of Directors or, (ii)
in his capacity as a Director, Mr. Botica recommends or approves the reduction.
If Mr. Botica's employment is terminated within two years of a "hostile change
in control" of the Company, the Company will pay to Mr. Botica an amount equal
to the greater of amount of base salary that would have been paid through the
expiration of the initial four-year term of the Botica Employment Agreement or
2.99 times the sum of the base salary payable on the date of termination plus
the annual bonus paid to Mr. Botica during the last full fiscal year. For
purposes of the Botica Employment Agreement, a "hostile change in control" is
defined as the completion of a tender offer or exchange offer (other than an
offer by the Company) which by its terms could result in the acquisition by an
entity, person or group of 30% or more of the Company's common stock, provided
such tender offer is not recommended for acceptance to the shareholders of the
Company by the Board of Directors.
The Company has been named as a defendant in several lawsuits alleging the
Company through its alleged agents sold unregistered and restricted securities
to the plaintiffs based upon misrepresentations. The other defendants in these
matters are in bankruptcy. The Company has denied all liability and is
vigorously defending against these actions. Nevertheless the Company has
entered into a Stipulation of Settlement (the "Stipulation") with the trustees
in bankruptcy and the debtor in possession. The Stipulation terms provide for
the Company on or before July 1, 1998 to rescind the sale of approximately
560,000 shares of the Company's Common Stock to be obtained by the bankruptcy
trustee from individual investors or creditors to be identified.
For return of such shares the Company will pay $7,000,000 and any and all
actions initiated against the Company and the other defendants will be
permanently enjoined by an order of the Bankruptcy Court. In accordance with
the terms of the Stipulation, the Company has provided the trustees with a
$7,000,000 letter of credit. However, the Stipulation contains various
provisions requiring the trustee to deliver a minimum number of shares. If the
trustee is not able to deliver the minimum (500,000 shares) and the trustee does
not exercise his right to deliver less than the minimum, the Stipulation will be
void. If the trustee exercises the right to deliver less than the minimum, the
Company will pay for the rescinded shares the greater of $12.50 per share or the
average closing price of the Company's Common Stock on the last ten trading days
before the date of payment, upon delivery of the stock to the Company. At the
option of the trustees, payment for less than the minimum shares also
constitutes full satisfaction of the Stipulation.
F-28
<PAGE>
RECYCLING INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
As of the financial statements report date, the trustee has not yet filed the
Stipulation with the Bankruptcy Court, which must approve the Stipulation for it
to become effective. The Company's management and legal counsel have assessed
that it is not reasonably possible to conclude that the trustee will file the
Stipulation, or, if filed, that the Bankruptcy Court would approve it. Also, it
is not reasonably possible to assess that the trustee can obtain and deliver the
minimum number shares and if the minimum number is not obtained, whether the
trustee would void the Stipulation. Should the stipulation not proceed, the
Company will continue to vigorously defend the claims asserted against it.
The Company filed an action claim against Robert C. Rome ("Rome)", principal
of Anglo Metal, Inc. ("AMI"), in the United States District Court for the
District of Colorado. The Company and Recycling Industries of Texas, Inc.
("RITI") are seeking actual and consequential damages in an undetermined
amount for fraud by misrepresentation, deceit by nondisclosure and
concealment and breach of contract in connection with the acquisition of
Anglo Iron & Metal in December 1995. Alternatively, the complaint seeks
specific performance of Mr. Rome's obligations under his agreements with the
Company. On February 21, 1997, the Company and RITI were served with a
compliant filed by AMI in the United States Bankruptcy Court for the Southern
District of Texas. The complaint alleges that the Company and RITI have
failed to perform certain obligations under their agreement to acquire Anglo
Iron & Metal in December 1995. The plaintiff seeks damages in excess of
$3,255,000 for breach of contract, fraud and conversion. Alternatively, the
complaint seeks to rescind the agreements executed by the Company and RITI to
acquire Anglo Iron & Metal. On September 30, 1997, the Company, Robert C.
Rome and Anglo Metal, Inc. settled the two actions through negotiations. The
terms of the settlement includes the reimbursement by AMI, which is netted
against selling, general and administrative expenses for the year ended
September 30, 1997, of $1.5 million in processing costs, legal expense and
environmental remediation expense incurred by the Company at its Southern
Texas facilities. The Company shall pay for any environmental remediation of
the real property located in Harlingen, Brownsville and the sub-leased
property in San Juan, Texas upon which certain of its Southern Texas
facilities are located, to a level necessary to obtain approval under the
Texas Voluntary Cleanup Program. The Company shall pay to AMI $0.4 million
and assign that number of shares of the Company's Common Stock from the
escrow account established at closing which, upon sale, will yield net
proceeds to AMI of $700,000. The proceeds from the sale of these shares will
be used for remediation of certain property and related expenses.
The Company is a defendant in a law suit where plaintiff, owner of a parcel
of real estate adjacent to the Company's Harlingen, Texas facility, are
seeking damages and a permanent injunction prohibiting the Company's
operations at its Harlingen, Texas facility arising out of allegations that
the operations of the facility throw debris and scrap metal onto the
Plaintiff's property. The Company believes the plaintiff's claims to be
without merit and is vigorously defending this matter.
13. SUBSEQUENT EVENTS
In December 1997, the Company completed the acquisitions of six metal
recycling facilities for an aggregate purchase price of approximately $146
million. The acquisitions will be accounted for using the purchase method of
accounting, as such, the purchase price will be allocated to the acquired
assets at their estimated fair value. The acquisitions were financed in part
with proceeds generated in December 1997 from a $150 million Senior Credit
Facility (Credit Facility), $60 million in Senior Subordinated Notes and
proceeds from the Sale of Common Stock to various accredited investors in
connection with the Credit Facility. The acquisitions were also financed in
part from the issuance of the Company's Preferred to the owners of the
acquired facilities and $10 million in proceeds from the sale of Common
Stock. The Company will continue the metal recycling operations of the
businesses acquired.
F-29
<PAGE>
RECYCLING INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
14. SUPPLEMENTAL INFORMATION TO STATEMENT OF CASH FLOWS AND NONCASH INVESTING
AND FINANCING ACTIVITIES
<TABLE>
<CAPTION>
(THOUSAND OF DOLLARS)
--------------------------------------------------------------------------------------
YEARS ENDED SEPTEMBER 30, 1997 1996 1995
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash paid for interest $ 2,489 $ 711 $ 407
Cash paid for taxes $ 107 $ - $ -
Purchase of equipment for notes
payable $ 202 $ 406 $ 56
Stock issued for conversion
of bridge financing $ - $ 1,138 $ 150
Acquisition of subsidiaries for
stock $ 500 $ 2,425 $ -
Acquisition of Anglo land and
building for note payable $ - $ 446 $ -
Acquisition of Anglo inventory
for notes payable $ - $ 1,354 $ -
Acquisition of Anglo goodwill
for note payable $ - $ 479 $ -
Capital lease obligation incurred
to finance Anglo acquisition $ - $ 1,800 $ -
Note payable issued for Anglo
non-compete agreement $ - $ 750 $ -
Assumption of liabilities for
Mid-America acquisition $ - $ 1,210 $ -
Assumption of liabilities for
Weissman acquisition $ - $ 738 $ -
Restructure of preferred stock
to debt $ - $ - $ 2,300
Issuance of Common Stock to
Chief Executive Officer $ - $ - $ 437
Acquisition of equipment under
capital lease $ - $ - $ 113
Reversal of deferred gain on sale
of subsidiary $ - $ - $ 751
- -------------------------------------------------------------------------------------------
</TABLE>
F-30
<PAGE>
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table lists the officers and directors and executive officers of
the Company, their age and their respective positions and titles.
- --------------------------------------------------------------------------------
POSITIONS AND FIRST BECAME A
NAME AGE OFFICES WITH COMPANY DIRECTOR
- --------------------------------------------------------------------------------
Thomas J. Wiens 45 Chairman of the Board Since 1992
Chief Executive Officer
Luke F. Botica 47 Vice Chairman, Director Since 1997
Brian L. Klemsz 38 Vice President Since 1996
Chief Financial Officer
Treasurer, Director
Jerome B. Misukanis 54 Director (1)(2) Since 1994
Graydon H. Neher 47 Director (1)(2) Since 1995
Barry D. Plost 50 Director (1) Since 1995
John E. McKibben 57 Vice President, Administration -
Harold "Skip" Rouster 48 Chief Operating Officer -
Vice President
- --------------------------------------------------------------------------------
- ----------------
(1) Member of Audit Committee
(2) Member of the Compensation Committee
Each director is elected to hold office until the next annual meeting of
shareholders, and until his successor is elected and qualified.
Certain information concerning the directors, executive officers and
certain key employees of the Company are set forth below:
THOMAS J. WIENS. Mr. Wiens has served as Chairman of the Board and Chief
Executive Officer of the Company since its inception. Mr. Wiens has served as
President of First Dominion Holdings, Inc. since 1987. Prior to founding the
Company, Mr. Wiens was involved in various entrepreneurial pursuits including
banking, communications, insurance and retail. Mr. Wiens has over ten years of
experience in the recycling industry. Mr. Wiens received a BA in Political
Science from American University and a MDIV from Yale University. Mr. Wiens
serves on the Board of Advisors of the Yale Divinity School and on the boards of
directors of various charitable organizations.
LUKE F. BOTICA. Mr. Botica was elected to the Board of Directors of the Company
in February 1997, and has served as Vice Chairman of the Company since September
1997. Mr. Botica has 24 years of senior, hands-on experience in fast growth
companies, including over $776 million in financings, IPOs,
<PAGE>
private placements, and commercial bank and lease facilities. His industry
experience includes solid waste and hazardous waste. From November 1996 to
September 1997, Mr. Botica served as the Senior Vice President and Chief
Financial Officer of Donnelley Enterprise Solutions, Inc. Mr. Botica served
as Senior Vice President - Finance and Chief Financial Officer of Allied
Waste Industries, Inc. from 1993 through 1995, and as Vice President -
Corporate Development and Planning for Chemical Waste Management, Inc. from
1990 through 1993.
BRIAN L. KLEMSZ. Mr. Klemsz has served as a Director, Chief Financial Officer
and Treasurer since August 1996. Prior to joining the Company, Mr. Klemsz
served in various management positions for eight years with Advanced Energy
Industries, Inc., a provider of power conversion and control equipment for the
semiconductor and optical coating industries. Mr. Klemsz has over 15 years of
experience in operations management, management information systems and finance.
Mr. Klemsz received a BS in Business Administration from the University of
Colorado, an MS in Finance from Colorado State University and an MS in
Accounting from Colorado State University. Mr. Klemsz is a Certified Public
Accountant and is Certified in Production and Inventory Management by the
American Production and Inventory Control Society.
JEROME B. MISUKANIS. Mr. Misukanis has served as a member of the Company's
Board of Directors since March 1994 and served as Treasurer and Chief Financial
Officer from February 1996 to August 1996. Since 1991 Mr. Misukanis has been a
principal of Misukanis and Dodge, P.A., CPA, a public accounting firm. Mr.
Misukanis has worked in the recycling industry for 12 years. Mr. Misukanis
received a BA in accounting from the University of St. Thomas and graduated from
the Harvard Business School's Executive Management Program. Mr. Misukanis also
attended the William Mitchell College of Law. Mr. Misukanis is a Certified
Public Accountant.
GRAYDON H. NEHER. Mr. Neher was elected to the Board of Directors in June 1995.
Mr. Neher has been President and a director of Chemco, Inc., a privately-held
oil and gas company since 1980. Mr. Neher is a director of Compa Food Ministry,
a non-profit food bank. Mr. Neher received a BA degree from the University of
Puget Sound.
BARRY D. PLOST. Mr. Plost was elected to the Board of Directors of the Company
in December 1995. Mr. Plost has served as Chairman, President and Chief
Executive Officer of SeraCare, Inc., a group of plasma collection centers, since
February 1996. Previously, Mr. Plost was with David Barrett, Inc., a management
consulting firm, from 1994 to 1996. Mr. Plost was President and Chief
Executive Officer of Country Wide Transportation Services, Inc., a
transportation and distribution company from 1991 to 1994. Mr. Plost is a
director of Care Concepts, Inc. Mr. Plost received a BA in Political Science
from the University of Illinois and an MBA from Loyola University.
JOHN E. MCKIBBEN. Mr. McKibben, has served as Vice President-Administration of
the Company since October 1996. Prior to joining the Company, Mr. McKibben was
Vice President-Administration of National Material Trading, a division of
National Material L.P. and a major broker of scrap iron and steel and importer
of iron substitutes for scrap. Previously, Mr. McKibben served in various
executive capacities in his over 30 years in the metals recycling industry with
Antrim Metals Recycling, Inc., and The David J. Joseph Company. Mr. McKibben
received his BS degree in Industrial Management from the University of
Cincinnati.
<PAGE>
HAROLD "SKIP" J. ROUSTER. Mr. Rouster, has served as Vice President and Chief
Operating Officer since September, 1997. Prior to joining the Company, Mr.
Rouster worked for The David J. Joseph Company, the largest scrap metal
recycling and brokerage company in the United States, with annual revenues of
over $1.7 billion, for 22 years most recently serving as Vice President of
Operations and Engineering. Mr. Rouster's experience includes involvement in 15
start-up operations and acquisitions. He led The David J. Joseph Company's
entry into the steel-mill service business and was involved in the development
of innovative approaches in scrap shredding technology and non-ferrous
reclamation. Prior to joining The David J. Joseph Company, Mr. Rouster worked
for Proctor and Gamble for 5 years in sales administration and product
administration
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT
Section 16(a) of the Securities Exchange Act requires the officers and directors
of the Company and persons who own more than ten percent of a registered class
of the Company's securities (collectively, Reporting Persons), to file reports
of ownership and changes in ownership on Forms 3, 4, and 5 with the Securities
and Exchange Commission and to furnish the Company with copies of all Forms 3,
4, and 5 filed.
Based solely upon a review of the copies of such forms it has received and
representations from the Reporting Persons; the Company believes all Reporting
Persons have complied with the applicable filing requirements, except that (i)
the Form 3 concerning the appointment of Luke F. Botica as a director on
February 1, 1997 was filed late on February 27, 1997; (ii) the Form 3 concerning
the appointment of Harold J. Rouster as vice president and Chief Operating
Officer on August 26, 1997 was filed late on September 11, 1997; and (iii) the
Form 4 reporting the exercise of an option by Michael I. Price, a former officer
and director of the Company, on August 15, 1997 has not been filed.
<PAGE>
ITEM 11 - EXECUTIVE COMPENSATION
The following table sets forth a summary of the compensation paid to the current
executive officers listed in Item 10 above for each of the last three fiscal
years.
SUMMARY COMPENSATION TABLE
- --------------------------------------------------------------------------------
NAME AND UNDERLYING FISCAL SALARY OTHER ANNUAL SECURITIES
PRINCIPAL POSITION YEAR COMPENSATION UNDERLYING
OPTIONS OPTIONS
- --------------------------------------------------------------------------------
Thomas J. Wiens 1997 $300,000 $85,000(1) 1,810,000
Chief Executive 1996 222,000 -0- 300,000
Officer and 1995 205,000 $1,257,197(2) -0-
Chairman of the Board
of Directors
Michael I. Price 1997 $210,000 -0- -0-
Chief Operating 1996 210,000 -0- 450,000
Officer and President 1995 142,500 -0- 150,000
Brian L. Klemsz 1997 $ 76,500 -0- 450,000(3)
Chief Financial 1996 10,937 -0- -0-
Officer 1995 -0- -0- -0-
John E. McKibben 1997 $118,967 -0- 200,000
Vice President- 1996 -0- -0- -0-
Administration 1995 -0- -0- -0-
(1) Represents amounts loaned to Mr. Wiens under the terms of his employment
agreement, described below under the caption "Executive Employment Agreements."
(2) Although accrued, the Company did not pay any cash compensation to Mr.
Wiens during fiscal 1994. During fiscal 1995, the unpaid 1994 salary of
$147,000 was forgiven by Mr. Wiens along with the transfer of certain technology
to the Company in exchange for the right to acquire shares of the Company's
Common Stock, which right was exercised on August 8, 1995. The amount reported
as "Other Annual Compensation" represents the difference between the purchase
price of the Common Stock under such right and the market value of the Common
Stock on August 8, 1995 related to the forgiven salary.
(3) During fiscal 1997, Mr. Klemsz agreed to forgo $36,000 of cash
compensation in exchange for an option to acquire up to 108,000 shares of
the Company's Common Stock at an exercise price of $1.31 per share.
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table summarizes the stock options granted to the named
executive officers during the year ended September 30, 1997:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Individual Grants
- --------------------------------------------------------------- Potential Realizable
Percent of Value at Assumed
total Annual Rates of
Number of options Stock Price
Securities granted to Appreciation for
Underlying employees Option Term
Options in fiscal Exercise Expiration --------------------
Name Granted year Price Date 5% 10%
- ---------------- ------------ --------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Thomas J. Wiens, 1,810,000(1) 47.3% $1.25 4/30/07 $1,422,824 $3,605,842
Chief Executive
Officer
Michael I. Price, - N/A - - - -
Chief Operating
Officer and
President
Brian L. Klemsz, 100,000(1) 2.6% $1.31 4/30/02 $ 36,193 $ 79,977
Chief Financial
Officer
108,000 2.8% $1.31 4/30/02 $ 39,088 $ 86,374
350,000(1) 9.1% $1.31 4/30/07 $ 288,348 $ 730,731
John E. McKibben, 50,000(1) 1.3% $1.31 4/30/02 $ 18,096 $ 39,988
Vice President -
Administration
150,000(1) 3.9% $1.31 4/30/07 $ 123,578 $ 313,170
</TABLE>
(1) Subject to periodic vesting in accordance with a schedule to be
determined by the Compensation Committee of the Company's Board of
Directors.
STOCK OPTION EXERCISES DURING THE FISCAL YEAR ENDED SEPTEMBER 30, 1997,
OUTSTANDING GRANTS AND GAINS AS OF SEPTEMBER 30, 1997
The following table shows stock options exercised by named executive officers
during the fiscal year ended September 30, 1997. In addition, this table
includes the number of shares covered by both exercisable and non-exercisable
stock options as of September 30, 1997 and the values for "in-the-money" options
which represent the positive spread between the exercise price of any such
existing stock options and the price of the Common Stock at September 30, 1997.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
SHARES VALUE OPTIONS AT YEAR-END ($) OPTIONS AT YEAR-END (#)
ACQUIRED REALIZED -------------------------- ------------------------------
NAME ON ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
EXERCISE
(#)
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
Thomas J. Wiens --- --- 0/2,110,000 0/$9,404,625
Michael I. Price 150,000 $225,938 --- ---
Brian L. Klemsz --- --- 0/450,000 0/$2,082,375
John E. McKibben --- --- 0/200,000 0/$925,500
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
COMPENSATION OF DIRECTORS
Directors who are not officers of the Company receive an annual fee of $7,500
for their services in that capacity and $1,500 for each Board of Directors or
committee meeting attended. In addition, Directors who are not officers of the
Company will be granted options under the Company's 1995 Non-Employee Director
Stock Option Plan. All directors are reimbursed for travel expenses incurred in
attending meetings.
EXECUTIVE EMPLOYMENT AGREEMENTS
THOMAS J. WIENS
- ---------------
On July 1, 1997, the Company entered into a five-year employment agreement with
its Chairman and Chief Executive Officer, Thomas J. Wiens (the "Wiens Employment
Agreement"). The Wiens Employment Agreement provides for an initial annual base
salary of $288,000 and annual bonuses in an amount to be determined by the
Compensation Committee. The Wiens Employment Agreement also provides that the
Company will loan Mr. Wiens up to $1,925,000, to be advanced in increments of
$100,000 (increased by $15,000 for each advance) upon the closing of each
acquisition of a new operating facility subsequent to June 23, 1997 (the
"Loan"). The amount advanced upon the closing of each acquisition may be
increased depending upon the annual revenues of the business being acquired by
the Company. The Loan bears interest at prime plus 2% with interest payable
annually on or before December 31st of each year during the term of the Loan,
commencing December 15, 1998. The Loan matures on July 1, 2004. As of
September 30, 1997, the Company had advanced Mr. Wiens $85,000 under the terms
of the Loan. Subsequent to September 30, 1997, in connection with the
closing of six acquisitions in December 1997, the Company advanced Mr. Wiens
an additional $1,440,000 under the terms of the Loan. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Events Subsequent to September 30, 1997," above.
<PAGE>
The Wiens Employment Agreement also provides that the Company will provide a $1
million life insurance policy on Mr. Wiens payable to his spouse or lineal
descendants.
If Mr. Wiens terminates his employment with the Company for "good reason" or is
terminated without cause, the Company shall pay to Mr. Wiens (i) the base salary
and bonus, if any, through the date of termination; (ii) the amount of base
salary that would have been paid through the expiration of the initial five-year
term of the Wiens Employment Agreement; and (iii) an amount equal to the
pro-rata portion of the prior year's annual bonus through the date of
termination. In addition, all amounts advanced to Mr. Wiens under the Loan
shall be forgiven by the Company and the Company shall pay to Mr. Wiens an
amount equal to the income taxes payable by him as a result of such forgiveness.
For purposes of the Wiens Employment Agreement, "good reason" generally means a
material diminishment in Mr. Wiens' duties, any material breach by the Company
of any of the provisions of the Wiens Employment Agreement, or any reduction, or
attempted reduction, at any time during the term of the Wiens Employment
Agreement, of Mr. Wiens' base salary unless: (i) such reduction is part of an
overall proportional reduction in the compensation of the Company's executive
officers implemented by the Board of Directors or, (ii) in his capacity as a
Director, Mr. Wiens recommends or approves the reduction.
If Mr. Wiens's employment is terminated within two years of a "hostile change in
control" of the Company, the Company will pay to Mr. Wiens an amount equal to
the greater of amount of base salary that would have been paid through the
expiration of the initial five-year term of the Wiens Employment Agreement or
2.99 times the sum of the base salary payable on the date of termination plus
the annual bonus paid to Mr. Wiens during the last full fiscal year. In
addition, all amounts advanced to Mr. Wiens under the Loan shall be forgiven by
the Company and the Company shall pay to Mr. Wiens an amount equal to the income
taxes payable by him as a result of such forgiveness. For purposes of the Wiens
Employment Agreement, a "hostile change in control" is defined as the completion
of a tender offer or exchange offer (other than an offer by the Company) which
by its terms could result in the acquisition by an entity, person or group of
30% or more of the Company's common stock, provided such tender offer is not
recommended for acceptance to the shareholders of the Company by the Board of
Directors.
LUKE F. BOTICA
- --------------
On September 8, 1997, the Company entered into a four-year employment agreement
with its Vice-Chairman, Luke F. Botica (the "Botica Employment Agreement"). The
Botica Employment Agreement provides for an annual base salary of $100,000
increasing to $250,000 on September 8, 1998, an annual bonus of $150,000 payable
over the 12 month period commencing September 30, 1997 and annual bonuses in an
amount to be determined by the Compensation Committee.
The Botica Employment Agreement also provides that the Company will provide a
$500,000 life insurance policy on Mr. Botica payable to his spouse or lineal
descendants.
If Mr. Botica terminates his employment with the Company for "good reason" or is
terminated without cause, the Company shall pay to Mr. Botica (i) the base
salary and bonus, if any, through the date of termination; (ii) the amount of
base salary that would have been paid through the expiration of the initial
four-year term of the Botica Employment Agreement; and (iii) an amount equal to
the pro-rata portion of the prior year's annual bonus through the date of
termination. For purposes of the Botica Employment Agreement, "good reason"
generally means a material diminishment in Mr. Botica's duties, any material
breach by the Company of any of the provisions of the Botica Employment
Agreement, or any reduction, or attempted reduction, at any time during the term
of the Botica Employment Agreement, of Mr. Botica's base salary unless: (i) such
reduction is part of an overall proportional reduction in the compensation of
the Company's executive officers implemented by the Board of Directors or, (ii)
in his capacity as a Director, Mr. Botica recommends or approves the reduction.
<PAGE>
If Mr. Botica's employment is terminated within two years of a "hostile change
in control" of the Company, the Company will pay to Mr. Botica an amount equal
to the greater of amount of base salary that would have been paid through the
expiration of the initial four-year term of the Botica Employment Agreement or
2.99 times the sum of the base salary payable on the date of termination plus
the annual bonus paid to Mr. Botica during the last full fiscal year. For
purposes of the Botica Employment Agreement, a "hostile change in control" is
defined as the completion of a tender offer or exchange offer (other than an
offer by the Company) which by its terms could result in the acquisition by an
entity, person or group of 30% or more of the Company's common stock, provided
such tender offer is not recommended for acceptance to the shareholders of the
Company by the Board of Directors.
<PAGE>
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below sets forth, as of September 30, 1997, the number of shares of
Common Stock beneficially owned by each director and each executive officer of
the Company named in the Summary Compensation Table, named individually, all
executive officers and directors as a group and all beneficial owners of more
than five percent of the Common Stock and the Series D Preferred. The following
shareholders have sole voting and investment power with respect to their
holdings unless otherwise noted:
- --------------------------------------------------------------------------------
AMOUNT
NAME AND ADDRESS OF BENEFICIALLY PERCENT OF
TITLE OF CLASS BENEFICIAL OWNER OWNED CLASS
- --------------------------------------------------------------------------------
Common Stock Linder Growth Fund 1,000,000 6.9%
c/o Ryback Management
Corporation
7711 Carondelet Avenue,
Box 16900
St. Louis, MO 63105
Series D Nathan S. Addlestone 5,031 50.3%
Preferred PO Drawer 979
Charleston, SC 26402
Series D Susan Berlijn 2,485 24.9%
Preferred PO Drawer 979
Charleston, SC 26402
Series D Keith Rosen 2,484 24.8%
Preferred PO Drawer 979
Charleston, SC 26402
CERTAIN DIRECTORS AND EXECUTIVE OFFICERS
----------------------------------------
Common Stock Thomas J. Wiens 2,284,103 (1) 15.7%
9780 Meridian Boulevard, Suite 180
Englewood, CO 80112
Common Stock Michael I. Price 14,000 *
9780 Meridian Boulevard, Suite 180
Englewood, CO 80112
Common Stock John E. McKibben 10,000 *
9780 Meridian Boulevard, Suite 180
Englewood, CO 80112
Common Stock Brian L. Klemsz 10,000 *
9780 Meridian Boulevard, Suite 180
Englewood, CO 80112
<PAGE>
- --------------------------------------------------------------------------------
AMOUNT
NAME AND ADDRESS OF BENEFICIALLY PERCENT OF
TITLE OF CLASS BENEFICIAL OWNER OWNED CLASS
- --------------------------------------------------------------------------------
Common Stock Jerome B. Misukanis 42,500 (2) *
9780 Meridian Boulevard, Suite 180
Englewood, CO 80112
Common Stock Graydon H. Neher 35,800 (3) *
9780 Meridian Boulevard, Suite 180
Englewood, CO 80112
Common Stock Barry D. Plost 33,000 (4) *
9780 Meridian Boulevard, Suite 180
Englewood, CO 80112
Common Stock All executive officers and 2,588,103 17.8%
directors as a group
(nine persons)
- ----------
*Less than one percent
(1) Includes 1,664 shares owned by Real Heroes, Inc., a non-profit corporation
controlled by Thomas J. Wiens, and 227,414 shares owned by First Dominion
Holdings, Inc., a corporation controlled by Thomas J. Wiens.
(2) Includes 36,500 shares underlying options.
(3) Includes 18,500 shares underlying Common Stock purchase warrants and
options.
(4) Includes 25,000 shares underlying Common Stock purchase warrants and
options.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Executive Employment Agreements under ITEM 10.
<PAGE>
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS:
Reports of Independent Accountants
Consolidated Balance Sheets as of September 30, 1997 and 1996
Consolidated Statements of Operations for the years ended September 30,
1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the years ended
September 30, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended September 30,
1997, 1996 and 1995
Notes to Consolidated Financial Statements
EXHIBIT
NUMBER DESCRIPTION
------ -----------
2.1 Agreements related to the acquisition of Addlestone International
Corporation
2.1.1 Asset Purchase Agreement dated February 16, 1997 by and among
Recycling Industries of Georgia, Inc., Recycling Industries, Inc.,
Addlestone Recycling Corporation, Nathan Addlestone, Keith Rosen
and Susan Berlijn, incorporated by reference to Exhibit 10.1 to
the Company's Current Report on Form 8-K reporting an event of
April 7, 1997, as amended June 20, 1997 on Form 8-K/A, Commission
File No. 0-20179.
2.2 Agreements related to the Acquisition of Addlestone International
Corporation:
2.2.1 Asset Purchase Agreement dated April 8, 1997 by and among
Recycling Industries of South Carolina, Inc., Recycling
Industries, Inc., Addlestone International Corporation and Nathan
Addlestone, incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K reporting an event of June
25, 1997, Commission File No. 0-20179.
2.2.2 First Amendment to the Asset Purchase Agreement dated June 24,
1997 by and among Recycling Industries of South Carolina, Inc.,
Recycling Industries, Inc., Addlestone International Corporation
and Nathan Addlestone, incorporated by reference to Exhibit 10.2
to the Company's Current Report on Form 8-K reporting an event
of June 25, 1997, Commission File No. 0-20179.
3.1 Amended and Restated Articles of Incorporation, incorporated by
reference to Exhibit 3.1 to the Company's Registration Statement on
Form S-1, filed May 3, 1996, as amended, Commission File No. 333-4574.
3.2 Amended Bylaws of Recycling Industries, Inc., incorporated by
reference to Exhibit 3.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997, Commission
File No. 0-20179.
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
4.1 Form of Common Stock Certificate, incorporated by reference to Exhibit
4.1 to the Company's Registration Statement on Form S-1, filed May 3,
1996, as amended, Commission File No. 333-4574.
4.2 Form of Series G Warrant Agreement, incorporated by reference to
Exhibit 4.3 to the Company's Registration Statement on Form S-1, filed
May 3, 1996, as amended, Commission File No. 333-4574.
4.3 Form of Series G Registration Rights Agreement, incorporated by
reference to Exhibit 4.4 to the Company's Registration Statement on
Form S-1, filed May 3, 1996, as amended, Commission File No. 333-4574.
4.4 Form of Series I Warrant Agreement, incorporated by reference to
Exhibit 4.5 to the Company's Registration Statement on Form S-1, filed
May 3, 1996, as amended, Commission File No. 333-4574.
4.5 Form of Series J Warrant Agreement, incorporated by reference to
Exhibit 4.6 to the Company's Registration Statement on Form S-1, filed
May 3, 1996, as amended, Commission File No. 333-4574.
4.6 Form of Series J Registration Rights Agreement, incorporated by
reference to Exhibit 4.7 to the Company's Registration Statement on
Form S-1, filed May 3, 1996, as amended, Commission File No. 333-4574.
4.7 Form of 1996 Placement Agents Warrant Agreement, incorporated by
reference to Exhibit 4.11 to the Company's Registration Statement on
Form S-1, filed May 3, 1996, as amended, Commission File No. 333-4574.
4.8 Form of 1996 Placement Agents Registration Rights Agreement,
incorporated by reference to Exhibit 4.12 to the Company's
Registration Statement on Form S-1, filed May 3, 1996, as amended,
Commission File No. 333-4574.
4.9 Designation of Preferences, Limitations and Relative Rights of the
Series C Convertible Preferred Stock of Recycling Industries, Inc.*
4.10 Designation of Preferences, Limitations and Relative Rights of the
Series D Convertible Preferred Stock of Recycling Industries, Inc.,
incorporated by reference to Exhibit 4.1 to the Company's Current
Report on Form 8-K reporting an event of April 7, 1997, as amended
June 20, 1997 on Form 8-K/A, Commission File No. 0-20179.
10.1 Second Amended and Restated Loan and Security Agreement dated April 7,
1997, by and among Recycling Industries, Inc.; Nevada Recycling, Inc.;
Recycling Industries of Texas, Inc.; Recycling Industries of Missouri,
Inc.; Recycling Industries of Georgia, Inc.; Weissman Industries,
Inc.; and Coast Business Credit, incorporated by reference to Exhibit
10.19 to the Company's Registration Statement on Form S-1, as amended
June 24, 1997, Commission File No. 333-20289.
10.2 Agreements related to the June 1997 Bridge Loan Transaction:
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.2.1 Securities Purchase Agreement dated June 20, 1997, by and among
Recycling Industries, Inc. and Siena Capital Partners, L.P.,
incorporated by reference to Exhibit 10.4.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1997, Commission File No. 0-20179.
10.2.2 Form of $7,000,000 Promissory Note from Recycling Industries, Inc.
to Siena Capital Partners, L.P., incorporated by reference to
Exhibit 10.4.2 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997, Commission File No. 0-20179.
10.2.3 Form of Warrant Agreement between Recycling Industries, Inc. and
Siena Capital Partners, L.P., incorporated by reference to
Exhibit 10.4.3 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997, Commission File No. 0-20179
10.3 Executive Employment Agreement dated July 1, 1997 between the
Company and Thomas J. Wiens.**
10.4 Executive Employment Agreement dated September 8, 1997 between the
Company and Luke F. Botica.**
11 Statement regarding computation of per share earnings.*
16 Letter from AJ. Robbins, P.C., dated April 11, 1996, addressed to the
Securities and Exchange Commission, incorporated by reference to the
Company's Current Report on Form 8-K/A reporting an event of March 25,
1996, Commission File No. 0-20179.
16.2 Letter from AJ. Robbins, P.C., dated December 19, 1997, addressed to
the Securities and Exchange Commission, incorporated by reference to
Exhibit 16 to the Company's Current Report on Form 8-K reporting and
event of December 19, 1997, Commission File No. 0-020179.
21.1 List of the subsidiaries of Recycling Industries, Inc.*
27 Financial Data Schedule. *
- --------------
* Filed herewith
** To be filed by Amendment
REPORTS ON FORM 8-K
NONE DURING THE QUARTER ENDED SEPTEMBER 30, 1997
[cad 228][cad 228][cad 228]
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
RECYCLING INDUSTRIES, INC.
Date: January 13, 1998 By: /s/ Thomas J. Wiens
-----------------------------------
Thomas J. Wiens, Chairman and CEO
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
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Date: January 13, 1998 By: /s/ Thomas J. Wiens
-----------------------------------
Thomas J. Wiens, Principal Executive
Officer, Director
Date: January 13, 1998 By: /s/ Luke F. Botica
-----------------------------------
Luke F. Botica, Vice Chairman, Director
Date: January 13, 1998 By: /s/ Brian L. Klemsz
-----------------------------------
Brian L. Klemsz, Principal Financial
Officer, Director
Date: January 13, 1998 By: /s/ Jerome B. Misukanis
-----------------------------------
Jerome B. Misukanis, Director
Date: January 13, 1998 By: /s/ Graydon H. Neher
-----------------------------------
Graydon H. Neher, Director
Date: January 13, 1998 By:
-----------------------------------
Barry L. Plost, Director
<PAGE>
ARTICLES OF AMENDMENT
TO THE
RESTATED ARTICLES OF INCORPORATION WITH AMENDMENTS
OF
RECYCLING INDUSTRIES, INC.
Pursuant to Section 7-106-102 of the Colorado Business Corporations Act,
the undersigned Corporation adopts the following Articles of Amendment to its
Articles of Incorporation:
FIRST: The name of the Corporation is Recycling Industries, Inc.
SECOND: The text of the amendment determining the designations, preferences,
limitations and relative rights of the Corporation's Series C
Convertible Preferred Stock are contained in the attached Exhibit A.
THIRD: This amendment to the Articles of Incorporation was adopted on
December 30, 1996.
FOURTH: The amendment was duly adopted by the board of directors, and,
pursuant to C.R.S. Section 7-106-102(4), is effective without
shareholder action.
IN WITNESS WHEREOF, the undersigned hereby acknowledges under penalty of
perjury that the execution of this instrument is undersigned's act and deed,
that the undersigned has read these Articles of Amendment and all attachments
thereto and knows the contents thereof and the facts stated therein are true.
RECYCLING INDUSTRIES, INC.
By: /s/ Thomas J. Wiens
--------------------------------
Thomas J. Wiens, Chairman and
Chief Executive Officer
<PAGE>
EXHIBIT A
DESIGNATIONS, PREFERENCES, LIMITATIONS AND RELATIVE RIGHTS
OF THE
SERIES C CONVERTIBLE PREFERRED STOCK
OF
RECYCLING INDUSTRIES, INC.
1. DESIGNATION AND AMOUNT. The distinctive designation of such series is
"Convertible Preferred Stock, Series C" without par value (hereinafter in this
Certificate called the "Series C Preferred Stock") of Recycling Industries,
Inc., a Colorado corporation (the "Company"), and the number of shares
constituting this series shall be 10,000.
2. CONVERSION RIGHTS.
(a) RIGHT TO CONVERT. Each share of Series C Preferred
Stock acquired by any holder may be converted, at the option of the holder
thereof, at any time following April 30, 1997, without the payment of any
additional consideration therefor, into that number of fully paid and
nonassessable shares of Common Stock $.001 par value per share, of the Company
(the "Common Stock") as is determined by dividing (i) the sum of (a) $100 plus
(b) the amount of all accrued dividends per share of Series C Preferred Stock
being so converted by (ii) the Conversion Price (determined as hereinafter
provided) in effect at the time of conversion. The "Conversion Price" shall be
equal to the lesser of (i) 110% of the last sale price of the Common Stock on
the day preceding the date of initial issuance of the Series C Preferred Stock
or (ii) 73% of the average closing bid price of a share of Common Stock as
reported on the Nasdaq National Market, or other national or regional securities
exchange or automated quotation system upon which the Common Stock is listed and
principally traded or, if the Common Stock is not listed on any exchange or
quoted on the Nasdaq National Market, the average of the closing bid prices on
the Nasdaq SmallCap Market or any other trading market in which quotes can be
obtained) for the five consecutive trading days immediately preceding the date
of the Conversion Notice (as defined in Section 2(b) hereof).
(b) MECHANICS OF CONVERSION. No fractional shares of Common Stock
shall be issued upon conversion of Series C Preferred Stock. If upon
conversion of shares of Series C Preferred Stock held by a registered holder
which are being converted, such registered holder would, but for the
provisions of this Section 2(b), receive a fraction of a share of Common
Stock, then in lieu of the fractional share, the Company shall pay to the
holder cash equal to such fraction multiplied by the then effective
Conversion Price. Before any holder of Series C Preferred Stock shall be
entitled to convert the same into Common Stock, such holder shall surrender
the certificate or certificates therefor, duly endorsed, at the office of the
Company or of any transfer agent for the Series C Preferred Stock, and shall
give written notice (the "Conversion Notice") to the Company at such office
that the holder elects to convert the same
-1-
<PAGE>
and shall state therein the holder's name or the name or names of its
nominees in which the holder wishes the certificate or certificates for
shares of Common Stock to be issued. The Company shall, as soon as
practicable thereafter, but in any event within three business days of the
date of its receipt of the Conversion Notice and the original certificate or
certificates representing the shares of Series C Preferred Stock to be
converted, issue and deliver or cause to be issued and delivered to such
holder of Series C Preferred Stock, or to its nominee or nominees, a
certificate or certificates for the number of shares of Common Stock to which
such holder shall be entitled, together with cash in lieu of any fraction of
a share. Such conversion shall be deemed to have been made on the date that
the Company first receives the Conversion Notice, by telecopier or otherwise
or, in the case of a mandatory conversion pursuant to Section 2(e) hereof,
the second anniversary of original issuance of the Series C Preferred Stock,
and the person or persons entitled to receive the shares of Common Stock
issuable upon conversion shall be treated for all purposes as the record
holder or holders of such shares of Common Stock on such date; provided,
however, that if the person or persons entitled to receive the shares of
Common Stock issuable upon conversion does not deliver the original
certificate or certificates representing the shares of Series C Preferred
Stock to be converted within three business days after the Company first
receives the Conversion Notice, the person or persons entitled to receive the
shares of Common Stock issuable upon conversion shall not be treated as the
record holder or holders of such shares of Common Stock until three business
days after such person or persons delivers to the Company the original
certificates representing the shares of Series C Preferred Stock. Upon the
conversion of any shares of Series C Preferred Stock, such shares shall be
restored to the status of authorized but unissued shares of Preferred Stock
and may be reissued by the Company at any time.
(c) NOTICES OF RECORD DATE. In the event of (i) any declaration
by the Company of a record date of the holders of any class of securities for
the purpose of determining the holders thereof who are entitled to receive
any dividend or other distribution or (ii) any capital reorganization of the
Company, any reclassification or recapitalization of the capital stock of the
Company, any merger or consolidation of the Company, any transfer of all or
substantially all of the assets of the Company to any other company or any
other entity or person, or any voluntary or involuntary dissolution,
liquidation or winding up of the Company, the Company shall mail to each
holder of Series C Preferred Stock at least 20 days prior to the record date
specified therein, a notice specifying (A) the date on which any such record
is to be declared for the purpose of such dividend or distribution and a
description of such dividend or distribution, (B) the date on which any such
reorganization, reclassification, transfer, consolidation, merger,
dissolution, liquidation or winding up is expected to become effective and
(C) the time, if any, that is to be fixed, as to when the holders of record
of Common Stock (or other securities) shall be entitled to exchange their
shares of Common Stock (or other securities) for securities or other property
deliverable upon such reorganization, reclassification, transfer,
consolidation, merger, dissolution or winding up.
(d) STOCK DIVIDENDS; STOCK SPLITS; ETC. If the Company shall (i)
take a record of holders of shares of the Common Stock for the purpose of
determining the holders entitled
-2-
<PAGE>
to receive a dividend payable in shares of Common Stock, (ii) subdivide the
outstanding shares of Common Stock, (iii) combine the outstanding shares of
Common Stock into a smaller number of shares or (iv) issue, by
reclassification of the Common Stock, any other securities of the Company,
then, in each such case, the Conversion Price then in effect shall be
adjusted so that upon the conversion of each share of Series C Preferred
Stock then outstanding the number of shares of Common Stock into which such
shares of Series C Preferred Stock are convertible after the happening of any
of the events described in clauses (i) through (iv) above shall be the number
of such shares of Common Stock into which such shares of Series C Preferred
Stock would have been converted if so converted immediately prior to the
happening of such event or any record date with respect thereto.
(e) AUTOMATIC MANDATORY CONVERSION. If not sooner converted, all
outstanding shares of Series C Preferred Stock shall be subject to automatic
mandatory conversion on the second anniversary of the date of original
issuance thereof.
(f) COMMON STOCK RESERVED. The Company shall reserve and keep
available out of its authorized but unissued Common Stock such number of
shares of Common Stock as shall from time to time be sufficient to effect
conversion of all of the then outstanding shares of Series C Preferred Stock.
3. DIVIDEND RIGHTS OF SERIES C PREFERRED STOCK. Subject to the
dividend provisions fixed by the Board for any series of Preferred Stock
designated by the Board in the future, the holders of Series C Preferred
Stock shall be entitled to receive dividends at the rate of eight percent per
annum payable in shares of Common Stock except as otherwise provided in
Section 6 below, out of any assets at the time legally available therefor.
4. VOTING RIGHTS OF SERIES C PREFERRED STOCK. The holders of
outstanding shares of Series C Preferred Stock shall not be entitled to vote
on any matters submitted to the shareholders of the Company except as
otherwise required by law, in which case every holder of Series C Preferred
Stock shall be entitled to one vote for each such share of Series C Preferred
Stock held of record on the applicable record date.
5. PREFERENCE ON LIQUIDATION.
(a) The holders of Series C Preferred Stock shall be entitled to
receive, prior and in preference to any distribution of any of the assets of
the Company to the holders of the Common Stock or to the holders of any other
class of Preferred Stock of the Company by reason of their ownership of such
stock, the amount of (i) $100 per share for each share of Series C Preferred
Stock then held by them, adjusted for any stock split, stock combination,
stock distribution or stock dividend with respect to such shares and (ii) an
amount equal to all declared but unpaid dividends on the Series C Preferred
Stock as provided in Section 3 above.
-3-
<PAGE>
(b) After payment in full to (i) the holders of Series C Preferred
Stock of all amounts exclusively payable on or with respect to said shares
pursuant to Section 5(a) above, and (ii) the holders of any class or series
of Preferred Stock created or issued by the Company after the original
issuance of the Series C Preferred Stock of all amounts exclusively payable
on or with respect to any liquidation preference with respect to such shares
of Preferred Stock, the holders of Common Stock shall be entitled to receive
the remaining assets of the Company available for distribution upon the
dissolution, liquidation or winding up of the Company. If the assets and
funds available for distribution among the holders of the Common Stock and
among the holders of the Series C Preferred Stock or of any other series of
Preferred Stock ranking on a parity with the Common Stock with respect to
this Section 5(b) as to the distribution of assets upon such dissolution,
liquidation or winding up shall be insufficient to permit the payment to such
holders of their full liquidation payments, then the entire remaining assets
and funds of the Company legally available for such distribution shall be
distributed ratably among such holders in proportion to their aggregate
preferential amounts.
(c) A consolidation or merger of the Company with or into another
company or entity in a transaction involving the disposition of more than 50%
of the voting power of the Company, or a sale of all or substantially all of
the assets of the Company (a "Sale of the Company") shall be regarded as a
dissolution, liquidation or winding up of the Company within the meaning of
this Section 5. The Company shall not consummate a Sale of the Company
before the expiration of ten days after mailing written notice of the
proposed Sale of the Company to the holders of record of the Series C
Preferred Stock.
6. REDEMPTION RIGHTS.
(a) In the event that the Company has issued 2,745,091 or more
shares of Common Stock upon the conversion of shares of Series C Preferred
Stock, the Company shall have the right to redeem the remaining outstanding
shares of Series C Preferred Stock, in whole or in part, at a cash redemption
price equal to the sum of (i) $136.90 per share, and (ii) the amount of all
accrued but unpaid dividends with respect to the shares being redeemed
(collectively, the "Cash Redemption Price"); provided, however, that the
Company shall not be entitled to redeem any shares of Series C Preferred
Stock unless it has given the holder of such shares written notice of such
redemption (the "Redemption Notice") prior to the date that the holder
submits a Conversion Notice with respect to such shares. If the Company
delivers a timely Redemption Notice, the Cash Redemption Price will be paid
to the holder of the shares to be redeemed, by certified or official bank
check, within five business days after the date of the Redemption Notice,
upon the surrender of the certificates representing the Series C Preferred
Stock being redeemed; provided that the Company shall not be required to pay
the Cash Redemption Price to a holder until the Company has received the
certificate(s) of the Series C Preferred Stock being redeemed from the holder.
-4-
<PAGE>
Exhibit 11
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
YEARS ENDED SEPTEMBER 30, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net earnings (loss) available to common shareholders $ 712 $(2,961) $1,815
-------------------------------------
-------------------------------------
Weighted average number of common shares outstanding 13,896 10,212 5,143
Assumed exercise of options and warrants ( as determined
by the application of the treasury stock method using
average stock price) 242 - 957
-------------------------------------
Weighted average number of common shares outstanding
as adjusted 14,138 10,212 6,100
-------------------------------------
Primany earnings (loss) per common share $ 0.05 $ (0.29) $ 0.30
-------------------------------------
Fully diluted earnings (loss) available to common shareholders $ 712 $(2,961) $1,815
-------------------------------------
-------------------------------------
Weighted average number of common shares outstanding
as adjusted 14,138 10,212 6,100
Assuming conversion of convertible preferred stock and
convertible debt 161 - 252
Assumed exercise of options and warrants ( as determined
by the application of the treasury stock method using
end of year stock price, greater than average) 3,309 - -
-------------------------------------
Weighted average number of common shares outstanding
as adjusted 17,608 10,212 6,352
-------------------------------------
Fully diluted earnings (loss) per common share $ 0.04 $ (0.29) $ 0.29
-------------------------------------
</TABLE>
Page 1
<PAGE>
RECYCLING INDUSTRIES, INC.
SUBSIDIARIES AS OF DECEMBER 31, 1997
NR Holdings, Inc., a Nevada corporation, wholly-owned
Nevada Recycling, Inc., a Nevada corporation, wholly-owned by NR
Holdings, Inc.
Metal Recovery, Inc., a Delaware corporation, wholly owned*
Recycling Industries of Texas, Inc., a Colorado corporation, wholly-owned
Recycling Industries of Missouri, Inc. d/b/a Mid-America Shredding, Inc., a
Colorado corporation, wholly-owned
Recycling Industries of Iowa, Inc., a Colorado corporation, wholly-owned
Weissman Industries, Inc., an Iowa corporation, wholly-owned by Recycling
Industries of Iowa, inc.
Recycling Industries of South Carolina, Inc., a Colorado corporation,
wholly-owned
Recycling Industries of Georgia, Inc., a Colorado corporation, wholly-owned
Recycling Industries of Chesapeake, Inc., a Colorado corporation, wholly-owned
Recycling Industries of Atlanta, Inc., a Colorado corporation, wholly-owned
Recycling Industries of Wisconsin, Inc., a Colorado corporation, wholly-owned
Recycling Industries of Winston-Salem, Inc., d/b/a Brenner Iron and Metal
Company and Brenner Steel, a Colorado corporation, wholly-owned
Recycling Industries of Greensboro, Inc., d/b/a United Metal Recyclers, a
Colorado corporation, wholly-owned
Wm. Lans Sons Company, Inc., an Illinois corporation, wholly-owned
Environmental Recovery Systems of Wrenthem, a Massachusetts corporation,
90% owned*
Environmental Recovery Systems of New Milford, a Connecticut corporation,
wholly-owned*
<PAGE>
Environmental Recovery Systems of Leominster, a Massachusetts corporation,
wholly owned*
Environmental Recovery Systems of Metals, a Colorado corporation, wholly-owned*
Environmental Recovery Systems of Georgia, a Georgia corporation, wholly-owned*
- -----------
* Corporation is inactive with no operations.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 746
<SECURITIES> 0
<RECEIVABLES> 8,824
<ALLOWANCES> (4)
<INVENTORY> 4,183
<CURRENT-ASSETS> 15,004
<PP&E> 33,227
<DEPRECIATION> 0
<TOTAL-ASSETS> 55,079
<CURRENT-LIABILITIES> 7,448
<BONDS> 0
0
500
<COMMON> 14
<OTHER-SE> 16,161
<TOTAL-LIABILITY-AND-EQUITY> 55,079
<SALES> 62,424
<TOTAL-REVENUES> 62,424
<CGS> 55,179
<TOTAL-COSTS> 55,179
<OTHER-EXPENSES> 4,221
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,616
<INCOME-PRETAX> 481
<INCOME-TAX> (595)
<INCOME-CONTINUING> 1,076
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,076
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.04
</TABLE>
