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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, 1998
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 $17,136,045. This calculation is based upon the
closing price of the stock on December 31, 1998 of $1.00, and the number of
shares held by non-affiliates, which was 17,136,045 shares on December 31, 1998.
The number of shares of the Registrant's $.001 par value Common Stock that was
outstanding as of December 31, 1998 was 21,325,249.
Documents Incorporated by Reference: None
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TABLE OF CONTENTS
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PART I PAGE
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Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . .10
Item 4. Submission of Matters to a Vote of Security Holders. . . . .12
Special Considerations Affecting the Company . . . . . . . .13
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters . . . . . . . . . . . . .22
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . . .25
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . .26
Item 8. Financial Statements and Supplementary Data. . . . . . . F-1 - F-44
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure. . . . . . . . . .40
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . .42
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . .44
Item 12. Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . . . . . . . .50
Item 13. Certain Relationships and Related Transactions . . . . . . .52
PART IV
Item 14. Exhibits, Financial Statement Schedules and. . . . . . . . .52
Reports on Form 8-K
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . .58
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ALL STATEMENTS CONTAINED WITHIN THIS ANNUAL REPORT ON FORM 10-K FOR
RECYCLING INDUSTRIES, INC. AND ITS SUBSIDIARIES (COLLECTIVELY THE "COMPANY"),
THAT ARE NOT STATEMENTS OF HISTORICAL FACT CONSTITUTE "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES EXCHANGE ACT.
SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES
AND OTHER FACTORS THAT COULD CAUSE THE ACTUAL RESULTS OF THE COMPANY TO BE
MATERIALLY DIFFERENT FROM HISTORICAL RESULTS OR FROM ANY FUTURE RESULTS
EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. READERS ARE URGED TO
CONSIDER STATEMENTS THAT INCLUDE THE TERMS "BELIEVES," "BELIEF," "EXPECTS,"
"PLANS," "ANTICIPATES," "INTENDS" OR THE LIKE TO BE UNCERTAIN AND
FORWARD-LOOKING. 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."
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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 17 wholly-owned subsidiaries.
The Company operates an aggregate of 36 metals recycling facilities located in
Arkansas, Georgia, Illinois, Iowa, Missouri, Nevada, North Carolina, South
Carolina, Oklahoma, Texas, Virginia, and Wisconsin. 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 $239.4
million for the year ended September 30, 1998.
During the fiscal year ended September 30, 1998, the Company completed 13
acquisitions. In May 1998, the Company acquired substantially all of the
capital stock of Ferex Corporation ("Ferex"), a metals recycler and auto crusher
located in Tyler, Texas, with operations in Arkansas, Oklahoma and Texas. Also,
in May 1998, the Company acquired substantially all of the scrap metals
recycling assets and business of the following five companies: Republic Alloys,
Inc. ("Republic"), a metals recycler and crane operator located in Charlotte,
North Carolina; Peanut City Iron & Metal Co., Inc. ("Peanut City"), a metals
recycler located in Suffolk, Virginia; Pro Recycling, L.L.C. ("Pro Recycling"),
a metals recycler located in Milwaukee, Wisconsin; McKinney Smelting, Inc.
("McKinney"), a metals recycler located in McKinney, Texas; C&J Crushing, Inc.
("C&J Crushing"), a car crushing operation located in Salisbury, North Carolina.
In December 1997, the Company acquired all of the issued and outstanding stock
of Wm. Lans Sons' Co., Inc. ("Lans"), a metals recycler located in South Beloit,
Illinois. Also, in December 1997, the Company acquired substantially all of the
scrap metals recycling assets and business of the following six companies:
Brenner Companies, Inc. ("Brenner"), a metals recycler located in Winston-Salem,
North Carolina; Grossman Brothers Company, Inc. ("Grossman"), a metals recycler
located in Milwaukee, Wisconsin; Central Metals Company, Inc. ("Central"), a
metals recycler located in Atlanta, Georgia; Money Point Land Holding
Corporation and Money Point Diamond Corporation (collectively "Jacobson"), a
metals recycler located in Chesapeake, Virginia; United Metal Recyclers
("United"), a metals recycler located in Kernersville, North Carolina; and
United Metal - D.H. Griffin Recyclers L.L.C. ("D.H. Griffin"), a metals recycler
located in Smithfield, North Carolina.
DESCRIPTION OF BUSINESS
The Company is a full-service metals recycler engaged in the collection and
processing of various ferrous and non-ferrous metals for resale primarily to
domestic steel producers and other metals producers and processors. The
Company's operations consist of purchasing and processing unprepared scrap and
selling processed scrap. Scrap is categorized as either ferrous, containing
iron and consisting primarily of steel, or non-ferrous, which includes materials
such as copper, aluminum and brass. The Company purchases unprepared scrap
primarily from automobile salvage and wrecking yards, demolition firms,
ordinance depots, military bases, public utilities, industrial facilities, metal
fabricators, machine shops, railroads, refineries, shipyards and numerous
independent scrap collectors. Scrap is processed for resale by shearing,
shredding, baling, sorting and cleaning according to customer specifications
into various
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chemistry types and sizes. The Company's non-ferrous operations complement its
ferrous operations, as most unprocessed scrap contains ferrous and non-ferrous
components that require separation in preparation for resale.
MARKETS
THE INDUSTRY
According to industry sources, there are over 3,000 independent metals recyclers
in North America, of which more than 180 operate automotive shredders.
Shredders constitute the primary equipment used in processing large volumes of
ferrous and non-ferrous scrap for sale to steel and other metals producers.
Many of the companies in this fragmented industry are family-owned operations.
THE FERROUS SCRAP MARKET
DOMESTIC: The largest portion of the Company's operations involves the
collection, shredding, processing and sale of ferrous scrap, the primary raw
material for mini-mill steel producers who utilize electric arc furnace
("EAF") technology. All of the Company's facilities process ferrous scrap.
The increase in total EAF production from 22.7 million net tons in 1975 to
46.4 million net tons in 1997 had resulted in strong demand and increasing
prices for processed ferrous scrap over that period. Demand for ferrous
scrap is expected to increase as a number of new EAFs come on line in the
next several years, increasing in EAF production to over 50.0 million net
tons by the year 2000. Currently, approximately $12.0 billion of processed
ferrous scrap is sold each year to mini-mills, integrated producers and other
consumers, such as foundries. Notwithstanding this trend, the price of
processed scrap can be and has been extremely volatile. For example, in
1998, the published price of ore grade ferrous scrap fell 38%.
The growth in mini-mill production has been fueled by advances in EAF technology
which enable mini-mills to produce higher quality steel from processed ferrous
scrap and the ability of mini-mills to produce high quality steel at a lower
cost than integrated steel producers. Integrated steel producers must charge a
blast furnace with iron ore, coke and limestone to produce molten iron which is
then combined with scrap in the furnace to make steel. Mini-mills avoid this
energy inefficient process and charge an electric arc furnace with scrap to make
steel. Mini-mills, however, are metallic consumers as opposed to being metallic
producers. Unlike the integrated steel producers which create basic iron units
from raw materials, mini-mills depend on iron or steel units previously created
by integrated producers. The key economic strength of mini-mills lies in their
advanced technology, reduced manpower count and the reduced initial capital
costs of facility construction and implementation as compared to integrated
operators. Consequently, even though prices for processed ferrous scrap are
projected to increase over the next decade, the mini-mills are expected to have
a significant cost advantage over the integrated mills and should continue to
increase their consumption of processed ferrous scrap.
Ferrous scrap is generated in two forms: prompt industrial scrap and old scrap.
Prompt industrial scrap is the material left over from manufacturing processes
that use steel, such as automobile and appliance manufacturing. Old scrap
includes the obsolete or broken goods generated by society consisting of
automobiles, refrigerators and other consumer and industrial steel goods. The
Company purchases unprepared scrap from automobile salvage and wrecking yards,
demolition firms, ordinance depots, military bases, public utilities, industrial
facilities, metal fabricators, machine shops, railroads, refineries, shipyards
and numerous independent scrap collectors. The geographic market for prepared
ferrous scrap is larger, tending to be within a 100 to 150 mile radius of the
metals recyclers, but may include shipments to overseas markets via deep water
port facilities of the United States. The primary limitation on the geographic
size of the supply and resale markets in the metals recycling industry is the
cost of
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transporting unprepared and processed scrap materials. For this reason, metal
scrap processing facilities tend to be located on or near key rail, interstate
highway or water transportation routes.
WORLDWIDE: The growth in mini-mill production outside the United States has
paralleled the substantial expansion of EAFs in the United States. While the
world-wide market penetration of mini-mill production has not yet reached the
levels in the United States, the current trends point towards international EAF
technology proliferation achieving similar levels. According to industry
reports, over the three year period from 1997 through 2000, in countries outside
the United States, mainly in Asia and Latin America, approximately 60 million
tons of new mini-mill capacity is scheduled to come on line. This represents an
approximately 40% incremental increase to mini-mill capacity in these regions,
an annual capacity growth of approximately 12%. The Company does not make
siginificant sales on these regions.
AVAILABILITY OF FERROUS SCRAP
Three trends over the past decade have reduced the generation of recyclable
scrap metal. They are: (i) manufacturers have found other materials to use in
place of steel; (ii) there has been a general reduction in size of products
which use steel, such as automobiles; and (iii) many steel-based products now
have longer life cycles.
PRICE OF FERROUS SCRAP
Ferrous scrap prices have historically exhibited a general pattern, rising
during the winter months, peaking in March, and declining during the spring and
summer. The impact of weather on the ease of accumulation and transportation of
scrap is primarily responsible for this seasonality. In addition, the seasonal
demand for new automobiles creates a cyclical flow of prompt industrial scrap.
During 1998, the historic seasonal trends and recent increases in the demand
and price for processed ferrous scrap were dirupted and reversed. Finished
steel imports from Asia and Europe reduced the demand for domestically
produced steel which, in turn, resulted in a significant decrease in the
demand for and price of processed ferrous scrap, the Company's primary
product.
As noted above, the general scrap market and the Company experienced a decline
in the realized price for all grades of ferrous scrap in the period from January
1998 through September 1998, the end of the fiscal year, and through December
31, 1998. For example, the general market price for processed shredded scrap in
January 1998 was approximately $148 per gross ton as compared to a price of
approximately $100 per gross ton at September 30, 1998. The average market
price realized by the Company for shredded scrap in December 1998 was $95 per
gross ton. At this time management cannot assess whether metal prices will
remain at lower levels or the effect the lower prices will have on operating
income. (All prices are quoted FOB the Company's processing facilities.)
THE NON-FERROUS SCRAP MARKET
Non-ferrous metals include copper, aluminum, brass, stainless steel, high
temperature alloys and other exotic metals. The non-ferrous scrap market is
less fragmented than the ferrous scrap market due to the higher intrinsic values
of the non-ferrous metals and the available commodity market prices for these
metals. 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.
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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 23.4% of the Company's total
net sales for the year ended September 30, 1998.
OPERATIONS
RAW SCRAP PURCHASING (SOURCE AND AVAILABILITY OF RAW MATERIALS)
Raw scrap metal is purchased by the ton from local sources, including, among
others, 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, 1998, 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 majority of the
Company's supply relationships are not represented by long-term contracts.
While the Company has long-term supply arrangements with certain suppliers, none
of these arrangements are 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, crane-mounted
electromagnets, and other equipment.
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The Company's processing operations at the majority 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 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 ten
heavy-duty automotive shredders with a monthly output capacity of approximately
78,000 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 or a shear.
Each of the Company's facilities processes these items through a variety of
methods, including manual and automatic sorting, shearing, torching, baling,
wire stripping or a combination of these methods. Prepared non-ferrous items
are either sold in their separated form or baled into low-density bales in
accordance with customer specifications.
PROCESSED SCRAP SALES
The Company sells processed ferrous scrap primarily to regional and local steel
mills operating EAFs, foundries, and to a limited extent to integrated steel
producers which utilize some ferrous scrap in their blast furnace operations.
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.
Sales of processed ferrous scrap accounted for 63.9% of the Company's revenues
for the year ended September 30, 1998.
The Company sells processed non-ferrous scrap primarily to foundries, aluminum
sheet and ingot manufacturers, copper refineries and smelters, brass and bronze
ingot manufacturers and other consumers. Ingot manufacturers produce a
semi-finished mass of a particular metal to a chemical specification and shaped
for convenient storage and transportation. The ingots are remelted by
manufacturers to produce finished products. Non-ferrous scrap is sold on a spot
market basis. Sales of non-ferrous materials accounted for 23.4% of the
Company's revenues for the year ended September 30, 1998.
SIGNIFICANT CUSTOMERS
One of the Company's customers, The David J. Joseph Company ("Joseph") accounted
for approximately 10.4% of the Company's revenues for the year ended September
30, 1998. The loss of this customer would not have a material adverse effect on
the Company's business since Joseph is an intermediary
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broker only and the Company expects that it can sell materials directly to other
consumers.
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 barge. 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
could have a material adverse effect on the Company's business. However, this
business risk is somewhat offset by the Company's maintenance and operation of
its own fleet of trucks.
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 availability and processing capability. In addition, the
sale of processed scrap is affected by the reliability of the metals recycler as
a source of supply and the quality of its processed scrap. The Company believes
that its professional management team, quality of processed scrap and emphasis
on customer service enable it to compete favorably in its markets. In addition,
the Company believes that its national growth strategy will increase its market
exposure to large purchasers of processed scrap, thereby giving it a competitive
advantage relative to independent local and regional metals recyclers.
The Company competes on a regional and local basis with a large number of other
scrap metals processors, some of which may have greater financial, marketing and
other resources than the Company and several of which are public companies. The
Company may also face competition for acquisition candidates from these public
companies, most of whom acquired a number of scrap metals processors during the
past decade. The Company also competes to a lesser extent with primary metals
producers, who typically sell directly only to very large customers requiring
regular shipments of large volumes of metals. Other smaller metals processors
may also seek acquisitions from time to time.
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. Specifically, the Company
believes that the following factors will limit construction of new recycling
facilities: (i) the scarcity of potential sites that are properly zoned for
scrap metal recycling and have access to rail or other cost-effective means of
transportation; (ii) increasingly restrictive environmental regulations; and
(iii) the long-established relationships between existing scrap metal recyclers,
their customers and sources of supply.
Some mini-mills are examining alternatives to processed steel scrap, such as
pre-reduced iron pellets, as a feedstock for EAFs. The Company believes,
however, that such alternatives to processed ferrous scrap will be used
primarily as a supplemental feedstock to permit EAFs to produce higher grade
products, increasing the potential market for EAF-produced steel and possibly
increasing the demand for processed ferrous scrap in the aggregate. Although a
significant increase in the usage of scrap alternatives by mini-mills could have
an adverse effect on the demand for processed ferrous scrap, current domestic
production of scrap alternatives is approximately 0.8 million tons per year, or
less than 3% of domestic scrap requirements. Of the approximately 225 million
metric tons of steel per year that are produced on a
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world-wide basis in mini-mills, scrap alternatives have only grown to about 30
million metric tons per year, approximately 13% of present global mini-mill iron
unit supply.
COMPLIANCE WITH ENVIRONMENTAL REGULATIONS
The Company's facilities and operations are currently engaged in environmentally
sensitive businesses and, as such, are subject to a wide range of federal, state
and local environmental laws and regulations. Like many of its competitors, the
Company has incurred, and will continue to incur, substantial capital costs and
other expenses in complying with such laws and regulations, including those
relating to wastewater and stormwater discharges, the treatment, storage and
disposal of solid and hazardous wastes and the remediation of contamination
associated with the release of hazardous substances.
In particular, the Company is involved in investigative and remedial activities
under the Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA") and analogous state statutes with respect to contamination at certain
of its current properties. Such laws may impose joint and several liability on
the Company for the costs of investigation and remediation of such contaminated
properties, regardless of fault or the legality of the original disposal. In
addition, due to the nature of the Company's operations and the potential for
recurrence of subsurface soil contamination, there is a high probability that
additional removal or remediation activities will be required from time to time.
The Company's operations produce substantial volumes of waste. In the course of
processing ferrous and non-ferrous metals, the Company's procedures are designed
to inspect all inbound material several times prior to and during processing to
screen out matter that may be considered "hazardous materials" under various
environmental laws, including CERCLA and the Resource Conservation Recovery Act
("RCRA"). Such materials may be contained in the Company's feed stream, which
includes 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. While the Company
screens the feed stream for hazardous materials and rejects high-risk items such
as transformers (which may contain PCB's), batteries, equipment containing freon
or any sealed or closed-end barrels of material, certain items in the feed
stream may inadvertently contain hazardous materials that end up in shredder
fluff, the by-product of shredder operation or other processed scrap materials.
The Company generally disposes of shredder fluff at municipal or private
landfills on a truckload basis. Such disposal is pursuant to long-term
contracts. To avoid classification as a hazardous waste, shredder fluff must
pass toxic leaching tests under certain environmental laws. The Company's
screening of the feed stream and periodic independent testing of the company's
facilities, have been designed to produce shredder fluff suitable for disposal
in municipal or private landfills.
Nonetheless, because of the volume and condition of these screened materials,
certain items containing hazardous or toxic substances may inadvertently proceed
through inspection and shredding and be disposed of in shredder fluff.
Therefore, contamination heretofore unknown to the Company at the Company's
facilities or at sites to which the Company sent wastes may be identified and
become the subject of future investigative and remedial actions. In addition,
changes in the environmental laws or testing methods with respect to shredder
fluff may change the classification and availability of suitable disposal sites
for shredder fluff, resulting in significant additional expense to the Company.
Finally, hazardous materials through inadvertent spillage or improper disposal
may contaminate the premises upon which the Company's operations are conducted,
although the Company believes that such contamination will not have a material
impact on the Company's operations or financial condition.
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
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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's operations or financial condition.
In addition, many of the Company's present and former facilities have or had
been in operation for several decades and, over such time, such facilities have
generated and disposed of wastes which are or may be considered hazardous under
CERCLA. Prior to and as a condition to the consummation of any new acquisition,
the Company performs subsurface soil and groundwater testing of the target
company's facilities in order to identify potential conditions of noncompliance
with applicable environmental laws and regulations. In many cases, such testing
has identified the presence of such contamination in subsurface soil or
groundwater and the Company has taken steps to address such conditions.
However, the Company has not fully assessed the scope of potential soil and
groundwater contamination at all of its present or former facilities. In
particular, the Company has not fully assessed its scrap metal storage areas
because materials stored in these areas precluded sampling. Therefore, the
Company does not have sufficient information to estimate the aggregate liability
which may arise with respect to the potential presence of contamination at such
facilities or any facilities that may be acquired in the future. Such
contamination, if present, could have a material adverse effect on the Company's
business or financial condition.
In pursuing its acquisition strategy the Company typically finds that certain
acquired entities have unresolved environmental liabilities. The Company
typically requires such entities to fund an escrow account (with a portion of
the acquisition purchase price) in an amount sufficient to satisfy the cost of
these environmental liabilities. However there can be no assurance that the
amounts included in such escrow accounts will be sufficient to cover all
potential environmental liabilities. In addition, because a large portion of
such escrow amounts is comprised of convertible preferred stock, the value of
which is based on the capital markets, there can be no assurance that the full
escrow amounts will be available on a timely basis to pay for environmental
liabilities.
SEASONALITY
The Company's 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, 1998 the Company had approximately 975 full-time employees,
most of whom are employed by the Company's wholly-owned subsidiaries. At
December 31, 1998, the Company had approximately 850 full-time employees as the
Company continues to reduce operating costs due to unfavorable industry
conditions. One subsidiary, Weissman Iron & Metal, Inc., has 41 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.
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
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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 PROCESSING
FACILITY LOCATION (ACRES) MATERIALS PROCESSED CAPACITY (TONS)
- - ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Eldorado, Arkansas 2.6 Ferrous and non-ferrous scrap 425
Texarkana, Arkansas 25 Ferrous and non-ferrous scrap 575
Metter, Georgia 22.5 Ferrous and non-ferrous scrap 11,500
Georgetown, S. Carolina 12.5 Ferrous and non-ferrous scrap 10,200
Marietta, Georgia 1.3 Ferrous and non-ferrous scrap 250
Warrenton, Georgia 5.5 Ferrous and non-ferrous scrap 2,000
Atlanta, Georgia (3 locations) 16.1 Ferrous and non-ferrous scrap 16,500
Waterloo, Iowa (1) 34 Ferrous and non-ferrous scrap 6,500
South Beloit, Illinois 33 Ferrous and non-ferrous scrap 16,600
Ste. Genevieve, Missouri 32 Ferrous and non-ferrous scrap 3,500
Winston-Salem, N. Carolina 27 Ferrous and non-ferrous scrap 12,000
Smithfield, N. Carolina 30 Ferrous and non-ferrous scrap 15,000
Charlotte, N. Carolina 12 Ferrous and non-ferrous scrap 4,000
Kernersville, N. Carolina 70 Ferrous and non-ferrous scrap 17,000
Salisbury, N. Carolina 3 Ferrous and non-ferrous scrap 3,000
Las Vegas, Nevada 26 Ferrous and non-ferrous scrap 10,000
Ada, Oklahoma 3.3 Ferrous and non-ferrous scrap 350
Idabel, Oklahoma 2.2 Ferrous and non-ferrous scrap 300
McAlester, Oklahoma 3.6 Ferrous and non-ferrous scrap 600
Harlingen, Texas 2.9 Ferrous and non-ferrous scrap 7,800
Lufkin, Texas 2.8 Ferrous and non-ferrous scrap 400
Marshall, Texas 8.2 Ferrous and non-ferrous scrap 350
McKinney, Texas 6 Ferrous and non-ferrous scrap 2,200
Odessa, Texas 3.6 Ferrous and non-ferrous scrap 2,150
Palestine, Texas 10.8 Ferrous and non-ferrous scrap 300
Sherman, Texas 8.1 Ferrous and non-ferrous scrap 250
Sulphur Springs, Texas 7.6 Ferrous and non-ferrous scrap 300
Tyler, Texas 11.2 Ferrous and non-ferrous scrap 30,000
Chesapeake, Virginia 64.3 Ferrous and non-ferrous scrap 11,000
Suffolk, Virginia 2.7 Ferrous and non-ferrous scrap 3,000
Milwaukee, Wisconsin (4 locations) 9.8 Ferrous and non-ferrous scrap 6,000
- - ----------------------------------------------------------------------------------------------------------------------------
499.6 194,050
- - ----------------------------------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Subject to a deed of trust granted to the former owner of Weissman to
secure the Company's guarantee of the $1.5 million value of the 363,636 shares
of Common Stock issued in connection with the acquisition of Weissman. The
holder of the Deed of Trust has commenced foreclosure proceedings on this
facility. See "Legal Proceedings" below. 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
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<PAGE>
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 shredder and/or
shears for maintenance. If these shutdowns occur for an extended period of
time, they may have an adverse impact on the Company's operations.
ITEM 3 - LEGAL PROCEEDINGS
The Company is involved in various legal proceedings arising from its
normal business activities. Management believes that these legal proceedings,
individually or in the aggregate, will not have a material adverse effect on the
financial condition or results of operations of the Company. However, the
Company is involved in certain proceedings which could have a material adverse
effect on the financial condition of the Company. These proceedings are
summarized below:
CASIDE ASSOCIATES/JOHN SILVIA, JR. LITIGATION
(1) ALLAN R.A. BEEBER, ET AL., PLAINTIFFS, V. JOHN SILVIA, JR., ET AL.,
DEFENDANTS, U.S.D.Ct., D. Mass., Civil Action No. 96-12416-JLT
This action arises out of allegedly fraudulent sales of the Company's
securities by John Silvia, Jr. and a partnership entitled Caside Associates.
Plaintiffs allege that Mr. Silvia was acting as the Company's agent in selling
the Company's securities and, as a result, the Company is liable for Mr.
Silvia's wrongful actions. The Company believes Plaintiffs' claims to be
without merit and is vigorously defending this matter. On February 20, 1998,
this action was dismissed without prejudice to either party moving to restore it
to the docket upon completion of all matters pending before the U.S. Bankruptcy
Court for the District of Massachusetts, Eastern Division, in three chapter 11
proceedings involving CASIDE ASSOCIATES, DEBTOR (Case No. 97-13222-JNF),
ENVIRONMENTAL RECOVERY SYSTEMS OF SOMERSET, INC., DEBTOR (Case No. 97-13221-JNF)
and JOHN SILVIA, JR., DEBTOR (Case No. 97-134154-JNF). An amended stipulation
of settlement (the "Amended Stipulation") has been signed by each Debtor and the
Company and was filed in the bankruptcy proceedings on or about September 30,
1998 as a part of a proposed plan of reorganization (the "Plan"). Under the
Amended Stipulation, the Company will rescind $7 million invested in the Company
by Caside Associates, and pay up to an additional $1.4 million (for a total of
$8.4 million) to settle all claims. If certain investors/creditors in Caside
elect not to participate in the settlement, the total amount of the settlement
will be reduced proportionately from $8.4 million. The Company has posted an
irrevocable letter of credit in the amount of $7 million to fund a portion of
the settlement. On December 30, 1998, the U.S. Bankruptcy Court confirmed the
Plan, including the Amended Stipulation. The Plan was approved by over 99% of
the creditors of Caside by number and by dollar amount of claim. Accordingly,
all pending and potential claims of investors in the bankruptcy proceedings,
which include all investors, and their successors and assigns, in Caside who
claim they were defrauded by John Silvia, Jr., Caside Associates and the Company
and who elected to participate in the settlement, are permanently enjoined
against the Company.
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<PAGE>
(2) WILLIAM C. MITCHELL ET AL., PLAINTIFFS V. RECYCLING INDUSTRIES, INC.,
DEFENDANT, Mass. Superior Court, Bristol Div., Civil Action No. C97-00845.
The action alleges that the Company devised a scheme in connection with
John Silvia, Jr. and his affiliates in violation of federal and state securities
laws whereby Silvia deceptively sold the Company's securities owned by Caside
Associates, an affiliated partnership of Mr. Silvia, and Mr. Silvia. Plaintiffs
seek damages based on contract, quantum meruit, negligence, fraud and violation
of federal and state securities laws. The Company believes Plaintiffs' claims
are without merit and is vigorously defending this matter. Because the Amended
Stipulation, was approved by the U.S. Bankruptcy Court as part of the Plan, this
action is permanently enjoined against those investors/creditors, and their
successors and assigns, of Caside, Environmental Recovery Systems of Somerset,
Inc. ("ERSS") and Silvia who elected to participate in the settlement.
(3) DWIGHT SILVIA, ET AL., PLAINTIFF, V. RECYCLING INDUSTRIES, INC.,
DEFENDANT, U.S.D.Ct., D. Mass., Civil Action No. 97-12015-JLT.
The Complaint in this action is a virtual word-for-word copy of the
MITCHELL complaint and, thus, the same disclosure in that action applies here.
(4) FERREIRA, ET AL., PLAINTIFFS, V. RECYCLING INDUSTRIES, INC.,
DEFENDANT, U.S.D.Ct., D. Mass., Civil Action No. 97-12660-JLT.
The Complaint in this action is a virtual word-for-word copy of the
MITCHELL AND DWIGHT SILVIA complaints and, thus, the same disclosure applies
here.
(5) ROCHA, PLAINTIFF, V. JOHN SILVIA, JR. ET AL., DEFENDANTS, Mass.
Superior Court, Bristol Div., Civil Action No. 9501347.
The Complaint alleges that Plaintiff, individually and as trustee of the
U.N. Trust, was fraudulently induced to invest $15,000 in Caside Associates by
signing a "Promissory Note, Security and Assignment Agreement," which funds have
not been returned to Plaintiff. That is scheduled for January 19, 1999.
Because the Amended Stipulation was approved by the U.S. Bankruptcy Court as
part of the Plan, this action is permanently enjoined against Rocha.
ANGLO METAL LITIGATION
(1) RECYCLING INDUSTRIES, INC., ET AL., PLAINTIFFS, V. ROBERT C. ROME,
DEFENDANT, U.S.D.Ct., D. Colo., Civil Action No. 97-D-128, consolidated with
ANGLO METALS, INC., PLAINTIFF, V. RECYCLING INDUSTRIES, ET. AL., DEFENDANTS,
Bankr. S.D. Texas, Adversary No. 97-2024-C.
The Company and a subsidiary, Recycling Industries of Texas, Inc. ("RITI"),
sought actual and consequential damages in a undetermined amount for fraud by
misrepresentation, deceit by nondisclosure and concealment and breach of
contract in connection with the acquisition of Anglo Iron & Metals in December
1995. Alternatively, the complaint sought specific performance of Mr. Rome's
obligations under his agreement with the Company. As described below, this
matter was settled along with the following action.
(2) ANGLO METALS, INC., PLAINTIFF, V. RECYCLING INDUSTRIES, ET. AL.,
DEFENDANTS, Bankr. S.D. Texas, Adversary No. 97-2024-C.
The Complaint alleged that the Company and RITI failed to perform certain
obligations under their agreement to acquire substantially all the assets of
Anglo Metals, Inc. in December 1995.
11
<PAGE>
Plaintiff sought damages in excess of $3.255 million for breach of contract,
fraud and conversion. Alternatively, the Complaint sought to rescind the
agreements executed by the Company and RITI to acquire substantially all the
assets of Anglo Metals, Inc.
SETTLEMENT AGREEMENT.
On September 28, 1998, the Company, Recycling Industries of Texas, inc.,
Anglo Metal, Inc., Anglo Iron & Metal Company (collectively "Anglo"), Robert C.
Rome ("Rome") and Union Pacific railroad Company ("UP") entered into a
Settlement Agreement regarding each of the foregoing actions (the "Settlement").
Under the terms of the settlement, in exchange for the release of all claims
against the Company , the Company paid Rome $438,122, Anglo $ 68,000 and placed
$700,000 into escrow for the remediation of certain properties owned by Rome and
Anglo. In addition, the Company acquired the real property underlying its San
Juan and Harlingen, Texas facilities from the UP for a purchase price of $65,000
and agreed to remediate these properties pursuant to the Texas Voluntary Cleanup
Program. Of the aggregate settlement amount of $1,206,122, $928,762 was funded
through the sale of shares of the Company's common stock that were issued to
Anglo as part of the acquisition in December 1995.
OTHER LITIGATION
DEPARTMENT OF TOXIC SUBSTANCES CONTROL V. INTERSTATE NON-FERROUS
CORPORATION; SAN FERNANDO MOTORS, INC. V. A-1 METAL MARKET, U.S. District Court
for the Eastern District of California, Docket No. CV-F-97-5016 OWW DLB
The Company's wholly-owned subsidiary, Nevada Recycling, Inc. (the "NV
Subsidiary") is one of 94 entities named in a third party complaint filed by San
Fernando Motors seeking indemnification and contribution for contamination at a
site referenced as "the Mobile Smelting facility" located in or near Mojave,
California. This action arises out of a complaint filed against San Fernando
Motors and others allegedly responsible for response, removal and remedial costs
in connection with hazardous waste contamination at the Mobile Smelting site.
This action is in the preliminary stages. The Company is vigorously defending
against this action.
WEISSMAN FINANCIAL V. WEISSMAN INDUSTRIES, INC., RECYCLING INDUSTRIES,
INC., GENERAL ELECTRIC CAPITAL CORP. AND COAST BUSINESS CREDIT, A DIVISION OF
SOUTHERN PACIFIC THRIFT AND LOAN, Iowa District Court for Black Hawk County, No.
EQCV081771.
This is a foreclosure action brought by Weissman Financial ("Weissman") on
its mortgage encumbering the real property and equipment owned by the Company's
wholly-owned subsidiary, Weissman Industries, Inc. (the "Mortgage"). The
Mortgage secures the Company's performance under the terms of an agreement
between the Company and Weissman under which the Company guaranteed the value of
certain shares of Common Stock owned by Weissman to be $4.125 per share (the
"Price Guaranty"). Under the terms of the Price Guaranty, Weissman has demanded
that the Company pay $900,900 to Weissman as the guaranteed value of 218,400
shares of Common Stock. The Company believes that Weissman has agreed to a
modification of the Price Guaranty that would make foreclosure of the Mortgage
wrongful at this time. Accordingly, the Company has commenced litigation
against Weissman to enforce the terms of the Price Guaranty, as amended.
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
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<PAGE>
ended September 30, 1998.
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.
DEFAULT UNDER CREDIT AGREEMENTS
During Fiscal 1998, the Company's cash flows from current operations,
availability under its existing credit facilities and additional financing
obtained by the Company were insufficient to satisfy the Company's cash flow
requirements for operating activities, investing and financing activities and
debt service. As a result of these cash flow difficulties and operating
losses, as of September 30, 1998 and continuing as of December 31, 1998, the
Company is in default under certain non-payment related terms of its Senior
Credit Facility and the Indenture related to the Company's $110 million of
Subordinated Notes issued in December 1997 and April 1998. If the Company
is not successful in restructuring these agreements or is unable to cure or
obtain a waiver of its defaults, its lenders could commence foreclosure
proceedings against substantially all of the Company's assets which are
pledged as collateral for the Senior Credit Facility, force the Company into
reorganization or exercise other remedies which may be adverse to the Company.
IMMEDIATE AND FUTURE CAPITAL REQUIREMENTS
The Company had negative cash flow from operating activities of $4.6 million and
$4.0 million for the years ended September 30, 1998 and 1997, respectively, and
continues to seek additional capital from time to time. In order to continue
its acquisition strategy, the Company will require significant additional
capital to finance acquisitions. In addition to financing required for
acquisitions, metals recycling 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. Due to the significant resources required by
the Company to finance acquisitions, the company may need to seek equity or debt
financing to fund future improvements and expansion of its metals recycling
business. 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 expansion, which would materially
adversely affect results of operations. The Company will have to obtain
additional capital through either debt or equity financing in order to continue
its acquisition strategy. There can be no assurance that the Company will be
able to obtain such financing on terms acceptable to the Company.
At September 30, 1998, the Company was in default under certain provisions of
the Senior Credit Facility. Further, at December 31, 1998, the Company was not
able to make its scheduled interest payments due on its subordinated debt.
While the Company has 30 days in which to cure such payment default, it is
unlikely that the Company will be able to secure sufficient financing to cure
such default. The Company's results of operations through December 31, 1998
were insufficient to allow it to make its regularly scheduled interest payment
under the terms of its subordinated debt agreement.
The Company requires significant additional funds to continue its operations
past December 31, 1998. While the Company is pursuing every avenue to secure
such additional financing, there can be no assurance that such financing will be
available to the Company.
SUBSTANTIAL LEVERAGE
The Company has substantial indebtedness and, as a result, significant debt
service obligations. As of September 30, 1998, the Company had approximately
$228.1 million of total indebtedness. As of September 30, 1998, the Company had,
net of the Caside litigation reserve, an aggregate of $4.54 million available
for borrowing under its Senior Credit Facility. The Company's ability to
satisfy its debt obligations will depend on its future operating performance,
which will be affected by prevailing economic conditions and financial, business
and other factors, certain of which are beyond the Company's control.
The degree to which the Company is leveraged could have important consequences
to holders of the Company's Common Stock, including: (i) the Company's ability
to obtain additional financing in the future for working capital, capital
expenditures, acquisitions or general corporate purposes may be impaired; (ii) a
substantial portion of the Company's cash flows from operations may be dedicated
to the payment of principal and interest on its indebtedness, thereby reducing
the funds available to the Company for its operations; (iii) certain portions of
the Company's indebtedness contain financial and other restrictive covenants,
including those restricting the incurrence of additional indebtedness, the
creation of liens, the payment of dividends, sales of assets and the making of
investments; (iv) certain portions of the Company's borrowings are and will
continue to be at variable rates of interest which exposes the Company to the
risk of greater interest rates; and (v) the Company may be more leveraged than
certain of its competitors, which may place the Company at a relative
competitive disadvantage and make the Company more vulnerable to changing
economic conditions. As a result of the Company's current level of
indebtedness, its financial capacity to respond to market conditions, capital
needs and other factors may be limited.
POTENTIAL INSOLVENCY OF SUBSIDIARIES
The Company has temporarily suspended metals processing operations at two of its
subsidiaries,
13
<PAGE>
specifically Mid-America Shredding, Inc. and Anglo Metals, Inc. The Company
expects to continue operations at these facilities when market conditions
improve. While these subsidiaries are still considered to be partially
operational, there can be no assurance that these subsidiaries will become fully
operational in the future and therefore could be deemed insolvent. The
insolvency of subsidiaries is in violation of a provision under both the Senior
Credit Facility and the Indenture covering its Subordinated Notes due in 2005.
Failure to remedy these violations could have a material adverse effect on the
Company's business, results of operations and financial condition.
INABILITY TO COMPLETE ACQUISITIONS
The Company seeks to grow its business primarily through acquisitions. However
due to current conditions in the steel industry and the Company's violation of
certain provisions of its Senior Credit Facility and the Indenture covering its
Subordinated Notes, the Company is not currently able to pursue its acquisition
strategy. There can be no assurance that the Company will be able to resume its
acquisition strategy and, that if it does, that the Company will be able to
identify suitable acquisition candidates, consummate any such transactions on
favorable terms, or obtain financing on terms that are acceptable to the
Company.
ACCUMULATED DEFICIT AND NET LOSSES
At September 30, 1998, the Company's accumulated deficit was $48.1 million,
compared to a deficit of approximately $10.7 million at September 30, 1997. The
Company had a loss before extraordinary charges of $25.7 million for the year
ended September 30, 1998 as compared to net income of $1.1 million for the year
ended September 30, 1997, and a net loss of $3.0 million for the year ended
September 30, 1996. There can be no assurance that the Company will be able to
operate profitably on a consistent basis.
NEGATIVE CASH FLOW AND NEED FOR ADDITIONAL CAPITAL
The Company had negative cash flow from operating activities of $4.6 million and
$4.0 million for the years ended September 30, 1998 and 1997, respectively, and
continues to seek additional capital from time to time. Metals recycling
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. There can be no assurance that financing to make such
investments 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 expansion,
which could materially adversely affect results of operations. The Company will
have to obtain additional capital through either debt or equity financing in
order to continue its acquisition strategy. There can be no assurance that the
Company will be able to obtain such financing on terms acceptable to the
Company.
DECLINE IN MARKET CAPITALIZATION
The price of the Common Stock has historically been volatile. Recently, the
Common Stock has experienced a significant diminution in value. As of January
8, 1999, the Company's stock price was $1.09. Based on approximately 34.5
million fully diluted shares using the Treasury Stock Method, this represents a
market capitalization of $37.6 million, representing a decrease of $250.4
million or 86.9% as compared to a high of $288.0 million during the preceding
52-week period. If the Company's stock price declines to less than $1.00 per
share and remains below $1.00 per share for a period of 30
14
<PAGE>
consecutive days, the Company will be at risk of being delisted by the NASDAQ
Stock Market which would decrease the attractiveness of the Company's common
stock as an investment and make it more difficult for the Company to attract
additional equity capital. In addition, under certain circumstances the
Company will be required to issue Common Stock pursuant to automatic
conversion provisions of preferred stock issued in connection with several of
its acquisitions. At current levels, such issuances would have a significant
dilutive effect on the share price of the Common Stock. In the past,
following periods of volatility in the market price of a company's
securities, class action securities litigation has often been instituted
against such company. Any such litigation instigated against the Company
could result in substantial costs and a diversion of management's attention
and resources, which could have a material adverse effect on the Company's
business, results of operations and financial condition.
DEPENDENCE ON KEY CUSTOMERS AND CREDIT RISK
Each of the Company's facilities is economically dependent on a small number of
significant customers. Concentrations of credit risk with respect to trade
receivables exist due to large balances with a few customers. At September 30,
1998 and 1997, accounts receivable balances from significant customers were $2.2
million and $3.3 million or 7% and 38%, respectively, of the total accounts
receivable balance. Ongoing credit evaluations of customers' financial condition
are performed and, generally, no collateral is required. The Company maintains
an allowance for potential credit losses and such losses, in the aggregate, have
not exceeded management's expectations. At September 30, 1998 and 1997 the
allowance for doubtful accounts was $1.3 million and $4,000 respectively.
15
<PAGE>
Customers are located throughout the Midwest, Southeast and Western regions of
the United States and Mexico. Sales to one customer in Mexico comprised 1.1%,
11.5% and 15.4% of consolidated net sales for the years ended September 30,
1998, 1997 and 1996, respectively. The David J. Joseph Company, which is one of
the Company's major customers for processed scrap, is also a major competitor of
the Company in the market for unprocessed scrap. The Existing Facilities
recently acquired have had, and any future acquisitions could have, a material
effect on the concentration of the Company's key customers.
In connection with the sale of the Company's products, the Company generally
does not require collateral as security for customer receivables. Certain of
the Company's subsidiaries have significant balances owing from customers that
operate in cyclical industries and under leveraged conditions that may impair
the collectibility of these receivables. Failure to collect a significant
portion of amounts due on these receivables could have a material adverse effect
on the Company's results of operations or financial condition.
MARKET CONSIDERATIONS AND EXPOSURE TO SCRAP PRICE FLUCTUATIONS
Sales prices for processed scrap metal are cyclical and seasonal 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. The demand for
processed ferrous and non-ferrous scrap is subject to general economic, industry
and market-specific conditions beyond the Company's control, which may result in
periodic fluctuations in the sales prices of the Company's products. The Company
is unable to hedge against changes in ferrous scrap prices and attempts to
minimize this risk by maintaining low inventory levels of raw and processed
scrap and by establishing firm prices with its larger customers at the beginning
of each month.
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. These
losses occurred, among other reasons, because the Company was unable to obtain
the requisite state and local permits in order to commence construction of
municipal solid waste recycling facilities. As a result, the Company ceased its
pursuit of the municipal solid waste business. Since May 1994, the Company has
acquired 35 metals recycling facilities in 11 states. Twenty nine of these
acquisitions were consummated since December 1997. The Company has only a
limited combined history for its current facilities and has been unable to
consistently generate net income and cash flow from these facilities. There can
be no assurance that the Company's existing operations or those acquired in any
future acquisition, will generate sufficient cash flow to fund the future
operations of the Company.
RISKS RELATED TO THE COMPANY'S ACQUISITION STRATEGY
The Company's objective is to increase its revenues and earnings and expand the
markets it serves through the acquisition of additional metals recycling
facilities. Accordingly, the Company's future growth will depend in large part
on its ability to acquire additional metals recycling facilities as well as on
its ability to manage expansion, control costs in its operations and consolidate
assets acquired into existing operations. There can be no assurance that the
Company will be able to identify, acquire or profitably manage additional
facilities or successfully integrate their operations without substantial costs,
delays or other unanticipated problems. There can be no assurance that acquired
companies will achieve sales and profitability that justify the Company's
investment. Acquisitions involve a number of risks, which may include the
following: adverse short-term effects on the Company's reported operating
results
16
<PAGE>
and cash flows; diversion of management's attention; dependence on retraining,
hiring and training key personnel; risks associated with environmental and legal
liabilities; significantly higher capital expenditures and operating expenses;
failure to maintain uniform standards, controls, and policies; impaired
relationships with employees and customers as a result of changes in management;
increased expenses for accounting and computer systems (including, but not
limited to, reprogramming such computer systems to effectively handle
transactions in the year 2000 and beyond); and the effects of amortization of
acquired intangible assets, 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 current 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
noncollection 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.
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; therefore, they have no obligation to supply scrap
materials to the Company. In the event that 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.
COMMODITY PRICE RISK
Although the Company has a policy of turning over its inventory of raw or
processed scrap metals as rapidly as possible, the Company is exposed to
commodity price risk during the period that it has title to products that are
held in inventory for processing and/or resale. Prices of commodities can be
volatile due to numerous factors beyond the Company's control, including general
economic conditions, labor costs, competition, availability of scrap metal
substitutes, import duties, tariffs and currency exchange rates. In an
increasing price environment, competitive conditions may limit the Company's
ability to pass on price increases to its customers. In a decreasing price
environment, the Company may not have the ability to fully recoup the cost of
raw scrap it processes and sells to its customers. The lack of long-term
purchase agreements with the Company's significant customers also may exacerbate
this risk.
POTENTIAL UNAVAILABILITY OF 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 barge. 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
could have a material adverse effect on the Company's financial condition and
results of operations.
THE USE OF SCRAP ALTERNATIVES
The increased demand for scrap by the expanding mini-mill industry has caused an
unusual tightness in
17
<PAGE>
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 rises
and if the levels of available unprepared ferrous scrap decrease, the use of
scrap alternatives may increase. Any significant increase in production of
scrap alternatives could have a material adverse effect on the financial
condition and results of operations of the Company.
CONTROL BY PRINCIPAL SHAREHOLDER AND ANTI-TAKEOVER PROVISIONS
As of September 30, 1998, Thomas J. Wiens, the Company's Chairman and Chief
Executive Officer, beneficially owned 6,184,103 shares of the Company's Common
Stock, representing approximately 27.3% of the issued and outstanding shares.
As a result, Mr. Wiens will have sufficient voting power to significantly
influence the election of the Company's board of directors and to determine the
results of other matters submitted to a vote of stockholders. The concentration
of ownership may have the effect of delaying or preventing a change of control
of the Company.
The Company's Amended and Restated Articles of Incorporation contain certain
provisions which may inhibit a change of control of the Company. These
include scaled voting provisions that, upon a determination by the Company's
Board of Directors, may limit the voting rights of any person or entity that
becomes a "Substantial Stockholder," defined as any stockholder designated by
the board who is the beneficial owner of 10% or more of the Company's Common
Stock, including shares issuable pursuant to any agreement or upon the
exercise of any conversion rights, options or warrants. All shares of Common
Stock owned by a Substantial Stockholder in excess of 10% will not be
entitled to any voting rights and will be deemed not outstanding for purposes
of determining a quorum. The Company also has the right to redeem all or a
portion of the Common Stock owned by a Substantial Stockholder at redemption
prices which may be less than the market price of the Common Stock. These
provisions may discourage a party from making a tender offer or otherwise
attempting to take control of the Company. The Board of Directors has not
determined any person or entity to be a Substantial Stockholder. The
Company's charter also authorizes the issuance of 10,000,000 shares of
preferred stock, the terms of which are to be determined by the Board of
Directors at the time of issuance.
As of September 30, 1998, if all fo the Company's outstanding Preferred Stock
was Converted into Common Stock in accordance with its terms, the Company
would issue 10,491,218 shares of Common Stock to the Holders of such
Preferred Stcok.
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 availability and processing capability. In addition, the
sale of processed scrap is affected by the reliability of the metals recycler as
a source of supply and the quality of its processed scrap. The Company believes
that its professional management team, quality of processed scrap and emphasis
on customer service enable it to compete favorably in its markets. In addition,
the Company believes that its national growth strategy will increase its market
exposure to large purchasers of processed scrap, thereby giving it a competitive
advantage relative to independent local and regional metals recyclers.
The Company competes on a regional and local basis with a large number of other
scrap metals processors, some of which may have greater financial, marketing and
other resources than the Company and several of which are public companies. The
Company may also face competition for acquisition
18
<PAGE>
candidates from these public companies, most of whom acquired a number of scrap
metals processors during the past decade. The Company also competes to a lesser
extent with primary metals producers, who typically sell directly only to very
large customers requiring regular shipments of large volumes of metals. Other
smaller metals processors may also seek acquisitions from time to time.
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. Specifically, the Company
believes that the following factors will limit construction of new recycling
facilities: (i) the scarcity of potential sites that are properly zoned for
scrap metal recycling and have access to rail or other cost-effective means of
transportation; (ii) increasingly restrictive environmental regulations; and
(iii) the long-established relationships between existing scrap metal recyclers,
their customers and sources of supply.
As a result of upward price trends in the price of processed ferrous scrap, some
mini-mills are examining alternatives to processed steel scrap, such as
pre-reduced iron pellets, as a feedstock for EAFs. The Company believes,
however, that such alternatives to processed ferrous scrap will be used
primarily as a supplemental feedstock to permit EAFs to produce higher grade
products, increasing the potential market for EAF-produced steel and possibly
increasing the demand for processed ferrous scrap in the aggregate. Although a
significant increase in the usage of scrap alternatives by mini-mills could have
an adverse effect on the demand for processed ferrous scrap, current domestic
production of scrap alternatives is approximately 0.8 million tons per year, or
less than 3% of domestic scrap requirements. Of the approximately 225 million
metric tons of steel per year that are produced on a world-wide basis in
mini-mills, scrap alternatives have only grown to about 30 million metric tons
per year, approximately 13% of present global mini-mill iron unit supply
ENVIRONMENTAL MATTERS
The Company's facilities and operations are currently engaged in environmentally
sensitive businesses and, as such, are subject to a wide range of federal, state
and local environmental laws and regulations. Like many of its competitors, the
Company has incurred, and will continue to incur, substantial capital costs and
other expenses in complying with such laws and regulations, including those
relating to wastewater and stormwater discharges, the treatment, storage and
disposal of solid and hazardous wastes and the remediation of contamination
associated with the release of hazardous substances.
In particular, the Company is involved in investigative and remedial activities
under the Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA") and analogous state statutes with respect to contamination at certain
of its current properties. Such laws may impose joint and several liability on
the Company for the costs of investigation and remediation of such contaminated
properties, regardless of fault or the legality of the original disposal. In
addition, due to the nature of the Company's operations and the potential for
recurrence of subsurface soil contamination, there is a high probability that
additional removal or remediation activities will be required from time to time.
The Company's operations produce substantial volumes of waste. In the course of
processing ferrous and non-ferrous metals, the Company's procedures are designed
to inspect all inbound material several times prior to and during processing to
screen out matter that may be considered "hazardous materials" under various
environmental laws, including CERCLA and Resource Conservation Recovery Act
("RCRA"). Such materials may be contained in the Company's feed stream, which
includes 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. While the Company
screens the feed stream for hazardous materials and rejects high-risk items such
as transformers, batteries, PCB contaminated
19
<PAGE>
transformers, equipment containing freon or any sealed or closed-end barrels of
material, 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 generally disposes of shredder fluff at municipal or private
landfills on a truckload basis. Such disposal is pursuant to long-term
contracts. To avoid classification as a hazardous waste, shredder fluff must
pass toxic leaching tests under certain environmental laws. The Company's
screening of the feed stream and periodic independent testing of the company's
facilities, have been designed to process shredder fluff suitable for disposal
in municipal or private landfills.
Nonetheless, because of the volume and condition of these screened materials,
certain items containing hazardous or toxic substances may inadvertently proceed
through inspection and shredding and be disposed of in shredder fluff.
Therefore, contamination heretofore unknown to the Company at the Company's
facilities or at sites to which the Company sent wastes may be identified and
become the subject of future investigative and remedial actions. In addition,
changes in the environmental laws or testing methods with respect to shredder
fluff may change the classification and availability of suitable disposal sites
for shredder fluff, resulting in significant additional expense to the Company.
Finally, hazardous materials through inadvertent spillage or improper disposal
may contaminate the premises upon which the Company's operations are conducted,
although the Company believes that such contamination will not have a material
impact on the Company's operations or financial condition.
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's operations or financial condition.
In addition, many of the Company's present and former facilities have or had
been in operation for several decades and, over such time, such facilities
have generated and disposed of wastes which are or may be considered
hazardous under CERCLA. Prior to and as a condition to the consummation of
any new acquisition, the Company performs subsurface soil and groundwater
testing of the target company's facilities in order to identify potential
conditions of noncompliance with applicable environmental laws and
regulations. In many cases, such testing has identified the presence of such
contamination in subsurface soil or groundwater and the Company has taken
steps to address such conditions. However, the Company has not fully
assessed the scope of potential soil and groundwater contamination at all of
its present or former facilities. In particular, the Company has not fully
assessed its scrap metal storage areas because materials stored in these
areas precluded sampling. Therefore, the Company does not have sufficient
information to estimate the aggregate liability which may arise with respect
to the potential presence of contamination at such facilities or any
facilities that may be acquired in the future. Such contamination, if
present, could result in a material adverse effect on the Company's business
or financial condition.
In pursuing its acquisition strategy the Company typically finds that certain
acquired entities have unresolved environmental liabilities. The Company
typically requires such entities to fund an escrow account (with a portion of
the acquisition purchase price) in an amount sufficient to satisfy the cost of
these environmental liabilities. However there can be no assurance that the
amounts included in such escrow accounts will be sufficient to cover all
potential environmental liabilities. In addition, because a large portion of
such escrow amounts is comprised of convertible preferred stock, the value of
which is based on the capital markets, there can be no assurance that the full
escrow amounts will be available on a timely basis to pay for environmental
liabilities.
RELIANCE ON KEY PERSONNEL
20
<PAGE>
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 "Skip" J. Rouster. The loss of any or all of these individuals
or other key employees or the inability to attract additional qualified
employees could have a material adverse effect on the Company's financial
condition and results of operations. The Company has entered into employment
arrangements with Mr. Wiens, Mr. Botica, and Mr. Rouster.
THE USE OF SCRAP ALTERNATIVES
The relative scarcity of scrap, particularly the cleaner grades, and its price,
have created opportunities for producers of scrap alternatives, or scrap
substitutes. These substitutes 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, if the price
of scrap were to rise and the levels of available unprepared ferrous scrap
continue to decrease, the use of scrap alternatives may increase. Any
significant increase in production of scrap alternatives could have a material
adverse effect on the financial condition and results of operations of the
Company.
EQUIPMENT MAINTENANCE
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 to meet the needs of a particular facility.
Periodically, the Company may be required to shut down its processing equipment
for maintenance. Any shutdown for an extended period of time could have an
adverse impact on the Company's operations.
21
<PAGE>
The Company requires significant additional funds to continue its operations
past December 31, 1998. While the Company is pursuing every avenue to secure
such additional financing, there can be no assurance that such financing will be
available to the Company.
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, 1998 and 1997. These quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
-----------------------------------------------------------
COMMON STOCK
HIGH LOW
-----------------------------------------------------------
<S> <C> <C>
FISCAL 1998:
First Quarter $8.28 $5.13
Second Quarter 6.69 5.06
Third Quarter 7.50 5.50
Fourth Quarter 6.19 1.59
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
-----------------------------------------------------------
</TABLE>
As of September 30, 1998, there were approximately 720 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.
22
<PAGE>
PART II
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.
<TABLE>
<CAPTION>
(THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
- - ----------------------------------------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------------------------------------
PRO PRO PRO
FORMA FORMA FORMA
(2) (2) (2)
1994(1) 1995(4) 1996(4) 1996 1997(4) 1997 1998(3) 1998
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS:
- - ----------------------------------------------------------------------------------------------------------------------------------
Net Sales $ 4,831 $ 13,812 $ 27,619 $ 294,765 $ 62,424 $ 344,405 $ 239,359 $ 325,119
- - ----------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) $ (939) $ 664 $ (2,224) $ 11,534 $ 3,024 $ 34,175 $ (5,211) $ 5,509
- - ----------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) from
continuing operations
net of income taxes $ (1,142) $ 1,009 $ (2,961) $ (10,156) $ 1,076 $ 6,085 $ (25,652) $ (24,123)
- - ----------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per
share from continuing
operations net of
income taxes $ (0.46) $ 0.12 $ (0.29) $ (0.85) $ 0.05 $ 0.20 $ (1.44) $ (1.17)
- - ----------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA:
- - ----------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 9,618 $ 10,297 $ 34,855 $ 287,298 $ 55,079 $ 295,803 $ 304,281 $ 304,281
- - ----------------------------------------------------------------------------------------------------------------------------------
Long-term Debt $ 519 $ 2,152 $ 12,018 $ 195,760 $ 29,456 $ 213,198 $ 4,335 $ 4,335
- - ----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities $ 6,852 $ 3,843 $ 19,192 $ 222,988 $ 36,904 $ 240,700 $ 264,093 $ 264,093
- - ----------------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity $ 2,766 $ 6,454 $ 14,163 $ 51,099 $ 16,675 $ 53,603 $ 38,688 $ 38,688
- - ----------------------------------------------------------------------------------------------------------------------------------
EBITDA (5) $ (547) $ 1,489 $ (1,023) $ 22,544 $ 5,619 $ 46,734 $ 6,491 $ 20,402
- - ----------------------------------------------------------------------------------------------------------------------------------
</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), Weissman Iron & Metal
(August 1996), Addlestone Recycling Corporation (April 1997), Addlestone
International Corporation (June 1997), Lans, Brenner, Grossman, Central,
Jacobson, and United (December 1997), D.H. Griffin (April 1998), Ferex,
Republic, Peanut City, Pro Recycling, McKinney, and C&J Crushing (May 1998) 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.
25
<PAGE>
(3) The historical operating results for the year ended September 30, 1998 are
not comparable to those of the corresponding periods ended September 30, 1997,
1996 and 1995 due to the acquisitions of Anglo Iron & Metal (December 1995),
Mid-America Shredding (April 1996), Weissman Iron & Metal (August 1996),
Addlestone Recycling Corporation (April 1997), Addlestone International
Corporation (June 1997), Lans, Brenner, Grossman, Central, Jacobson, and United
(December 1997), D.H. Griffin (April 1998), Ferex, Republic, Peanut City, Pro
Recycling, McKinney, and C&J Crushing (May 1998).
(4) 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 (December 1995),
Mid-America Shredding (April 1996), Weissman Iron & Metal (August 1996),
Addlestone Recycling Corporation (April 1997), and Addlestone International
Corporation (June 1997).
(5) 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.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
ALL STATEMENTS CONTAINED WITHIN THE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, THAT ARE NOT STATEMENTS OF
HISTORICAL FACT CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 21E OF THE SECURITIES EXCHANGE ACT. SUCH FORWARD-LOOKING STATEMENTS
INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT COULD
CAUSE THE ACTUAL RESULTS OF THE COMPANY TO BE MATERIALLY DIFFERENT FROM
HISTORICAL RESULTS OR FROM ANY FUTURE RESULTS EXPRESSED OR IMPLIED BY SUCH
FORWARD-LOOKING STATEMENTS. READERS ARE URGED TO CONSIDER STATEMENTS THAT
INCLUDE THE TERMS "BELIEVES," "BELIEF," "EXPECTS," "PLANS," "ANTICIPATES,"
"INTENDS" OR THE LIKE TO BE UNCERTAIN AND FORWARD-LOOKING. 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 ABOVE UNDER THE CAPTION "SPECIAL CONSIDERATIONS."
GENERAL
The largest portion of the Company's operations involves the collection,
processing and sale of ferrous scrap, the primary raw material for mini-mill
steel producers who utilize electric arc furnace technology. The Company's
operations consist of purchasing and processing unprepared scrap and selling
processed scrap. Scrap is categorized as either ferrous, containing iron and
consisting primarily of steel, or non-ferrous. Ferrous scrap is generated in
two forms consisting of prompt industrial scrap and old scrap. Prompt
industrial scrap is the material left over from manufacturing processes that use
steel, such as automobile and appliance manufacturing. Old scrap includes
obsolete or broken goods consisting of automobiles, refrigerators and other
consumer and industrial steel goods. The Company purchases unprepared scrap
primarily from automobile salvage and wrecking yards, demolition firms,
ordinance depots, military bases, public utilities, industrial facilities, metal
fabricators, machine shops, railroads, refineries, shipyards and numerous
independent scrap collectors. Unprepared scrap is processed for resale by
resorting, cleaning, shearing and shredding by a variety of methods according to
customer specifications and market demand. The Company sells its processed
ferrous scrap to mini-mill steel producers, integrated steel producers,
foundries and brokers.
The Company has completed several acquisitions, each of which was financed in
part by borrowings and the issuance of common and/or preferred stock. See
"Recent Acquisitions." The acquisitions have been
26
<PAGE>
accounted for using the purchase method of accounting and the operating results
of the entities have been included in the Company's consolidated financial
statements since the date of acquisition. Management believes these
acquisitions will have a positive impact on the Company's future results of
operations and that the historical results of operations of the acquired
companies do not reflect the operating efficiencies and improvements that the
Company seeks to achieve by integrating the acquired businesses into the
Company's operations. The Company plans to integrate certain functions such as
administration, finance and information systems which may be duplicated at
certain newly acquired companies. If there are downturns in the markets for the
Company's products, as occurred in Fiscal 1998, or if the Company is unable to
successfully integrate acquired operations and realize operating efficiencies,
the Company's operating results will be adversely effected.
The principal elements of the Company's cost of sales are raw materials, direct
labor and manufacturing overhead. The Company seeks to partially offset
fluctuations in raw material costs by entering into supply arrangements with
certain customers, none of which is material to the Company's operations. The
Company purchases and processes many different grades of ferrous and non-ferrous
material with varying gross margins. Accordingly, the Company's overall gross
margin is impacted by its material mix, raw material costs and its ability to
efficiently process various ferrous and non-ferrous materials.
The following table sets forth selected statement of income data as a percentage
of net sales for the periods indicated:
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------
YEARS ENDED
STATEMENT OF OPERATIONS DATA: SEPTEMBER 30,
- - ----------------------------------------------------------------------------
1998 1997 1996
----------------------------------
<S> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0%
Cost of sales and operating expenses 90.1 88.4 96.3
----------------------------------
Gross profit 9.9 11.6 3.7
Selling, general and administrative 12.1 6.8 11.8
expenses ----------------------------------
Operating income (loss) (2.2) 4.8 (8.1)
Interest expense and other 8.5 4.1 2.6
----------------------------------
Earnings (loss) before income taxes and
Extraordinary(loss) (10.7) 0.7 (10.7)
Income tax benefit - 1.0 -
Extraordinary (loss) (4.9) - -
----------------------------------
Net earnings (loss) (15.6) 1.7 (10.7)
----------------------------------
----------------------------------
EBITDA (1) 2.7 9.0 (3.7)
- - ----------------------------------------------------------------------------
</TABLE>
(1) "EBITDA" represents, for any period, operating income before interest
expense, income taxes, depreciation and amortization. EBITDA is presented
because it is a widely accepted financial indicator of a company's ability
to service and/or incur indebtedness. Management believes that
presentation of EBITDA is helpful to investors. However, EBITDA should not
be considered as an alternative to net income as a measure of the Company's
operating results or cash flows as a measure of liquidity. In addition,
although the EBITDA measure of performance is not recognized under
generally accepted accounting principles, it is widely used by industrial
companies as a general measure of a company's operating performance because
it assists in comparing performance on a relatively consistent basis across
companies without regard to depreciation and amortization, which can vary
significantly depending on accounting methods (particularly where
acquisitions are involved) or non-operating factors such as historical cost
bases. Because EBITDA is not calculated identically by all companies, the
presentation herein may not be comparable to other similarly titled
measures of other companies.
27
<PAGE>
RECENT ACQUISITIONS
Since September 30, 1997, the Company directly or indirectly, through its
subsidiaries, has consummated 13 acquisitions (the "Recent Acquisitions") for an
aggregate purchase price of approximately $ 227 million. As the Recent
Acquisitions were accounted for using the purchase method of accounting, the
purchase price was allocated to the acquired assets at their estimated fair
value. The Recent Acquisitions were financed in part with proceeds generated in
May 1998 and December 1997 from the Credit Facility, the sale of Subordinated
Debt and proceeds from the sale of the Company's Common Stock to various
accredited investors in connection with the Credit Facility. The acquisitions
were also financed in part from the issuance of the Company's Preferred and
Common Stock to the owners of the acquired facilities.
The results of operations from the following acquisitions have been included in
the Company's consolidated financial statements since the date of acquisition.
On May 29, 1998, the Company completed the acquisition of substantially all of
the assets of McKinney Smelting, Inc. ("McKinney"), with operations in the
McKinney, Texas area. The assets acquired from McKinney consist of heavy
equipment, tools and rolling stock used in the business of recycling ferrous and
non-ferrous metals. The total purchase price for McKinney was $2.9 million in
cash.
On May 28, 1998, the Company acquired all of the capital stock of Ferex
Corporation ("Ferex"), headquartered in Tyler, Texas. Ferex is a metals
recycler and auto crusher with operations in Arkansas, Oklahoma and Texas.
Ferex operates 16 facilities, a scrap brokering business, six mobile auto
crushing units that operate in a six state geographic region, one non-ferrous
shredder and one non-ferrous wire chopper operation. The total aggregate
purchase price for Ferex was $46.3 million, comprised of $28.9 million in cash,
556,944 shares of the Company's common stock, $0.001 par value per share
("Common Stock"), having a stated value of $6.125 per share or $3.4 million on
May 28, 1998 and $14.0 million of assumed liabilities.
On May 28, 1998, the Company acquired substantially all of the scrap metals
recycling assets and business of Peanut City Iron & Metal Co., Inc. ("Peanut
City"), a privately held metals recycler with operations in the Suffolk,
Virginia area. The assets acquired from Peanut City consist of heavy equipment,
tools and rolling stock used in the business of recycling ferrous and
non-ferrous metals. The Company also purchased from Peanut City approximately
three acres of real property, buildings and improvements used in the metals
recycling business. The total purchase price for Peanut City was $3.4 million,
comprised of $2.9 million in cash and 1,005 shares of the Company's Series J
Redeemable Convertible Preferred Stock having a stated value of $0.5 million, or
$500 per share.
On May 22, 1998, the Company acquired substantially all of the scrap metals
recycling assets and business of Republic Alloys, Inc. ("Republic"), a privately
held metals recycler and crane operator with operations in the Charlotte, North
Carolina area. The assets acquired from Republic consist of heavy equipment,
tools and rolling stock used in the business of recycling ferrous and
non-ferrous metals. The Company also purchased approximately 13.5 acres of real
property, buildings and improvements used in the metals recycling business. The
total purchase price for Republic was $12.9 million, comprised of $10.2 million
in cash, 5,080 shares of the Company's Series K Redeemable Convertible Preferred
Stock having a stated value of $2.5 million, or $500 per share, and 30,000
shares of the Company's Common Stock, $.001 par value per share, having a stated
value of $0.2 million, or $5.62 per share.
On May 22, 1998, the Company acquired substantially all of the scrap metals
recycling assets and business of Pro Recycling, L.L.C. ("Pro Recycling"), a
privately-held metals recycler with operations in the Milwaukee, Wisconsin area.
The assets acquired from Pro Recycling consist primarily of heavy equipment,
tools and rolling stock used in the business of recycling ferrous and
non-ferrous metals. As part of the transaction the Company also purchased from
Lewinsky Iron and Metal and AA Investment three separate parcels of real
property, buildings and improvements used in the metals recycling business of
Pro Recycling. The total purchase price for Pro Recycling was $3.0 million,
comprised of $2.5 million
28
<PAGE>
of cash and 1,030 shares of the Company's Series M Redeemable Convertible
Preferred Stock valued at $0.5 million, or $500 per share.
On May 21, 1998, the Company acquired substantially all of the scrap metals
recycling assets and business of C&J Crushing, Inc. ("C&J Crushing"), a
privately held metals recycler with operations in the Landis, North Carolina
area. The assets acquired from C&J Crushing consist primarily of heavy
equipment, tools and rolling stock used in the business of recycling ferrous and
non-ferrous metals. The Company also purchased from C&J Crushing approximately
3.5 acres of real property, buildings and improvements used in the metals
recycling business. The total purchase price for C&J Crushing was $1.5 million,
comprised of $1.2 million of cash and 580 shares of the Company's Series L
Redeemable Convertible Preferred Stock valued at $0.3 million, or $500 per
share.
On December 8, 1997, the Company acquired from Bertram Lans, Bruce Lans and
Scott Lans all of the issued and outstanding capital stock of Wm. Lans Sons'
Co., Inc. ("Lans"), a privately held metals recycler with operations in the
South Beloit, Illinois, area. The assets owned by Lans consist of heavy
equipment, tools and rolling stock used in the business of recycling ferrous and
non-ferrous metals. The Company also purchased from an affiliate of Lans
certain real property, buildings and leasehold improvements used in the metals
recycling business. The total adjusted purchase price for Lans was $25.2
million, comprised of $22.0 million of cash and 9,072 shares of the Company's
Series I 8% Redeemable Convertible Preferred Stock (the "Series I Preferred")
having a stated value of $3.2 million. If not earlier redeemed or converted on
December 8, 1999, the Series I Preferred will automatically convert into that
number of shares of Common Stock having a market value on the date of conversion
of not less than $3.2 million.
On December 5, 1997, the Company acquired substantially all of the scrap metals
recycling assets and business of Brenner Companies, Inc. ("Brenner"), a
privately held metals recycler with operations in the Winston-Salem, North
Carolina area. The assets acquired from Brenner consist of heavy equipment,
tools and rolling stock used in the business of recycling ferrous and
non-ferrous metals. The Company also purchased from Brenner certain real
property, buildings and leasehold improvements used in the metals recycling
business. The total purchase price for the Brenner assets was $23.8 million,
comprised of $15.7 million of cash, 14,000 shares of the Company's Series F 6.5%
Redeemable Convertible Preferred Stock (the "Series F Preferred") having a
stated value of $3.5 million, 14,000 shares of the Company's Series G 6.5%
Redeemable Convertible Preferred Stock (the "Series G Preferred") having a
stated value of $3.5 million and the assumption of $1.1 million of Brenner's
deferred compensation liabilities.
If not earlier redeemed or converted on December 5, 2000, the Series F Preferred
will automatically convert into that number of shares of Common Stock having an
aggregate market value on the date of conversion of not less than $3.5 million.
Brenner has the right to require the Company to find a purchaser of the shares
of common stock received upon conversion of the Series F Preferred (the "Series
F Conversion Shares") on or before December 5, 2000. If the sale of the Series
F Conversion Shares yields net proceeds of less than $3.5 million, the Company
will pay the difference to Brenner. If not earlier redeemed or converted on
December 5, 2000, the Series G Preferred will automatically convert into that
number of shares of Common Stock having an aggregate market value on the date of
conversion of not less than $3.5 million.
On December 5, 1997, the Company acquired substantially all of the scrap metals
recycling assets and business of Grossman Brothers Company, Inc. and Milwaukee
Metal Briquetting Co., Inc. (collectively "Grossman"). Grossman was a privately
held metals recycler with operations in the Milwaukee, Wisconsin area. The
assets acquired from Grossman consisted of heavy equipment, tools and rolling
stock used in the business of recycling ferrous and non-ferrous metals. The
Company is leasing, pursuant to a capital lease with an option to purchase, the
real property, buildings and leasehold improvements used in the metals recycling
business acquired from Grossman. The total purchase price for Grossman was $7.4
million, comprised of $3.7 million of cash, a capital lease with a present value
of $2.7 million, 98,039 shares of Common Stock valued at $0.7 million which will
be held in escrow during the lease term, and the assumption of $0.3 million of
Grossman's liabilities.
29
<PAGE>
On December 5, 1997, the Company acquired substantially all of the scrap metals
recycling assets and business of Central Metals Company, Inc. ("Central"), a
privately held metals recycler with operations in the Atlanta, Georgia area.
The assets acquired from Central consist of heavy equipment, tools and rolling
stock used in the business of recycling ferrous and non-ferrous metals. The
Company is leasing certain equipment used in the metals recycling business from
an affiliate of Central. The total purchase price for Central was $31.0
million, comprised of $20.7 million of cash and 800,000 shares of Common Stock,
having an agreed value of $12.50 per share or $10 million. The Company also
assumed $0.3 million of Central's liabilities.
The Company has guaranteed that the aggregate market value of the 800,000 shares
of Common Stock issued to Central will be at least $10 million on December 4,
1999. If the market value of the Common Stock is less than $10 million, the
Company will issue shares of Common Stock to Central having a market value equal
to the difference between $10 million and the market value of the 800,000 shares
of Common Stock initially issued to Central.
In connection with the acquisition, Central was issued warrants to acquire up to
200,000 shares of the Company's Common Stock for $15.00 per share, exercisable
upon satisfaction of certain financial performance conditions related to the
operations of the acquired subsidiary (the "Contingent Warrants"). The exercise
price per share of the Contingent Warrants is subject to adjustment at the time
of exercise so that the aggregate spread between the exercise price of all
Contingent Warrants and the market value of the Common Stock received upon
exercise of the Contingent Warrants is not less than $1 million. The value of
the Contingent Warrants will be reflected as an adjustment to the purchase
price, as an increase in goodwill, when the financial performance conditions are
met by Central.
On December 5, 1997, the Company acquired substantially all of the scrap metals
recycling assets and business of Money Point Land Holding Corporation and Money
Point Diamond Corporation (collectively "Jacobson"). Jacobson was a privately
held metals recycler with operations in the Chesapeake, Virginia area. The
assets acquired from Jacobson consist of heavy equipment, tools and rolling
stock used in the business of recycling ferrous and non-ferrous metals. The
Company also purchased from Jacobson certain real property, buildings and
leasehold improvements used in the metals recycling business. The total
purchase price for Jacobson was $19.9 million, comprised of $16.9 million of
cash and 10,000 shares of the Company's Series E Redeemable Convertible
Preferred Stock (the "Series E Preferred") having a stated value of $3.0
million.
If not earlier redeemed or converted, on December 5, 2000, the Series E
Preferred will automatically convert into that number of shares of Common Stock
having an aggregate market value on the date of conversion of not less than $3.0
million. Unless Jacobson elects to retain the shares of Common Stock received
upon conversion of the Series E Preferred (the "Series E Conversion Shares"),
the Company will assist Jacobson in selling the Series E Conversion Shares on or
before January 4, 2001. If the sale of the Series E Conversion Shares yields
net proceeds of less than $3,000,000, the Company will pay the difference to
Jacobson.
On December 5, 1997, the Company acquired substantially all of the scrap metals
recycling assets and business of United Metal Recyclers, Inc. ("United"), a
privately held metals recycler with operations in the Kernersville, North
Carolina area. The assets acquired from United consist of heavy equipment,
tools and rolling stock used in the business of recycling ferrous and
non-ferrous metals. The Company also purchased from United certain real
property, buildings and leasehold improvements used in the metals recycling
business and United's 50% interest in another metals recycling facility located
in the Smithfield, North Carolina area. The total purchase price for the United
assets and United's 50% interest in D.H. Griffin was $42.0 million, comprised of
$36.0 million of cash, 11,378 shares of the Company's Series H 6% Secured
Redeemable Convertible Preferred Stock having a stated value of $5.7 million and
the assumption of $0.3 million of United's liabilities.
If not earlier redeemed or converted on December 5, 2000, the Series H Preferred
will automatically convert into that number of shares of Common Stock having an
aggregate market value on the date of conversion of not less than $5.7 million.
United has the right to require the Company to find a purchaser of the shares of
30
<PAGE>
common stock received upon conversion of the Series H Preferred (the "Series H
Conversion Shares") on or before December 5, 2000. If the sale of the Series H
Conversion Shares yields net proceeds of less than $5.7 million, the Company
will pay the difference to United.
On April 15, 1998, the Company acquired for approximately $8.0 million the
remaining 50% interest of United Metal - D. H. Griffin Recyclers L.L.C. ("D. H.
Griffin") located in Smithfield, North Carolina. The purchase price was
financed with proceeds from the Company's acquisition line of credit. The
initial 50% interest was acquired in December 1997 as part of the Company's
acquisition of United Metal Recyclers. The Company will continue the metals
recycling operations of D. H. Griffin.
RESULTS OF OPERATIONS
The Company's operating results depend in large part on its ability to
effectively manage the purchase, processing and sale of scrap metals. The
demand for processed ferrous and non-ferrous scrap is subject to general
economic, industry and market-specific conditions beyond the Company's control,
which may result in periodic fluctuations in the sales prices of the Company's
products. The Company seeks to maintain its operating margins by adjusting the
purchase price for raw ferrous and non-ferrous scrap in response to such
fluctuations, subject to local market conditions. Although the Company is
unable to hedge against changes in ferrous market prices, it seeks to minimize
this risk by maintaining low inventory levels of raw and processed scrap.
The results of operations for the twelve months ended September 30, 1998 have
been driven primarily by the Company's acquisition activity.
NET SALES. Net sales for the year ended September 30, 1998, were $239.4
million an increase of $176.9 million or 283% compared to the same period one
year earlier. The increase was primarily related to increased processing
capacity resulting from the acquisition of Lans, Brenner, Grossman, Central,
Jacobson, and United, in December 1997, the acquisition of D.H. Griffin in
April 1998, and the acquisition of McKinney, Ferex, Peanut City, Republic,
Pro Recycling, and C&J Crushing during May, 1998. Total tons processed of
ferrous material for the year ended September 30, 1998 increased by
approximately 322% to 1,204,000 tons compared to the same period one year
earlier. Total pounds processed of nonferrous material for the year ended
September 30, 1998 increased by approximately 22% to 133,405,438 pounds
compared to the same period one year earlier. The increase in total ferrous
and non-ferrous quantities processed was primarily related to new
acquisitions.
The average sales price per ton of prepared ferrous material for the year ended
September 30, 1998 was $127 a decline of $5 per ton or approximately 5% compared
to the same period one year earlier. The decrease in the Company's average
sales price of prepared ferrous material was primarily related to an approximate
21% decline in the average sales price and a decline in the demand of prepared
ferrous material during the quarter ended September 30, 1998. The Company's
average sales price per pound of prepared non-ferrous material for the year
ended September 30, 1998 was $0.42 representing an increase of 27% or $0.09 per
pound compared to the same period one year ago. The increase in the Company's
average sales price of prepared non-ferrous material is primarily attributable
to changes in material mix.
The Company's average sales price of ferrous and non-ferrous material for the
quarter ended September 30, 1998 declined by approximately $28 per ton or
approximately 21% and $0.06 per pound or approximately 14%, respectively,
compared to the quarter ended June 30, 1998. The decline in the Company's
average sales price of both ferrous and non-ferrous material is a result of a
current trend in the metals market. Weak demand for exports of ferrous and
non-ferrous prepared scrap as well as an increase in steel imports from Europe
and Asia has served to reduce prices and demand of shredded scrap.
Net sales from brokerage activities for the year ended September 30, 1998 was
$9.5 million, an increase of approximately 398% compared to the same period one
year earlier. The increase was primarily related to new acquisitions.
GROSS PROFIT. Gross profit for the year ended September 30, 1998 was $23.8
million an increase of $16.5
31
<PAGE>
million compared to the same period one year earlier. Gross profit margin for
the year ended September 30, 1998 was 9.9% as a percentage of net sales compared
to 11.6% for the same period in 1997. The increase in gross profit was
primarily related to businesses acquired during the year. Partially offsetting
the increase in gross profit at September 30, 1998 was the significant decline
in the average sales price, the decline in demand of processed ferrous and
non-ferrous scrap and a $4.5 million charge to cost of sales as a result of
writing inventory down to net realizable value. The rapid decline in the
average sales price in the fourth quarter served to compress gross profit margin
as inventories on hand were carried at higher prices than the current purchase
price of ferrous and non-ferrous scrap. During the fourth quarter of 1998, in
conjunction with the decline in the average sales price of processed ferrous and
non-ferrous material, the Company began to reduce inventory levels in an attempt
to reduce certain market risk that arise from declining sales prices. By
September 30, 1998, the Company had significantly reduced the quantities of
inventory compared to June 30, 1998.
In the fourth quarter, Management decided to implement a plan to restructure
certain facilities from metals processing operations to feeder yards that will
supply material to other Company owned processing yards. The Company recognized
a one-time charge against earnings of $0.6 million which included severance
arising from the elimination of approximately 300 positions and certain other
expenses associated with the restructuring.
SELLING, GENERAL, AND ADMINISTRATIVE. Selling, general, and administrative
(SG&A) expenses increased to $29.0 million for the year ended September 30, 1998
from $4.2 million during the year ended September 30, 1997, an increase of $24.8
million or 587%. The increase was primarily the result of the new acquisitions
and staffing and other related administrative expenses in anticipation of
planned growth. Included in SG&A are nonrecurring expenses of $3.2 million in
acquisition charges and a $1.9 million write off of goodwill at the Company's
southern Texas facility. Selling expenses increased as the Company increased
reserves by $1.4 million for potential uncollectible receivables in the fourth
quarter 1998. As a percent of net sales, SG&A increased to 12.1% for the year
ended September 30, 1998 compared to 6.8% for the year ended September 30, 1997
OPERATING INCOME (LOSS). The Company reported an operating loss for the year
ended September 30, 1998 of $5.2 million compared to operating income of $3
million for the year ended September 30, 1997, a decrease of $8.2 million. The
decrease is principally the result of declines in the average selling prices and
demand of ferrous and non-ferrous material. The average purchase price of
ferrous and non-ferrous material trails the declines in the average sales price
which negatively impacts margins. The loss from operations was further impacted
by nonrecurring expenses of $3.2 million in acquisition charges and a $1.9
million write off of goodwill. Also, the Company recorded a $1.4 million
reserve for potential uncollectible receivables. Management is continuously
monitoring the operations of the facilities and has implemented and continues to
implement certain cost cutting strategies in order to improve operating income
without reducing net sales.
The Company expects first and second quarter 1999 results to continue to be
adversely effected from the declines in the average sales price of ferrous and
non-ferrous material and declines in production of processed scrap resulting
from weak demand. The average market price realized by the Company for shredded
scrap in December 1998 was $95 per gross ton compared to an average of $103 per
gross ton for the quarter ended September 30, 1998. At this time, management
cannot assess whether metal prices will remain at lower levels or the effect the
lower prices will have on operating income.
INTEREST EXPENSE. Interest expense increased to $20.4 million for the year
ended September 30, 1998 from $2.6 million (net of capitalized interest of $0.1
million) for the year ended September 30, 1997 an increase of $17.8 million or
680%. The increases were primarily related to increases in long-term debt to
finance the acquisition of Brenner, United, Jacobson, Central, Grossman, and
Lans in December 1997, D.H. Griffin in April 1998, McKinney, Ferex, Peanut City,
Republic, Pro Recycling, and C&J Crushing in May 1998, and the amortization of
transaction costs associated with the Credit Facility and Subordinated Debt.
MISCELLANEOUS. Miscellaneous expense for the year ended September 30, 1998
includes $0.2 million of
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<PAGE>
expense for minority interest in the earnings of a metals recycling facility.
EARNINGS BEFORE EXTRAORDINARY LOSS. Loss before extraordinary charges for the
year ended September 30, 1998 was $25.7 million compared to earnings of $1.1
million for the same period one year earlier. During the first quarter of 1998,
the Company recorded a $3.6 million extraordinary loss from early extinguishment
of debt. In the fourth quarter of 1998, the Company recorded an $8.2 million
extraordinary loss from the settlement of litigation.
INCOME TAX EXPENSE. At September 30, 1998, the Company has a federal income
tax loss carryforward of approximately $57.8 million which expires at various
amounts and dates through the year 2013. The Company has not recorded a
deferred tax asset at September 30, 1998 since it is more likely than not the
tax assets will not be realized.
The Internal Revenue Service has substantially completed an examination of the
Company's federal income tax return for the year ended September 30, 1996. The
Company does not expect any significant changes as a result of the examination.
Year Ended September 30, 1997 Compared to Year Ended September 30, 1996
The results of operations for the years ended September 30, 1997 and 1996 have
been driven primarily by the Company's acquisition activity.
NET SALES. Net sales for the year ended September 30, 1997 increased to $62.4
million from $27.6 million for the year ended September 30, 1996, an increase of
$34.8 million or 126.1%. The increase was primarily related to inclusion of a
full year's results of operations of Anglo, Mid-America and Weissman and the
acquisition of Addlestone Recycling Corporation ("ARC") and Addlestone
International Corporation ("AIC") in April and June 1997, respectively. For the
year ended September 30, 1997, the average sales price per ton of prepared
ferrous scrap was $132, an 8% 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 scrap was $0.33 per pound, a 30% decrease compared to the same
period one year earlier. 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. Gross profit for the year ended September 30, 1997 increased to
$7.2 million from $1.0 million for the year ended September 30, 1996, an
increase of $6.2 million or 620.0%. 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
of fiscal 1997 compared to the preceding quarter by 53% as a result of increased
processing costs and higher than normal repairs and maintenance expense at the
South Texas and Nevada facilities in the fourth quarter.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses increased to $4.2 million
for the year ended September 30, 1997 from $3.3 million during the year ended
September 30, 1996, an increase of $0.9 million or 27.3%. The increase was
primarily the result of the acquisitions of ARC and AIC and other facilities
reaching normal operating capacity. Partially offsetting the increase in SG&A
expenses was a $1.5 million litigation recovery in the fourth quarter of 1997 to
offset excess scrap processing costs, legal expense and environmental
remediation costs pursuant to a law suit filed by the Company to recover such
costs. As a percentage of sales, SG&A expenses declined to 6.7% for the year
ended September 30, 1997 compared to 11.8% during the same period one year
earlier. The decline in SG&A expenses as a percentage of net sales resulted
primarily from the $1.5 million 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.
OPERATING INCOME. Operating income for the year ended September 30, 1997
increased to $3.0 million compared to an operating loss of $2.2 million in the
year ended September 30, 1996, an increase of $5.2 million. The increase was
primarily due to the acquisitions of Mid-America, Weissman, ARC and AIC,
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<PAGE>
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 substantial 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 the seller of
the Texas facilities 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.
INTEREST EXPENSE. Interest expense increased to $2.6 million (net of
capitalized interest of $0.1 million) for the year ended September 30, 1997 from
$0.7 million for the year ended September 30, 1996, an increase of $1.9 million
or 271%. The increase was primarily related to increases in long-term debt to
finance the acquisitions of Weissman, ARC, Anglo and Mid-America.
EARNINGS BEFORE INCOME TAX. Earnings before income tax benefit were $0.5
million in the year ended September 30, 1997 compared to a loss before income
tax expense of $3.0 million in the prior year. Income tax benefit was $0.6
million during the year ended September 30, 1997 compared to an insignificant
income tax expense during the year ended September 30,1996. The income tax
benefit relates to the Company's use of net loss carryforwards. The Company in
prior years generated a net loss carryforward 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 of $1.4 million was recorded at September 30, 1997 and a net
deferred tax asset of $0.8 million (net of a $1.2 million valuation allowance)
was recorded at September 30, 1996. Income tax benefit for the year ended
September 30, 1997 totaled $0.6 million. There was no income tax benefit for
the year ended September 30, 1996. See Note 6 to the financial statements of
the Company, contained elsewhere herein, for further analysis of income taxes.
As a result of the above, net earnings were $1.1 million for the year ended
September 30, 1997 compared to a net loss of $3.0 million for the year ended
September 30, 1996.
The Company does not believe its businesses have been adversely affected by
general inflation.
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1996
- - -------------------------------------------------------------------------------
<S> <C> <C> <C>
Current ratio .19:1 2.01:1 1.21:1
Working capital (deficiency) $ (201.1) $ 7.6 $ 1.5
Cash (used) by
operating activities $ (4.3) $ (4.0) $ (1.5)
Capital expenditures $ 7.9 $ 3.0 $ 1.6
Long-term debt $ 4.3 $ 29.5 $ 12.0
Total capitalization * $ 53.6 $ 46.1 $ 26.2
- - -------------------------------------------------------------------------------
</TABLE>
34
<PAGE>
* Total capitalization is defined as stockholders' equity and noncurrent
liabilities.
At September 30, 1998, the Company was in default under certain provisions of
the senior credit agreement. Further, at December 31, 1998, the Company was not
able to make its scheduled interest payments due on its subordinated debt.
While the Company has 30 days to cure such payment default, it is unlikely that
the Company will be able to secure financing to cure such default. The
Company's results of operations through December 31, 1998 were insufficient to
allow it to make its regularly scheduled interest payment under the terms of its
subordinated debt agreement. In connection with the default, all amounts due
under the credit agreement have been classified as a component of current
liabilities.
The Company invested $7.9 million in property and equipment, not including
property and equipment acquired in business acquisitions, during the year ended
September 30, 1998 for expansion of the Company's ferrous and non-ferrous
processing capacity and general modernization and efficiency upgrades. Planned
capital expenditures for the next fiscal year for the Company's existing
facilities are estimated to be $8.4 million. Included in this amount are
capital expenditures for the Company's shredders and materials handling
equipment designed to increase capacity and improve operating efficiencies.
Management anticipates the capital expenditures will be paid with long-term debt
financing, if available.
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.
In December 1997, the Company and all of its operating subsidiaries entered into
a $150 million Senior Credit Facility ("Credit Facility") with General Electric
Capital Corporation and BankBoston, N.A. as agents for the lenders. The Credit
Facility is comprised of a $45 million revolving credit facility, a $40 million
term loan due December 5, 2003, with interest and principal payable quarterly, a
$40 million term loan due on the earlier of December 5, 2005 or six months prior
to the maturity of the Subordinated Notes discussed below with interest and
principal payable quarterly, and a $25 million acquisition line of credit due
December 5, 2003, with interest and principal payable quarterly. The notes bear
interest at either (i) the higher of (a) prime plus .75% or (b) the Federal
Funds rate plus 50 basis points per annum plus .75%, or (ii) at the option of
the Company upon certain conditions, the LIBOR rate plus 2.25%. The proceeds
from the Credit Facility are secured by substantially all of the Company's
assets and are to be used for acquisitions, repayment of existing indebtedness
and general corporate purposes. At September 30, 1998, approximately $15.1
million was outstanding under the $45 million revolving credit facility. During
the third quarter of 1998, the Company advanced $24.3 million under the
acquisition line of credit leaving available funds under the acquisition line of
$0.7 million. The proceeds from the acquisition line advance were used in part
to acquire the assets of certain companies acquired in May 1998. At September
30, 1998, the Company failed to meet certain financial ratios which resulted in
a violation to certain covenants under the Credit Facility.
On May 29, 1998, the Company issued an additional $50 million in Senior
Subordinated Notes (the "Subordinated Debt") increasing the $60 million in
Subordinated Debt issued in December, 1997, to $110 million. The proceeds were
used for acquisitions, repayment of existing indebtedness and general corporate
purposes. The Subordinated debt bears interest at 13%, matures in December,
2005, and is guaranteed by all of the Company's operating subsidiaries.
In December 1997, the Company issued warrants to acquire up to 1,266,000 shares
of Common Stock in connection with the issuance of the Subordinated Debt. The
exercise price of the warrants is $0.01 per share. Additionally, warrants were
issued to acquire 200,000 shares of Common Stock with an exercise price of $2.50
per share as part of entering into the Credit Facility. For accounting purposes
the fair value of the warrants has been recorded as paid-in-capital and as a
discount to the respective debt which is amortized as interest expense over the
life of the debt.
35
<PAGE>
In connection with the Credit Facility and the issuance of the Subordinated
Debt, the Company sold 1,666,666 shares of its Common Stock for an aggregate of
$10 million to various accredited investors in a transaction exempt from the
registration requirements of the Securities Act of 1933, as amended (the
"Securities Act"). The $10 million in proceeds were used for acquisitions,
repayment of existing indebtedness and general corporate purposes.
On December 5, 1997, long-term debt of $32.1 million was repaid in advance of
scheduled maturity with proceeds in part from the Credit Facility and the
issuance of the Subordinated Debt and Common Stock as discussed above. As a
result of the early extinguishment of debt, the Company recognized $3.7 million
in loan fees expense which includes a prepayment penalty of $2.5 million and
$1.2 million of prepaid loan fees both of which were charged to expense as an
extraordinary item, net of a tax benefit of $1.3 million.
In April 1998, the Company's Chairman and Chief Executive Officer was issued
2,110,000 shares of common stock pursuant to exercising certain options at an
average exercise price of $1.48 per share netting proceeds to the Company of
$3,123,500. Total cash proceeds from the exercise of warrants and options for
the year ended September 30, 1998, amounted to $5.1 million.
In March 1998, the Company commenced an exchange offer in which it offered to
exchange 0.2517291 shares of its Common Stock for each of its 2,641,827
outstanding Series G and Series J Common Stock purchase warrants. The holders
of 2,611,827 of such warrants were entitled to purchase one share of Common
Stock for $5.52 per share for each warrant held and the holders of 30,000 of
such warrants were entitled to purchase one share of Common Stock for $4.00 per
share for each warrant held. The exchange offer was designed to reduce the
overhang to the market for the Common Stock. Following the completion of the
exchange offer on April 12, 1998, there were 403,666 warrants outstanding
exercisable at $5.52 per share and 30,000 warrants outstanding exercisable at
$4.00 per share. All of such warrants expire on December 27, 1999.
On April 24, 1997, the Board of Directors of the Company authorized the
repurchase of up to 700,000 shares of Common Stock in open market transactions.
As of September 30, 1998, the Company had acquired 66,000 shares for $130,000
with cash from operations. The Board of Directors does not currently intend to
continue this repurchase program.
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.
During December 1997 and May 1998, the Company completed the Recent Acquisitions
for an aggregate purchase price of approximately $227 million. The Recent
Acquisitions were financed in part with proceeds generated in December 1997 from
the Credit Facility, the sale of $110 million of Subordinated Debt and proceeds
from the sale of the Company's Common Stock to various accredited investors in
connection with the Credit Facility. The acquisitions were also financed in
part from the issuance of the Company's preferred and Common stock to the owners
of the acquired facilities.
In connection with the acquisition of Brenner, a portion of the purchase price
paid by the Company was 14,000 shares of Series F Preferred having a stated
value of $3.5 million. If the sale of the Common Stock into which Series F
Preferred may be converted into yields net proceeds of less than $3.5 million ,
the Company has agreed to pay the difference to Brenner. In connection with the
acquisition of Jacobson, a portion of the purchase price paid by the Company was
10,000 shares of Series E Preferred having a stated value of $3.0 million. If
the sale of the Common Stock into which the Series E Preferred may be converted
yields net proceeds of less than $3.0 million, the Company has agreed to pay the
difference to Jacobson. In connection with the acquisition of United, portion of
the purchase price paid by the company was 12,000 shares of Series H Preferred
having a stated value of $5.7 million. If the sale of the Common Stock into
which the Series H Preferred may be converted yields net proceeds of less than
$5.7 million, the Company has agreed to pay the difference to United.
36
<PAGE>
On April 7, 1997, the Company acquired for $5.7 million substantially all the
assets of 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 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 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.
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 his 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.
The Company has not paid dividends on its Common Stock and the Board of
Directors intends to continue a policy of retaining earnings to finance growth
and for general corporate purposes and, therefore, does not anticipate paying
any such dividends in the future. In addition, the Credit Facility contains
limitations on payment of cash dividends or other distributions of assets which
may restrict the Company's ability to pay dividends.
37
<PAGE>
On December 31, 1996, the Company completed a private placement of $1 million of
Series C Convertible Preferred Stock ("Series C Preferred"). The company
redeemed the Series C Preferred for $1.3 million during the quarter ended June
30, 1997 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.
YEAR 2000 ISSUES
Many computer systems and other equipment with embedded chips or microprocessors
may not be able to appropriately interpret dates after December 31, 1999 because
such systems use only two digits to indicate a year in the date field rather
than four digits. If not corrected, many computers and computer applications
could fail or create miscalculations, causing disruptions to the Company's
operations. In addition, the failure of customer and supplier computer systems
could result in interruption of sales and deliveries of key supplies or
utilities. Because of the complexity of the issues and the number of parties
involved, the Company cannot reasonably predict with certainty the nature or
likelihood of such impacts.
Using internal staff and outside consultants, the Company is actively addressing
this situation and anticipates that it will not experience a material adverse
impact to its operations, liquidity or financial condition related to systems
under its control. The Company is addressing the Year 2000 issue in four
overlapping phases: (i) identification and assessment of all critical software
systems and equipment requiring modification or replacement prior to 2000; (ii)
assessment of critical business relationships requiring modification prior to
2000; (iii) corrective action and testing of critical systems; (iv) development
of contingency and business continuation plans to mitigate any disruption to the
Company's operations arising from the Year 2000 issue.
During 1998, in order to improve access to financial information through common,
integrated computing systems across the company, the Company began an accounting
system replacement and upgrade project. The Company has completed its corporate
financial accounting software implementation to SAP America, Inc., and is in the
process of reviewing certain subsidiaries financial systems to determine the
cost and benefit of converting such subsidiaries to SAP America, Inc. as well.
Approximately 53% of the Company's subsidiaries existing financial systems have
been upgraded to be Year 2000 compliant.
The Company is in the process of implementing a plan to obtain information from
its external service providers, significant suppliers and customers, and
financial institutions to confirm their plans and readiness to become Year 2000
compliant, in order to better understand and evaluate how their Year 2000 issues
may affect the Company's operations. The Company currently is not in a position
to assess this aspect of the Year 2000 issue, however the Company plans to take
the necessary steps to provide itself with reasonable assurance that its service
providers, suppliers, customers and financial institutions are Year 2000
compliant. This phase is 20% complete to date.
The Company is developing contingency plans to identify and mitigate potential
problems and disruptions to the Company's operations arising from the Year 2000
issue. This phase is expected to be completed by November 1999.
The total cost to achieve Year 2000 compliance is currently estimated at $4.3
million. Approximately $1.5 million has been spent to date. Reaching
compliance will require additional funding which will be dependant upon the
Company's lending institutions willingness and ability to continue to fund
necessary Year 2000 compliance projects. Through December 31, 1998, funds from
operations and availability under the Company's Credit Facility were
insufficient to allow the Company to make its regularly scheduled interest
payment under the terms of its subordinated debt agreement. The Company
requires significant additional funds to continue its operations past December
31, 1998. While the Company is pursuing every avenue to secure such additional
financing, there can be no assurance that such financing will be available to
the Company.
38
<PAGE>
While the Company believes that its own internal assessment and planning efforts
with respect to its external service providers, suppliers, customers and
financial institutions are and will be adequate to address its Year 2000
concerns, there can be no assurance that these efforts will be successful or
will not have a material adverse effect on the Company's operations.
Recent Accounting Pronouncements
The Company has implemented Financial Accounting Standards ("FAS") No. 128,
"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 reflect the potential dilution of securities that could share in the
earnings of the entity, similar to fully diluted earnings per share. In loss
periods, dilutive common equivalent shares are excluded, as the effect would be
anti-dilutive.
The Company is required to implement FAS No. 130 "Reporting Comprehensive
Income" and FAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information" in fiscal 1999. 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 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.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" which standardizes the disclosure
requirements for pensions and other postretirement benefits and requires
additional information on changes in the benefit obligations and fair values of
plan assets that will facilitate financial analysis. SFAS No. 132 is effective
for years beginning after December 15, 1997 and requires comparative information
for earlier years to be restated, unless such information is not readily
available. Management believes the adoption of this statement will have no
material impact on the Company's financial statements.
In June 1998, the Financial Accounting Standards Board issued FAS No. 133,
accounting for derivative instruments and hedging activities. FAS No. 133
requires companies to recognize all derivatives contracts as either assets or
liabilities in the balance sheet and to measure them at fair value. If certain
conditions are met, a derivative may be specifically designated as a hedge of
the: (i) exposure to changes in the fair value of a recognized asset or
liability or an unrecognized firm commitment ("fair value hedges"), (ii)
exposure to variable cash flows of a forecasted transaction ("cash flow
hedges"), or (iii) foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction ("foreign currency hedges").
The objective of hedge accounting is to match the timing of gain or loss
recognition on the hedging derivative with the recognition of (i) the changes in
the fair value of the hedged asset or liability that are attributable
39
<PAGE>
to the hedged risk or (ii) the earnings effect of the hedged forecasted
transaction. For a derivative not designated as a hedging instrument (e.g.,
derivative contracts entered into for speculative purposes), the gain or loss is
recognized in income in the period of change.
FAS No. 133 is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. The Company currently plans to adopt FAS No. 133 on October 1,
1999. On that date, hedging relationships will be designated anew and
documented. The Company has not yet evaluated the financial statement impact of
adopting FAS No. 133.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the information set forth on pages F-1 through F-44.
ITEM 9 - CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS
CHANGE IN INDEPENDENT ACCOUNTANTS
RESIGNATION OF BDO SEIDMAN, LLP
Effective September 16, 1998, BDO Seidman, LLP ("BDO"), which served as
Registrant's independent public accountant to audit Registrant's financial
statements for the fiscal years of Registrant ended September 30, 1997 and 1996,
resigned. None of BDO's audit reports on Registrant's financial statements for
such years contained an adverse opinion or a disclaimer of opinion, nor was any
report qualified as to uncertainty, audit, scope or accounting principles.
During the Registrant's fiscal years ended September 30, 1997 and 1996, and
any subsequent interim period preceding BDO's resignation, there were no
disagreements with BDO on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure which, if not
resolved to BDO's satisfaction, would have caused it to make reference to the
subject matter of the disagreement(s) in connection with its reports. Except as
described below, none of the events described in subsections (a)(1)(v)(A)
through (D) of Item 304 of Regulation S-K occurred during Registrant's fiscal
years ended September 30, 1997 and 1996 and any subsequent interim period
preceding BDO's resignation.
At the time of its resignation, BDO advised Registrant that, with respect to
information disclosed in the Registrant's reports previously filed with the
Securities and Exchange Commission for the quarters ending within the fiscal
year ending September 30, 1998, BDO had not performed any audit procedures with
respect to the purchase price allocations for acquisitions that occurred in May
1998, April 1998, and December 1997. As previously disclosed in the
Registrant's current reports on Form 8-K reporting each acquisition and its
quarterly reports on Form 10-Q for each relevant fiscal quarter, the purchase
price allocations are preliminary, subject to the completion of appraisals and
environmental studies and post-closing adjustments pursuant to the respective
asset and stock purchase agreements. Had BDO applied audit procedures to these
purchase price allocations, such procedures may or may not have resulted in
material adjustments to these allocations in the Registrant's financial
statements for the fiscal year ended September 30, 1998. Had BDO performed
other procedures since the date of its last audit, which covered the fiscal year
ended September 30, 1997, other matters may have come to its attention which
might have been reported to the Registrant.
Effective October 8, 1998, the Audit Committee recommended and the Board
appointed AJ. Robbins, PC, as the Registrant's independent public accountant.
As discussed below, AJ. Robbins, PC was the Registrant's Principal independent
accountant until March 1996 and auditor of a significant subsidiary until
December 19, 1997
BDO has refused to permit the inclusion on this Form 10-K of its operators on
the Financial Statements for the years ended September 30, 1997 and 1996,
because of a dispute regarding fees that it claims are due from the Company.
DISMISSAL OF AJ. ROBBINS, P.C.
40
<PAGE>
On December 19, 1997, AJ. 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 AJ. 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 AJ. 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 AJ. 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, AJ. Robbins, P.C., prior to the engagement of BDO
Seidman, LLP.
41
<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 46 Chairman of the Board Since 1992
Chief Executive Officer
Luke F. Botica 48 Vice Chairman, Director Since 1997
Harold "Skip" J. Rouster 49 Senior Vice President -
Michael J. McCloskey 46 Senior Vice President -
John E. McKibben 58 Senior Vice President, -
Administration
Secretary
Brian L. Klemsz 39 Senior Vice President, Since 1996
Chief Financial Officer,
Treasurer, Director
Jerome B. Misukanis 56 Director (1)(2) Since 1994
Graydon H. Neher 49 Director (1)(2) Since 1995
(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.
42
<PAGE>
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, 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.
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.
MICHAEL J. MCCLOSKEY. Mr. McCloskey has served as Senior Vice President,
Acquisitions of the Company since August 1997. Mr. McCloskey has a substantial
history of investment banking leadership and financial management. He was a
founding partner of Stone Pine Capital where his responsibilities included
investment origination, financing and administration of portfolio companies.
Previously Mr. McCloskey held the positions of Senior Vice President and
Director of the Private Finance Group at Paine Webber, Inc. and First Vice
President at E.F. Hutton & Company, Inc. where he was the Director of the New
Product Development Group.
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.
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 14 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
43
<PAGE>
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.
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 a
Form 4 reporting the purchase of common stock by Graydon H. Neher on October 9,
1998 was inadvertently filed late on November 17, 1998.
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
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------------------------
FISCAL SALARY OTHER ANNUAL SECURITIES
NAME AND UNDERLYING YEAR COMPENSATION UNDERLYING
PRINCIPAL POSITION OPTIONS
OPTIONS
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Thomas J. Wiens 1998 $376,667 $1,840,000 (1) 4,000,000 (5)
Chief Executive Officer and Chairman
of the Board of Directors 1997 300,000 85,000 (1) 1,810,000
1996 222,000 -0- 300,000
Luke F. Botica 1998 $250,000 -0- 438,474 (6)
Vice Chairman
1997 -0- -0- 319,321
1996 -0- -0- -0-
Harold "Skip" J. Rouster 1998 $180,000 $30,000 (2) 260,715 (6)
Chief Operating Officer
Vice President 1997 15,000 -0- 231,800
1996 -0- -0- -0-
Michael J. McCloskey 1998 $134,000 $54,000 (3) 260,715 (6)
Senior Vice President
1997 24,000 -0- 200,000
1996 -0- -0- -0-
44
<PAGE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------------------------
FISCAL SALARY OTHER ANNUAL SECURITIES
NAME AND UNDERLYING YEAR COMPENSATION UNDERLYING
PRINCIPAL POSITION OPTIONS
OPTIONS
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John E. McKibben 1998 $139,583 -0- 150,109 (6)
Senior Vice President-
Administration 1997 118,967 -0- 200,000
1996 -0- -0- -0-
Brian L. Klemsz 1998 $151,688 -0- 191,586 (6)
Chief Financial Officer
1997 76,500 -0- 558,000 (4)
1996 10,937 -0- -0-
- - ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Represents amounts loaned to Mr. Wiens under the terms of his employment
agreement described below under the caption "Executive Employment
Agreements."
(2) Represents a bonus awarded to Mr. Rouster.
(3) Represents a bonus awarded to Mr. McCloskey.
(4) During fiscal 1997 Mr. Klemsz agreed to forego $36,000 of cash compensation
in exchange for options to acquire up to 108,000 shares of the Company's
Common Stock at an exercise price of $1.31 per share.
(5) Options to acquire up to 2,200,000 shares have been granted under the
Company's 1998 Employee Stock Option Plan and 1998 Executive Stock Option
Plan, both of which are subject to shareholder approval.
(6) Granted under the Company's 1998 Executive Stock Option Plan which is
subject to shareholder approval.
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, 1998:
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------------------
INDIVIDUAL GRANTS POTENTIAL
REALIZABLE VALUE AT
- - ------------------------------------------------------------------------------------------------- ASSUMED ANNUAL
NUMBER OF PERCENT OF RATES OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION -
NAME GRANTED FISCAL YEAR PRICE DATE 5% 10%
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Thomas J. Wiens, 2,900,000 (1) 43.7% $3.50 8/27/03 $2,804,258 $6,196,677
Chief Executive 1,100,000 (1) 16.6% $3.50 8/27/08 $2,421,244 $6,135,908
Officer
Luke F. Botica,
Vice Chairman 438,475 (1) 6.6% $3.50 8/27/03 $423,999 $936,927
- - -----------------------------------------------------------------------------------------------------------------------------------
45
<PAGE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------------------
INDIVIDUAL GRANTS POTENTIAL
REALIZABLE VALUE AT
- - ------------------------------------------------------------------------------------------------- ASSUMED ANNUAL
NUMBER OF PERCENT OF RATES OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION -
NAME GRANTED FISCAL YEAR PRICE DATE 5% 10%
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Harold "Skip" J. 260,715 (1) 3.9% $3.50 8/27/03 $252,108 $557,092
Rouster,
Chief Operating
Officer
Michael J. McCloskey, 260,715 (1) 3.9% $3.50 8/27/03 $252,108 $557,092
Senior Vice
President
John E. McKibben, 150,109 (1) 2.3% $3.50 8/27/03 $145,153 $320,751
Senior Vice
President -
Administration
Brian L. Klemsz, 191,586 (1) 2.9% $3.50 8/27/03 $185,251 $409,378
Senior Vice
President,
Chief Financial
Officer
- - -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Subject to periodic vesting in accordance with a schedule to be determined
by the Compensation Committee of the Company's Board of Directors.
STOCK OPTION EXERCISES DURING THE FISCAL YEAR ENDED SEPTEMBER 30, 1998,
OUTSTANDING GRANTS AND GAINS AS OF SEPTEMBER 30, 1998
The following table shows stock options exercised by named executive officers
during the fiscal year ended September 30, 1998. In addition, this table
includes the number of shares covered by both exercisable and non-exercisable
stock options as of September 30, 1998 and the values for "in-the-money" options
which represent the positive spread between the exercise price of any such
existing stock options and the price of the Common Stock at September 30, 1998.
46
<PAGE>
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------------------------
SHARES
ACQUIRED NUMBER OF SECURITIES
ON VALUE UNDERLYING VALUE OF UNEXERCISED IN-THE-
EXERCISE (#) REALIZED UNEXERCISED MONEY OPTIONS AT YEAR-END (#)
NAME ($) OPTIONS AT YEAR-END ($) -----------------------------
-----------------------
EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- - -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$-0- / -0-
Thomas J. Wiens 2,110,000 $-0- 1,333,333 / 2,666,667
21,735 / -0-
Luke F. Botica -0- -0- 234,547 / 523,249
Harold "Skip" J. -0- -0- 159,000 / 333,515 3,408 / 4,771
Rouster
Michael J. McCloskey -0- -0- 114,583 / 346,132 -0- / -0-
John E. McKibben -0- -0- 150,000 / 200,109 42,600 / 14,200
Brian L. Klemsz -0- -0- 378,333 / 371,253 107,447 / 51,025
- - -------------------------------------------------------------------------------------------------------------------------------
</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
Effective July 1, 1998, the Company entered into an amended employment agreement
with its Chairman and Chief Executive Officer, Thomas J. Wiens which expires on
July 1, 2002 (the "Wiens Employment Agreement"). The Wiens Employment Agreement
provides for an initial annual base salary of $400,000 and annual bonuses in an
amount to be determined by the Compensation Committee but not less than
$180,000. 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, 1998, the Company
had advanced Mr. Wiens the full amount 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.
Upon a change of control of the Company or if Mr. Wiens terminates his
employment for "good reason" or is terminated without cause, the Company shall
pay to Mr. Wiens a lump sum equal to the aggregate of the following amounts: (i)
an amount equal to 5.0 times the base salary (as then in effect or such higher
rate as may have been in effect at any time during the 90-day period preceding
the change of control or termination)and the annual bonus paid for the last full
fiscal year but, if no bonus was paid, an amount of
47
<PAGE>
not less than $180,000; (ii) all compensation previously deferred and not yet
paid by the Company; (iii) the amount of all accrued but unused vacation through
the date of the change of control or termination; and (iv) the amount of any
federal, state and local taxes payable by Mr. Wiens as a result of the foregoing
payments plus the amount of any federal, state and local taxes payable by Mr.
Wiens as a result of the preceding tax reimbursement payment. In addition, (i)
the Loan shall be forgiven by the Company and the Company shall pay to Mr. Wiens
an amount equal to the amount of any federal, state and local taxes payable by
Mr. Wiens as a result of such forgiveness plus the amount of any federal, state
and local taxes payable by the Mr. Wiens as a result of the preceding tax
reimbursement payment; and (ii) all stock options granted to the Employee shall:
(x) immediately vest and become exercisable either by payment of the exercise
price or upon a cashless exercise by the Employee; and (y) have their exercise
price reduced to the lower of the then market price or $1.00 per share and the
Company shall pay to Mr. Wiens a lump sum equal to the amount of any federal,
state and local taxes payable by Mr. Wiens as a result of either the vesting,
change in exercise price or exercise of any options held by the Employee plus
the amount of any federal, state and local taxes payable by Mr. Wiens as a
result of the preceding tax reimbursement payment.
For purposes of the Wiens Employment Agreement, "change of control" means any
one of the following events: (i) the acquisition by an entity, person or group
(other than the Company), either in a single transaction or in a series of
transactions, of 30% or more of the Company's Voting Stock, including
acquisitions of Voting Stock through the exercise or conversion of warrants,
options, convertible securities, debt or any rights to acquire Voting Stock;
(ii) a change in a majority of the Company; Directors as of the date hereof (the
"Incumbent Board"), unless the new or additional Directors have been appointed
or nominated by a majority of the Board of Directors; PROVIDED HOWEVER, that
any change in the majority of the Incumbent Board in connection with an actual
or threatened proxy contest shall be a change of control; (iii) a merger by the
Company with or into another entity, following which the Company's shareholders
own less than 60% of the outstanding voting securities of the surviving
entity;(iv) the completion by the Company of a sale of all or substantially all
of its assets; and (v) the Company entering into or completing any type of
reorganization, whereby during the pendency or upon completion of the
reorganization, the Company's Chief Executive Officer, Chief Operating Officer
or Chief Financial Officer are replaced by persons who are representatives of or
nominated by any class of the Company's debt or equity securities, other than
the Common Stock. "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, or 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, (ii) in his capacity as a Director, Mr. Wiens recommends or approves
the reduction.
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
48
<PAGE>
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 the 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.
BRIAN L. KLEMSZ
Effective July 1, 1998, the Company entered into a five-year employment
agreement with its Chief Financial Officer, Brian L. Klemsz (the "Klemsz
Employment Agreement"). The Klemsz Employment Agreement provides for an initial
base salary of $260,000 and annual bonuses in an amount to be determined by the
Compensation Committee, but not less than $40,000.
If Mr. Klemsz terminates his employment with the Company for "good reason" or is
terminated without cause, the Company shall pay to Mr. Klemsz an amount equal to
three times the base salary as in effect on the date of termination plus
$84,000. In addition, all stock options granted to Mr. Klemsz shall immediately
vest and become exercisable either by payment of the exercise price or upon a
cashless exercise and the Company shall pay to Mr. Klemsz a lump sum equal to
the amount of any federal, state and local taxes payable by Mr. Klemsz as a
result of either the vesting or exercise of any options held by Mr. Klemsz plus
a lump sum equal to the amount of any federal, state and local taxes payable by
Mr. Klemsz as a result of the preceding tax reimbursement payment. For purposes
of the Klemsz Employment Agreement, "good reason" generally means a material
diminishment in Mr. Klemsz's duties, any material breach by the Company of any
of the provisions of the Klemsz Employment Agreement, or any reduction, or
attempted reduction, at any time during the term of the Klemsz Employment
Agreement, or Mr. Klemsz'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, (ii) in his capacity as a
Director, Mr. Klemsz recommends or approves the reduction.
If Mr. Klemsz terminates his employment for any reason or no reason during the
twelve month period following a change of control or his employment is
terminated by him for good reason or the Company without cause during the 24
month period following a change of control, the Company shall pay to Mr. Klemsz
a lump sum in cash equal to (i) three times the base salary as then in effect
plus $132,000, and (ii) the amount of any federal, state and local taxes
payable by Mr. Klemsz as a result of the foregoing payment plus a lump sum
equal to the amount of any federal, state and local taxes payable by Mr. Klemsz
as a result of the preceding tax reimbursement payment. In addition, all stock
options granted to Mr. Klemsz shall immediately vest and become exercisable
either by payment of the exercise price or upon a cashless exercise and the
Company shall pay to Mr. Klemsz a lump sum equal to the amount of any federal,
state and local taxes payable by Mr. Klemsz as a result of either the vesting or
exercise of any options held by Mr. Klemsz plus a lump sum equal to the amount
of any federal, state and local taxes payable by Mr. Klemsz as a result of the
preceding tax reimbursement payment. The term "change of control" has the same
meaning in the Klemsz Employment Agreement as in the Wiens Employment Agreement.
HAROLD J. ROUSTER
Effective July 1, 1998, the Company entered into a four-year employment
agreement with its Chief Operating Officer, Harold J. Rouster (the "Rouster
Employment Agreement"). The Rouster Employment Agreement provides for an
initial base salary of $280,000, a one-time signing bonus of $60,000 and
annual bonuses of up to $120,000 based upon the achievement of certain
performance criteria to be determined by the Board of Directors. The Rouster
Employment Agreement includes termination provisions which are substantially
identical to those found in the Botica Employment Agreement, however, upon a
change of control or termination for good reason or without cause, all stock
options granted to Mr. Rouster shall immediately vest and become exercisable
either by payment of the exercise price or upon a cashless exercise and the
Company shall pay to Mr. Rouster a lump sum equal to the amount of any
federal, state and local taxes payable by Mr. Rouster as a result of either
the vesting or exercise of any options held by Mr. Rouster plus a lump sum
equal to the amount of any federal, state and local taxes payable by Mr.
Rouster as a result of the preceding tax reimbursement payment.
For purposes of the Rouster Employment Agreement, "change of control" means
any one of the following events: (i) the completion of a tender offer or
exchange offer (other than an offer by the Company) which results in the
acquisition by an entity, person or group of 30% or more of the Company's
Voting Stock, other than acquisitions by employee benefits plans sponsored by
the Company, acquisitions of Voting Stock directly from the Company and
acquisitions of Voting Stock by entities under common control with the
Company; (ii) a change in a majority of the Company; Directors as of the date
hereof (the "Incumbent Board"), unless the new or additional Directors
have been appointed or nominated by a majority of the Board of Directors;
PROVIDED HOWEVER, that any change in the majority of the Incumbent Board in
connection with an actual or threatened proxy contest shall be a change of
control; (iii) a merger by the Company with or into another entity, following
which the Company's shareholders own less than 60% of the outstanding voting
securities of the surviving entity; and (iv) the completion by the Company of
a sale of all or substantially all of its assets, unless such sale is a
corporate restructuring whereby the successor entity's acquisition of the
assets, if the acquisition of such assets had been achieved by a merger,
would not have constituted a change of control.
49
<PAGE>
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below sets forth, as of September 30, 1998, 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. The following shareholders have
sole voting and investment power with respect to their holdings unless
otherwise noted:
50
<PAGE>
<TABLE>
<CAPTION>
AMOUNT
NAME AND ADDRESS OF BENEFICIALLY PERCENT OF
TITLE OF CLASS BENEFICIAL OWNER OWNED CLASS
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock Linder Growth Fund 1,200,000 4.0%
c/o Ryback Management Corporation
7711 Carondelet Avenue
Box 16900
St. Louis, MO 63105
CERTAIN DIRECTORS AND EXECUTIVE OFFICERS
Common Stock Thomas J. Wiens 6,184,103 (1) 27.3%
9780 Meridian Boulevard, Suite 180
Englewood, CO 80112
Common Stock Luke F. Botica 319,322 (2) 2.5%
9780 Meridian Boulevard, Suite 180
Englewood, CO 80112
Common Stock Harold "Skip" J. Rouster 231,800 (3) 1.6%
9780 Meridian Boulevard, Suite 180
Englewood, CO 80112
Common Stock Michael J. McCloskey 200,000 (4) 1.5%
9780 Meridian Boulevard, Suite 180
Englewood, CO 80112
Common Stock John E. McKibben 200,000 (5) 1.2%
9780 Meridian Boulevard, Suite 180
Englewood, CO 80112
Common Stock Brian L. Klemsz 558,000 (6) 2.5%
9780 Meridian Boulevard, Suite 180
Englewood, CO 80112
Common Stock Jerome B. Misukanis 107,500 (7) *
9780 Meridian Boulevard, Suite 180
Englewood, CO 80112
Common Stock Graydon H. Neher 90,521 (8) *
9780 Meridian Boulevard, Suite 180
Englewood, CO 80112
Common Stock All executive officers and 9,091,246 37.6%
directors as a group
(nine persons)
- - ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Less than one percent
(1) Includes 1,664 shares owned by Real Heroes, Inc., a non-profit corporation
controlled by Thomas J. Wiens and 994 shares owned by First Dominion
Holdings, Inc., a corporation controlled by Thomas J. Wiens. Includes
1,800,000 underlying options.
(2) Includes 319,322 shares underlying options, exercisable within 60 days of
September 30, 1998.
(3) Includes 231,800 shares underlying options, exercisable within 60 days of
September 30, 1998.
51
<PAGE>
(4) Includes 200,000 shares underlying options, exercisable within 60 days of
September 30, 1998.
(5) Includes 200,000 shares underlying options, exercisable within 60 days of
September 30, 1998.
(6) Includes 550,000 shares underlying options, exercisable within 60 days of
September 30, 1998.
(7) Includes 101,500 shares underlying options, exercisable within 60 days of
September 30, 1998.
(8) Includes 65,000 shares underlying options, exercisable within 60 days of
September 30, 1998.
(9) Includes 84,000 shares underlying options, exercisable within 60 days of
September 30, 1998.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Executive Employment Agreements Under ITEM 10
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS:
Report of Independent Accountants
Consolidated Balance Sheets as of September 30, 1998 and 1997
Consolidated Statements of Operations for the years ended September 30,
1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity for the years ended
September 30, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended September 30,
1998, 1997 and 1996
Notes to Consolidated Financial Statements
EXHIBITS:
EXHIBIT
NUMBER DESCRIPTION
2.1 Agreements related to the Acquisition of the Assets of Grossman
brothers Company and Milwaukee Metal Briquetting Co., Inc.
2.1.1 Asset Purchase Agreement dated October 31, 1997, by and among
recycling Industries of Wisconsin, Inc., a Colorado corporation,
Recycling Industries, Inc., a Colorado corporation, Grossman
Brothers company, Inc., a Wisconsin corporation, Milwaukee Metal
Briquetting Co., Inc., a Wisconsin corporation, and Arthur
Grossman. Incorporated by reference to Exhibit 2.1.1 to the
Company's current report on form 8-K as filed with the
Commission on December 22, 1997 and amended on February 11,
1998 on Form 8-K/A, Commission File No. 0-20179.
2.1.2 Amendment to Asset Purchase Agreement dated December 5, 1997, by
and among Recycling Industries of Wisconsin, Inc., Recycling
Industries, Inc., Grossman Brothers Company, Inc. and Milwaukee
Metal Briquetting Co., Inc. Incorporated by reference to Exhibit
2.1.2 to the Company's current report on Form 8-K as filed with
the Commission on December 22, 1997 and amended on February 11,
1998 on Form 8-K/A, Commission File No. 0-20179.
52
<PAGE>
2.2 Asset Purchase Agreement dated December 4, 1997 by and among
Recycling Industries, Inc., a Colorado corporation, Recycling
Industries of Atlanta, Inc., a Colorado corporation, and Central
Metals Company, Inc., a Georgia corporation. Incorporated by
reference to Exhibit 2.2to the Company's current report on Form
8-K as filed with the commission on December 22, 1997 and amended
on February 11, 1998 on form 8-K/A, Commission File No. 0-20179.
2.3 Asset Purchase Agreement dated December 5, 1997 by and among
Recycling Industries of Chesapeake, Inc., a Colorado corporation,
Recycling Industries, Inc., a Colorado corporation, Money Point
Land Holding Corporation, a Virginia corporation, Money Point
Diamond Corporation, a Virginia corporation, George B. Ginsburg,
the Fred Jacobson Revocable Trust, a Virginia trust, and the
Dorothy G. Jacobson Revocable Trust, a Virginia trust.
Incorporated by reference to Exhibit 2.3 to the Company's current
report on Form 8-K as filed with the Commission on December 22,
1997 and amended on February 11, 1998on Form 8-K/A, Commission
File No. 0-20179.
2.4 Stock Purchase Agreement dated December 8, 1997, by and among
recycling Industries, Inc., a Colorado corporation, Wm. Lans
Sons'Co., Inc., an Illinois corporation, Bertram Lans, Bruce Lans
and Scott Lans. Incorporated by reference to Exhibit 2.4 to the
Company's current report on Form 8-K as filed with the Commission
on December 22, 1997 and amended on February 11, 1998 on Form
8-K/A, Commission File No. 0-20179.
2.5 Asset Purchase Agreement dated December 5, 1997 by and among
Recycling Industries of Winston-Salem, Inc., a Colorado
corporation, Recycling Industries, Inc., a Colorado corporation,
Brenner Companies, Inc., a North Carolina corporation, Frank
Brenner, Mike Brenner and the Shareholder of the Brenner
Companies, Inc. Incorporated by reference to Exhibit 2.5 to the
Company's current report on Form 8-K as filed with the Commission
on December 22, 1997 and amended on February 11,1998 on Form
8-K/A, Commission File No. 0-20179.
2.6 Asset Purchase Agreement dated December 5, 1997 by and among
recycling Industries of Greensboro, Inc., a Colorado corporation,
Recycling Industries, Inc., a Colorado corporation, United Metal
Recyclers, a North Carolina general partnership, Brenner
Companies, Inc., a North Carolina corporation, and Levin
Brothers, Inc., a North Carolina corporation. Incorporated by
reference to Exhibit 2.6to the Company's current report on Form
8-K as filed with the commission on December 22, 1997 and amended
on February 11, 1998 on Form 8-K/A, Commission File No. 0-20179.
2.7 Asset Purchase Agreement dated May 21, 1998, by and among
Recycling Industries of Greensboro, Inc., a Colorado corporation,
Recycling Industries, Inc., a Colorado corporation, C&J Crushing,
Inc., a North Carolina corporation, Carl Drye and the Seller
Owners. Incorporated by reference to Exhibit 2.1 to the
Company's current report on Form 8-K as filed with the commission
on June 5, 1998,and amended on August 4, 1998, on Form 8-K/A,
Commission File No.0-20179.
2.8 Asset Purchase Agreement dated May 22, 1998, by and among
Recycling Industries of Wisconsin, Inc., a Colorado corporation,
Recycling Industries, Inc., a Colorado corporation, Pro
Recycling, L.L.C., a Wisconsin limited liability company,
Lewinsky Iron & Metal, Inc., a Wisconsin corporation, Steven
Lewinsky and Arthur Arnstein. Incorporated by reference to
Exhibit 2.2 to the Company's current report on Form 8-K as filed
with the commission on June 5, 1998,and amended on August 4,
1998, on Form 8-K/A, Commission File No.0-20179.
2.9 Asset Purchase Agreement dated May 21, 1998, by and among
Recycling Industries of Charlotte, Inc., a Colorado corporation,
Recycling Industries, Inc., a Colorado corporation, Republic
Alloys, Inc., a North Carolina corporation, William. B. Allen and
Mark W. Russo. Incorporated by reference to Exhibit 2.3 to the
Company's current report on Form 8-K as filed with the
53
<PAGE>
commission on June 5, 1998,and amended on August 4, 1998, on Form
8-K/A, Commission File No.0-20179.
2.10 Asset Purchase Agreement dated May 27, 1998, by and among
Recycling Industries of Suffolk, Inc., a Colorado corporation,
Recycling Industries, Inc., a Colorado corporation, Peanut City
Iron & Metal Co., Inc., a Virginia corporation, George Ginsburg,
Fred Jacobson, Edwin Jacobson, Kenny Weinstein and Samuel Blum.
Incorporated by reference to Exhibit 2.4 to the Company's current
report on Form 8-K as filed with the commission on June 5, 1998,
and amended on August 4, 1998, on Form 8-K/A, Commission File No.
0-20179.
2.11 Agreement and Plan of Share Exchange dated May 27, 1998, by and
among Recycling Industries, Inc., a Colorado corporation, Ferex
Corporation, a Texas corporation, and its Control Shareholders.
Incorporated by reference to Exhibit 2.1 to the Company's current
report on Form 8-K as filed with the commission on June 12,
1998,and amended on August 4, 1998, on Form 8-K/A, Commission
File No.0-20179.
2.12 Asset Purchase Agreement dated April 15, 1998, by and among
McKinney Smelting, Inc., a Texas corporation, Benjamin L. Smith
and Ferex Metals Recycling of McKinney, Inc., a Texas
corporation. Incorporated by reference to Exhibit 2.2 to the
Company's current report on Form 8-K as filed with the commission
on June 12, 1998,and amended on August 4, 1998, on Form 8-K/A,
Commission File No.0-20179.
3(i).1 Articles of Amendment to the Amended and Restated Articles of
Incorporation of Recycling Industries, Inc. - Designation of
Preferences, Limitations and Relative Rights of the Series E
Redeemable Convertible Preferred Stock of Recycling Industries,
Inc. Incorporated by reference to Exhibit 3(i).1 to the Company's
current report on Form 8-K as filed with the Commission on
December 22, 1997and amended on February 11, 1998 on Form 8-K/A,
Commission File No.0-20179.
3(i).2 Articles of Amendment to the Amended and Restated Articles of
Incorporation of Recycling Industries, Inc. - Designation of
Preferences, Limitations and Relative Rights of the Series F
6 1/2% Redeemable Convertible Preferred Stock of Recycling
Industries, Inc. Incorporated by reference to Exhibit 3(i).2 to
the Company's current report on Form 8-K as filed with the
Commission on December 22, 1997and amended on February 11, 1998
on Form 8-K/A, Commission File No.0-20179.
3(i).3 Articles of Amendment to the Amended and Restated Articles of
Incorporation of Recycling Industries, Inc. - Designation of
Preferences, Limitations and Relative Rights of the Series G
6 1/2%Redeemable Convertible Preferred Stock of Recycling
Industries, Inc. Incorporated by reference to Exhibit 3(i).3 to
the Company's current report on Form 8-K as filed with the
Commission on December 22, 1997and amended on February 11, 1998
on Form 8-K/A, Commission File No.0-20179.
3(i).4 Articles of Amendment to the Amended and Restated Articles of
Incorporation of Recycling Industries, Inc. - Designation of
Preferences, Limitations and Relative Rights of the Series H
6%Secured Redeemable Convertible Preferred Stock of Recycling
Industries, Inc. Incorporated by reference to Exhibit 3(i).4 to
the Company's current report on Form 8-K as filed with the
Commission on December 22, 1997 and amended on February 11, 1998
on Form 8-K/A, Commission File No. 0-20179.
3(i).5 Articles of Amendment to the Amended and Restated Articles of
Incorporation of Recycling Industries, Inc. - Designation of
Preferences, Limitations and Relative Rights of the Series I 8%
Redeemable Convertible Preferred Stock of Recycling Industries,
Inc. Incorporated by reference to Exhibit 3(i).5 to the Company's
current report on Form 8-K as filed with the
54
<PAGE>
Commission on December 22, 1997and amended on February 11, 1998 on
Form 8-K/A, Commission File No.0-20179.
3(i).6 Articles of Amendment to the Amended and Restated Articles of
Incorporation of Recycling Industries, Inc. - Designation of
Preferences, Limitations and Relative Rights of the Series J
Redeemable Convertible Preferred Stock of Recycling Industries,
Inc. Incorporated by reference to Exhibit 3(i).1 to the Company's
current report on Form 8-K as filed with the commission on June
5, 1998, and amended on August 4, 1998, on Form 8-K/A,
Commission File No.0-20179.
3(i).7 Articles of Amendment to the Amended and Restated Articles of
Incorporation of Recycling Industries, Inc. - Designation of
Preferences, Limitations and Relative Rights of the Series K
Redeemable Convertible Preferred Stock of Recycling Industries,
Inc. Incorporated by reference to Exhibit 3(i).2 to the Company's
current report on Form 8-K as filed with the commission on June
5, 1998, and amended on August 4, 1998, on Form 8-K/A,
Commission File No.0-20179.
3(i).8 Articles of Amendment to the Amended and Restated Articles of
Incorporation of Recycling Industries, Inc. - Designation of
Preferences, Limitations and Relative Rights of the Series L
Redeemable Convertible Preferred Stock of Recycling Industries,
Inc. Incorporated by reference to Exhibit 3(i).3 to the Company's
current report on Form 8-K as filed with the commission on June
5, 1998, and amended on August 4, 1998, on Form 8-K/A,
Commission File No.0-20179.
3(i).9 Articles of Amendment to the Amended and Restated Articles of
Incorporation of Recycling Industries, Inc. - Designation of
Preferences, Limitations and Relative Rights of the Series M
Redeemable Convertible Preferred Stock of Recycling Industries,
Inc. Incorporated by reference to Exhibit 3(i).4 to the Company's
current report on Form 8-K as filed with the commission on June
5, 1998, and amended on August 4, 1998, on Form 8-K/A, Commission
File No.0-20179.
3.1 Amended and Restated Articles of Incorporation, incorporated by
reference to Exhibit 3.1 to the Company's Registration Statement
on Form S-1, filed May 3, 1996, as amended, Commission File
No.333-4574.
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.
4.1 Indenture dated December 4, 1997. Incorporated by reference to
Exhibit 4.1 to the Company's current report on Form 8-K as filed
with the Commission on December 22, 1997 and amended on February
11, 1998 on Form 8-K/A, Commission File No. 0-20179.
10.1 Credit Agreement dated December 4, 1997, among Recycling
Industries, Inc., a Colorado corporation, Nevada Recycling, Inc.,
a Nevada corporation, NR Holdings, Inc., a Nevada corporation,
Recycling Industries of Texas, Inc., a Colorado corporation,
Recycling Industries of Missouri, Inc., a Colorado corporation,
Recycling Industries of Georgia, Inc., a Colorado corporation,
Recycling Industries of Atlanta, Inc., a Colorado corporation,
Weissman Industries, Inc., an Iowa corporation, Recycling
Industries of South Carolina, Inc., a Colorado corporation,
Recycling Industries of Chesapeake, Inc., a Colorado corporation,
Recycling Industries of Greensboro, Inc., a Colorado corporation,
Recycling Industries of Winston-Salem, Inc., a Colorado
corporation, William Lans Sons Company, an Illinois corporation,
Recycling Industries of Wisconsin, Inc., a Colorado corporation,
and General Electric Capital Corporation, a New York corporation,
and Bank Boston, N.A. Incorporated by reference to Exhibit 10.1
to the Company's current report on form 8-K as filed with the
Commission on December 22, 1997 and amended on February 11, 1998
on Form 8-K/A, Commission File No. 0-20179.
55
<PAGE>
10.2 Second Amended Executive Employment Agreement between Recycling
Industries, Inc. and Thomas J. Wiens, effective July 1, 1998.*
10.3 Executive Employment Agreement between Recycling Industries, Inc.
and Brian L. Klemsz, effective July 1, 1998. *
10.4 Executive Employment Agreement between Recycling Industries, Inc.
and Harold J. Rouster, effective July 1, 1998. *
16 Letter from BDO Seidman, LLP to the Securities and Exchange
Commission. Incorporated by Reference to Exhibit 16 to the
company's current report on Form 8-K as filed with the Commission
on December 19, 1997.
16 Letter from BDO Seidman, LLP to the Securities and Exchange
commission Incorporated by Reference to Exhibit 16 to the
Company's current report on Form 8-K as filed with the Commission
on September 23, 1998.
27 Financial Data Schedule*
* Filed herewith
REPORTS ON FORM 8-K
1. Current report on Form 8-K dated December 22, 1997, reporting the
acquisitions of substantially all of the assets of Brenner, United,
Jacobson, Central and Grossman on December 5, 1997, and Lans on December 8,
1997. The 8-K/A includes the audited financial statements of Brenner,
United and Jacobson for the years ended December 31, 1994, 1995 and 1996,
the audited financial statements of Central for the years ended December
31, 1995 and 1996 and the eleven months ended November 30, 1997, and the
audited financial statements for Lans for the years ended June 30, 1995,
1996 and 1997.
2. Current report on Form 8-K dated December 19, 1997, reporting a change in
auditors for a subsidiary from AJ Robbins P.c. to BDO Seidman, LLP,
Commission File No. 0-20179.
3. Current report on Form 8-K/A dated February 11, 1998, reporting the
acquisitions of substantially all of the assets of Brenner, United,
Jacobson, Central and Grossman on December 5, 1997, and Lans on December 8,
1997. The 8-K/A includes the audited financial statements of Brenner,
United and Jacobson for the years ended December 31, 1994, 1995 and 1996,
the audited financial statements of Central for the years ended December
31, 1995 and 1996 and the eleven months ended November 30, 1997, and the
audited financial statements for Lans for the years ended June 30, 1995,
1996 and 1997.
4. Current report on Form 8-K dated April 30, 1998
5. Current report on Form 8-K dated June 1, 1998
6. Current report on Form 8-K dated June 5, 1998, reporting the acquisition of
substantially all of the assets of C&J Crushing, Inc., on May 21, 1998, Pro
Recycling, LLC and Republic Alloys, Inc. on May 22, 1998, and Peanut City
Iron & Metal Co., Inc., on May 23, 1998
7. Current report on Form 8-K dated June 12, 1998, reporting the acquisition
of all of the capital stock of Ferex Corporation on May 28, 1998, and
substantially all of the assets of McKinney Smelting, Inc. on May 29, 1998
56
<PAGE>
8. Current report on Form 8-K/A dated August 4, 1998, reporting the
acquisition of substantially all of the assets of Republic Alloys, Inc.
on May 22, 1998, Peanut City Iron & Metal Co., Inc. on May 28, 1998, C&J
Crushing, Inc., on May 21, 1998, Pro Recycling, LLC , all of the assets of
McKinney Smelting, Inc. on May 29, 1998 and the acquisition of all of the
capital stock of Ferex Corporation on May 28, 1998. The 8-K/A includes the
unaudited consolidated financial statements of Registrant for the year
ended September 30, 1997 and for the six months ended March 31, 1998;
audited financial statements of Republic Alloys, Inc. for the three months
ended March 31, 1998 and 1997, and for the years ended December 31, 1997
and 1996; audited financial statements of Peanut City for the three months
ended March 31, 1998 and 1997, and the year ended December 31, 1997;
unaudited financial statements of Ferex Corporation for the three months
ended March 31, 1998 and 1997, and audited financial statements for the
year ended December 31, 1997 and 1996.
9. Current report on Form 8-K/A dated August 5, 1998, reporting the
acquisition of substantially all of the assets of Republic Alloys, Inc.
on May 22, 1998, Peanut City Iron & Metal Co., Inc. on May 28, 1998, C&J
Crushing, Inc., on May 21, 1998, Pro Recycling, LLC , all of the assets of
McKinney Smelting, Inc. on May 29, 1998 and the acquisition of all of the
capital stock of Ferex Corporation on May 28, 1998; and reporting the
issuance of an additional $50 million of 13% Subordinated Notes, due in
2005. The 8-K/A includes the unaudited consolidated financial statements
of Registrant for the year ended September 30, 1997 and for the six months
ended March 31, 1998; audited financial statements of Republic Alloys, Inc.
for the three months ended March 31, 1998 and 1997, and for the years ended
December 31, 1997 and 1996; audited financial statements of Peanut City for
the three months ended March 31, 1998 and 1997, and the year ended December
31, 1997; unaudited financial statements of Ferex Corporation for the three
months ended March 31, 1998 and 1997, and audited financial statements for
the year ended December 31, 1997 and 1996
10. Current report on Form 8-K dated September 23, 1998, reporting the
resignation of BDO Seidman, LLC.
11. Current report on Form 8-K dated October 9, 1998, reporting the appointment
of AJ. Robbins, P.C.
57
<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, 1999 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, 1999 By: /s/ Thomas J. Wiens
---------------------------------------
Thomas J. Wiens, Principal
Executive Officer, Director
Date: January 13, 1999 By: /s/ Luke F. Botica
---------------------------------------
Luke F. Botica, Vice Chairman,
Director
Date: January 13, 1999 By: /s/ Brian L. Klemsz
---------------------------------------
Brian L. Klemsz, Principal
Financial Officer, Director
Date: January 13, 1999 By: /s/ Jerome B. Misukanis
---------------------------------------
Jerome B. Misukanis, Director
Date: January 13, 1999 By: /s/ Graydon H. Neher
---------------------------------------
Graydon H. Neher, Director
58
<PAGE>
Recycling Industries, Inc.
And Subsidiaries
Contents
Report of Independent Certified Public Accountants F-2
Financial Statements:
Consolidated Balance Sheets F-3 F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Stockholders' Equity F-6 F-8
Consolidated Statements of Cash Flows F-9
Summary of Accounting Policies
And Notes to Consolidated Financial Statements F-10 F-44
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
Recycling Industries, Inc.
Denver, Colorado
We have audited the accompanying consolidated balance sheet of Recycling
Industries, Inc., and Subsidiaries as of September 30, 1998 and the related
statements of operations, stockholders' equity and cash flows for the year
then ended. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Recycling
Industries, Inc. and Subsidiaries as of September 30, 1998, and the result of
their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As shown in the
financial statements, the Company incurred a net loss of $37.5 million during
the year ended September 30, 1998. As described more fully in Note 9 to the
financial statements, the Company is in default on its senior credit facility
and subordinated loan agreements, which cause the balances of $225.2 million
to become due on demand. Those conditions raise substantial doubt about the
Company's ability to continue as a going concern. The consolidated financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.
AJ. Robbins, PC.
CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS
Denver, Colorado
January 12, 1999
F-2
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
ASSETS (Note 9)
- - ----------------------------------------------------------------------------
September 30, 1998 1997
- - ----------------------------------------------------------------------------
CURRENT ASSETS:
Cash $ 750 $ 746
Accounts receivable, net (Note 1) 31,212 8,820
Inventories (Note 3) 11,473 4,183
Deferred income taxes (Note 6) - 810
Prepaid expenses and other 4,613 445
- - ----------------------------------------------------------------------------
TOTAL CURRENT ASSETS 48,048 15,004
- - ----------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, NET (Note 4) 172,953 33,227
- - ----------------------------------------------------------------------------
OTHER ASSETS:
Notes receivable, related party (Note 10) 1,925 85
Deferred income taxes (Note 6) - 585
Goodwill, net of amortization 66,296 2,749
Other assets, net of amortization (Note 5) 15,059 3,429
- - ----------------------------------------------------------------------------
TOTAL OTHER ASSETS 83,280 6,848
- - ----------------------------------------------------------------------------
TOTAL ASSETS $ 304,281 $ 55,079
- - ----------------------------------------------------------------------------
See accompanying summary of accounting
policies and notes to consolidated financial statements.
F-3
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
- - -----------------------------------------------------------------------------------
<S> <C> <C>
September 30, 1998 1997
- - -----------------------------------------------------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt (Note 9) $ 217,204 $ 3,300
Accounts payable 9,468 2,661
Accounts payable - related parties - 438
Settlement liability (Note 13) 8,150 -
Accrued interest 3,575 24
Accrued payroll 2,081 396
Other current liabilities 8,655 629
- - -----------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 249,133 7,448
- - -----------------------------------------------------------------------------------
LONG-TERM LIABILITIES:
Long-term debt, less current maturities (Note 9) 4,335 29,456
Other long-term liabilities 10,625 -
- - -----------------------------------------------------------------------------------
TOTAL LONG-TERM LIABILITIES 14,960 29,456
- - -----------------------------------------------------------------------------------
TOTAL LIABILITIES 264,093 36,904
- - -----------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 13)
- - -----------------------------------------------------------------------------------
Redeemable common stock, $.001 par value,
363,636 shares issued and outstanding (Note 2) 1,500 1,500
- - -----------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (Notes 7, 10 and 12):
Preferred stock, no par value, 10,000,000
shares authorized 76,145 and 10,000 shares issued
and outstanding 23,183 500
Common Stock, $.001 par value, 50,000,000 shares
authorized, 21,325,249 and 14,149,780 shares issued
and outstanding 21 14
Additional paid-in capital 63,628 26,846
Accumulated deficit (48,144) (10,685)
- - -----------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 38,688 16,675
- - -----------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 304,281 $ 55,079
- - -----------------------------------------------------------------------------------
<FN>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
</FN>
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Thousands of dollars except per share amounts)
- - ----------------------------------------------------------------------------------------------------------
Years Ended September 30, 1998 1997 1996
- - ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales (Note 8) $ 239,359 $ 62,424 $ 27,619
Cost of sales and operating expenses 215,592 55,179 26,590
- - ----------------------------------------------------------------------------------------------------------
Gross profit 23,767 7,245 1,029
Selling, general and administrative expenses, net (Note 13) 28,978 4,221 3,253
- - ----------------------------------------------------------------------------------------------------------
Operating income (loss) (5,211) 3,024 (2,224)
- - ----------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest expense (20,406) (2,616) (732)
Miscellaneous (35) 73 4
- - ----------------------------------------------------------------------------------------------------------
TOTAL OTHER INCOME (EXPENSE) (20,441) (2,543) (728)
- - ----------------------------------------------------------------------------------------------------------
Earnings (loss) before income tax benefit (expense)
and extraordinary loss (25,652) 481 (2,952)
Benefit (provision) for income taxes (Note 6) - 595 (9)
- - ----------------------------------------------------------------------------------------------------------
Earnings (loss) before extraordinary loss (25,652) 1,076 (2,961)
Extraordinary loss (Note 1) (11,807) - -
- - ----------------------------------------------------------------------------------------------------------
NET EARNINGS (LOSS) $ (37,459) $ 1,076 $ (2,961)
- - ----------------------------------------------------------------------------------------------------------
Net earnings (loss) $ (37,459) $ 1,076 $ (2,961)
Preferred stock dividends (Note 12) 897 364 -
- - ----------------------------------------------------------------------------------------------------------
Net earnings (loss) available to common shareholders $ (38,356) $ 712 $ (2,961)
- - ----------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) PER SHARE:
BASIC EARNINGS (LOSS) PER COMMON SHARE
Before extraordinary item $ (1.44) 0.05 $ (0.29)
Extraordinary item (0.64) - -
- - ----------------------------------------------------------------------------------------------------------
BASIC EARNINGS (LOSS) PER COMMON SHARE $ (2.08) $ 0.05 $ (0.29)
- - ----------------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 18,414,565 13,529,644 10,153,502
- - ----------------------------------------------------------------------------------------------------------
DILUTED EARNINGS (LOSS) PER COMMON SHARE
Before extraordinary item $ (1.44) 0.05 $ (0.29)
Extraordinary item (0.64) - -
- - ----------------------------------------------------------------------------------------------------------
DILUTED EARNINGS (LOSS) PER COMMON SHARE $ (2.08) $ 0.05 $ (0.29)
- - ----------------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE DILUTED COMMON SHARES OUTSTANDING 18,414,565 15,170,081 10,153,502
- - ----------------------------------------------------------------------------------------------------------
<FN>
See accompanying summary of accounting
policies and notes to consolidated financial statements.
</FN>
</TABLE>
F-5
<TABLE>
<CAPTION>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Thousands of dollars)
- - -----------------------------------------------------------------------------------------------------------------------------------
Additional
Preferred Stock Common Stock Paid-in Accumulated
Years Ended September 30, 1996, 1997 and 1998 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 in 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 12) - - 1,070,636 1 2,395 - 2,396
Conversion of bridge loans (Note 12) - - 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 12) - - 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 12) (13,000) (1,312) (120,000) - (1,088) - (2,400)
Redemption of Common Stock (Note 12) - - (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
- - ----------------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying summary of accounting
policies and notes to consolidated financial statements.
</FN>
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Thousands of dollars)
- - -------------------------------------------------------------------------------------------------------------
Additional
Preferred Stock Common Stock Paid-in
Years Ended September 30, 1996, 1997 and 1998 Shares Amount Shares Amount Capital
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances, September 30, 1996 - $ - 13,430,793 $ 13 $ 25,547
Preferred Stock Series C issued for cash (Note 12) 10,000 1,000 - - -
Redemption of Preferred Stock Series C (Note 12) (10,000) (1,000) - - -
Preferred Stock Series D issued for acquisitions (Note 12) 10,000 500 - - -
Common Stock issued in private offering (Note 12) - - 500,000 1 1,249
Common Stock issued on exercise or - - 150,000 - 135
conversion of Series I warrants - - 133,800 - 27
Common Stock issued on exercise or
conversion of Dealer warrants - - 1,187 - 7
Common Stock repurchased (Note 12) - - (66,000) - (119)
Preferred dividends paid (Note 12) - - - - -
Net earnings - - - - -
- - -------------------------------------------------------------------------------------------------------------
BALANCES, SEPTEMBER 30, 1997 10,000 $ 500 14,149,780 $ 14 $ 26,846
- - -------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------
Accumulated
Years Ended September 30, 1996, 1997 and 1998 (Deficit) Total
- - -----------------------------------------------------------------------------------------
<S> <C> <C>
Balances, September 30, 1996 $ (11,397) $ 14,163
Preferred Stock Series C issued for cash (Note 12) - 1,000
Redemption of Preferred Stock Series C (Note 12) - (1,000)
Preferred Stock Series D issued for acquisitions (Note 12) - 500
Common Stock issued in private offering (Note 12) 1,250
Common Stock issued on exercise or 135
conversion of Series I warrants - 27
Common Stock issued on exercise or
conversion of Dealer warrants - 7
Common Stock repurchased (Note 12) - (119)
Preferred dividends paid (Note 12) (364) (364)
Net earnings 1,076 1,076
- - -----------------------------------------------------------------------------------------
BALANCES, SEPTEMBER 30, 1997 $ (10,685) $16,675
- - -----------------------------------------------------------------------------------------
<FN>
See accompanying summary of accounting
policies and notes to consolidated financial statements.
</FN>
</TABLE>
F-7
<TABLE>
<CAPTION>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Thousands of dollars)
- - -----------------------------------------------------------------------------------------------------------------------
Additional
Preferred Stock Common Stock Paid-in Accumulated
Years ended September 30, 1996, 1997 and 1998 Shares Amount Shares Amount Capital (Deficit) Total
- - ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, September 30,1997 10,000 $ 500 14,149,780 $ 14 $26,846 $ (10,685) $ 16,675
Preferred Stock issued for
acquisitions (Notes 2 and 12):
Series E 10,000 3,000 3,000
Series F 14,000 3,500 3,500
Series G 14,000 3,500 3,500
Series H 11,378 5,660 5,660
Series I 9,072 3,175 3,175
Series J 1,005 503 503
Series K 5,080 2,540 2,540
Series L 580 290 290
Series M 1,030 515 515
Common Stock issued for acquisitions,
net of issuance costs (Notes 2 and 12) - - 1,484,983 2 14,328 - 14,330
Common Stock issued for cash, net of
issuance costs (Note 12) - - 1,666,666 1 9,474 - 9,475
Common stock issued on exercise of
options and warrants, net of issuance
costs (Notes 7 and 12) - - 4,023,820 4 4,870 - 4,874
Issuance of warrants in connection
with debt financing (Notes 9 and 12) - - - - 9,007 - 9,007
Preferred stock dividends - - - - (897) - (897)
Net loss - - - - - (37,459) (37,459)
- - -----------------------------------------------------------------------------------------------------------------------
BALANCES, SEPTEMBER 30, 1998 76,145 $ 23,183 21,325,249 $ 21 $63,628 $ (48,144) $ 38,688
- - -----------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying summary of accounting
policies and notes to consolidated financial statements.
</FN>
</TABLE>
F-8
<PAGE>
<TABLE>
<CAPTION>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
- - -----------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------
Years Ended September 30, 1998 1997 1996
- - -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities:
Net earnings (loss) $(37,459) $ 1,076 $(2,961)
Adjustments to reconcile net earnings (loss)
to net cash used in operating activities:
Depreciation and amortization 9,769 2,592 1,197
Extraordinary loss 11,807 - -
Other operating activities - (1,472) 230
Deferred income taxes - (595) -
Changes in assets and liabilities, net of
the effect of business acquisitions:
Accounts receivable 151 (4,355) (2,199)
Inventories 4,213 (1,498) 657
Prepaid expenses and other (6,801) (53) (244)
Accounts payable 3,558 (73) 1,531
Liabilities, exclusive of debt 10,495 391 240
- - ------------------------------------------------------------------------- -------------
Net cash used in operating activities (4,267) (3,987) (1,549)
- - -----------------------------------------------------------------------------------------
Investing Activities:
Capital expenditures, net (7,862) (2,962) (1,561)
Note receivable, related party (1,840) (85) 146
Other assets 2,942 (1,197) 19
Acquisitions, net of equity issued (185,789) (11,212) (11,568)
Cash acquired in acquisitions 3,083 - -
- - ------------------------------------------------------------------------- -------------
Net cash used in investing activities (189,466) (15,456) (12,964)
- - -----------------------------------------------------------------------------------------
Financing Activities:
Proceeds from borrowings 232,509 26,867 10,215
Principal payments on borrowings (37,379) (8,229) (2,614)
Other long-term liabilities 203 - -
Prepayment penalty on debt (2,532) - -
Loan fees paid (13,364) (835) (429)
Dividends paid (50) (364) -
Net proceeds from issuance of stock 14,350 2,419 16,679
Redemption of preferred stock - (1,000) (8,072)
Common stock repurchased - (119) -
- - ------------------------------------------------------------------------- -------------
Net cash provided by financing activities 193,737 18,739 15,779
- - -----------------------------------------------------------------------------------------
Increase (decrease) in cash 4 (704) 1,266
Cash, beginning of period 746 1,450 184
- - -----------------------------------------------------------------------------------------
Cash, end of period $ 750 $ 746 $ 1,450
- - -----------------------------------------------------------------------------------------
<FN>
See accompanying summary of accounting
policies and notes to consolidated financial statements.
</FN>
</TABLE>
F-9
<PAGE>
Recycling Industries, Inc.
and Subsidiaries
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.
The Company's financial statements have been prepared in conformity with
principles of accounting applicable to a going concern. These principles
contemplate the realization of assets and liquidation of liabilities in the
normal course of business. During the year ended September 30, 1998, the Company
sustained a substantial net loss. This net loss caused the Company to be in
violation of its senior credit facility and subordinated debt agreements, due to
among other items, the Company's inability to meet certain financial ratio
covenants and to make certain interest payments. Provisions of the senior credit
facility and subordinated debt agreements state that in event of default, or
events that might lead to default, the lenders have the option to make all notes
and loans due and owing immediately. As of the date of this report, no action
has been taken by the lenders in this regard. Amounts due to the lenders have
been classified in the financial statements in accordance with provisions of the
credit agreements. The resulting effect is the classification of long term debt
totaling $217.1 million (representing $225.2 million due under the agreements
less $8.1 million of unamortized discount) as a current liability. The Company
has entered into negotiations with the lenders toward restructuring the
obligations. Additionally, management has instituted measures to mitigate future
losses including suspending activities of marginal operations and eliminating
numerous positions, and is in the process of investigating additional and or
alternate sources of financing.
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, 1998 and 1997, accounts
receivable balances from significant customers were $2.2 million and $3.3
million or 7% and 38%, respectively, of the total accounts receivable balance.
Ongoing credit evaluations of customers' financial condition are performed and,
generally, no collateral is required. The Company maintains an allowance for
potential credit losses and such losses, in the aggregate, have not exceeded
management's expectations. At September 30, 1998 and 1997 the allowance for
doubtful accounts was $1.6 million and $4,000 respectively. Customers are
located throughout the Midwest, Southeast and Western regions of the United
States and Mexico. Sales to one customer in Mexico comprised 1.1%, 11.5% and
15.4% of consolidated net sales for the years ended September 30, 1998, 1997 and
1996, respectively.
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
was estimated based on market values for debt with similar terms.
Management believes that the fair value of that debt approximates its
carrying value.
F-10
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. In
addition, if future costs are estimated to exceed future sales, an allowance for
losses equal to the excess is provided by a charge to current operations. At
September 30, 1998, the Company recorded a $4.5 million charge to cost of sales
as a result of reducing inventory to net realizable value.
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 and
equipment leases, which are deemed to be installment purchase obligations, have
been capitalized and included in the property and equipment accounts.
Maintenance, repairs and minor renewals are charged to operations while major
renewals and betterments are capitalized.
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 40 years.
Recoverability is reviewed annually or sooner if events or circumstances
indicate that the carrying amount may exceed fair value. Recoverability is
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. At September 30, 1998, the
Company reduced $1.9 million of goodwill in connection with Company's southern
Texas facility.
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. At September 30, 1998, the Company wrote
off $3.2 million in acquisition costs.
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
Basic earnings (loss) per common share are computed by dividing net earnings,
after deducting preferred stock dividends, by the weighted average number of
common shares outstanding during the period.
Dilutive common equivalent shares consist of convertible preferred stock, 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. Included in
accounts payable are outstanding checks in excess of cash balances of $1.1
million at September 30, 1998.
F-11
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.
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.
Commodity Contracts
The Company enters into copper futures contracts to manage its exposure to
fluctuations in the copper markets. At September 30, 1998, the Company had net
contracts to purchase 0.8 million pounds of copper. Based upon the correlation
of commodity types and contract dates, these contracts are accounted for as
hedges. Realized and unrealized gains and losses on futures contracts designated
as hedges are deferred and are ultimately recognized as part of the measurement
of the hedged transactions. At September 30, 1998, the amount of net deferred
gains and losses on futures contracts qualifying as hedges were not material.
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 can be
reasonably estimated. In conjunction with the acquisitions completed during the
year ended September 30, 1998, $10.9 million of preferred stock and cash were
placed in or has been allocated to escrow accounts at closing for estimated
future environmental remediation costs. In addition to the amounts escrowed, the
Company accrued as other long-term liabilities an additional $6 million for
potential environmental contamination costs associated with the acquisitions
completed during the year.
F-12
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 recorded an extraordinary loss of $11.8 million, net of an income
tax benefit, during the year ended September 30, 1998. This extraordinary loss
was comprised of $8.2 million for a litigation settlement reserve and $3.6
million for the extinguishment of $32.1 million of debt.
Recent Accounting Pronouncements
The Company has implemented Financial Accounting Standards ("FAS") No. 128,
"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 reflect the potential dilution of securities that could share in the
earnings of the entity, similar to fully diluted earnings per share. In loss
periods, dilutive common equivalent shares are excluded, as the effect would be
anti-dilutive.
The Company is required to implement FAS No. 130 "Reporting Comprehensive
Income" and FAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information" in fiscal 1999. 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 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.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" which standardizes the disclosure
requirements for pensions and other postretirement benefits and requires
additional information on changes in the benefit obligations and fair values of
plan assets that will facilitate financial analysis. SFAS No. 132 is effective
for years beginning after December 15, 1997 and requires comparative information
for earlier years to be restated, unless such information is not readily
available. Management believes the adoption of this statement will have no
material impact on the Company's financial statements.
F-13
In June 1998, the Financial Accounting Standards Board issued FAS No.
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. FAS
No. 133 requires companies to recognize all derivatives contracts as
either assets or liabilities in the balance sheet and to measure them at
fair value. If certain conditions are met, a derivative may be
specifically designated as a hedge of the: (i) exposure to changes in
the fair value of a recognized asset or liability or an unrecognized
firm commitment ("fair value hedges"), (ii) exposure to variable cash
flows of a forecasted transaction ("cash flow hedges"), or (iii)
foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security, or (iii) a
foreign-currency-denominated forecasted transaction ("foreign currency
hedges"). The objective of hedge accounting is to match the timing of
gain or loss recognition on the hedging derivative with the recognition of
(i) the changes in the fair value of the hedged asset or liability that are
attributable to the hedged risk or (ii) the earnings effect of the hedged
forecasted transaction. For a derivative not designated as a hedging
instrument (e.g., derivative contracts entered into for speculative
purposes), the gain or loss is recognized in income in the period of change.
FAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. The Company currently plans to adopt FAS No. 133 on
October 1, 1999. On that date, hedging relationships will be
designated anew and documented. The Company has not yet evaluated the
financial statement impact of adopting FAS No. 133.
Reclassifications
Certain balances in the 1996 and 1997 financial statements have been
reclassified to conform to the 1998 presentation. The reclassifications had no
effect on financial condition, results of operations, or cash flows.
2. ACQUISITIONS
The following acquisitions were accounted for using the purchase method of
accounting. The results of operations of the businesses acquired have been
included in the Company's consolidated financial statements since the date of
acquisition.
On May 29, 1998, the Company completed the acquisition of substantially all of
the assets of McKinney Smelting, Inc. ("McKinney"), with operations in the
McKinney, Texas area. The assets acquired from McKinney consist of heavy
equipment, tools and rolling stock used in the business of recycling ferrous and
non-ferrous metals. The total purchase price for McKinney was $2.9 million in
cash.
On May 28, 1998, the Company acquired all of the capital stock of Ferex
Corporation ("Ferex"), headquartered in Tyler, Texas. Ferex is a metals recycler
and auto crusher with operations in Arkansas, Oklahoma and Texas. Ferex operates
16 facilities, a scrap brokering business, six mobile auto crushing units that
operate in a six state geographic region, one non-ferrous shredder and one
non-ferrous wire chopper operation. The total aggregate purchase price for Ferex
was $46.3 million, comprised of $28.9 million in cash, 556,944 shares of the
Company's common stock, $0.001 par value per share ("Common Stock"), having a
stated value of $6.125 per share or $3.4 million on May 28, 1998 and $14.0
million of assumed liabilities.
F-14
On May 28, 1998, the Company acquired substantially all of the scrap metals
recycling assets and business of Peanut City Iron & Metal Co., Inc. ("Peanut
City"), a privately held metals recycler with operations in the Suffolk,
Virginia area. The assets acquired from Peanut City consist of heavy equipment,
tools and rolling stock used in the business of recycling ferrous and
non-ferrous metals. The Company also purchased from Peanut City approximately
three acres of real property, buildings and improvements used in the metals
recycling business. The total purchase price for Peanut City was $3.4 million,
comprised of $2.9 million in cash and 1,005 shares of the Company's Series J
Redeemable Convertible Preferred Stock having a stated value of $0.5 million, or
$500 per share.
On May 22, 1998, the Company acquired substantially all of the scrap metals
recycling assets and business of Republic Alloys, Inc. ("Republic"), a privately
held metals recycler and crane operator with operations in the Charlotte, North
Carolina area. The assets acquired from Republic consist of heavy equipment,
tools and rolling stock used in the business of recycling ferrous and
non-ferrous metals. The Company also purchased approximately 13.5 acres of real
property, buildings and improvements used in the metals recycling business. The
total purchase price for Republic was $12.9 million, comprised of $10.2 million
in cash, 5,080 shares of the Company's Series K Redeemable Convertible Preferred
Stock having a stated value of $2.5 million, or $500 per share, and 30,000
shares of the Company's Common Stock, $.001 par value per share, having a stated
value of $0.2 million, or $5.62 per share.
On May 22, 1998, the Company acquired substantially all of the scrap metals
recycling assets and business of Pro Recycling, L.L.C. ("Pro Recycling"), a
privately-held metals recycler with operations in the Milwaukee, Wisconsin area.
The assets acquired from Pro Recycling consist primarily of heavy equipment,
tools and rolling stock used in the business of recycling ferrous and
non-ferrous metals. Also as part of the transaction the Company also purchased
from Lewinsky Iron and Metal and AA Investment three separate parcels of real
property, buildings and improvements used in the metals recycling business of
Pro Recycling. The total purchase price for Pro Recycling was $3.0 million,
comprised of $2.5 million of cash and 1,030 shares of the Company's Series M
Redeemable Convertible Preferred Stock valued at $0.5 million, or $500 per
share.
On May 21, 1998, the Company acquired substantially all of the scrap metals
recycling assets and business of C&J Crushing, Inc. ("C&J Crushing"), a
privately held metals recycler with operations in the Landis, North Carolina
area. The assets acquired from C&J Crushing consist primarily of heavy
equipment, tools and rolling stock used in the business of recycling ferrous and
non-ferrous metals. The Company also purchased from C&J Crushing approximately
3.5 acres of real property, buildings and improvements used in the metals
recycling business. The total purchase price for C&J Crushing was $1.5 million,
comprised of $1.2 million of cash and 580 shares of the Company's Series L
Redeemable Convertible Preferred Stock valued at $0.3 million, or $500 per
share.
On December 8, 1997, the Company acquired from Bertram Lans, Bruce Lans and
Scott Lans all of the issued and outstanding capital stock of Wm. Lans Sons'
Co., Inc. ("Lans"), a privately held metals recycler with operations in the
South Beloit, Illinois, area. The assets owned by Lans consist of heavy
equipment, tools and rolling stock used in the business of recycling ferrous and
non-ferrous metals. The Company also purchased from an affiliate of Lans certain
real property, buildings and leasehold improvements used in the metals recycling
business. The total adjusted purchase price for Lans was $25.2 million,
comprised of $22.0 million of cash and 9,072 shares of the Company's Series I 8%
Redeemable Convertible Preferred Stock (the "Series I Preferred") having a
stated value of $3.2 million. If not earlier redeemed or converted on December
8, 1999, the Series I Preferred will automatically convert into that number of
shares of Common Stock having a market value on the date of conversion of not
less than $3.2 million.
F-15
On December 5, 1997, the Company acquired substantially all of the scrap metals
recycling assets and business of Brenner Companies, Inc. ("Brenner"), a
privately held metals recycler with operations in the Winston-Salem, North
Carolina area. The assets acquired from Brenner consist of heavy equipment,
tools and rolling stock used in the business of recycling ferrous and
non-ferrous metals. The Company also purchased from Brenner certain real
property, buildings and leasehold improvements used in the metals recycling
business. The total purchase price for the Brenner assets was $23.8 million,
comprised of $15.7 million of cash, 14,000 shares of the Company's Series F 6.5%
Redeemable Convertible Preferred Stock (the "Series F Preferred") having a
stated value of $3.5 million, 14,000 shares of the Company's Series G 6.5%
Redeemable Convertible Preferred Stock (the "Series G Preferred") having a
stated value of $3.5 million and the assumption of $1.1 million of Brenner's
deferred compensation liabilities.
If not earlier redeemed or converted on December 5, 2000, the Series F Preferred
will automatically convert into that number of shares of Common Stock having an
aggregate market value on the date of conversion of not less than $3.5 million.
Brenner has the right to require the Company to find a purchaser of the shares
of common stock received upon conversion of the Series F Preferred (the "Series
F Conversion Shares") on or before December 5, 2000. If the sale of the Series F
Conversion Shares yields net proceeds of less than $3.5 million, the Company
will pay the difference to Brenner. If not earlier redeemed or converted on
December 5, 2000, the Series G Preferred will automatically convert into that
number of shares of Common Stock having an aggregate market value on the date of
conversion of not less than $3.5 million.
On December 5, 1997, the Company acquired substantially all of the scrap metals
recycling assets and business of Grossman Brothers Company, Inc. and Milwaukee
Metal Briquetting Co., Inc. (collectively "Grossman"). Grossman was a privately
held metals recycler with operations in the Milwaukee, Wisconsin area. The
assets acquired from Grossman consisted of heavy equipment, tools and rolling
stock used in the business of recycling ferrous and non-ferrous metals. The
Company is leasing, pursuant to a capital lease with an option to purchase, the
real property, buildings and leasehold improvements used in the metals recycling
business acquired from Grossman. The total purchase price for Grossman was $7.4
million, comprised of $3.7 million of cash, a capital lease with a present value
of $2.7 million, 98,039 shares of Common Stock valued at $0.7 million which will
be held in escrow during the lease term, and the assumption of $0.3 million of
Grossman's liabilities.
On December 5, 1997, the Company acquired substantially all of the scrap metals
recycling assets and business of Central Metals Company, Inc. ("Central"), a
privately held metals recycler with operations in the Atlanta, Georgia area. The
assets acquired from Central consist of heavy equipment, tools and rolling stock
used in the business of recycling ferrous and non-ferrous metals. The real
property and buildings owned and used by Central in the metals recycling
business have been placed into escrow and are being leased by the Company until
Central can provide clear title to these assets, at which time the Company will
complete the purchase of the real property and buildings. The Company is leasing
certain equipment used in the metals recycling business from an affiliate of
Central. The total purchase price for Central was $31.0 million, comprised of
$20.7 million of cash and 800,000 shares of Common Stock, having an agreed value
of $12.50 per share or $10 million. The Company also assumed $0.3 million of
Central's liabilities.
The Company has guaranteed that the aggregate market value of the 800,000 shares
of Common Stock issued to Central will be at least $10 million on December 4,
1999. If the market value of the Common Stock is less than $10 million, the
Company will issue shares of Common Stock to Central having a market value equal
to the difference between $10 million and the market value of the 800,000 shares
of Common Stock initially issued to Central.
F-16
In connection with the acquisition, Central was issued warrants to acquire up to
200,000 shares of the Company's Common Stock for $15.00 per share, exercisable
upon satisfaction of certain financial performance conditions related to the
operations of the acquired subsidiary (the "Contingent Warrants"). The exercise
price per share of the Contingent Warrants is subject to adjustment at the time
of exercise so that the aggregate spread between the exercise price of all
Contingent Warrants and the market value of the Common Stock received upon
exercise of the Contingent Warrants is not less than $1 million. The value of
the Contingent Warrants will be reflected as an adjustment to the purchase
price, as an increase in goodwill, when the financial performance conditions are
met by Central.
On December 5, 1997, the Company acquired substantially all of the scrap metals
recycling assets and business of Money Point Land Holding Corporation and Money
Point Diamond Corporation (collectively "Jacobson"). Jacobson was a privately
held metals recycler with operations in the Chesapeake, Virginia area. The
assets acquired from Jacobson consist of heavy equipment, tools and rolling
stock used in the business of recycling ferrous and non-ferrous metals.
The Company also purchased from Jacobson certain real property, buildings and
leasehold improvements used in the metals recycling business. The total purchase
price for Jacobson was $19.9 million, comprised of $16.9 million of cash and
10,000 shares of the Company's Series E Redeemable Convertible Preferred Stock
(the "Series E Preferred") having a stated value of $3.0 million.
If not earlier redeemed or converted, on December 5, 2000, the Series E
Preferred will automatically convert into that number of shares of Common Stock
having an aggregate market value on the date of conversion of not less than $3.0
million. Unless Jacobson elects to retain the shares of Common Stock received
upon conversion of the Series E Preferred (the "Series E Conversion Shares"),
the Company will assist Jacobson in selling the Series E Conversion Shares on or
before January 4, 2001. If the sale of the Series E Conversion Shares yields net
proceeds of less than $3,000,000, the Company will pay the difference to
Jacobson.
On December 5, 1997, the Company acquired substantially all of the scrap metals
recycling assets and business of United Metal Recyclers, Inc. ("United"), a
privately held metals recycler with operations in the Kernersville, North
Carolina area. The assets acquired from United consist of heavy equipment, tools
and rolling stock used in the business of recycling ferrous and non-ferrous
metals. The Company also purchased from United certain real property, buildings
and leasehold improvements used in the metals recycling business and United's
50% interest in another metals recycling facility located in the Smithfield,
North Carolina area. The total purchase price for the United assets and United's
50% interest in D.H. Griffin was $42.0 million, comprised of $36.0 million of
cash, 11,378 shares of the Company's Series H 6% Secured Redeemable Convertible
Preferred Stock having a stated value of $5.7 million and the assumption of $0.3
million of United's liabilities.
If not earlier redeemed or converted on December 5, 2000, the Series H Preferred
will automatically convert into that number of shares of Common Stock having an
aggregate market value on the date of conversion of not less than $5.7 million.
United has the right to require the Company to find a purchaser of the shares of
common stock received upon conversion of the Series H Preferred (the "Series H
Conversion Shares") on or before December 5, 2000. If the sale of the Series H
Conversion Shares yields net proceeds of less than $5.7 million, the Company
will pay the difference to United.
On April 15, 1998, the Company acquired for approximately $8.0 million the
remaining 50% interest of United Metal - D. H. Griffin Recyclers L.L.C. ("D. H.
Griffin") located in Smithfield, North Carolina. The purchase price was financed
with proceeds from the Company's acquisition line of credit. The initial 50%
interest was acquired in December 1997 as part of the Company's acquisition of
United Metal Recyclers. The Company will continue the metals recycling
operations of D. H. Griffin.
F-17
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 public 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 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 results of operations of Anglo are included in the accompanying
financial statements from the date of acquisition.
F-18
On December 5, 1997, in connection with the December 1997 and May 1998
acquisitions referred to above, the Company and all of its operating
subsidiaries entered into a $150 million Senior Credit Facility ("Credit
Facility") with General Electric Capital Corporation and BankBoston, N.A. as
agents for the lenders. The Credit Facility is comprised of a $45 million
revolving credit facility, a $40 million term loan due December 5, 2003, with
interest and principal payable quarterly, a $40 million term loan due on the
earlier of December 5, 2005 or six months prior to the maturity of the
Subordinated Notes discussed below with interest and principal payable
quarterly, and a $25 million acquisition line of credit due December 5, 2003,
with interest and principal payable quarterly. The notes bear interest at either
(i) the higher of (a) prime plus .75% or (b) the Federal Funds rate plus 50
basis points per annum plus .75%, or (ii) at the option of the Company upon
certain conditions, the LIBOR rate plus 2.25%. The proceeds from the Credit
Facility are secured by substantially all of the Company's assets and are to be
used in part for acquisitions.
On May 29, 1998, and December 5, 1997, in connection with the acquisitions
referred to above, the Company issued $50 million and $60 million, respectively,
in Senior Subordinated Notes (the "Subordinated Debt"), the proceeds of which
were used in part for acquisitions. The Subordinated Debt is guaranteed by all
of the Company's operating subsidiaries. The Subordinated Debt bears interest at
13% and matures in December 2005.
In connection with the Credit Facility and the issuance of the Subordinated
Debt, the Company sold 1,666,666 shares of its Common Stock for an aggregate of
$10 million to various accredited investors in a transaction exempt from the
registration requirements of the Securities Act of 1933, as amended. The $10
million in proceeds were used in part for acquisitions.
F-19
<PAGE>
The following summarized unaudited pro forma results of operations assumes the
acquisition of McKinney, Ferex, Peanut City, Republic, Pro Recycling, C&J
Crushing, Lans, Brenner, Grossman, Central, Jacobson, United, D.H. Griffin, AIC,
ARC, Weissman, Mid-America and Anglo had occurred at the beginning of the year
acquired and the preceding year(s).
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------------------
Years ended September 30, 1998 1997 1996
- - ---------------------------------------------------------------------------------------------------------------
(Thousands of dollars except per share amounts)
<S> <C> <C> <C>
Net sales $ 325,119 $ 344,405 $ 294,765
Depreciation and amortization 14,893 12,559 11,010
Operating income 5,509 34,175 11,534
Earnings (loss) before income taxes and extraordinary loss (24,123) 9,402 (16,273)
Benefit (provision) for income taxes - (3,317) 6,117
Extraordinary loss (11,807) (2,414) (2,414)
Net earnings (loss) (35,930) 3,671 (12,570)
Preferred stock dividends 1,089 1,432 1,089
Net income (loss) available to common shareholders $ (37,019) $ 2,239 $ (13,659)
- - ---------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per common share:
Earnings before extraordinary item $ (1.17) $ 0.28 $ (0.85)
Extraordinary item (0.55) (0.14) (0.18)
- - ---------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per common share $ (1.72) $ 0.14 $ (1.03)
- - ---------------------------------------------------------------------------------------------------------------
Weighted average number of common shares outstanding 21,566,000 16,681,000 13,305,000
- - ---------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per common share (2):
Earnings before extraordinary item $ (1.17) $ 0.20 $ (0.85)
Extraordinary item (0.55) (0.09) (0.18)
- - ---------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per common share $ (1.72) $ 0.11 $ (1.03)
- - ---------------------------------------------------------------------------------------------------------------
Weighted average number of common shares outstanding 21,566,000 25,663,000 13,305,000
- - ---------------------------------------------------------------------------------------------------------------
EBITDA (1) $ 20,402 $ 46,734 $ 22,544
- - ---------------------------------------------------------------------------------------------------------------
<FN>
(1) "EBITDA" represents, for any period, operating income before interest
expense, income taxes, depreciation and amortization. EBITDA is presented
because it is a widely accepted financial indicator of a company's ability
to service and/or incur indebtedness. Management believes that presentation
of EBITDA is helpful to investors. However, EBITDA should not be considered
as an alternative to net income as a measure of the Company's operating
results or cash flows as a measure of liquidity. In addition, although the
EBITDA measure of performance is not recognized under generally accepted
accounting principles, it is widely used by industrial companies as a
general measure of a company's operating performance because it assists in
comparing performance on a relatively consistent basis across companies
without regard to depreciation and amortization, which can vary
significantly depending on accounting methods (particularly where
acquisitions are involved) or non-operating factors such as historical cost
bases. Because EBITDA is not calculated identically by all companies, the
presentation herein may not be comparable to other similarly titled
measures of other companies.
F-20
(2) Potentially dilutive issues not included in the computation of pro forma
diluted earnings per common share: For the fiscal year ended September 30,
1998, warrants and options to acquire 1,050,071 shares of common stock, at
exercise prices of $4.00 to $75.00 per share, were not included in the
computation of diluted EPS because the warrants' and options' exercise
prices were greater than the average market price of the common shares. In
addition, warrants and options to acquire 9,691,029 shares of common stock
at exercise prices of $0.01 to $6.61 per share were not included in the
computation of diluted EPS as the effect would be anti-dilutive. Preferred
shares convertible into 4,080,383 common shares, at various conversion
rates, were not included in the computation of diluted EPS as the effect
would be anti-dilutive. Contingently issuable common shares of 5,473,526
were not included in the computation of diluted EPS as the effect would be
anti-dilutive. Redeemable common shares of 363,636 were not included in the
computation of diluted EPS as the effect would be anti-dilutive.
For the fiscal year ended September 30, 1997, warrants and options to
acquire 4,845,541 shares of common stock at exercise prices of $1.63 to
$75.00 per share were not included in the computation of diluted EPS
because the warrants' and options' exercise prices were greater than the
average market price of the common shares. Preferred shares convertible
into 3,831,068 common shares, at various conversion rates, were not
included in the computation of diluted EPS as the effect would be
anti-dilutive. Debt convertible into 353,970 common shares were not
included in the computation of diluted EPS as the effect would be
anti-dilutive.
For the fiscal year ended September 30, 1996, warrants and options to
acquire 3,677,167 shares of common stock at exercise prices of $5.00 to
$75.00 per share were not included in the computation of diluted EPS
because the warrants' and options' exercise prices were greater than the
average market price of the common shares. In addition, warrants and
options to acquire 3,575,482 shares of common stock at exercise prices of
$0.01 to $4.00 were not included in the computation of diluted EPS as the
effect would be anti-dilutive. Preferred shares convertible into 6,196,473
common shares, at various conversion rates, were not included in the
computation of diluted EPS as the effect would be anti-dilutive.
Contingently issuable common shares of 2,162,963 were also not included in
the computation of diluted EPS as the effect would be anti-dilutive.
Redeemable common shares of 58,619 were not included in the computation of
diluted EPS as the effect would be anti-dilutive.
</FN>
</TABLE>
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 fiscal years ended September 30, 1998,
1997 and 1996 nor are they indicative of the results of future operations.
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, 1998 1997
- - ---------------------------------------------------------
Raw materials $ 6,634 $ 2,590
Finished goods 4,213 1,330
Other 626 263
- - ---------------------------------------------------------
Total $ 11,473 $ 4,183
- - ---------------------------------------------------------
F-21
4. PROPERTY AND EQUIPMENT
A summary of property and equipment at the end of each year is as follows:
(Thousands of dollars)
-------------------------------------------------------------
September 30, 1998 1997
------------------------------------------------------------
Land $ 32,595 $ 4,600
Buildings and improvements 27,783 3,807
Machinery and equipment 110,748 25,849
Transportation equipment 11,740 2,077
Office equipment 1,910 450
------------------------------------------------------------
Total 184,776 36,783
Less accumulated depreciation 11,823 3,556
------------------------------------------------------------
Total $ 172,953 $ 33,227
------------------------------------------------------------
Included in property and equipment at September 30, 1998 and 1997 are capital
leases of $6.6 million and $2.1 million, respectively. Accumulated depreciation
on capital lease assets as of September 30, 1998 and 1997 was $0.5 million and
$0.2 million, respectively.
Depreciation expense on property and equipment was $8.3 million, $1.9
million and $0.9 million for the years ended September 30, 1998, 1997 and 1996,
respectively.
Approximately $0.1 million of interest costs were capitalized as part
of property and equipment for the year ended September 30, 1997.
5. OTHER ASSETS
A summary of other assets at the end of each year is as follows:
(Thousands of dollars)
- - --------------------------------------------------------------------------
September 30, 1998 1997
- - --------------------------------------------------------------------------
Non-compete agreements, net of accumulated
amortization of $614 and $364 $ 1,061 $ 886
Loan fees, net of accumulated amortization
of $1,234 and $288 12,278 976
Other 1,720 1,567
- - --------------------------------------------------------------------------
Total $ 15,059 $ 3,429
- - --------------------------------------------------------------------------
F-22
6. TAXES ON INCOME
During fiscal year 1998 and 1997 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 $0.0 million and $1.4 million has been recorded as of
September 30, 1998 and 1997. Net operating loss carryforwards available for
future use through the year 2013 were approximately $57.8 million at September
30, 1998. 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.
The components of deferred tax assets and (liabilities) are as follows:
(Thousands of dollars)
- - --------------------------------------------------------------------
September 30, 1998 1997
- - --------------------------------------------------------------------
Total deferred tax assets $ 32,510 $ 5,753
Less valuation allowance (21,972) -
- - --------------------------------------------------------------------
10,538 5,753
Total deferred tax (liabilities) (10,538) (4,358)
- - --------------------------------------------------------------------
Net deferred tax asset $ - $ 1,395
- - --------------------------------------------------------------------
During the year ended September 30, 1998, the Company recorded deferred tax
liabilities in connection with acquisitions which eliminated the deferred tax
asset recorded at September 30, 1997.
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, 1998 1997
- - ---------------------------------------------------- ------------------
Temporary differences:
Property and equipment $ (10,538) $ (4,358)
Accrued expenses 1,035 -
Net operating loss carryforwards 19,649 3,936
Goodwill and other assets 11,370 1,515
Valuation allowance (21,972) -
Alternative minimum tax credits 87 87
Other 369 215
- - ------------------------------------------------------ ----------------
Totals $ - $ 1,395
- - ------------------------------------------------------ ----------------
F-23
Income tax benefit (expense) consisted of the following:
(Thousands of dollars)
- - --------------------------------------- ----------------
Years Ended September 30, 1998 1997 1996
- - --------------------------------------- ------- --------
Current $ - $ - $ (9)
Deferred - 595 -
- - --------------------------------------- ------- --------
$ - $ 595 $ (9)
- - --------------------------------------- ------- --------
A reconciliation of the effective tax rates to the federal statutory rate is
shown below:
(Thousands of dollars)
- - --------------------------------------
Years Ended September 30, 1998 1997 1996
- - --------------------------------------- ------------ -------- --------
Federal income tax benefit (expense)
computed at federal statutory rates $ 12,736 $ (163) $ 1,004
Change in valuation allowance (21,972) 1,170 (928)
Nonqualified stock options 2,883 - -
Goodwill - stock purchase acquisitions 6,393 - -
Other (40) (412) (85)
- - --------------------------------------- ---------------- ----- -------
Income tax benefit (expense) $ - $ 595 $ (9)
- - --------------------------------------- ---------------- ----- -------
F-24
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, 1998, 1997 and 1996.
Each stock option and stock purchase warrant outstanding is exercisable to
purchase one share of the Company's $.001 par value Common Stock.
- - -----------------------------------------------------------------------
Number of Weighted Average
Years Ended September 30, Options/Warrants Exercise Price ($)
- - ------------------------------------------------------------------------
Stock Options:
Balance, September 30, 1995 202,000 1.42
Granted 765,000 2.87
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
- - ------------------------------------------------------------------------
Balance, September 30, 1997 4,148,800 1.59
Granted 6,636,268 3.79
Exercised (2,146,500) 1.49
Expired/cancelled (42,200) 2.81
- - ------------------------------------------------------------------------
Balance, September 30, 1998 8,596,368 3.30
- - ------------------------------------------------------------------------
Stock Purchase Warrants:
Balance, September 30, 1995 1,153,497 14.13
Granted 3,656,751 5.54
Exercised (816,822) 1.50
- - ------------------------------------------------------------------------
Balance, September 30, 1996 3,993,426 6.59
Granted 798,000 1.94
Exercised (134,987) 1.50
- - ------------------------------------------------------------------------
Balance, September 30, 1997 4,656,439 5.80
Granted 1,711,839 2.08
Exercised (3,269,255) 4.45
- - ------------------------------------------------------------------------
Balance, September 30, 1998 3,099,023 4.26
- - ------------------------------------------------------------------------
F-25
The following information summarizes
stock options outstanding at September 30, 1998:
<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 53,000 $2.56 $0.90 - 6.25 53,000 $2.56
2001 15,000 2.87 2.87 15,000 2.87
2002 967,600 1.45 1.25 - 2.78 581,042 1.48
2003 5,413,447 3.89 2.78 - 7.74 639,000 3.55
2007 1,047,321 1.78 1.31 - 2.43 698,214 1.78
2008 1,100,000 3.50 3.50 733,333 3.50
- - ---------------------------------------------------------- -----------------------------
8,596,368 $3.30 $0.90 - 7.74 2,719,589 $2.61
- - ---------------------------------------------------------- -----------------------------
<FN>
</FN>
</TABLE>
The weighted average grant date fair value of stock options granted during the
year is summarized as follows:
- - -----------------------------------------------------------------------
Years Ended September 30, 1998 1997
- - -----------------------------------------------------------------------
Market value equal to exercise price $ 2.20 $ 0.52
Market value less than exercise price $ 1.34 $ -
- - -----------------------------------------------------------------------
<TABLE>
<CAPTION>
The following information summarizes stock purchase warrants outstanding at
September 30, 1998:
- - ------------------------------------------------------------------- -------------------------------------
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 180,000 $ 7.50 $7.50 180,000 $7.50
2000 503,619 5.37 4.00 - 5.52 503,619 5.37
2001 341,667 5.43 3.75 - 5.57 341,667 5.43
2002 651,224 5.76 1.56 - 75.00 651,224 5.76
2005 20,000 1.25 1.25 20,000 1.25
2006 1,202,515 0.42 0.01 - 2.50 1,202,515 0.42
conditional 199,998 15.00 15.00 199,998 15.00
- - ------------------------------------------------------------------- -------------------------------------
3,099,023 $4.26 $0.01 - 75.00 3,099,023 $4.26
- - ------------------------------------------------------------------- -------------------------------------
<FN>
</FN>
</TABLE>
F-26
The weighted average grant date fair value of stock purchase warrants granted
during the year is summarized as follows:
- - ------------------------------------------------------- ---------------
<TABLE>
<CAPTION>
Years Ended September 30, 1998 1997 1996
- - ------------------------------------------------------- --------------- ------------
<S> <C> <C> <C>
Market value equal to exercise price $ - $ 0.31 1.57
Market value greater than exercise price $ 7.39 $ - 2.63
Market value less than exercise price $ 1.31 $ 0.34 1.07
- - ------------------------------------------------------- --------------- ------------
</TABLE>
The Company applies Accounting Principles 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.
<TABLE>
<CAPTION>
(Thousands of dollars except per share amounts)
- - ----------------------------------------------------------- ------------------
Years Ended September 30,
1998 1997 1996
- - ----------------------------------------------------------- ------------------ ----------
<S> <C> <C> <C>
Net earnings (loss) as recorded $ (37,459) $ 1,076 (2,961)
Net earnings (loss) pro forma $ (35,930) $ 3,671 (3,064)
Net earnings (loss) per share as reported $ (2.08) $ 0.05 (0.29)
Net earnings (loss) per share pro forma $ (1.72) $ 0.11 (0.30)
- - ----------------------------------------------------------- ------------------ ----------
</TABLE>
The fair value of each employee stock option granted during the years ended
September 30, 1998 and 1997 is estimated on the date of grant using the
Black-Scholes option-pricing model using the following factors: expected
volatility of 40%, risk free interest rate of 5%; expected annual dividends,
none; and, estimated lives of the options of five years.
The 1998 Executive Stock Option Plan (the "1998 Executive Plan") provides for
the grant of stock options to existing and future executives of the Company. An
aggregate of 6,000,000 shares of Common Stock is authorized for issuance under
this plan. Options granted under the 1998 Executive Plan must have an exercise
price of not less than 100% of the fair market value of Common Stock on the date
of grant. The 1998 Executive Plan terminates on February 3, 2003, and the term
of any option granted under the 1998 Executive Plan may not exceed ten years.
The 1998 Employee Incentive Stock Option Plan (the "1998 Incentive Plan")
provides for the grant of stock options to employees of the Company. An
aggregate of 3,000,000 shares of Common Stock is authorized for issuance under
this plan. Options granted under the 1998 Incentive Plan must have an exercise
price of not less than 100% of the fair market value of Common Stock on the date
of grant. The 1998 Incentive Plan terminates on December 3, 2002, and the term
of any option granted under the 1998 Incentive Plan may not exceed ten years.
The 1998 Executive Plan and the 1998 Incentive Plan were approved by the
Compensation Committee of the Board of Directors of the Company and are subject
to approval by the Company's shareholders.
F-27
The 1997 Executive Plan (the "1997 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 Plan (the
"1997 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.
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, 1998 1997 1996
- - ---------------------------------------------- -------------- ---------------
Customer A 10.4% 18.5% 22.5%
Customer B 1.6% 11.5% 5.2%
Customer C (export sales to Mexico) 1.1% 11.5% 15.4%
- - ---------------------------------------------- -------------- ---------------
F-28
9. LONG-TERM DEBT
<TABLE>
<CAPTION>
A summary of long-term debt at the end of each year is as follows:
(Thousands of dollars)
- - --------------------------------------------------------------- ---------------- ----------
September 30, 1998 1997
- - --------------------------------------------------------------- ---------------- ----------
<S> <C> <C>
Senior Credit Facility with interest rates ranging from 1% to
1.5% plus prime (9.25% - 9.75% at September 30, 1998), due
2003 through 2005 $ 115,228 $ -
13% Senior Subordinated Notes, due 2005, less unamortized
discount of $8,084 101,916 -
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
Bridge Note, 4.0% plus prime (12.5% at September 30, 1997),
Due July 1998 - 7,000
Capital lease obligations with interest rates ranging from
10.5% to 17.6% 4,192 1,482
Other, interest at 5.9% to 18% 203 1,663
- - --------------------------------------------------------------- ---------------- ----------
Total 221,539 32,756
Less current maturities (217,204) (3,300)
- - --------------------------------------------------------------- ---------------- ----------
Net long-term debt $ 4,335 $ 29,456
- - --------------------------------------------------------------- ---------------- ----------
<FN>
</FN>
</TABLE>
In December 1997, the Company and all of its operating subsidiaries entered into
a $150 million Senior Credit Facility ("Credit Facility") with General Electric
Capital Corporation and BankBoston, N.A. as agents for the lenders. The Credit
Facility is comprised of a $45 million revolving credit facility, a $40 million
term loan due December 5, 2003, with interest and principal payable quarterly, a
$40 million term loan due on the earlier of December 5, 2005 or six months prior
to the maturity of the Subordinated Notes discussed below with interest and
principal payable quarterly, and a $25 million acquisition line of credit due
December 5, 2003, with interest and principal payable quarterly. The notes bear
interest at either (i) the higher of (a) prime plus .75% or (b) the Federal
Funds rate plus 50 basis points per annum plus .75%, or (ii) at the option of
the Company upon certain conditions, the LIBOR rate plus 2.25%. The proceeds
from the Credit Facility are secured by substantially all of the Company's
assets and were used for acquisitions, repayment of existing indebtedness and
general corporate purposes. At September 30, 1998, approximately $15.1 million
was outstanding under the $45 million revolving credit facility. The high, low
and average balances due under the revolving credit facility were $20.1 million,
$2.9 million , and $13.7 million respectively. The average interest rate paid
during the period ended September 30, 1998 was 9.3%.
F-29
In December 1997, the Company issued $60 million in Senior Subordinated Notes
(the "Subordinated Notes"). On May 29, 1998, the Company issued an additional
$50 million in Subordinated Notes. The proceeds of the $110 million Subordinated
Notes were used for acquisitions, repayment of existing indebtedness and general
corporate purposes. The Subordinated Notes bear interest at 13% and mature in
December 2005.
In December 1997, the Company issued warrants to acquire up to 1,266,000 shares
of Common Stock in connection with the issuance of the Subordinated Notes. The
exercise price of the warrants is $0.01 per share. Additionally, warrants were
issued to acquire 200,000 shares of Common Stock with an exercise price of $2.50
per share as part of entering into the Credit Facility. For accounting purposes
the fair value of the warrants has been recorded as paid-in-capital and as a
discount to the respective debt which is amortized as interest expense over the
life of the debt.
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. At September 30, 1998, the Company failed to meet certain
financial ratios, which resulted in a violation of certain covenants under the
Credit Facility, and has failed to make certain interest payments due in
December, 1998. As a result of the defaults, amounts due under the agreements
have been reflected as current liabilities.
In December 1997, long-term debt of $32.1 million was repaid in advance of
scheduled maturity with proceeds in part from the Credit Facility and the
issuance of the Subordinated Debt and Common Stock as discussed above. As a
result of the early extinguishment of debt, the Company recognized $3.7 million
in loan fees expense which includes a prepayment penalty of $2.5 million and
$1.2 million of prepaid loan fees both of which were charged to expense as an
extraordinary item, net of a tax benefit of $1.3 million.
Annual maturities of long-term debt under terms of the existing agreements at
September 30, 1998 are as follows: $6.8 million in 1999, $12.5 million in 2000,
$10.3 million in 2001, $10.8 million in 2002, $12.2 million in 2003 and $168.9
million thereafter.
10. RELATED PARTY TRANSACTIONS
During 1998, the Company loaned $0.4 million to the majority stockholder
maturing July 1, 2004. On December 5, 1997, and July 28, 1997, the Company
loaned $1.4 million and $0.1 million, respectively, to the majority stockholder
maturing July 1, 2004. 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, the Company purchased raw materials from related entities in the
amount of $1.2 million. The purchase price of the raw materials approximated the
cost paid to other large bulk suppliers.
F-30
11. EMPLOYEE BENEFITS
Effective August 1, 1998, the Company adopted the Recycling Industries, Inc.
401(k) Retirement Plan covering all eligible employees. The Company contributes
to the plan an amount equal to 25% of the employee contributions up to a maximum
of 6% of employee compensation. Employee vesting is based on years of service
with 20% vested after one year of service and an additional 20% vesting with
each additional complete year of service. Contribution expense was $33,000 for
the year ended September 30, 1998.
12. STOCKHOLDERS' EQUITY
On December 5, 1997, the Company issued 10,000 shares of Series E Redeemable
Convertible Preferred Stock (the "Series E Preferred") having a stated value of
$3.0 million as part of the purchase of Money Point Land Holding Corporation and
Money Point Diamond Corporation (collectively "Jacobson"). If not earlier
redeemed or converted on December 5, 2000, the Series E Preferred will
automatically convert into that number of shares of Common Stock having an
aggregate market value on the date of conversion of not less than $3.0 million.
Unless Jacobson elects to retain the shares of Common Stock received upon
conversion of the Series E Preferred (the "Series E Conversion Shares"), the
Company will assist Jacobson in selling the Series E Conversion Shares on or
before January 4, 2001. If the sale of the Series E Conversion Shares yields net
proceeds of less than $3.0 million the Company will pay the difference to
Jacobson.
On December 5, 1997, as part of the purchase of Brenner Companies, Inc.
("Brenner"), the Company issued 14,000 shares of the Company's Series F 6.5%
Redeemable Convertible Preferred Stock (the "Series F Preferred") having a
stated value of $3.5 million and 14,000 shares of the Company's Series G 6.5%
Redeemable Convertible Preferred Stock (the "Series G Preferred") having a
stated value of $3.5 million.
If not earlier redeemed or converted on December 5, 2000, the Series F Preferred
will automatically convert into that number of shares of Common Stock having an
aggregate market value on the date of conversion of not less than $3.5 million.
Brenner has the right to require the Company to find a purchaser of the shares
of common stock received upon conversion of the Series F Preferred (the "Series
F Conversion Shares") on or before December 5, 2000. If the sale of the Series F
Conversion Shares yields net proceeds of less than $3.5 million, the Company
will pay the difference to Brenner. If not earlier redeemed or converted on
December 5, 2000, the Series G Preferred will automatically convert into that
number of shares of Common Stock having an aggregate market value on the date of
conversion of not less than $3.5 million.
On December 5, 1997, the Company issued 11,378 shares of the Company's Series H
6% Redeemable Convertible Preferred Stock having a stated value of $5.7 million
as part of the acquisition of United Metal Recyclers, Inc. ("United").
If not earlier redeemed or converted on December 5, 2000, the Series H Preferred
will automatically convert into that number of shares of Common Stock having an
aggregate market value on the date of conversion of not less than $5.7 million.
United has the right to require the Company to find a purchaser of the shares of
common stock received upon conversion of the Series H Preferred (the "Series H
Conversion Shares") on or before December 5, 2000. If the sale of the Series H
Conversion Shares yields net proceeds of less than $5.7 million, the Company
will pay the difference to United.
F-31
On December 8, 1997, the Company issued 9,072 shares of the Company's Series I
8% Redeemable Convertible Preferred Stock (the "Series I Preferred") having a
stated value of $3.2 million in connection with the acquisition of Wm. Lans
Sons' Co., Inc. ("Lans"). If not earlier redeemed or converted on December 8,
1999, the Series I Preferred will automatically convert into that number of
shares of Common Stock having a market value on the date of conversion of not
less than $3.2 million.
On May 28, 1998, in connection with the Company's acquisition of Peanut City
Iron & Metal Co. ("Peanut City"), the Company issued 1,005 shares of Series J
Redeemable Convertible Preferred Stock ("Series J Preferred") having a stated
value of $0.5 million, or $500 per share. The Series J Preferred is subject to
automatic conversion at the earlier of a consolidation or merger of the Company
or on May 28, 2001. The Series J Preferred will automatically convert on May 28,
2001 into that number of shares of the Company's Common Stock as determined by
dividing $502,500 by the average market price of the Common Stock for the 30
trading days preceding the date of the conversion. Holders of the Series J
Preferred are not entitled to dividends. At any time prior to conversion, the
Company and Peanut City may mutually agree to redeem the outstanding shares of
Series J Preferred Stock, in whole or in part, at a cash redemption price equal
to $500 per share.
In connection with the acquisition of Republic Alloys, Inc. ("Republic"), on May
22, 1998, the Company issued 5,080 shares of Series K Redeemable Convertible
Preferred Stock ("Series K Preferred") having a stated value of $2.5 million or
$500 per share. The Series K Preferred is subject to automatic conversion at the
earlier of a consolidation or merger of the Company or on May 22, 2001. The
Series K Preferred may be converted at any time before May 22, 2001 into that
number of shares of the Company's Common Stock as determined by dividing $2.5
million by $16. On May 22, 2001, the Series K Preferred shall convert into that
number of shares of Common Stock equal to the lesser of: (i) 158,750 or (ii) an
amount equal to $2.5 million divided by the average closing price for the Common
Stock for the 30 trading days immediately preceding the date of the conversion.
Holders of the Series K Preferred are not entitled to dividends.
In connection with the acquisition of C & J Crushing, Inc. ("C & J Crushing"),
on May 21, 1998 the Company issued 580 shares of Series L Redeemable Convertible
Preferred Stock ("Series L Preferred") having a stated value of $0.3 million, or
$500 per share. The Series L Preferred is subject to automatic conversion at the
earlier of a consolidation or merger of the Company or on May 21, 2001. The
Series L Preferred may be converted at any time before May 21, 2001 into that
number of shares of the Company's Common Stock as determined by dividing
$290,000 by $18. On May 21, 2001, the Series L Preferred shall convert into that
number of shares of Common Stock equal to the lesser of: (i) 16,111 or (ii) an
amount equal to $290,000 divided by the average closing price for the Common
Stock for the 30 trading days immediately preceding the date of the conversion.
Holders of the Series L Preferred are not entitled to dividends.
In connection with the acquisition of Pro Recycling, L.L.C. ("Pro Recycling"),
on May 22, 1998, the Company issued 1,030 shares of Series M Redeemable
Convertible Preferred Stock ("Series M Preferred") valued at $0.5 million, or
$500 per share. The Series M Preferred is subject to automatic conversion at the
earlier of a consolidation or merger of the Company or on May 22, 2001. The
Series M Preferred may be converted on May 22, 2001 into that number of shares
of the Company's Common Stock as determined by dividing $515,000 by $16. On May
22, 2001, the Series M Preferred shall convert into that number of shares of
Common Stock equal to the lesser of: (i) 32,188 or (ii) an amount equal to
$515,000 divided by the average closing price for the Common Stock for the 30
trading days immediately preceding the date of the conversion. Holders of the
Series M Preferred are not entitled to dividends.
F-32
In connection with the acquisition of Central Metals Company, Inc. ("Central")
on December 5, 1997, the Company issued 800,000 shares of the Company's Common
Stock, $0.001 par value per share, having an agreed value of $12.50 per share or
$10 million.
In connection with the acquisition of Grossman Bros. Company ("Grossman") on
December 5, 1997, the Company issued 98,039 shares of the Company's Common
Stock, $0.001 par value per share, which will be held in escrow. The shares have
an agreed value of $0.7 million.
In connection with the acquisition of Ferex Corporation ("Ferex") on May 28,
1998, the Company issued 556,944 shares of the Company's Common Stock, $0.001
par value per share, having a stated value of $3.4 million or $6.125 per share.
In connection with the acquisition of Republic Alloys, Inc. ("Republic"), on May
22, 1998, the Company issued 30,000 shares of the Company's Common Stock, $0.001
par value per share, having a stated value of $0.2 million or $5.62 per share.
In December 1997, the Company sold 1,666,666 shares of its Common Stock for an
aggregate of $10 million to various accredited investors in a transaction exempt
from the registration requirements of the Securities Act of 1933, as amended
(the "Securities Act"). The $10 million in proceeds were used for acquisitions,
repayment of existing indebtedness, and general corporate purposes. These stock
sales were made in connection with entering into a $150 million Senior Credit
Facility with General Electric Capital Corporation and the issuance of Senior
Subordinated Notes (see Note 9).
In December 1997, the Company issued warrants to acquire up to 1,266,000 shares
of Common Stock in connection with the issuance of the Senior Subordinated
Notes. The exercise price of the warrants is $0.01 per share. In addition,
warrants with an exercise price of $2.50 per share were issued to acquire
200,000 shares of Common Stock as part of entering into the Credit Facility. For
accounting purposes the fair value of the warrants has been recorded as
paid-in-capital and as a discount to the respective debt which is amortized as
interest expense over the life of the debt.
In April 1998, the Company's Chairman and Chief Executive Officer was issued
2,110,000 shares of the Company's Common Stock pursuant to exercising certain
options at an average exercise price of $1.48 per share netting proceeds to the
Company of $3.1 million net of issuance costs. Total cash proceeds from the
exercise of warrants and options for the fiscal year ended September 1998
amounted to $5.1 million.
In March 1998, the Company commenced an exchange offer in which it offered to
exchange 0.2517291 shares of its Common Stock for each of its 2,641,827
outstanding Series G and Series J Common Stock purchase warrants. The holders of
2,611,827 of such warrants were entitled to purchase one share of Common Stock
for $5.52 per share for each warrant held and the holders of 30,000 of such
warrants were entitled to purchase one share of Common Stock for $4.00 per share
for each warrant held. The exchange offer was designed to reduce the overhang to
the market for the Common Stock. Following the completion of the exchange offer,
there were 393,666 warrants outstanding exercisable at $5.52 per share and
30,000 warrants outstanding exercisable at $4.00 per share. All of such warrants
expire on December 27, 1999.
F-33
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.
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 fiscal year ended September 30, 1997, 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 727,083 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.
F-34
13. COMMITMENTS AND CONTINGENCIES
The Company leases various facilities and equipment under non-cancelable
operating lease agreements. Rental expense for the operating leases amounted to
$0.6 million, $0.4 million and $0.1 million for the years ended September 30,
1998, 1997 and 1996, respectively. Minimum lease commitments under noncancelable
leases with initial terms greater than one year at September 30, 1998 were $0.9
million for 1999, $0.8 million for 2000, $0.6 million for 2001, $0.4 million for
2002, $0.2 million for 2003 and none 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.
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.
Effective July 1, 1998, the Company entered into an amended employment agreement
with its Chairman and Chief Executive Officer, Thomas J. Wiens which expires on
July 1, 2002 (the "Wiens Employment Agreement"). The Wiens Employment Agreement
provides for an initial annual base salary of $400,000 and annual bonuses in an
amount to be determined by the Compensation Committee but not less than
$180,000. 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, 1998, the Company
had advanced Mr. Wiens the full amount 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.
Upon a change of control of the Company or if Mr. Wiens terminates his
employment for "good reason" or is terminated without cause, the Company shall
pay to Mr. Wiens a lump sum equal to the aggregate of the following amounts: (i)
an amount equal to 5.0 times the base salary (as then in effect or such higher
rate as may have been in effect at any time during the 90-day period preceding
the change of control or termination)and the annual bonus paid for the last full
fiscal year but, if no bonus was paid, an amount of not less than $180,000; (ii)
all compensation previously deferred and not yet paid by the Company; (iii) the
amount of all accrued but unused vacation through the date of the change of
F-35
control or termination; and (iv) the amount of any federal, state and local
taxes payable by Mr. Wiens as a result of the foregoing payments plus the amount
of any federal, state and local taxes payable by Mr. Wiens as a result of the
preceding tax reimbursement payment. In addition, (i) the Loan shall be forgiven
by the Company and the Company shall pay to Mr. Wiens an amount equal to the
amount of any federal, state and local taxes payable by Mr. Wiens as a result of
such forgiveness plus the amount of any federal, state and local taxes payable
by the Mr. Wiens as a result of the preceding tax reimbursement payment; and
(ii) all stock options granted to the Employee shall: (x) immediately vest and
become exercisable either by payment of the exercise price or upon a cashless
exercise by the Employee; and (y) have their exercise price reduced to the lower
of the then market price or $1.00 per share and the Company shall pay to Mr.
Wiens a lump sum equal to the amount of any federal, state and local taxes
payable by Mr. Wiens as a result of either the vesting, change in exercise price
or exercise of any options held by the Employee plus the amount of any federal,
state and local taxes payable by Mr. Wiens as a result of the preceding tax
reimbursement payment.
For purposes of the Wiens Employment Agreement, "change of control" means any
one of the following events: (i) the acquisition by an entity, person or group
(other than the Company), either in a single transaction or in a series of
transactions, of 30% or more of the Company's Voting Stock, including
acquisitions of Voting Stock through the exercise or conversion of warrants,
options, convertible securities, debt or any rights to acquire Voting Stock;
(ii) a change in a majority of the Company; Directors as of the date hereof (the
"Incumbent Board"), unless the new or additional Directors have been appointed
or nominated by a majority of the Board of Directors; provided however, that any
change in the majority of the Incumbent Board in connection with an actual or
threatened proxy contest shall be a change of control; (iii) a merger by the
Company with or into another entity, following which the Company's shareholders
own less than 60% of the outstanding voting securities of the surviving
entity;(iv) the completion by the Company of a sale of all or substantially all
of its assets; and (v) the Company entering into or completing any type of
reorganization, whereby during the pendency or upon completion of the
reorganization, the Company's Chief Executive Officer, Chief Operating Officer
or Chief Financial Officer are replaced by persons who are representatives of or
nominated by any class of the Company's debt or equity securities, other than
the Common Stock. "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, or 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, (ii) in his capacity as a Director, Mr. Wiens recommends or approves
the reduction.
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.
F-36
If Mr. Botica's employment is terminated within the 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.
Effective July 1, 1998, the Company entered into a five-year employment
agreement with its Chief Financial Officer, Brian L. Klemsz (the "Klemsz
Employment Agreement"). The Klemsz Employment Agreement provides for an initial
base salary of $260,000 and annual bonuses in an amount to be determined by the
Compensation Committee, but not less than $40,000.
If Mr. Klemsz terminates his employment with the Company for "good reason" or is
terminated without cause, the Company shall pay to Mr. Klemsz an amount equal to
three times the base salary as in effect on the date of termination plus
$84,000. In addition, all stock options granted to Mr. Klemsz shall immediately
vest and become exercisable either by payment of the exercise price or upon a
cashless exercise and the Company shall pay to Mr. Klemsz a lump sum equal to
the amount of any federal, state and local taxes payable by Mr. Klemsz as a
result of either the vesting or exercise of any options held by Mr. Klemsz plus
a lump sum equal to the amount of any federal, state and local taxes payable by
Mr. Klemsz as a result of the preceding tax reimbursement payment. For purposes
of the Klemsz Employment Agreement, "good reason" generally means a material
diminishment in Mr. Klemsz's duties, any material breach by the Company of any
of the provisions of the Klemsz Employment Agreement, or any reduction, or
attempted reduction, at any time during the term of the Klemsz Employment
Agreement, or Mr. Klemsz'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, (ii) in his capacity as a
Director, Mr. Klemsz recommends or approves the reduction.
If Mr. Klemsz terminates his employment for any reason or no reason during the
twelve month period following a change of control or his employment is
terminated by him for good reason or the Company without cause during the 24
month period following a change of control, the Company shall pay to Mr. Klemsz
a lump sum in cash equal to (i) three times the base salary as then in effect
plus $132,000, and (ii) the amount of any federal, state and local taxes payable
by Mr. Klemsz as a result of the foregoing payment plus a lump sum equal to the
amount of any federal, state and local taxes payable by Mr. Klemsz as a result
of the preceding tax reimbursement payment. In addition, all stock options
granted to Mr. Klemsz shall immediately vest and become exercisable either by
payment of the exercise price or upon a cashless exercise and the Company shall
pay to Mr. Klemsz a lump sum equal to the amount of any federal, state and local
taxes payable by Mr. Klemsz as a result of either the vesting or exercise of any
options held by Mr. Klemsz plus a lump sum equal to the amount of any federal,
state and local taxes payable by Mr. Klemsz as a result of the preceding tax
reimbursement payment. The term "change of control" has the same meaning in the
Klemsz Employment Agreement as in the Wiens Employment Agreement.
The Company is involved in various legal proceedings arising from its normal
business activities. Management believes that these legal proceedings,
individually or in the aggregate, will not have a material adverse effect on the
financial condition or results of operations of the Company. However, the
Company is involved in certain proceedings which could have a material adverse
effect on the financial condition of the Company. These proceedings are
summarized below:
F-37
Caside Associates/John Silvia, Jr. Litigation
(1) Allan R.A. Beeber, et al., Plaintiffs, v. John Silvia, Jr., et al.,
Defendants, U.S.D.Ct., D. Mass., Civil Action No. 96-12416-JLT This action
arises out of allegedly fraudulent sales of the Company's securities by John
Silvia, Jr. and a partnership entitled Caside Associates.
Plaintiffs allege that Mr. Silvia was acting as the Company's agent in selling
the Company's securities and, as a result, the Company is liable for Mr.
Silvia's wrongful actions. The Company believes Plaintiffs' claims to be without
merit and is vigorously defending this matter. On February 20, 1998, this action
was dismissed without prejudice to either party moving to restore it to the
docket upon completion of all matters pending before the U.S. Bankruptcy Court
for the District of Massachusetts, Eastern Division, in three chapter 11
proceedings involving Caside Associates, Debtor (Case No. 97-13222-JNF),
Environmental Recovery Systems of Somerset, Inc., Debtor (Case No. 97-13221-JNF)
and John Silvia, Jr., Debtor (Case No. 97-134154-JNF). An amended stipulation of
settlement (the "Amended Stipulation") has been signed by each Debtor and the
Company and was filed in the bankruptcy proceedings on or about September 30,
1998 as a part of a proposed plan of reorganization (the "Plan"). Under the
Amended Stipulation, the Company will rescind $7 million invested in the Company
by Caside Associates, and pay up to an additional $1.4 million (for a total of
$8.4 million) to settle all claims. If certain investors/creditors in Caside
elect not to participate in the settlement, the total amount of the settlement
will be reduced proportionately from $8.4 million. The Company has posted an
irrevocable letter of credit in the amount of $7 million to fund a portion of
the settlement and has accrued $8.4 million as an extraordinary loss in
connection with the settlement. On December 30, 1998, the U.S. Bankruptcy
Court confirmed the Plan, including the Amended Stipulation. The Plan was
approved by over 99% of the creditors of Caside by number and by dollar
amount of claim. Accordingly, all pending and potential claims of
investors in the bankruptcy proceedings, which include all investors, and
their successors and assigns, in Caside who claim they were defrauded by
John Silvia, Jr., Caside Associates and the Company and who elected to
participate in the settlement, are permanently enjoined against the
Company.
(2) William C. Mitchell et al., Plaintiffs v. Recycling Industries,
Inc., Defendant, Mass. Superior Court, Bristol Div., Civil Action No. C97-00845.
The action alleges that the Company devised a scheme in connection with
John Silvia, Jr. and his affiliates in violation of federal and state securities
laws whereby Silvia deceptively sold the Company's securities owned by Caside
Associates, an affiliated partnership of Mr. Silvia, and Mr. Silvia. Plaintiffs
seek damages based on contract, quantum meruit, negligence, fraud and violation
of federal and state securities laws. The Company believes Plaintiffs' claims
are without merit and is vigorously defending this matter. Because the Amended
Stipulation, was approved by the U.S. Bankruptcy Court as part of the Plan, this
action is permanently enjoined against those investors/creditors, and their
successors and assigns, of Caside, Environmental Recovery Systems of Somerset,
Inc. ("ERSS") and Silvia who elected to participate in the settlement.
(3) Dwight Silvia, et al., Plaintiff, v. Recycling Industries, Inc.,
Defendant, U.S.D.Ct., D. Mass., Civil Action No. 97-12015-JLT.
The Complaint in this action is a virtual word-for-word copy of the
Mitchell complaint and, thus, the same disclosure in that action applies here.
(4) Ferreira, et al., Plaintiffs, v. Recycling Industries, Inc., Defendant,
U.S.D.Ct., D. Mass., Civil Action No. 97-12660-JLT.
The Complaint in this action is a virtual word-for-word copy of the
Mitchell and Dwight Silvia complaints and, thus, the same disclosure applies
here.
F-38
(5) Rocha, Plaintiff, v. John Silvia, Jr. et al., Defendants, Mass. Superior
Court, Bristol Div., Civil Action No. 9501347.
The Complaint alleges that Plaintiff, individually and as trustee of
the U.N. Trust, was fraudulently induced to invest $15,000 in Caside Associates
by signing a "Promissory Note, Security and Assignment Agreement," which funds
have not been returned to Plaintiff. That is scheduled for January 19, 1999.
Because the Amended Stipulation was approved by the U.S.
Bankruptcy Court as part of the Plan, this action is permanently enjoined
against Rocha.
Anglo Metal Litigation
(1) Recycling Industries, Inc., et al., Plaintiffs, v. Robert C. Rome,
Defendant, U.S.D.Ct., D. Colo., Civil Action No. 97-D-128, consolidated with
Anglo Metals, Inc., Plaintiff, v. Recycling Industries, et. al., Defendants,
Bankr. S.D. Texas, Adversary No. 97-2024-C.
The Company and a subsidiary, Recycling Industries of Texas, Inc.
("RITI"), sought actual and consequential damages in a undetermined amount for
fraud by misrepresentation, deceit by nondisclosure and concealment and breach
of contract in connection with the acquisition of Anglo Iron & Metals in
December 1995. Alternatively, the complaint sought specific performance of Mr.
Rome's obligations under his agreement with the Company. As described below,
this matter was settled along with the following action.
(2) Anglo Metals, Inc., Plaintiff, v. Recycling Industries, et. al., Defendants,
Bankr. S.D. Texas, Adversary No. 97-2024-C. The Complaint alleged that the
Company and RITI failed to perform
certain obligations under their agreement to acquire substantially all the
assets of Anglo Metals, Inc. in December 1995. Plaintiff sought damages in
excess of $3.255 million for breach of contract, fraud and conversion.
Alternatively, the Complaint sought to rescind the agreements executed by the
Company and RITI to acquire substantially all the assets of Anglo Metals, Inc.
Settlement Agreement.
On September 28, 1998, the Company, Recycling Industries of Texas,
inc., Anglo Metal, Inc., Anglo Iron & Metal Company (collectively "Anglo"),
Robert C. Rome ("Rome") and Union Pacific railroad Company ("UP") entered into a
Settlement Agreement regarding each of the foregoing actions (the "Settlement").
Under the terms of the settlement, in exchange for the release of all claims
against the Company , the Company paid Rome $438,122, Anglo $ 68,000 and placed
$700,000 into escrow for the remediation of certain properties owned by Rome and
Anglo. In addition, the Company acquired the real property underlying its San
Juan and Harlingen, Texas facilities from the UP for a purchase price of $65,000
and agreed to remediate these properties pursuant to the Texas Voluntary Cleanup
Program. Of the aggregate settlement amount of $1,206,122, $928,762 was funded
through the sale of shares of the Company's common stock that were issued to
Anglo as part of the acquisition in December 1995.
The effect of the settlement included the reimbursement by Anglo, as of
September 30, 1997, which is netted against selling, general administrative
expenses of $1.5 million in processing costs, legal expense and environmental
remediation expense incurred by the Company at its Southern Texas facilities.
Other Litigation
Department of Toxic Substances Control v. Interstate Non-Ferrous Corporation;
San Fernando Motors, Inc. v. A-1 Metal Market, U.S. District Court for the
Eastern District of California, Docket No. CV-F-97-5016 OWW DLB
The Company's wholly-owned subsidiary, Nevada Recycling, Inc. (the "NV
Subsidiary") is one of 94 entities named in a third party complaint filed by San
Fernando Motors seeking indemnification and contribution for contamination at a
site referenced as "the Mobile Smelting facility" located in or near Mojave,
California. This action arises out of a complaint filed against San Fernando
Motors and others allegedly responsible for response, removal and remedial costs
in connection with hazardous waste contamination at the Mobile Smelting site.
This action is in the preliminary stages. The Company is vigorously defending
against this action.
F-39
Weissman Financial v. Weissman Industries, Inc., Recycling Industries, Inc.,
General Electric Capital Corp. and Coast Business Credit, a Division of Southern
Pacific Thrift and Loan, Iowa District Court for Black Hawk County, No.
EQCV081771.
This is a foreclosure action brought by Weissman Financial ("Weissman")
on its mortgage encumbering the real property and equipment owned by the
Company's wholly-owned subsidiary, Weissman Industries, Inc. (the "Mortgage").
The Mortgage secures the Company's performance under the terms of an agreement
between the Company and Weissman under which the Company guaranteed the value of
certain shares of Common Stock owned by Weissman to be $4.125 per share (the
"Price Guaranty"). Under the terms of the Price Guaranty, Weissman has demanded
that the Company pay $900,900 to Weissman as the guaranteed value of 218,400
shares of Common Stock. The Company believes that Weissman has agreed to a
modification of the Price Guaranty that would make foreclosure of the Mortgage
wrongful at this time. Accordingly, the Company has commenced litigation against
Weissman to enforce the terms of the Price Guaranty, as amended.
14. BUSINESS RESTRUCTURING
In the fourth quarter of fiscal 1998, the Company began implementation of a
restructuring plan and recorded a restructuring charge of $0.6 million. Under
the restructuring plan, the Company significantly changed operations at certain
facilities where the metals markets were significantly impacted by the downturn
in the price of ferrous and nonferrous materials. The charge includes $0.4
million for severance arising from the elimination of approximately 300
positions, and $0.2 million for certain other expenses associated with the
restructuring. In addition, the Company expects to incur costs associated with
relocating equipment and other realignment expenses which cannot be estimated at
this time and therefore not accrued but will be expensed as the plan is
implemented.
15. YEAR 2000 ISSUES
Many computer systems and other equipment with embedded chips or microprocessors
may not be able to appropriately interpret dates after December 31, 1999 because
such systems use only two digits to indicate a year in the date field rather
than four digits. If not corrected, many computers and computer applications
could fail or create miscalculations, causing disruptions to the Company's
operations. In addition, the failure of customer and supplier computer systems
could result in interruption of sales and deliveries of key supplies or
utilities. Because of the complexity of the issues and the number of parties
involved, the Company cannot reasonably predict with certainty the nature or
likelihood of such impacts.
Using internal staff and outside consultants, the Company is actively addressing
this situation and anticipates that it will not experience a material adverse
impact to its operations, liquidity or financial condition related to systems
under its control. The Company is addressing the Year 2000 issue in four
overlapping phases: (i) identification and assessment of all critical software
F-40
systems and equipment requiring modification or replacement prior to 2000; (ii)
assessment of critical business relationships requiring modification prior to
2000; (iii) corrective action and testing of critical systems; (iv) development
of contingency and business continuation plans to mitigate any disruption to the
Company's operations arising from the Year 2000 issue.
During 1998, in order to improve access to financial information through common,
integrated computing systems across the company, the Company began an accounting
system replacement and upgrade project. The Company has completed its corporate
financial accounting software implementation to SAP America, Inc., and is in the
process of reviewing certain subsidiaries financial systems to determine the
cost and benefit of converting such subsidiaries to SAP America, Inc. as well.
Approximately 53% of the Company's subsidiaries existing financial systems have
been upgraded to be Year 2000 compliant.
The Company is in the process of implementing a plan to obtain information from
its external service providers, significant suppliers and customers, and
financial institutions to confirm their plans and readiness to become Year 2000
compliant, in order to better understand and evaluate how their Year 2000 issues
may affect the Company's operations. The Company currently is not in a position
to assess this aspect of the Year 2000 issue, however the Company plans to take
the necessary steps to provide itself with reasonable assurance that its service
providers, suppliers, customers and financial institutions are Year 2000
compliant. This phase is 20% complete to date.
The Company is developing contingency plans to identify and mitigate potential
problems and disruptions to the Company's operations arising from the Year 2000
issue. This phase is expected to be completed by November 1999.
The total cost to achieve Year 2000 compliance is currently estimated at $4.3
million. Approximately $1.5 million has been spent to date. Reaching compliance
will require additional funding which will be dependant upon the Company's
lending institutions willingness and ability to continue to fund necessary Year
2000 compliance projects. Through December 31, 1998, funds from operations and
availability under the Company's Credit Facility were insufficient to allow the
Company to make its regularly scheduled interest payment under the terms of its
subordinated debt agreement. The Company requires significant additional funds
to continue its operations past December 31, 1998. While the Company is pursuing
every avenue to secure such additional financing, there can be no assurance that
such financing will be available to the Company.
While the Company believes that its own internal assessment and planning efforts
with respect to its external service providers, suppliers, customers and
financial institutions are and will be adequate to address its Year 2000
concerns, there can be no assurance that these efforts will be successful or
will not have a material adverse effect on the Company's operations.
F-41
<PAGE>
<TABLE>
<CAPTION>
16. SUPPLEMENTAL DISCLOSURE FOR EARNINGS (LOSS) PER SHARE
Years Ended September 30,
=======================================================================================================
(Thousands of dollars except per share amounts) 1998 1997 1996
- - -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic earnings (loss) per common share:
Numerator
Earnings (loss) before extraordinary (loss) $ (25,652) $ 1,076 $ (2,961)
Preferred stock dividends (897) (364) -
- - -------------------------------------------------------------------------------------------------------
Earnings (loss) before extraordinary (loss)
available to common shareholders (26,549) 712 (2,961)
Extraordinary (loss) (11,807) - -
- - -------------------------------------------------------------------------------------------------------
Net earnings (loss) available to common shareholders $ (38,356) $ 712 $ (2,961)
=======================================================================================================
Denominator
Weighted average common shares outstanding 18,414,565 13,529,644 10,153,502
=======================================================================================================
Per share amounts
Basic earnings (loss) before extraordinary (loss) $ (1.44) $ 0.05 $ (0.29)
Extraordinary (loss) (0.64) - -
- - -------------------------------------------------------------------------------------------------------
Basic earnings (loss) $ (2.08) $ 0.05 $ (0.29)
=======================================================================================================
Diluted earnings (loss) per common share:
Numerator
Earnings (loss) before extraordinary (loss)
available to common shareholders $ (26,549) $ 712 $ (2,961)
Extraordinary (loss) (11,807) - -
- - -------------------------------------------------------------------------------------------------------
Net earnings (loss) available to common
shareholders and assumed conversions
outstanding $ (38,356) $ 712 $ (2,961)
=======================================================================================================
Denominator
Weighted average common shares outstanding 18,414,565 13,529,644 10,153,502
Effect of dilutive securities:
Options and warrants - 1,276,801 -
Redeemable common shares - 363,636 -
- - -------------------------------------------------------------------------------------------------------
Weighted average common shares and
assumed conversions outstanding 18,414,565 15,170,081 10,153,502
=======================================================================================================
Per share amounts
Diluted earnings (loss) before extraordinary (loss) $ (1.44) $ 0.05 $ (0.29)
Extraordinary (loss) (0.64) - -
- - -------------------------------------------------------------------------------------------------------
Diluted earnings (loss) $ (2.08) $ 0.05 $ (0.29)
- - -------------------------------------------------------------------------------------------------------
<FN>
</FN>
</TABLE>
Potentially dilutive issues not included in the computation of diluted earnings
(loss) per common share:
For the fiscal year ended September 30, 1998, warrants and options to acquire
1,050,071 shares of common stock at exercise prices of $4.00 to $75.00 per share
were not included in the computation of diluted EPS because the warrants' and
options' exercise prices were greater than the average market price of the
common shares. In addition, warrants and options to acquire 9,691,029 shares of
common stock at exercise prices of $0.01 to $6.61 were not included in the
computation of diluted EPS as the effect would be anti-dilutive. Preferred
shares convertible into 2,275,424 common shares, at various conversion rates,
F-42
were not included in the computation of diluted EPS as the effect would be
anti-dilutive. Contingently issuable common shares of 4,528,780 were not
included in the computation of diluted EPS as the effect would be anti-dilutive.
Redeemable common shares of 363,636 were not included in the computation of
diluted EPS as the effect would be anti-dilutive.
For the fiscal year ended September 30, 1997, warrants and options to acquire
4,845,541 shares of common stock at exercise prices of $1.63 to $75.00 per share
were not included in the computation of diluted EPS because the warrants' and
options' exercises prices were greater than the average market price of the
common shares. Preferred shares convertible into 531,487 common shares, at
various conversion rates, were not included in the computation of diluted EPS as
the effect would be anti-dilutive. Debt convertible into 1,496,168 common shares
was not included in the computation of diluted EPS as the effect would be
anti-dilutive.
For fiscal year ended September 30, 1996, warrants and options to acquire
3,677,167 shares of common stock at exercise prices of $5.00 to $75.00 per share
were not included in the computation of diluted EPS because the warrants' and
options' exercise prices were greater than the average market price of the
common shares. In addition, warrants and options to acquire 2,309,146 shares of
common stock at exercise prices of $0.15 to $4.00 were not included in the
computation of diluted EPS as the effect would be anti-dilutive. Preferred
shares convertible into 576,425 common shares, at various conversion rates, were
not included in the computation of diluted EPS as the effect would be
anti-dilutive. Redeemable common shares of 58,619 were not included in the
computation of diluted EPS as the effect would be anti-dilutive.
F-43
<PAGE>
<TABLE>
<CAPTION>
17. SUPPLEMENTAL INFORMATION TO STATEMENT OF CASH FLOWS AND
NONCASH INVESTING AND FINANCING ACTIVITIES
(Thousand of dollars)
- - ----------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------
Years Ended September 30, 1998 1997 1996
(unaudited) (unaudited)
- - ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash paid for interest $ 14,443 $ 2,489 $ 711
Cash paid for taxes $ 18 $ 107 $ -
Acquisition of subsidiaries for common stock $ 14,330 $ - $ 2,425
Acquisition of subsidiaries for preferred stock $ 22,683 $ 500 $ -
Capital lease incurred to finance acquisitions $ 2,660 $ - $ 1,800
Warrant exchange for common stock $ 12,703 $ - $ -
Assumption of liabilities for Ferex acquisition $ 14,000 $ - $ -
Assumption of liabilities for Brenner acquisition $ 1,100 $ - $ -
Assumption of liabilities for Grossman acquisition $ 300 $ - $ -
Assumption of liabilities for Central acquisition $ 300 $ - $ -
Assumption of liabilities for United acquisition $ 300 $ - $ -
Assumption of liabilities for Mid-America acquisition $ - $ - $ 1,210
Assumption of liabilities for Weissman acquisition $ - $ - $ 738
Note payable issued for Anglo non-compete agreement $ - $ - $ 750
Purchase of equipment for notes payable $ - $ 202 $ 406
Stock issued for conversion of bridge financing $ - $ - $ 1,138
Acquisition of Anglo land and building for note payable $ - $ - $ 446
Acquisition of Anglo inventory for note payable $ - $ - $ 1,354
Acquisition of Anglo goodwill for note payable $ - $ - $ 479
- - ---------------------------------------------------------------------------------------------------
<FN>
</FN>
</TABLE>
18. FOURTH QUARTER ADJUSTMENTS
During the quarter ended September 30, 1998, certain transactions originally
recorded during the quarter ended June 30, 1998 reflecting the conversion of
certain preferred shares to common shares were revised because the parties
did not to final, binding contractual terms evidencing the conversion.
F-44
<PAGE>
SECOND AMENDED EXECUTIVE EMPLOYMENT AGREEMENT
THIS AGREEMENT is made and entered into effective the 1st day of July,
1998, by and between RECYCLING INDUSTRIES, INC., a Colorado corporation having
its principal executive office at 9780 South Meridian Blvd., Suite 180,
Englewood, CO 80112 (hereinafter referred to as the "Company"), and THOMAS J.
WIENS (hereinafter referred to as the "Employee").
W I T N E S S E T H:
WHEREAS, the Company desires to continue to employ the Employee in an
executive capacity and the Employee desires to remain in the Company's employ;
and
WHEREAS, the Company and the employee have previously entered into a First
Amended Executive Employment Agreement and desire, pursuant to Section 13.4 of
that agreement, to make certain revisions thereto which were agreed to but not
properly reflected in that agreement.
NOW, THEREFORE, for and in consideration of the mutual promises, covenants
and obligations contained herein, and other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the Company and the
Employee hereby agree as follows:
1. CERTAIN DEFINITIONS. As used in this Agreement, the following terms have
the meanings prescribed below:
ACQUISITION shall mean the purchase by the Company of all the outstanding
equity interests in, or substantially all of the assets and business of, a
previously unaffiliated entity for the purposes of the Company assuming the
continued operation of the acquired business as a going concern.
AFFILIATE is used in this Agreement to define a relationship to a person or
entity and means a person or entity who, directly or indirectly through one or
more intermediaries, controls, is controlled by, or is under common control
with, such person or entity.
ANNUAL BONUS shall have the meaning assigned thereto in Section 4.2 hereof.
BASE SALARY shall have the meaning assigned thereto in Section 4.1 hereof.
BOARD OF DIRECTORS means the board of directors of the Company.
<PAGE>
BENEFICIAL OWNER shall have the meaning assigned thereto in Rule 13(d)-3
under the Exchange Act; provided, however, and without limitation, that any
individual, corporation, partnership, group, association or other person or
entity that has the right to acquire any Voting Stock at any time in the
future, whether such right is (i) contingent or absolute or (ii) exercisable
presently or at any time in the future, pursuant to any agreement or
understanding or upon the exercise or conversion of rights, options or
warrants, or otherwise, shall be the Beneficial Owner of such Voting Stock.
BORROWING RATE shall mean the "prime lending rate" as reported by the Wall
Street Journal.
BUSINESS DAY shall mean every day the New York Stock Exchange is open for
business.
CAUSE shall have the meaning assigned thereto in Section 5.3 hereof.
CHANGE OF CONTROL of the Company shall mean any one of the following
events: (i) the acquisition by an entity, person or group (other than the
Company), either in a single transaction or in a series of transactions, of
30% or more of the Company's Voting Stock, including acquisitions of Voting
Stock through the exercise or conversion of warrants, options, convertible
securities, debt or any rights to acquire Voting Stock; (ii) a change in a
majority of the Company; Directors as of the date hereof (the "Incumbent
Board"), unless the new or additional Directors have been appointed or
nominated by a majority of the Board of Directors; PROVIDED HOWEVER, that
any change in the majority of the Incumbent Board in connection with an
actual or threatened proxy contest shall be a change of control; (iii) a
merger by the Company with or into another entity, following which the
Company's shareholders own less than 60% of the outstanding voting securities
of the surviving entity;(iv) the completion by the Company of a sale of all
or substantially all of its assets; and (v) the Company entering into or
completing any type of reorganization, whereby during the pendency or upon
completion of the reorganization, the Company's Chief Executive Officer,
Chief Operating Officer or Chief Financial Officer are replaced by persons
who are representatives of or nominated by any class of the Company's debt or
equity securities, other than the Common Stock.
CODE means the Internal Revenue Code of 1986, as amended, and the rules
and regulations promulgated by the Internal Revenue Service thereunder, all as
in effect from time to time during the Employment Period.
COMMON STOCK means the Company's common stock, par value $.001 per share.
COMPANY means Recycling Industries, Inc., a Colorado corporation, the
principal executive office of which is located at 9780 South Meridian Blvd.,
Suite 180, Englewood, CO 80112.
CONFIDENTIAL INFORMATION shall have the meaning assigned thereto in Section
8.2 hereof.
2
<PAGE>
DATE OF TERMINATION means the earliest to occur of (i) the date of the
Employee's death, (ii) the date on which the Employee terminates this Agreement
for any reason other than Good Reason or (iii) the date of receipt of the Notice
of Termination, or such later date as may be prescribed in the Notice of
Termination in accordance with Section 5.6 hereof.
DISABILITY means an illness or other disability which prevents the Employee
from discharging his responsibilities under this Agreement for a period of 180
consecutive calendar days, or an aggregate of 180 calendar days in any calendar
year, during the Employment Period, all as determined in good faith by the Board
of Directors of the Company (or a committee thereof).
EFFECTIVE DATE means July 1, 1997.
EMPLOYEE means Thomas J. Wiens.
EMPLOYMENT PERIOD shall have the meaning assigned thereto in Section 3
hereof.
EXCHANGE ACT means the Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated by the Securities and Exchange Commission
thereunder, all as in effect from time to time during the Employment Period.
EXCISE TAX shall have the meaning assigned thereto in Section 11.1.
GEORGETOWN ACQUISITION means the acquisition by the Company of Addlestone
International Corporation's Georgetown, South Carolina Facility.
GOOD REASON shall have the meaning assigned thereto in Section 5.5 hereof.
GROSS-UP PAYMENT shall have the meaning assigned thereto in Section 11.1
hereof.
IMPOSITION OF EXCISE TAX shall have the meaning assigned thereto in
Section 11.1.
INITIAL TERM shall have the meaning assigned thereto in Section 3 hereof.
MARKET PRICE. For purposes of this Agreement, Market Price means the
closing price of the Common Stock for the ten immediately preceding trading
days if listed on a national securities exchange or quoted on the Nasdaq
National Market or the average of the last reported bid and asked price for the
Common Stock as reported on the Nasdaq SmallCap Market or on the Electronic
Bulletin Board or, if none, the National Quotation Bureau, Inc.'s "Pink Sheets."
NOTICE OF TERMINATION shall have the meaning assigned thereto in Section
5.6 hereof.
3
<PAGE>
PAYMENT shall have the meaning assigned thereto in Section 11 hereof.
UNEXPIRED TERM shall have the meaning assigned thereto in Section 6.3(c)
hereof.
VOTING STOCK means all outstanding shares of capital stock of the Company
entitled to vote generally in an election of directors; provided, however, that
if the Company has shares of Voting Stock entitled to more or less than one vote
per share, each reference to a proportion of the issued and outstanding shares
of Voting Stock shall be deemed to refer to the proportion of the aggregate
votes entitled to be cast by the issued and outstanding shares of Voting Stock.
WITHOUT CAUSE shall have the meaning assigned thereto in Section 5.4
hereof.
2. GENERAL DUTIES OF COMPANY AND EMPLOYEE.
2.1 The Company agrees to employ the Employee, and the Employee agrees to
accept employment by the Company and to serve the Company as Chairman of the
Board and Chief Executive Officer. At all times during the Employment Period,
the Employee shall report directly to the Board of Directors and shall be
elected to serve as a member of the Board of Directors and as the Chairman of
the Board of Directors. The authority, duties and responsibilities of the
Employee shall include those described in Schedule A to this Agreement, and such
other or additional duties as may from time to time be assigned to the Employee
by the Board of Directors (or a committee thereof) and agreed to by the
Employee. While employed hereunder, the Employee shall devote reasonable time
and attention during normal business hours to the affairs of the Company and use
his best efforts to perform faithfully and efficiently his duties and
responsibilities. The Employee may (a) serve on corporate, civic, religious or
charitable boards or committees, (b) deliver lectures, fulfill speaking
engagements or teach at educational institutions, (c) participate in political
and religious activities, including participation in a political campaign
provided the Employee will comply with all laws and regulations related to such
activities, and (d) manage and oversee personal investments and other business
activities which are not competitive with the Company, so long as such
activities do not significantly interfere with the performance of the Employee's
duties and responsibilities; provided that such activities, alone or on a
cumulative basis, do not interfere with the performance of the Employee's duties
hereunder.
2.2 The Employee agrees and acknowledges that he owes a fiduciary duty of
loyalty, fidelity and allegiance to act at all times in the best interests of
the Company and to do no act and to make no statement, oral or written, which
would injure Company's business, its interests or its reputation.
2.3 The Employee agrees to comply at all times during the Employment
Period with all applicable policies, rules and regulations of the Company,
including, without limitation, the
4
<PAGE>
Company's policy regarding trading in the Common Stock, as each is in effect
from time to time during the Employment Period.
2.4 The Employee may search for and select, subject to the approval of
the Board of Directors, an individual to serve as his successor to the office of
Chief Executive Officer. If, during the Employment Period, a successor Chief
Executive Officer is hired by the Company and provided the Employee continues to
serve as Chairman of the Board of Directors, the duties of the Employee under
this Section 2 shall be appropriately modified and all other terms of this
agreement shall remain unchanged.
3. TERM.
Unless sooner terminated pursuant to other provisions hereof, the
Employee's period of employment under this Agreement shall be a period of five
years from July 1, 1997 (the "Initial Term"). Prior to the expiration of the
Initial Term, the Company and the Employee may agree, in writing, to extend the
Initial Term. The Initial Term and any and all renewals thereof are referred to
herein collectively as the "Employment Period."
4. COMPENSATION AND BENEFITS.
4.1 BASE SALARY. As compensation for services to the Company, the
Company shall pay to the Employee, until the Date of Termination, an annual base
salary of $400,000 (the "Base Salary"). The Board of Directors (or a committee
thereof), in its discretion, may increase the Base Salary based upon relevant
circumstances. The Base Salary shall be payable in equal semi-monthly
installments or in accordance with the Company's established policy, subject
only to such payroll and withholding deductions as may be required by law and
other deductions applied generally to employees of the Company for insurance and
other employee benefit plans.
4.2 LOAN. The Company shall loan the Employee the amounts and under the
terms provided in this Section 4.2
(i) LOAN AMOUNT. Commencing with the closing of the Georgetown
Acquisition, the Company shall loan to the Employee up to $1,925,000 as follows
(the "Loans"):
(a) Upon the execution of this agreement, the Company shall
loan to the Employee $85,000 in connection with the closing of the
Georgetown Acquisition.
(b) Upon the closing of each Acquisition subsequent to the
Georgetown Acquisition (a "Subsequent Acquisition"), the Company shall loan
to the Employee the amount set forth on Schedule B attached hereto and
incorporated by reference herein. For purposes of this Section 4.2(b); (i)
a single Subsequent Acquisition shall be deemed to occur if the acquired
business had annual revenues of more than $5,000,000 and less than
5
<PAGE>
$30,000,000 for its last completed fiscal year; (ii) two Subsequent
Acquisitions shall be deemed to have occurred if the acquired business had
annual revenues for its last completed fiscal year of greater than
$30,000,000 but less than $50,000,000; and (iii) each incremental increase,
or part thereof, of $25,000,000 in the acquired business's annual revenues
for its last completed fiscal year over $50,000,000 shall equal one
additional Subsequent Acquisition.
For example, if subsequent to the Georgetown Acquisition, the Company
acquires Company A with annual revenues of $10,000,000 on August 1, 1997;
Company B with annual revenues of $31,000,000 on September 1, 1997, and
Company C with annual revenues of $75,000,000 on October 1, 1997, the
Employee would be loaned the following amounts on the closing of each
acquisition:
<TABLE>
<S> <C>
Company A = $100,000 (Company A equals Subsequent Acquisition 1)
Company B = $245,000 (Company B equals Subsequent Acquisitions 2
and 3)
Company C = $480,000 (Company C equals Subsequent Acquisitions 4,
5 and 6)
</TABLE>
(ii) LOAN ADVANCE. Unless previously advanced upon the completion
of Subsequent Acquisitions as provided above in Section 4.2(i), the Company
shall advance to the Employee up to an additional $295,000 on or before October
1, 1997 from time to time as the Employee may request in writing and subject to
the Company's availability of funds at the time of the request. Amounts loaned
to the Employee pursuant to this Section 4.2(ii) are advances against amounts to
be loaned upon the closing of each Subsequent Acquisition as provided in Section
4.2(i) and, as a result, no additional amounts will be loaned to the Employee
upon the closing of a Subsequent Acquisition as provided in Section 4.2(i) until
sufficient Subsequent Acquisitions have been closed to cover the amounts
advanced pursuant to this Section 4.2(ii).
(iii) INTEREST. The Loans provided for in this Section 4.2 shall
bear interest at the Borrowing Rate as adjusted on the last day of each fiscal
quarter, PROVIDED, HOWEVER, that any amounts advanced to the Employee pursuant
to Section 4.2(ii) shall bear interest at the higher of the Borrowing Rate or
16% until such time as sufficient Subsequent Acquisitions are closed to cover
the amounts advanced pursuant to Section 4.2(ii). Commencing December 15, 1998,
interest shall be payable annually in cash on or before December 31st of each
year during the term of the Loans.
(iv) TERM. All outstanding principal and accrued but unpaid
interest on the Loans shall be due on July 1, 2004. The remaining principal
balance and accrued interest of the
6
<PAGE>
Note shall be forgiven by the Company if the Employee is terminated pursuant
to Sections 5.1. 5.2, 5.4 or 5.5 hereof or upon a Change of Control of the
Company.
(v) FORM OF NOTE The form of promissory note for each advance is
attached hereto as Schedule C.
4.3 BONUS. In addition to the Base Salary, the Employee shall be awarded
for each fiscal year until the Date of Termination, an annual bonus (either
pursuant to a bonus or incentive plan or program of the Company or otherwise) of
not less than $180,000 plus an additional amount to be determined by the Board
of Directors (or a committee thereof), in its sole discretion (the "Annual
Bonus").
4.4 LOCATION OF OFFICE. The Employee's primary office will be located at
the Company' headquarters in Arapahoe or Douglas County, Colorado.
4.5 VACATION. Until the Date of Termination, the Employee shall
accrue and be entitled to take one week of paid vacation during each one year
period the Employee has been employed by the Company provided, however, that
the Employee may only accrue a maximum of five weeks of vacation. Any
vacation accrued but not taken by the Employee in excess of five weeks will
be forfeited if not used during the one year Employment period following the
date of accrual. For purposes of this provision, the Employee was initially
employed by the Company on January 1, 1990.
4.6 VEHICLE. Until the Date of Termination, the Company shall lease a
sports utility vehicle, subject to the approval of the Compensation Committee,
on behalf of the Employee.
4.7 INCENTIVE, SAVINGS AND RETIREMENT PLANS. Until the Date of
Termination, the Employee shall be eligible to participate in and shall receive
all benefits under all executive incentive, savings and retirement plans and
programs currently maintained or hereinafter established by the Company for the
benefit of its executive officers and/or employees.
(i) Employee shall be entitled to participate in the Company's
insurance benefit plan which will provide the Employee with term insurance
on the life of the Employee equal to $1,000,000. The Company shall be
responsible for and shall pay all premiums thereon. In all cases, the
beneficiary of such insurance shall be the Employee's spouse and/or lineal
descendants and/or a trust for the benefit of any such person or persons,
as designated, from time to time, by the Employee.
(ii) The Employee and/or the Employee's family, as the case may
be, shall be eligible to participate in and shall receive all benefits
under the Company's welfare benefit plans. Such welfare benefit plans may
include, without limitation, medical, dental, disability, group life,
accidental death and travel accident insurance plans and programs.
7
<PAGE>
4.8 REIMBURSEMENT OF EXPENSES. The Employee may from time to time until
the Date of Termination incur various business expenses customarily incurred by
persons holding positions of like responsibility, including, without limitation,
travel, long distance telephone charges, cellular phone charges, facsimile,
entertainment and similar expenses incurred for the benefit of the Company or
while traveling or commuting on Company business. Subject to the Company's
policy regarding the reimbursement of such expenses as in effect from time to
time during the Employment Period, the Company shall reimburse the Employee for
such expenses from time to time, at the Employee's request, and the Employee
shall account to the Company for all such expenses.
4.9 DE-MINIMIS EXPENSES. The Employee shall be permitted to use Company
equipment, such as telephones, copy machines and facsimile machines, for
de-minimis personal matters.
5. TERMINATION.
5.1 DEATH. This Agreement shall terminate automatically upon the death
of the Employee.
5.2 DISABILITY. The Company may terminate this Agreement, upon written
notice to the Employee delivered in accordance with Sections 5.6 and 13.1
hereof, upon the Disability of the Employee.
5.3 CAUSE. The Company may terminate this Agreement, upon written notice
to the Employee delivered in accordance with Sections 5.6 and 13.1 hereof, for
Cause. For purposes of this Agreement, "Cause" means (i) the Employee's willful
and continued refusal to perform substantially his duties and responsibilities
as contemplated in this Agreement (other than any such refusal based upon the
written advice received from the Employee's legal counsel that performance of
his duties would cause a breach of his duties to the Company or be a violation
of applicable law or regulation, or resulting from Disability or from the
Employee's termination for Good Reason); (ii) the Employee's willful engaging in
activities which would (a) constitute a breach of a material term of this
Agreement, or (b) result in a material injury to the Company or its Affiliates;
(iii) the Employee's non-appealable conviction of a felony; (iv) the Employee's
acknowledged or admitted commission of acts of fraud, embezzlement, theft or
other dishonest acts against the Company or the good faith determination by the
Board of Directors that the Employee has committed the foregoing acts; and (v)
the Employee's use of alcohol (except at Company sponsored parties or
receptions) or illegal drugs on the Company's premises. For the purposes
hereof, no act or failure or refusal to act on the Employee's part shall be
considered "willful" unless done, or omitted to be done, by the Employee not in
good faith and without belief that his action or omission was in the best
interest of the Company or any Affiliate.
8
<PAGE>
5.4 WITHOUT CAUSE. The Company may terminate this Agreement Without
Cause, upon written notice to the Employee delivered in accordance with Sections
5.6 and 13.1 hereof. For purposes of this Agreement, the Employee will be
deemed to have been terminated "Without Cause" if the Employee is terminated by
the Company for any reason other than Cause, Disability or death.
5.5 GOOD REASON. The Employee may terminate this Agreement for Good
Reason, upon written notice to the Company delivered in accordance with Sections
5.6 and 13.1 hereof. For purposes of this Agreement, "Good Reason" means (i)
the assignment to the Employee of substantial duties inconsistent in any
material respect with the Employee's duties or responsibilities as contemplated
in this Agreement, provided, however, Employee acknowledges that, from time to
time, he may be required to fulfill various clerical and other tasks incidental
to his employment by the Company which are specifically considered within the
Employee's duties or responsibilities as contemplated in this Agreement, (ii)
any other action by the Company which results in a material diminishment in the
Employee's position (including titles and reporting requirements), authority,
duties or responsibilities, (iii) the removal of the Employee from his position
either as Chief Executive Officer or Chairman of the Company, (iv) any material
breach by the Company of any of the provisions of this Agreement, (v) upon a
Change of Control, the failure of any successor or surviving entity to adopt and
assume all of the provisions of this agreement, including any obligations
triggered by a Change of Control or (vi) any reduction, or attempted reduction,
at any time during the Employment Period, of the Base Salary of the Employee
unless: (i) such reduction is part of an overall proportional reduction in the
compensation of the Company's executive officers implemented by the Company's
Board of Directors or, (ii) in his capacity as a Director, the Employee
recommends or approves the reduction. The determination of the occurrence of any
of the foregoing shall be based upon the good faith determination by the
Employee.
5.6 NOTICE OF TERMINATION. Any termination of this Agreement by the
Company for Cause, Without Cause or as a result of the Employee's Disability, or
by the Employee for Good Reason, shall be communicated by Notice of Termination
to the other party hereto given in accordance with this Agreement. For purposes
of this Agreement, a "Notice of Termination" means a written notice which (i)
indicates the specific termination provision in this Agreement relied upon, (ii)
sets forth in reasonable detail the facts and circumstances claimed to provide a
basis for a termination of the Employee's employment under the provisions so
indicated and (iii) in the case of termination of this Agreement by the Company
for Cause, provides the Employee, and in the case of termination of this
Agreement by the Employee for Good Reason, provides the Company, with a period
of 30 days to cure the basis of such termination, and (iv) specifies the
termination date, if such date is other than the date of receipt of such notice
(which termination date shall not be more than 30 days after the giving of such
notice).
6. OBLIGATIONS OF COMPANY UPON TERMINATION.
9
<PAGE>
6.1 CAUSE; OTHER THAN GOOD REASON. If this Agreement shall be terminated
either by the Company for Cause or by the Employee for any reason other than
Good Reason, the Company shall pay to the Employee, in a lump sum in cash within
30 days after the Date of Termination, (i) the aggregate of the Employee's Base
Salary (as in effect on the Date of Termination) through the Date of
Termination, if not theretofore paid, and, in the case of compensation
previously deferred by the Employee, all amounts of such compensation previously
deferred and not yet paid by the Company and (ii) the product of (a) the Annual
Bonus paid to the Employee for the last full fiscal year preceding the Date of
Termination and (b) the fraction obtained by dividing (x) the number of days
between the Date of Termination and the last day of the last full fiscal year
preceding the Date of Termination and (y) 365. All other obligations of the
Company and rights of the Employee hereunder shall terminate effective as of the
Date of Termination.
6.2 DEATH OR DISABILITY.
(i) Subject to the provisions of this Section 6.2, if this
Agreement is terminated as a result of the Employee's death or Disability,
the Company shall pay to the Employee or his estate, in a lump sum in cash
within 30 days of the Date of Termination an amount equal to the Employee's
Base Salary (as in effect on the Date of Termination). The Company may
purchase insurance to cover all or any part of the obligation contemplated
in the foregoing sentence, and the Employee agrees to submit to a physical
examination to facilitate the procurement of such insurance.
(ii) Whenever compensation is payable to the Employee hereunder
during a period in which he is partially or totally disabled, and such
Disability would (except for the provisions hereof) entitle the Employee to
Disability income or salary continuation payments from the Company
according to the terms of any plan or program presently maintained or
hereafter established by the Company, the Disability income or salary
continuation paid to the Employee pursuant to any such plan or program
shall be considered a portion of the payment to be made to the Employee
pursuant to this Section 6.2 and shall not be in addition hereto. If
Disability income is payable directly to the Employee by an insurance
company under the terms of an insurance policy paid for by the Company, the
amounts paid to the Employee by such insurance company shall be considered
a portion of the payment to be made to the Employee pursuant to this
Section 6.2 and shall not be in addition hereto.
6.3 CHANGE OF CONTROL; TERMINATION FOR GOOD REASON OR WITHOUT CAUSE.
Upon a Change of Control or if this Agreement shall be terminated either by the
Employee for Good Reason or by the Company Without Cause:
(i) the Company shall pay to the Employee, in a lump sum in cash
within 30 days after the earlier of the effective date of the Change of Control
or Date of Termination the aggregate of the following amounts:
10
<PAGE>
(a) an amount equal to 5.0 times the Employee's Base Salary
(as then in effect or such higher rate as may have been in effect at
any time during the 90-day period preceding the Change of Control)
and (b) the Annual Bonus paid to the Employee for the last full
fiscal year but, if no bonus was paid, an amount of not less than
$180,000;
(b) in the case of compensation previously deferred by the
Employee, all amounts of such compensation previously deferred and not yet
paid by the Company;
(c) the amount of all accrued but unused vacation as provided
in Section 6.5, below; and
(d) the amount of any federal, state and local taxes payable
by the Employee as a result of the foregoing payments made pursuant to this
Section 6.3(i) plus the amount of any federal, state and local taxes
payable by the Employee as a result of the preceding tax reimbursement
payment.
(ii) The Company shall promptly upon submission by the Employee of
supporting documentation, pay or reimburse to the Employee any costs and
expenses paid or incurred by the Employee which would have been payable under
Section 4.8 of this Agreement.
(iii) All loans made to the Employee under Section 4.2 of the
Agreement shall be immediately forgiven and the Company shall pay to the
Employee (1) a lump sum equal to the amount of any federal, state and local
taxes payable by the Employee as a result of such forgiveness, and (2) a lump
sum equal to the amount of any federal, state and local taxes payable by the
Employee as a result of the preceding tax reimbursement payment.
(iv) all stock options granted to the Employee shall: (i)
immediately vest and become exercisable either by payment of the exercise price
or upon a cashless exercise by the Employee; and (ii) have their exercise price
reduced to the lower of Market Price on the date of the Change of Control or
$1.00 per share. With respect to the stock options, the Company shall pay to
the Employee (1) a lump sum equal to the amount of any federal, state and local
taxes payable by the Employee as a result of either the vesting, change in
exercise price or exercise of any options held by the Employee, and (2) a lump
sum equal to the amount of any federal, state and local taxes payable by the
Employee as a result of the preceding tax reimbursement payment. The provisions
of this Section 6.3(iv) shall survive the termination or expiration of this
Agreement and until all options held by the Employee have been exercised or
expired and all resulting taxes paid.
(v) All legal fees and other expenses incurred by the Employee to
enforce the terms of this Agreement plus the Company shall pay to the Employee
an amount equal to (1) the amount of any federal, state and local taxes payable
by the Employee as a result of the foregoing
11
<PAGE>
payments, and (2) a lump sum equal to the amount of any federal, state and
local taxes payable by the Employee as a result of the preceding tax
reimbursement payment.
6.4 NO MITIGATION OBLIGATION. The Employee shall not be required to
mitigate damages or the amount of any payment provided for under this Section 6
by seeking other employment or otherwise, nor shall the amount of any payment
provided for under this Section 6 be reduced by any compensation earned by the
Employee as the result of employment by another employer after the termination
of the Employee's employment, or otherwise.
6.5 VACATION TIME. Notwithstanding anything herein to the contrary, upon
termination of this Agreement for any reason, the Company shall pay the Employee
for any accrued but not taken Vacation Time as of the Date of Termination on a
per diem basis based on the Base Salary then in effect, PROVIDED, HOWEVER, that
upon termination in the event of a Change of Control, the amount of accrued
vacation shall not be subject to the five week limitation and all forfeited
accrued vacation from January 1, 1990 through the Date of Termination shall be
deemed to be due and owing to the Employee.
7. EMPLOYEE'S OBLIGATION TO AVOID CONFLICTS OF INTEREST.
In keeping with the Employee's fiduciary duties to the Company, the
Employee agrees that he shall not knowingly become involved in a conflict of
interest with the Company, or upon discovery thereof, allow such conflict to
continue. The Employee further agrees to disclose to the Company, promptly
after discovery, any facts or circumstances which might involve a conflict of
interest with the Company.
8. EMPLOYEE'S CONFIDENTIALITY OBLIGATION.
8.1 The Employee hereby acknowledges, understands and agrees that all
Confidential Information is the exclusive and confidential property of the
Company and its Affiliates which shall at all times be regarded, treated and
protected as such in accordance with this Section 8. The Employee acknowledges
that all such Confidential Information is in the nature of a trade secret.
8.2 For purposes of this Agreement, "Confidential Information" means
information, which is used in the business of the Company or its Affiliates and
(i) is proprietary to, about or created by the Company or its Affiliates,(ii)
gives the Company or its Affiliates a competitive business advantage or the
opportunity of obtaining such advantage or the disclosure of which would be
detrimental to the interests of the Company or its Affiliates, (iii)is
designated as Confidential Information by the Company or its Affiliates, is
known by the Employee to be considered confidential by the Company or its
Affiliates, or from all the relevant circumstances should reasonably be assumed
by the Employee to be confidential and proprietary to the Company or its
Affiliates, (iv) was not or does not become generally available to the public
other than as a result of the disclosure by the Employee or (v) was not
available or did not become available
12
<PAGE>
to the Employee on a non-confidential basis prior to its disclosure to the
Employee by the Company. Such Confidential Information includes, without
limitation, the following types of information and other information of a
similar nature (whether or not reduced to writing or designated as
confidential):
(a) Internal personnel and financial information of the
Company or its Affiliates, purchasing and internal cost information,
internal service and operational manuals and the manner and methods
of conducting the business of the Company or its Affiliates;
(b) Marketing and development plans, price and cost data,
price and fee amounts, pricing and billing policies, quoting
procedures, marketing techniques, forecasts and forecast assumptions
and volumes, and future plans and potential strategies (including,
without limitation, all information relating to any acquisition
prospect and the identity of any key contact within the organization
of any acquisition prospect) of the Company or its Affiliates which
have been or are being discussed;
(c) Customer services and the type, quantity, specifications
and content of products and services purchased, leased, licensed or
received by customers of the Company or its Affiliates; and
(d) Confidential and proprietary information provided to the
Company or its Affiliates by any actual or potential customer,
government agency or other third party (including businesses,
consultants and other entities and individuals).
8.3 As a consequence of the Employee's acquisition or anticipated
acquisition of Confidential Information, the Employee shall occupy a position of
trust and confidence with respect to the affairs and business of the Company and
its Affiliates. In view of the foregoing and of the consideration to be
provided to the Employee, the Employee agrees that it is reasonable and
necessary that the Employee make each of the following covenants:
(i) At any time during the Employment Period and thereafter, except
as required by law, the Employee shall not disclose Confidential
Information to any person or entity, either inside or outside of the
Company, other than as necessary in carrying out his duties and
responsibilities as set forth in Section 2 hereof, without first obtaining
the Company's prior written consent (unless such disclosure is compelled
pursuant to court orders or subpoena, and at which time the Employee shall
give notice of such proceedings to the Company).
(ii) At any time during the Employment Period and thereafter, the
Employee shall not use, copy or transfer Confidential Information other
than as necessary in carrying
13
<PAGE>
out his duties and responsibilities as set forth in Section 2 hereof,
without first obtaining the Company's prior written consent.
(iii) On the Date of Termination, upon the Company's written request,
the Employee shall promptly deliver to the Company (or its designee) all
written materials, records and documents made by the Employee or which came
into his possession prior to or during the Employment Period concerning the
business or affairs of the Company or its Affiliates, including, without
limitation, all materials containing Confidential Information.
9. DISCLOSURE OF INFORMATION, IDEAS, CONCEPTS, IMPROVEMENTS, DISCOVERIES AND
INVENTIONS.
As part of the Employee's fiduciary duties to the Company, the Employee
agrees that during his employment by the Company, the Employee shall promptly
disclose in writing to the Company all information, ideas, concepts,
improvements, discoveries and inventions, whether patentable or not, and whether
or not reduced to practice, which are conceived, developed, made or acquired by
the Employee, either individually or jointly with others, and which relate to
the business, products or services of the Company or its Affiliates,
irrespective of whether the Employee used the Company's time or facilities and
irrespective of whether such information, idea, concept, improvement, discovery
or invention was conceived, developed, discovered or acquired by the Employee on
the job, at home, or elsewhere. This obligation extends to all types of
information, ideas and concepts, including information, ideas and concepts
relating to new types of services, corporate opportunities, acquisition
prospects, the identify of key representatives within acquisition prospect
organizations, prospective names or service marks for the Company's business
activities, and the like.
10. OWNERSHIP OF INFORMATION, IDEAS, CONCEPTS, IMPROVEMENTS, DISCOVERIES AND
INVENTIONS AND ALL ORIGINAL WORKS OF AUTHORSHIP.
10.1 All information, ideas, concepts, improvements, discoveries and
inventions, whether patentable or not, which are conceived, made, developed or
acquired by the Employee or which are disclosed or made known to the Employee,
individually or in conjunction with others, during the Employee's employment by
the Company and which relate to the business, products or services of the
Company or its Affiliates (including, without limitation, all such information
relating to corporate opportunities, research, financial and sales data, pricing
and trading terms, evaluations, opinions, interpretations, acquisition
prospects, the identity of customers or their requirements, the identity of key
contacts within the customers' organizations or within the organization of
acquisition prospects, marketing and merchandising techniques, and prospective
names and service marks) are and shall be the sole and exclusive property of the
Company. Furthermore, all drawings, memoranda, notes, records, files,
correspondence, manuals, models, specifications, computer programs, maps and all
other writings or materials of
14
<PAGE>
any type embodying any of such information, ideas, concepts, improvements,
discoveries and inventions are and shall be the sole and exclusive property
of the Company.
10.2 In particular, the Employee hereby specifically sells, assigns,
transfers and conveys to the Company all of his worldwide right, title and
interest in and to all such information, ideas, concepts, improvements,
discoveries or inventions, and any United States or foreign applications for
patents, inventor's certificates or other industrial rights which may be filed
in respect thereof, including divisions, continuations, continuations-in-part,
reissues and/or extensions thereof, and applications for registration of such
names and service marks. The Employee shall assist the Company and its nominee
at all times, during the Employment Period and thereafter, in the protection of
such information, ideas, concepts, improvements, discoveries or inventions, both
in the United States and all foreign countries, which assistance shall include,
but shall not be limited to, the execution of all lawful oaths and all
assignment documents requested by the Company or its nominee in connection with
the preparation, prosecution, issuance or enforcement of any application for
United States or foreign letters patent, including divisions, continuations,
continuations-in-part, reissues and/or extensions thereof, and any application
for the registration of such names and service marks.
10.3 If the Employee creates, during the Employment Period, any original
work of authorship fixed in any tangible medium of expression which is the
subject matter of copyright (such as, videotapes, written presentations on
acquisitions, computer programs, drawings, maps, architectural renditions,
models, manuals, brochures or the like) relating to the Company's business,
products or services, other than an autobiographical work concerning the
Employee or others, whether such work is created solely by the Employee or
jointly with others, the Company shall be deemed the author of such work if the
work is prepared by the Employee in the scope of his employment; or, if the work
is not prepared by the Employee within the scope of his employment but is
specially ordered by the Company as a contribution to a collective work, as a
part of a motion picture or other audiovisual work, as a translation, as a
supplementary work, as a compilation or as an instructional text, then the work
shall be considered to be work made for hire, and the Company shall be the
author of such work. If such work is neither prepared by the Employee within
the scope of his employment nor a work specially ordered and deemed to be a work
made for hire, then the Employee hereby agrees to sell, transfer, assign and
convey, and by these presents, does sell, transfer, assign and convey, to the
Company all of the Employee's worldwide right, title and interest in and to such
work and all rights of copyright therein. The Employee agrees to assist the
Company and its Affiliates, at all times, during the Employment Period and
thereafter, in the protection of the Company's worldwide right, title and
interest in and to such work and all rights of copyright therein, which
assistance shall include, but shall not be limited to, the execution of all
documents requested by the Company or its nominee and the execution of all
lawful oaths and applications for registration of copyright in the United States
and foreign countries.
11. CERTAIN TAXES.
15
<PAGE>
11.1 GROSS-UP PAYMENTS. If all or any portion of the payments and
benefits which the Employee is entitled to receive pursuant to the terms of this
Agreement or any other plan, arrangement or agreement in respect of the Company
or its affiliates (the "Payments") constitutes "excess parachute payments"
within the meaning of Section 280G of the Code, that are subject to the excise
tax (the "Excise Tax") imposed by Section 4999 of the Code (or similar tax
and/or assessment), the Company (or its successors or assigns) shall pay to the
Employee an additional amount ("Gross-Up Payment") such that the net amount
retained by the Employee, after deduction of (i) any Excise Tax on Payments,
(ii) any federal, state and local income tax and Excise Tax upon the payment
provided for by this Section 11.1, and (iii) any interest and penalties imposed
in respect of the Excise Tax shall be equal to the full amount of the Payments.
For purposes of determining the amount of the Gross-Up Payment, the Employee
shall be deemed to pay federal income taxes at the highest marginal rate of
federal income taxation in the calendar year in which the Gross-Up Payment is to
be made, and state and local income taxes at the highest marginal rates of
taxation in the state and locality of the Employee's residence on the date the
Gross-Up Payment is to be made, net of the maximum reduction in federal income
taxes which could be obtained from deduction of such state and local taxes. The
Gross-Up Payment for any Payment shall be paid to Employee within ten (10) days
after the Imposition of Excise Tax, unless the Company undertakes to indemnify
him as provided in Section 11.2. The "Imposition of Excise Tax" shall mean the
earliest of: (a) the issuance by the Internal Revenue Service of a notice
stating in effect that an Excise Tax is due with respect to the Payment; (b)
Employee's delivery to the Company of an opinion of tax counsel selected by
Employee that all or a portion of the Payment is subject to the Excise Tax and
the amount of the Excise Tax on the Payment; or (c) the Company's delivery to
Employee of an opinion of tax counsel selected by the Company and acceptable to
Employee that all or a portion of the Payment is subject to the Excise Tax and
the amount of the Excise Tax on the Payment.
11.2 DEFENSE AND SETTLEMENT OPTION. In lieu of paying the Gross-Up
Payment for any Payment, the Company may elect to undertake, at its sole
expense, the defense and settlement of any assessment by the Internal Revenue
Service of the Excise Tax on any Payment. If the Company so elects to undertake
the defense or settlement of any assessment by the Internal Revenue Service of
the Excise Tax on any Payment, the Company shall protect, defend, indemnify and
hold Employee forever harmless from and against the Excise Tax on such Payment
and any and all liabilities, demands, claims, actions, causes of action,
assessments, losses, costs, damages or expenses, including attorney's fees and
accountant's fees in connection with any thereof, and any interest and penalties
sustained by Employee as a result of or arising out of or by virtue of the
Company's undertaking.
11.3 ADJUSTMENTS. If the Excise Tax is determined to be less than the
amount taken into account in determining the Gross-Up Payment paid pursuant to
Section 11.1, Employee shall repay to the Company, within ten days after receipt
of a refund by the Employee from the Internal Revenue Service of such
overpayment, the portion of the Gross-Up Payment attributable to such reduction
plus interest on the amount of such repayment at the rate provided in Section
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<PAGE>
1273(b)(2)(B) of the Code for debt instruments with a maturity after issuance
equal to the period beginning on the date the Gross-Up Payment was made and
ending on the date of repayment required by this sentence. If the Excise Tax
is determined to exceed the amount taken into account in determining the
Gross-Up Payment paid pursuant to Section 11.1, the Company within 10 days
after the time that the amount of such excess Excise Tax is determined shall
make an additional payment to the Employee of an amount equal to such excess
plus an amount equal to any interest and penalties payable to the Internal
Revenue Service with respect to such excess and any Excise Tax on payment
pursuant to this sentence upon payments made pursuant to this sentence.
12. EMPLOYEE'S NON-COMPETITION OBLIGATION.
12.1 Until the Date of Termination, and for a period of 12 months
thereafter if this Agreement is terminated either by (i) the Company for Cause;
(ii) the Employee for any reason other than Good Reason or (iii) following or
upon a Change of Control, the Employee shall not, acting alone or in conjunction
with others, directly or indirectly, in any of the business territories in which
the Company or any of its Affiliates is presently or from time to time during
the Employment Period conducting business, invest or engage, directly or
indirectly, in any business which is competitive with that of the Company or
accept employment with or render services to such a competitor as a director,
officer, agent, employee or consultant, or take action inconsistent with the
fiduciary relationship of an employee to his employer; provided, however, that
the beneficial ownership by the Employee of up to three percent of the Voting
Stock of any corporation subject to the periodic reporting requirements of the
Exchange Act shall not violate this Section 12.1.
13. MISCELLANEOUS.
13.1 NOTICES. All notices and other communications required or permitted
hereunder or necessary or convenient in connection herewith shall be in writing
and shall be deemed to have been given when delivered by hand or mailed by
registered or certified mail, return receipt requested, as follows (provided
that notice of change of address shall be deemed given only when received):
If to the Company to:
9780 S. Meridian Blvd.
Suite 180
Englewood, CO 80112
Attention: Board of Directors
If to the Employee to:
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<PAGE>
Thomas J. Wiens
9780 S. Meridian Blvd.
Suite 180
Englewood, CO 80112
or to such other names or addresses as the Company or the Employee, as the case
may be, shall designate by notice to the other party hereto in the manner
specified in this Section 13.1.
13.2 WAIVER OF BREACH. The waiver by any party hereto of a breach of any
provision of this Agreement shall neither operate nor be construed as a waiver
of any subsequent breach by any party.
13.3 ASSIGNMENT. This Agreement shall be binding upon and inure to the
benefit of the Company, its successors, legal representatives and assigns, and
upon the Employee, his heirs, executors, administrators, representatives and
assigns; provided that in case of the sale of all or substantially all of the
assets and/or business of the Company, whether by merger, consolidation,
purchase or otherwise, the Company will require the purchaser or acquiror to
assume all of the Company's obligations and liabilities hereunder.
13.4 ENTIRE AGREEMENT; NO ORAL AMENDMENTS. This Agreement, together with
any exhibit attached hereto and any document, policy, rule or regulation
referred to herein, replaces and merges all previous agreements and discussions
relating to the same or similar subject matter between the Employee and the
Company and constitutes the entire agreement between the Employee and the
Company with respect to the subject matter of this Agreement. This Agreement
may not be modified in any respect by any verbal statement, representation or
agreement made by any employee, officer or representative of the Company or by
any written agreement unless signed by an officer of the Company who is
expressly authorized by the Company to execute such document.
13.5 ENFORCEABILITY. If any provision of this Agreement or application
thereof to anyone or under any circumstances shall be determined to be invalid
or unenforceable, such invalidity or unenforceability shall not affect any other
provisions or applications of this Agreement which can be given effect without
the invalid or unenforceable provision or application.
13.6 GOVERNING LAW. The laws of the State of Colorado shall govern the
interpretation, validity and effect of this Agreement without regard to the
place of execution or the place for performance thereof.
13.7 INJUNCTIVE RELIEF. The Company and the Employee agree that a breach
of any term of this Agreement by the Employee would cause irreparable damage to
the Company and that, in the event of such breach, the Company shall have, in
addition to any and all remedies of law, the
18
<PAGE>
right to any injunction, specific performance and other equitable relief to
prevent or to redress the violation of the Employee's duties or
responsibilities hereunder.
13.8 COMPLETE AMENDMENT. This Agreement amends in its entirety the
Executive Employment Agreement between the Company and the Employee dated
July 1, 1997.
IN WITNESS WHEREOF, the undersigned, intending to be legally bound, have
executed this Agreement to be effective July 1, 1998.
RECYCLING INDUSTRIES, INC.
By:
-------------------------------
Graydon H. Neher, Director
By:
-------------------------------
Jerome B. Misukanis, Director
EMPLOYEE:
By:
-------------------------------
Thomas J. Wiens
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<PAGE>
SCHEDULE A
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
The Employee as chairman shall preside at all meetings of shareholders,
and the chairman shall also preside at all meetings of the board of
directors. Subject to the direction and control of the board of directors,
the Employee shall be the chief executive officer of the Company and as such
shall have general and active management of the business of the Company and
shall see that all orders and resolutions of the board of directors are
carried into effect. The chairman may negotiate, enter into, and execute
contracts, deeds, and other instruments on behalf of the Company as are
necessary and appropriate to the conduct to the business and affairs of the
Company or as are approved by the board of directors. The chairman shall
have such additional authority and duties as are appropriate and customary
for the office of chairman and chief executive officer, except as the same
may be expanded or limited by the board of directors from time to time.
In addition the foregoing duties, the Employee shall:
1. Prepare a strategic plan for the Company in cooperation with the
Company's other executive officers.
2. Identify acquisition opportunities and negotiate for the completion of
such acquisitions in accordance with the Company's strategic plan.
3. Identify and negotiate debt and equity financing consistent with the
Company's strategic plan.
4. Oversee the operations of the Company through and with the Company's
officers who are responsible for operations.
5. Oversee the financing of the Company through and with the Company's
officers who are responsible for financial matters.
6. Manage the corporate functions of the Company.
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SCHEDULE B
LOAN SCHEDULE
<TABLE>
<CAPTION>
Subsequent Acquisition
Number Loan Amount Cumulative Loan Amount
<S> <C> <C>
1 $100,000 $100,000
2 $115,000 $215,000
3 $130,000 $345,000
4 $145,000 $490,000
5 $160,000 $650,000
6 $175,000 $825,000
7 $190,000 $1,015,000
8 $205,000 $1,220,000
9 $220,000 $1,440,000
10 $235,000 $1,675,000
11 $250,000 $1,925,000
</TABLE>
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SCHEDULE C
FORM OF PROMISSORY NOTE
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EXECUTIVE EMPLOYMENT AGREEMENT
THIS AGREEMENT is made and entered into effective the 1st. day of July,
1999, by and between RECYCLING INDUSTRIES, INC., a Colorado corporation having
its principal executive office at 9780 South Meridian Boulevard, Suite 180,
Englewood, CO 80112 (hereinafter referred to as the "Company"), and BRIAN L.
KLEMSZ (hereinafter referred to as the "Employee").
W I T N E S S E T H:
WHEREAS, the Company desires to employ the Employee in an executive
capacity and the Employee desires to enter the Company's employ.
NOW, THEREFORE, for and in consideration of the mutual promises, covenants
and obligations contained herein, and other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the Company and the
Employee hereby agree as follows:
1. CERTAIN DEFINITIONS. As used in this Agreement, the following terms have
the meanings prescribed below:
AFFILIATE is used in this Agreement to define a relationship to a person or
entity and means a person or entity who, directly or indirectly through one or
more intermediaries, controls, is controlled by, or is under common control
with, such person or entity.
ANNUAL BONUS shall have the meaning assigned thereto in Section 4.2 hereof.
BASE SALARY shall have the meaning assigned thereto in Section 4.1 hereof.
BOARD OF DIRECTORS means the board of directors of the Company.
BENEFICIAL OWNER shall have the meaning assigned thereto in Rule 13(d)-3
under the Exchange Act; provided, however, and without limitation, that any
individual, corporation, partnership, group, association or other person or
entity that has the right to acquire any Voting Stock at any time in the future,
whether such right is (i) contingent or absolute or (ii) exercisable presently
or at any time in the future, pursuant to any agreement or understanding or upon
the exercise or conversion of rights, options or warrants, or otherwise, shall
be the Beneficial Owner of such Voting Stock.
BUSINESS DAY shall mean every day the New York Stock Exchange is open for
business.
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CAUSE shall have the meaning assigned thereto in Section 5.3 hereof.
CHANGE OF CONTROL of the Company shall mean any one of the following
events: (i) the acquisition by an entity, person or group (other than the
Company), either in a single transaction or in a series of transactions, of
30% or more of the Company's Voting Stock, including acquisitions of Voting
Stock through the exercise or conversion of warrants, options, convertible
securities, debt or any rights to acquire Voting Stock; (ii) a change in a
majority of the Company; Directors as of the date hereof (the "Incumbent
Board"), unless the new or additional Directors have been appointed or
nominated by a majority of the Board of Directors; PROVIDED HOWEVER, that
any change in the majority of the Incumbent Board in connection with an
actual or threatened proxy contest shall be a change of control; (iii) a
merger by the Company with or into another entity, following which the
Company's shareholders own less than 60% of the outstanding voting securities
of the surviving entity;(iv) the completion by the Company of a sale of all
or substantially all of its assets; and (v) the Company entering into or
completing any type of reorganization, whereby during the pendency or upon
completion of the reorganization, the Company's Chief Executive Officer,
Chief Operating Officer or Chief Financial Officer are replaced by persons
who are representatives of or nominated by any class of the Company's debt or
equity securities, other than the Common Stock.
COBRA shall have the meaning assigned thereto in Section 4.8.
CODE means the Internal Revenue Code of 1986, as amended, and the rules
and regulations promulgated by the Internal Revenue Service thereunder, all as
in effect from time to time during the Employment Period.
COMMON STOCK means the Company's common stock, par value $.001 per share.
COMPANY means Recycling Industries, Inc., a Colorado corporation, the
principal executive office of which is located at 9780 South Meridian Blvd.,
Suite 180, Englewood, CO 80112.
CONFIDENTIAL INFORMATION shall have the meaning assigned thereto in Section
8.2 hereof.
DATE OF TERMINATION means the earliest to occur of (i) the date of the
Employee's death, (ii) the date on which the Employee terminates this Agreement
for any reason other than Good Reason or (iii) the date of receipt of the Notice
of Termination, or such later date as may be prescribed in the Notice of
Termination in accordance with Section 5.6 hereof.
DISABILITY means an illness or other disability which prevents the Employee
from discharging his responsibilities under this Agreement for a period of 180
consecutive calendar days, or an aggregate of 180 calendar days in any calendar
year, during the Employment Period,
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all as determined in good faith by the Board of Directors of the Company (or
a committee thereof).
EFFECTIVE DATE means July 1, 1998.
EMPLOYEE means Brian L. Klemsz, an individual residing at 9673 South
Hackberry Street, Highlands Ranch, CO 80126.
EMPLOYMENT PERIOD shall have the meaning assigned thereto in Section 3
hereof.
EXCHANGE ACT means the Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated by the Securities and Exchange Commission
thereunder, all as in effect from time to time during the Employment Period.
EXCISE TAX shall have the meaning assigned thereto in Section 11.1.
GOOD REASON shall have the meaning assigned thereto in Section 5.5 hereof.
GROSS-UP PAYMENT shall have the meaning assigned thereto in Section 11.1
hereof.
IMPOSITION OF EXCISE TAX shall have the meaning assigned thereto in
Section 11.1.
INITIAL TERM shall have the meaning assigned thereto in Section 3 hereof.
NOTICE OF TERMINATION shall have the meaning assigned thereto in
Section 5.6 hereof.
PAYMENT shall have the meaning assigned thereto in Section 11 hereof.
UNEXPIRED TERM shall have the meaning assigned thereto in Section 6.3(c)
hereof.
VOTING STOCK means all outstanding shares of capital stock of the Company
entitled to vote generally in an election of directors; provided, however, that
if the Company has shares of Voting Stock entitled to more or less than one vote
per share, each reference to a proportion of the issued and outstanding shares
of Voting Stock shall be deemed to refer to the proportion of the aggregate
votes entitled to be cast by the issued and outstanding shares of Voting Stock.
WITHOUT CAUSE shall have the meaning assigned thereto in Section 5.4
hereof.
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2. GENERAL DUTIES OF COMPANY AND EMPLOYEE.
2.1 The Company agrees to employ the Employee, and the Employee agrees to
accept employment by the Company and to serve the Company as Senior Vice
President, Chief Financial Officer and Treasurer. The Employee shall report
directly to the Company's Chief Executive Officer. In addition, at all times
during the Employment Period, Employee shall be elected to serve as a member of
the Board of Directors. The authority, duties and responsibilities of the
Employee shall include those described in Schedule A to this Agreement, and such
other or additional duties as may from time to time be assigned to the Employee
by the Board of Directors (or a committee thereof) and agreed to by the
Employee. While employed hereunder, the Employee shall devote reasonable time
and attention during normal business hours to the affairs of the Company and use
his best efforts to perform faithfully and efficiently his duties and
responsibilities. The Employee may (a) serve on corporate, civic, religious or
charitable boards or committees, (b) deliver lectures, fulfill speaking
engagements or teach at educational institutions, (c) participate in political
and religious activities, including participation in a political campaign
provided the Employee will comply with all laws and regulations related to such
activities, and (d) manage and oversee personal investments and other business
activities which are not competitive with the Company, so long as such
activities do not significantly interfere with the performance of the Employee's
duties and responsibilities; provided that such activities, alone or on a
cumulative basis, do not interfere with the performance of the Employee's duties
hereunder.
2.2 The Employee agrees and acknowledges that he owes a fiduciary duty of
loyalty, fidelity and allegiance to act at all times in the best interests of
the Company and to do no act and to make no statement, oral or written, which
would injure Company's business, its interests or its reputation.
2.3 The Employee agrees to comply at all times during the Employment
Period with all applicable policies, rules and regulations of the Company,
including, without limitation, the Company's policy regarding trading in the
Common Stock, as each is in effect from time to time during the Employment
Period.
3. TERM.
Unless sooner terminated pursuant to other provisions hereof, the
Employee's period of employment under this Agreement shall be a period of four
years from the July 1, 1998 (the "Initial Term"). Prior to the expiration of
the Initial Term, the Company and the Employee may agree, in writing, to extend
the Initial Term. The Initial Term and any and all renewals thereof are
referred to herein collectively as the "Employment Period."
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4. COMPENSATION AND BENEFITS.
4.1 Base Salary. As compensation for services to the Company, the Company
shall pay to the Employee until the Date of Termination, an annual base salary
of $260,000 (the "Base Salary"). The Board of Directors (or a committee
thereof), in its discretion, may increase the Base Salary based upon relevant
circumstances. The Base Salary shall be payable in equal semi-monthly
installments or in accordance with the Company's established policy, subject
only to such payroll and withholding deductions as may be required by law and
other deductions applied generally to employees of the Company for insurance and
other employee benefit plans.
4.2 Bonus. In addition to the Base Salary, the Employee shall be awarded
for each fiscal year until the Date of Termination, an annual performance bonus
(either pursuant to a bonus or incentive plan or program of the Company or
otherwise) of not less than $40,000 after the end of fiscal 1998, 1998 and 2000
plus an additional amount, if any to be determined by the Board of Directors (or
a committee thereof), in its sole discretion (the "Annual Bonus").
4.3 Location of Office. The Employee's primary office will be located at
the Company's headquarters in Douglas County, Colorado. The Employee will
either be present at the Company's offices, traveling on Company business or
meeting with persons on behalf of the Company in accordance with his duties
hereunder commencing at 8:00 a.m. and ending at 5:00 p.m. every Business Day,
unless Employee is on paid vacation.
4.4 Vacation. Until the Date of Termination, the Employee shall accrue
and be entitled to take during each one year period of the Employment Agreement,
four weeks of paid vacation plus an additional one week of paid vacation for
each full year of employment with the Company, not to exceed five weeks.
4.5 Automobile. Until the Date of Termination, the Company shall provide
a sport utility vehicle or equivalent vehicle, subject to the approval of the
Compensation Committee, on behalf of the Employee.
4.6 Incentive, Savings and Retirement Plans. Until the Date of
Termination, the Employee shall be eligible to participate in and shall receive
all benefits under all executive incentive, savings and retirement plans and
programs currently maintained or hereinafter established by the Company for the
benefit of its executive officers and/or employees. The Employee and/or the
Employee's family, as the case may be, shall be eligible to participate in and
shall receive all benefits under the Company's welfare benefit plans. Such
welfare benefit plans may include, without limitation, medical, dental,
disability, group life, accidental death and travel accident insurance plans and
programs.
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4.7 Reimbursement of Expenses. The Employee may from time to time until
the Date of Termination incur various business expenses customarily incurred by
persons holding positions of like responsibility, including, without limitation,
travel, long distance telephone charges, cellular phone charges, facsimile,
entertainment and similar expenses incurred for the benefit of the Company or
while traveling or commuting on Company business. Subject to the Company's
policy regarding the reimbursement of such expenses as in effect from time to
time during the Employment Period, the Company shall reimburse the Employee for
such expenses from time to time, at the Employee's request, and the Employee
shall account to the Company for all such expenses. In particular, the Company
shall reimburse the Employee for travel (including occasional and reasonable
first class upgrades), lodging and other out-of-pocket expenses associated with
Employee's travel and performance of services pursuant to this Agreement.
4.8 De-Minimis Expenses. The Employee shall be permitted to use
Company equipment, such as telephones, copy machines and facsimile machines,
for de-minimis personal matters.
5. TERMINATION.
5.1 Death. This Agreement shall terminate automatically upon the death of
the Employee.
5.2 Disability. The Company may terminate this Agreement, upon written
notice to the Employee delivered in accordance with Sections 5.6 and 13.1
hereof, upon the Disability of the Employee.
5.3 Cause. The Company may terminate this Agreement, upon written notice
to the Employee delivered in accordance with Sections 5.6 and 13.1 hereof, for
Cause. For purposes of this Agreement, "Cause" means (i) the Employee's willful
and continued refusal to perform substantially his duties and responsibilities
as contemplated in this Agreement (other than any such refusal based upon the
written advice received from the Employee's legal counsel that performance of
his duties would cause a breach of his duties to the Company or be a violation
of applicable law or regulation, or resulting from Disability or from the
Employee's termination for Good Reason); (ii) the Employee's willful engaging in
activities which would (a) constitute a breach of a material term of this
Agreement, or (b) result in a material injury to the Company or its Affiliates;
(iii) the Employee's non-appealable conviction of a felony; (iv) the Employee's
acknowledged or admitted commission of acts of fraud, embezzlement, theft or
other dishonest acts against the Company or the good faith determination by the
Board of Directors that the Employee has committed the foregoing acts; and (v)
the Employee's use of alcohol (except at Company sponsored parties or
receptions) or illegal drugs on the Company's premises. For the purposes
hereof, no act or failure or refusal to act on the Employee's part shall be
considered
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<PAGE>
"willful" unless done, or omitted to be done, by the Employee not in good
faith and without belief that his action or omission was in the best interest
of the Company or any Affiliate.
5.4 Without Cause. The Company may terminate this Agreement Without
Cause, upon written notice to the Employee delivered in accordance with
Sections 5.6 and 13.1 hereof. For purposes of this Agreement, the Employee
will be deemed to have been terminated "Without Cause" if the Employee is
terminated by the Company for any reason other than Cause, Disability or
death.
5.5 Good Reason. The Employee may terminate this Agreement for Good
Reason, upon written notice to the Company delivered in accordance with Sections
5.6 and 13.1 hereof. For purposes of this Agreement, "Good Reason" means (i)
the assignment to the Employee of substantial duties inconsistent in any
material respect with the Employee's duties or responsibilities as contemplated
in this Agreement, provided, however, Employee acknowledges that, from time to
time, he may be required to fulfill various clerical and other tasks incidental
to his employment by the Company which are specifically considered within the
Employee's duties or responsibilities as contemplated in this Agreement, (ii)
any other action by the Company which results in a material diminishment in the
Employee's position (including titles and reporting requirements), authority,
duties or responsibilities, (iii) any material breach by the Company of any of
the provisions of this Agreement, (iv) upon a Change of Control, the failure of
any successor or surviving entity to adopt and assume all of the provisions of
this Agreement; including any obligations triggered by a Change of Control; (v)
the resignation or removal of Thomas J. Wiens from the Company's Board of
Directors, as Chairman of the Board of Directors or as Chief executive Officer
of the Company during the term of this Agreement; or (vi) any reduction, or
attempted reduction, at any time during the Employment Period, of the Base
Salary of the Employee unless: (i) such reduction is part of an overall
proportional reduction in the compensation of the Company's executive officers
implemented by the Company's Board of Directors or, (ii) in his capacity as a
Director, the Employee recommends or approves the reduction. The determination
of the occurrence of any of the foregoing shall be based upon the good faith
determination by the Employee.
5.6 Notice of Termination.
(i) Any termination of this Agreement by the Company for Cause,
Without Cause or as a result of the Employee's Disability, or by the
Employee for Good Reason, shall be communicated by Notice of Termination to
the other party hereto given in accordance with this Agreement. For
purposes of this Agreement, a "Notice of Termination" means a written
notice which (i) indicates the specific termination provision in this
Agreement relied upon, (ii) sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for a termination of the
Employee's employment under the provisions so indicated and (iii) in the
case of termination of this Agreement by
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the Company for Cause, provides the Employee, and in the case of
termination of this Agreement by the Employee for Good Reason, provides
the Company, with a period of 30 days to cure the basis of such
termination, and (iv) specifies the termination date, if such date is
other than the date of receipt of such notice (which termination date
shall not be more than 30 days after the giving of such notice).
(ii) If the Employee terminates this agreement other than for Good
Reason, the Employee shall give the Company 30 days' prior written notice.
The Board of Directors may elect to waive the period of notice, or any
portion thereof.
6. OBLIGATIONS OF COMPANY UPON TERMINATION.
6.1 Cause; Other Than Good Reason. If this Agreement shall be
terminated either by the Company for Cause or by the Employee for any reason
other than Good Reason, the Company shall pay to the Employee, in a lump sum
in cash within 30 days after the Date of Termination an amount equal to the
sum of: (i) the aggregate of the Employee's Base Salary (as in effect on the
Date of Termination) through the Date of Termination, if not theretofore
paid, and, in the case of compensation previously deferred by the Employee,
all amounts of such compensation previously deferred and not yet paid by the
Company, (ii) an amount equal to one year's Base Salary as in effect on the
Date of Termination, and (iii) the product of (a) the Annual Bonus paid to
the Employee for the last full fiscal year preceding the Date of Termination
and (b) the fraction obtained by dividing (x) the number of days between the
Date of Termination and the last day of the last full fiscal year preceding
the Date of Termination and (y) 365. All other obligations of the Company
and rights of the Employee hereunder shall terminate effective as of the Date
of Termination.
6.2 Death or Disability.
(i) Subject to the provisions of this Section 6.2, if this
Agreement is terminated as a result of the Employee's death or Disability,
the Company shall pay to the Employee or his estate, in a lump sum in cash
within 30 days of the Date of Termination an amount equal to three times
the Employee's Base Salary (as in effect on the Date of Termination) plus a
lump-sum payment of $84,000. The Company may purchase insurance to cover
all or any part of the obligation contemplated in the foregoing sentence,
and the Employee agrees to submit to a physical examination to facilitate
the procurement of such insurance.
(ii) Whenever compensation is payable to the Employee hereunder
during a period in which he is partially or totally disabled, and such
Disability would (except for the provisions hereof) entitle the Employee to
Disability income or salary continuation payments from the Company
according to the terms of any plan or program presently maintained
or hereafter established by the Company, the Disability income or salary
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continuation paid to the Employee pursuant to any such plan or program
shall be considered a portion of the payment to be made to the Employee
pursuant to this Section 6.2 and shall not be in addition hereto.
If Disability income is payable directly to the Employee by an insurance
company under the terms of an insurance policy paid for by the Company,
the amounts paid to the Employee by such insurance company shall be
considered a portion of the payment to be made to the Employee pursuant
to this Section 6.2 and shall not be in addition hereto.
6.3 Good Reason; Without Cause. If (i) this Agreement shall be terminated
either by the Employee for Good Reason or by the Company Without Cause and (ii)
a Change of Control of the Company has not occurred within the two year period
preceding the Date of Termination:
(a) the Company shall pay to the Employee, in a lump sum in
cash within 30 days after the Date of Termination, the aggregate of
the following amounts:
(1) an amount equal to three times the Employee's Base
Salary (as in effect on the Date of Termination) plus $84,000;
and
(2) in the case of compensation previously deferred by
the Employee, all amounts of such compensation previously
deferred and not yet paid by the Company;
(b) the Company shall promptly upon submission by the
Employee of supporting documentation, pay or reimburse to the Employee
any costs and expenses paid or incurred by the Employee which would
have been payable under Section 4.8 of this Agreement if the
Employee's employment had not terminated; and
(c) until the expiration of the Initial Term or any renewal
period pursuant to Section 3 hereof (such period is sometimes referred
to herein as the "Unexpired Term") or of the 12-month period
commencing on the Date of Termination, whichever is longer, the
Company shall continue benefits to the Employee and/or the Employee's
family at least equal to those which would have been provided to them
under Section 4.8 if the Employee's employment had not been
terminated.
(d) all stock options granted to the Employee shall
immediately vest and become exercisable either by payment of the
Exercise Price or upon a cashless exercise by the Employee and the
Company shall pay to the Employee (i) a lump
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sum equal to the amount of any federal, state and local taxes
payable by the Employee as a result of either the vesting or
exercise of any options held by the Employee, and (ii) a lump sum
equal to the amount of any federal, state and local taxes payable
by the Employee as a result of the preceding tax reimbursement
payment. The provisions of this Section 6.3(e) shall survive the
termination of this Agreement and until all options held by the
Employee have been exercised or expired and all resulting taxes
paid.
6.4 Change of Control. If this Agreement shall be (i) terminated by the
employee for any reason or no reason during a twelve month period following a
Change of Control, or (ii) terminated either by the Employee for Good Reason or
by the Company Without Cause within a 24 month period following a Change of
Control:
(i) the Company shall pay to the Employee, in a lump sum in cash
within 30 days after the Date of Termination the aggregate of the following
amounts:
(a) an amount equal to three times the Employee's Base
Salary (as then in effect) plus $132,000;
(b) in the case of compensation previously deferred by
the Employee, all amounts of such compensation previously deferred and not
yet paid by the Company;
(c) the amount of all accrued but unused vacation as
provided in Section 6.7, below; and
(d) the amount of any federal, state and local taxes
payable by the Employee as a result of the foregoing payments made pursuant
to this Section 6.4(i) plus the amount of any federal, state and local
taxes payable by the Employee as a result of the preceding tax
reimbursement payment.
(ii) The Company shall promptly upon submission by the Employee of
supporting documentation, pay or reimburse to the Employee any costs and
expenses paid or incurred by the Employee which would have been payable under
Section 4.10 of this Agreement if the Employee's employment had not terminated.
(iii) Until the expiration of the longer of the Unexpired Term or 12
month period commencing on the Date of Termination, whichever is longer, the
Company shall continue benefits to the Employee and/or the Employee's family at
least equal to those which would have been provided to them under Section 4.9 if
the Employee's employment had not been terminated.
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(iv) All legal fees and other expenses incurred by the Employee to
enforce the terms of this Agreement, plus the Company shall pay to the Employee
an amount equal to (1) any federal, state or local taxes payable by the Employee
as a result of the foregoing payments, and (2) any federal, state and local
taxes payable by the Employee as a result of the preceding tax payment.
6.5 Stock Options. Upon a Change of Control, all stock options granted to
the Employee shall immediately vest and become exercisable either by payment of
the exercise price or upon a cashless exercise by the Employee and the Company
shall pay to the Employee (1) a lump sum equal to the amount of any federal,
state and local taxes payable by the Employee as a result of either the vesting
or exercise of any options held by the Employee, and (2) a lump sum equal to the
amount of any federal, state and local taxes payable by the Employee as a result
of the preceding tax reimbursement payment. The provisions of this Section 6.5
shall survive the termination or expiration of this Agreement and until all
options held by the Employee have been exercised or expired and all resulting
taxes paid.
6.6 No Mitigation Obligation. The Employee shall not be required to
mitigate damages or the amount of any payment provided for under this Section 6
by seeking other employment or otherwise, nor shall the amount of any payment
provided for under this Section 6 be reduced by any compensation earned by the
Employee as the result of employment by another employer after the termination
of the Employee's employment, or otherwise.
6.7 Vacation Time. Notwithstanding anything herein to the contrary, upon
termination of this Agreement for any reason, the Company shall pay the Employee
for any accrued but not taken Vacation Time which was not expired as of the Date
of Termination on a per diem basis based on the Base Salary then in effect,
provided, however, upon termination in the event of a Change of Control the
amount of accrued vacation shall not be subject to the annual limitation and all
forfeited accrued vacation from July 1, 1998 through the date of termination
shall be deemed to be due and owing to the Employee.
7. EMPLOYEE'S OBLIGATION TO AVOID CONFLICTS OF INTEREST.
In keeping with the Employee's fiduciary duties to the Company, the
Employee agrees that he shall not knowingly become involved in a conflict of
interest with the Company, or upon discovery thereof, allow such conflict to
continue. The Employee further agrees to disclose to the Company, promptly
after discovery, any facts or circumstances which might involve a conflict of
interest with the Company.
8. EMPLOYEE'S CONFIDENTIALITY OBLIGATION.
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8.1 The Employee hereby acknowledges, understands and agrees that all
Confidential Information is the exclusive and confidential property of the
Company and its Affiliates which shall at all times be regarded, treated and
protected as such in accordance with this Section 8. The Employee acknowledges
that all such Confidential Information is in the nature of a trade secret.
8.2 For purposes of this Agreement, "Confidential Information" means
information, which is used in the business of the Company or its Affiliates and
(i) is proprietary to, about or created by the Company or its Affiliates,(ii)
gives the Company or its Affiliates a competitive business advantage or the
opportunity of obtaining such advantage or the disclosure of which would be
detrimental to the interests of the Company or its Affiliates, (iii)is
designated as Confidential Information by the Company or its Affiliates, is
known by the Employee to be considered confidential by the Company or its
Affiliates, or from all the relevant circumstances should reasonably be assumed
by the Employee to be confidential and proprietary to the Company or its
Affiliates,(iv) was not or does not become generally available to the public
other than as a result of the disclosure by the Employee or (v) was not
available or did not become available to the Employee on a non-confidential
basis prior to its disclosure to the Employee by the Company. Such Confidential
Information includes, without limitation, the following types of information and
other information of a similar nature (whether or not reduced to writing or
designated as confidential):
(a) Internal personnel and financial information of the
Company or its Affiliates, purchasing and internal cost information,
internal service and operational manuals and the manner and methods of
conducting the business of the Company or its Affiliates;
(b) Marketing and development plans, price and cost data,
price and fee amounts, pricing and billing policies, quoting
procedures, marketing techniques, forecasts and forecast assumptions
and volumes, and future plans and potential strategies (including,
without limitation, all information relating to any acquisition
prospect and the identity of any key contact within the organization
of any acquisition prospect) of the Company or its Affiliates which
have been or are being discussed;
(c) Customer services and the type, quantity,
specifications and content of products and services purchased, leased,
licensed or received by customers of the Company or its Affiliates;
and
(d) Confidential and proprietary information provided to
the Company or its Affiliates by any actual or potential customer,
government agency or other third party (including businesses,
consultants and other entities and individuals).
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8.3 As a consequence of the Employee's acquisition or anticipated
acquisition of Confidential Information, the Employee shall occupy a position of
trust and confidence with respect to the affairs and business of the Company and
its Affiliates. In view of the foregoing and of the consideration to be
provided to the Employee, the Employee agrees that it is reasonable and
necessary that the Employee make each of the following covenants:
(i) At any time during the Employment Period and thereafter,
except as required by law, the Employee shall not disclose Confidential
Information to any person or entity, either inside or outside of the
Company, other than as necessary in carrying out his duties and
responsibilities as set forth in Section 2 hereof, without first obtaining
the Company's prior written consent (unless such disclosure is compelled
pursuant to court orders or subpoena, and at which time the Employee shall
give notice of such proceedings to the Company).
(ii) At any time during the Employment Period and thereafter, the
Employee shall not use, copy or transfer Confidential Information other
than as necessary in carrying out his duties and responsibilities as set
forth in Section 2 hereof, without first obtaining the Company's prior
written consent.
(iii) On the Date of Termination, upon the Company's written
request, the Employee shall promptly deliver to the Company (or its
designee) all written materials, records and documents made by the Employee
or which came into his possession prior to or during the Employment Period
concerning the business or affairs of the Company or its Affiliates,
including, without limitation, all materials containing Confidential
Information.
9. DISCLOSURE OF INFORMATION, IDEAS, CONCEPTS, IMPROVEMENTS, DISCOVERIES AND
INVENTIONS.
As part of the Employee's fiduciary duties to the Company, the Employee
agrees that during his employment by the Company, the Employee shall promptly
disclose in writing to the Company all information, ideas, concepts,
improvements, discoveries and inventions, whether patentable or not, and whether
or not reduced to practice, which are conceived, developed, made or acquired by
the Employee, either individually or jointly with others, and which relate to
the business, products or services of the Company or its Affiliates,
irrespective of whether the Employee used the Company's time or facilities and
irrespective of whether such information, idea, concept, improvement, discovery
or invention was conceived, developed, discovered or acquired by the Employee on
the job, at home, or elsewhere. This obligation extends to all types of
information, ideas and concepts, including information, ideas and concepts
relating to new types of services, corporate opportunities, acquisition
prospects, the identify of key representatives
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within acquisition prospect organizations, prospective names or service marks
for the Company's business activities, and the like.
10. OWNERSHIP OF INFORMATION, IDEAS, CONCEPTS, IMPROVEMENTS, DISCOVERIES AND
INVENTIONS AND ALL ORIGINAL WORKS OF AUTHORSHIP.
10.1 All information, ideas, concepts, improvements, discoveries and
inventions, whether patentable or not, which are conceived, made, developed or
acquired by the Employee or which are disclosed or made known to the Employee,
individually or in conjunction with others, during the Employee's employment by
the Company and which relate to the business, products or services of the
Company or its Affiliates (including, without limitation, all such information
relating to corporate opportunities, research, financial and sales data, pricing
and trading terms, evaluations, opinions, interpretations, acquisition
prospects, the identity of customers or their requirements, the identity of key
contacts within the customers' organizations or within the organization of
acquisition prospects, marketing and merchandising techniques, and prospective
names and service marks) are and shall be the sole and exclusive property of the
Company. Furthermore, all drawings, memoranda, notes, records, files,
correspondence, manuals, models, specifications, computer programs, maps and all
other writings or materials of any type embodying any of such information,
ideas, concepts, improvements, discoveries and inventions are and shall be the
sole and exclusive property of the Company.
10.2 In particular, the Employee hereby specifically sells, assigns,
transfers and conveys to the Company all of his worldwide right, title and
interest in and to all such information, ideas, concepts, improvements,
discoveries or inventions, and any United States or foreign applications for
patents, inventor's certificates or other industrial rights which may be filed
in respect thereof, including divisions, continuations, continuations-in-part,
reissues and/or extensions thereof, and applications for registration of such
names and service marks. The Employee shall assist the Company and its nominee
at all times, during the Employment Period and thereafter, in the protection of
such information, ideas, concepts, improvements, discoveries or inventions, both
in the United States and all foreign countries, which assistance shall include,
but shall not be limited to, the execution of all lawful oaths and all
assignment documents requested by the Company or its nominee in connection with
the preparation, prosecution, issuance or enforcement of any application for
United States or foreign letters patent, including divisions, continuations,
continuations-in-part, reissues and/or extensions thereof, and any application
for the registration of such names and service marks.
10.3 If the Employee creates, during the Employment Period, any original
work of authorship fixed in any tangible medium of expression which is the
subject matter of copyright (such as, videotapes, written presentations on
acquisitions, computer programs, drawings, maps, architectural renditions,
models, manuals, brochures or the like) relating to the Company's business,
products or services, other than an autobiographical work concerning the
Employee or
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others, whether such work is created solely by the Employee or jointly with
others, the Company shall be deemed the author of such work if the work is
prepared by the Employee in the scope of his employment; or, if the work is
not prepared by the Employee within the scope of his employment but is
specially ordered by the Company as a contribution to a collective work, as a
part of a motion picture or other audiovisual work, as a translation, as a
supplementary work, as a compilation or as an instructional text, then the
work shall be considered to be work made for hire, and the Company shall be
the author of such work. If such work is neither prepared by the Employee
within the scope of his employment nor a work specially ordered and deemed to
be a work made for hire, then the Employee hereby agrees to sell, transfer,
assign and convey, and by these presents, does sell, transfer, assign and
convey, to the Company all of the Employee's worldwide right, title and
interest in and to such work and all rights of copyright therein. The
Employee agrees to assist the Company and its Affiliates, at all times,
during the Employment Period and thereafter, in the protection of the
Company's worldwide right, title and interest in and to such work and all
rights of copyright therein, which assistance shall include, but shall not be
limited to, the execution of all documents requested by the Company or its
nominee and the execution of all lawful oaths and applications for
registration of copyright in the United States and foreign countries.
11. CERTAIN TAXES.
11.1 Gross-Up Payments. If all or any portion of the payments and benefits
which the Employee is entitled to receive pursuant to the terms of this
Agreement or any other plan, arrangement or agreement in respect of the Company
or its affiliates (the "Payments") constitutes "excess parachute payments"
within the meaning of Section 280G of the Code, that are subject to the excise
tax (the "Excise Tax") imposed by Section 4999 of the Code (or similar tax
and/or assessment), the Company (or its successors or assigns) shall pay to the
Employee an additional amount ("Gross-Up Payment") such that the net amount
retained by the Employee, after deduction of (i) any Excise Tax on Payments,
(ii) any federal, state and local income tax and Excise Tax upon the payment
provided for by this Section 11.1, and (iii) any interest and penalties imposed
in respect of the Excise Tax shall be equal to the full amount of the Payments.
For purposes of determining the amount of the Gross-Up Payment, the Employee
shall be deemed to pay federal income taxes at the highest marginal rate of
federal income taxation in the calendar year in which the Gross-Up Payment is to
be made, and state and local income taxes at the highest marginal rates of
taxation in the state and locality of the Employee's residence on the date the
Gross-Up Payment is to be made, net of the maximum reduction in federal income
taxes which could be obtained from deduction of such state and local taxes. The
Gross-Up Payment for any Payment shall be paid to Employee within ten (10) days
after the Imposition of Excise Tax, unless the Company undertakes to indemnify
him as provided in Section 11.2. The "Imposition of Excise Tax" shall mean the
earliest of: (a) the issuance by the Internal Revenue Service of a notice
stating in effect that an Excise Tax is due with respect to the Payment; (b)
Employee's delivery to the Company of an opinion of tax counsel selected by
Employee that all or a portion of the Payment
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is subject to the Excise Tax and the amount of the Excise Tax on the Payment;
or (c) the Company's delivery to Employee of an opinion of tax counsel
selected by the Company and acceptable to Employee that all or a portion of
the Payment is subject to the Excise Tax and the amount of the Excise Tax on
the Payment.
11.2 Defense and Settlement Option. In lieu of paying the Gross-Up Payment
for any Payment, the Company may elect to undertake, at its sole expense, the
defense and settlement of any assessment by the Internal Revenue Service of the
Excise Tax on any Payment. If the Company so elects to undertake the defense or
settlement of any assessment by the Internal Revenue Service of the Excise Tax
on any Payment, the Company shall protect, defend, indemnify and hold Employee
forever harmless from and against the Excise Tax on such Payment and any and all
liabilities, demands, claims, actions, causes of action, assessments, losses,
costs, damages or expenses, including attorney's fees and accountant's fees in
connection with any thereof, and any interest and penalties sustained by
Employee as a result of or arising out of or by virtue of the Company's
undertaking.
11.3 Adjustments. If the Excise Tax is determined to be less than the
amount taken into account in determining the Gross-Up Payment paid pursuant to
Section 11.1, Employee shall repay to the Company, within ten days after receipt
of a refund by the Employee from the Internal Revenue Service of such
overpayment, the portion of the Gross-Up Payment attributable to such reduction
plus interest on the amount of such repayment at the rate provided in Section
1273(b)(2)(B) of the Code for debt instruments with a maturity after issuance
equal to the period beginning on the date the Gross-Up Payment was made and
ending on the date of repayment required by this sentence. If the Excise Tax is
determined to exceed the amount taken into account in determining the Gross-Up
Payment paid pursuant to Section 11.1, the Company within 10 days after the time
that the amount of such excess Excise Tax is determined shall make an additional
payment to the Employee of an amount equal to such excess plus an amount equal
to any interest and penalties payable to the Internal Revenue Service with
respect to such excess and any Excise Tax on payment pursuant to this sentence
upon payments made pursuant to this sentence.
12. EMPLOYEE'S NON-COMPETITION OBLIGATION.
12.1 Until the Date of Termination, the Employee shall not, acting alone or
in conjunction with others, directly or indirectly, in any of the business
territories in which the Company or any of its Affiliates is presently or from
time to time during the Employment Period conducting business, invest or engage,
directly or indirectly, in any business which is competitive with that of the
Company or accept employment with or render services to such a competitor as a
director, officer, agent, employee or consultant, or take action inconsistent
with the fiduciary relationship of an employee to his employer; provided,
however, that the beneficial ownership by
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the Employee of up to three percent of the Voting Stock of any corporation
subject to the periodic reporting requirements of the Exchange Act shall not
violate this Section 12.1.
12.2 In addition to the other obligations agreed to by the Employee in this
Agreement, the Employee agrees that until the Date of Termination, he shall not
at any time, directly or indirectly, (a) solicit any employee of the Company to
leave his employment, (b) solicit any customer or acquisition prospect of the
Company, derived from any customer list, customer lead, mail, printed matter or
other information secured from the Company or its present or past employees or
(c) in any other manner use any customer lists or customer leads, mail,
telephone numbers, printed material or other information of the Company relating
thereto.
12.3 In addition to the other obligations agreed to by the Employee in this
Agreement, the Employee agrees that if this Agreement is terminated either by
the Company for Cause or by the Employee for any reason other than Good Reason
or during the 24 month period following a change of control, then for a period
of one year following the Date of Termination, he shall not at any time,
directly or indirectly, (i) solicit any employee of the Company to leave his
employment, (ii) solicit any customer or acquisition prospect of the Company
derived from any customer list, customer lead, mail, printed matter or other
information secured from the Company or its present or past employees or (iii)
in any other manner use any customer lists or customer leads, mail, telephone
numbers, printed material or other information of the Company relating thereto.
Notwithstanding the foregoing, the Employee shall not be precluded at any time
after the Date of Termination from being employed by a firm or other entity
which engages in any of the activities described in the preceding sentence;
provided that Employee himself does not participate or assist his employer in
any manner in such activities.
13. MISCELLANEOUS.
13.1 Notices. All notices and other communications required or permitted
hereunder or necessary or convenient in connection herewith shall be in writing
and shall be deemed to have been given when delivered by hand or mailed by
registered or certified mail, return receipt requested, as follows (provided
that notice of change of address shall be deemed given only when received):
If to the Company to:
9780 S. Meridian Blvd.
Suite 180
Englewood, CO 80112
Attention: Board of Directors
If to the Employee to:
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Brian L. Klemsz
9673 S. Hackberry Street
Highlands Ranch, CO 80126
or to such other names or addresses as the Company or the Employee, as the case
may be, shall designate by notice to the other party hereto in the manner
specified in this Section 13.1.
13.2 Waiver of Breach. The waiver by any party hereto of a breach of any
provision of this Agreement shall neither operate nor be construed as a waiver
of any subsequent breach by any party.
13.3 Assignment. This Agreement shall be binding upon and inure to the
benefit of the Company, its successors, legal representatives and assigns, and
upon the Employee, his heirs, executors, administrators, representatives and
assigns; provided that in case of the sale of all or substantially all of the
assets and/or business of the Company, whether by merger, consolidation,
purchase or otherwise, the Company will require the purchaser or acquiror to
assume all of the Company's obligations and liabilities hereunder.
13.4 Entire Agreement; No Oral Amendments. This Agreement, together with
any exhibit attached hereto and any document, policy, rule or regulation
referred to herein, replaces and merges all previous agreements and discussions
relating to the same or similar subject matter between the Employee and the
Company and constitutes the entire agreement between the Employee and the
Company with respect to the subject matter of this Agreement. This Agreement
may not be modified in any respect by any verbal statement, representation or
agreement made by any employee, officer or representative of the Company or by
any written agreement unless signed by an officer of the Company who is
expressly authorized by the Company to execute such document.
13.5 Enforceability. If any provision of this Agreement or application
thereof to anyone or under any circumstances shall be determined to be invalid
or unenforceable, such invalidity or unenforceability shall not affect any other
provisions or applications of this Agreement which can be given effect without
the invalid or unenforceable provision or application.
13.6 Governing Law. The laws of the State of Colorado shall govern the
interpretation, validity and effect of this Agreement without regard to the
place of execution or the place for performance thereof.
13.7 Injunctive Relief. The Company and the Employee agree that a breach
of any term of this Agreement by the Employee would cause irreparable damage to
the Company and that, in the event of such breach, the Company shall have, in
addition to any and all remedies of
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law, the right to any injunction, specific performance and other equitable
relief to prevent or to redress the violation of the Employee's duties or
responsibilities hereunder.
IN WITNESS WHEREOF, the undersigned, intending to be legally bound, have
executed this Agreement to be effective July 1, 1999.
RECYCLING INDUSTRIES, INC.
By:
---------------------------
Thomas J. Wiens
Chairman of the Board and
Chief Executive Officer
EMPLOYEE:
By:
---------------------------
Brian L. Klemsz
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SCHEDULE A
SENIOR VICE PRESIDENT,
CHIEF FINANCIAL OFFICER AND TREASURER
Summary
Primary Responsibilities:
A-1
<PAGE>
EXECUTIVE EMPLOYMENT AGREEMENT
THIS AGREEMENT is made and entered into effective the 1st day of July,
1998, by and between RECYCLING INDUSTRIES, INC., a Colorado corporation having
its principal executive office at 9780 South Meridian Boulevard, Suite 180,
Englewood, CO 80112 (hereinafter referred to as the "Company"), and HAROLD J.
ROUSTER (hereinafter referred to as the "Employee").
W I T N E S S E T H:
WHEREAS, the Company desires to employ the Employee in an executive
capacity and the Employee desires to enter the Company's employ.
NOW, THEREFORE, for and in consideration of the mutual promises, covenants
and obligations contained herein, and other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the Company and the
Employee hereby agree as follows:
1. CERTAIN DEFINITIONS. As used in this Agreement, the following terms have
the meanings prescribed below:
AFFILIATE is used in this Agreement to define a relationship to a person or
entity and means a person or entity who, directly or indirectly through one or
more intermediaries, controls, is controlled by, or is under common control
with, such person or entity.
ANNUAL BONUS shall have the meaning assigned thereto in Section 4.2 hereof.
BASE SALARY shall have the meaning assigned thereto in Section 4.1 hereof.
BOARD OF DIRECTORS means the board of directors of the Company.
BENEFICIAL OWNER shall have the meaning assigned thereto in Rule 13(d)-3
under the Exchange Act; provided, however, and without limitation, that any
individual, corporation, partnership, group, association or other person or
entity that has the right to acquire any Voting Stock at any time in the future,
whether such right is (i) contingent or absolute or (ii) exercisable presently
or at any time in the future, pursuant to any agreement or understanding or upon
the exercise or conversion of rights, options or warrants, or otherwise, shall
be the Beneficial Owner of such Voting Stock.
BUSINESS DAY shall mean every day the New York Stock Exchange is open for
business.
<PAGE>
CAUSE shall have the meaning assigned thereto in Section 5.3 hereof.
CHANGE OF CONTROL of the Company shall mean any one of the following
events: (i) the completion of a tender offer or exchange offer (other than an
offer by the Company) which results in the acquisition by an entity, person or
group of 30% or more of the Company's Voting Stock, other than acquisitions by
employee benefits plans sponsored by the Company, acquisitions of Voting Stock
directly from the Company and acquisitions of Voting Stock by entities under
common control with the Company; (ii) a change in a majority of the Company;
Directors as of the date hereof (the "Incumbent Board"), unless the new or
additional Directors have been appointed or nominated by a majority of the
Board of Directors; PROVIDED HOWEVER, that any change in the majority of the
Incumbent Board in connection with an actual or threatened proxy contest shall
be a change of control; (iii) a merger by the Company with or into another
entity, following which the Company's shareholders own less than 60% of the
outstanding voting securities of the surviving entity; and (iv) the completion
by the Company of a sale of all or substantially all of its assets, unless such
sale is a corporate restructuring whereby the successor entity's acquisition of
the assets, if the acquisition of such assets had been achieved by a merger,
would not have constituted a change of control.
COBRA shall have the meaning assigned thereto in Section 4.8.
CODE means the Internal Revenue Code of 1986, as amended, and the rules
and regulations promulgated by the Internal Revenue Service thereunder, all as
in effect from time to time during the Employment Period.
COMMON STOCK means the Company's common stock, par value $.001 per share.
COMPANY means Recycling Industries, Inc., a Colorado corporation, the
principal executive office of which is located at 9780 South Meridian Blvd.,
Suite 180, Englewood, CO 80112.
CONFIDENTIAL INFORMATION shall have the meaning assigned thereto in Section
8.2 hereof.
DATE OF TERMINATION means the earliest to occur of (i) the date of the
Employee's death, (ii) the date on which the Employee terminates this Agreement
for any reason other than Good Reason or (iii) the date of receipt of the Notice
of Termination, or such later date as may be prescribed in the Notice of
Termination in accordance with Section 5.6 hereof.
DISABILITY means an illness or other disability which prevents the Employee
from discharging his responsibilities under this Agreement for a period of 180
consecutive calendar days, or an aggregate of 180 calendar days in any calendar
year, during the Employment Period, all as determined in good faith by the Board
of Directors of the Company (or a committee thereof).
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EFFECTIVE DATE means July 1, 1998.
EMPLOYEE means Harold J. Rouster, an individual residing at 3203 Country
Club Parkway, Castle Rock, Colorado 80104.
EMPLOYMENT PERIOD shall have the meaning assigned thereto in Section 3
hereof.
EXCHANGE ACT means the Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated by the Securities and Exchange Commission
thereunder, all as in effect from time to time during the Employment Period.
EXCISE TAX shall have the meaning assigned thereto in Section 11.1.
GOOD REASON shall have the meaning assigned thereto in Section 5.5 hereof.
GROSS-UP PAYMENT shall have the meaning assigned thereto in Section 11.1
hereof.
IMPOSITION OF EXCISE TAX shall have the meaning assigned thereto in
Section 11.1.
INITIAL TERM shall have the meaning assigned thereto in Section 3 hereof.
NOTICE OF TERMINATION shall have the meaning assigned thereto in
Section 5.6 hereof.
PAYMENT shall have the meaning assigned thereto in Section 11 hereof.
UNEXPIRED TERM shall have the meaning assigned thereto in Section 6.3(c)
hereof.
VOTING STOCK means all outstanding shares of capital stock of the Company
entitled to vote generally in an election of directors; provided, however, that
if the Company has shares of Voting Stock entitled to more or less than one vote
per share, each reference to a proportion of the issued and outstanding shares
of Voting Stock shall be deemed to refer to the proportion of the aggregate
votes entitled to be cast by the issued and outstanding shares of Voting Stock.
WITHOUT CAUSE shall have the meaning assigned thereto in Section 5.4
hereof.
2. GENERAL DUTIES OF COMPANY AND EMPLOYEE.
2.1 The Company agrees to employ the Employee, and the Employee agrees to
accept employment by the Company and to serve the Company as Senior Vice
President and Chief Operating Officer. The Employee shall report directly to
the Company's Chief Executive Officer. The authority, duties and
responsibilities of the Employee shall include those described in
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Schedule A to this Agreement, and such other or additional duties as may from
time to time be assigned to the Employee by the Board of Directors (or a
committee thereof) and agreed to by the Employee. While employed hereunder,
the Employee shall devote reasonable time and attention during normal
business hours to the affairs of the Company and use his best efforts to
perform faithfully and efficiently his duties and responsibilities. The
Employee may (a) serve on corporate, civic, religious or charitable boards or
committees, (b) deliver lectures, fulfill speaking engagements or teach at
educational institutions, (c) participate in political and religious
activities, including participation in a political campaign provided the
Employee will comply with all laws and regulations related to such
activities, and (d) manage and oversee personal investments and other
business activities which are not competitive with the Company, so long as
such activities do not significantly interfere with the performance of the
Employee's duties and responsibilities; provided that such activities, alone
or on a cumulative basis, do not interfere with the performance of the
Employee's duties hereunder.
2.2 The Employee agrees and acknowledges that he owes a fiduciary duty of
loyalty, fidelity and allegiance to act at all times in the best interests of
the Company and to do no act and to make no statement, oral or written, which
would injure Company's business, its interests or its reputation.
2.3 The Employee agrees to comply at all times during the Employment
Period with all applicable policies, rules and regulations of the Company,
including, without limitation, the Company's policy regarding trading in the
Common Stock, as each is in effect from time to time during the Employment
Period.
3. TERM.
Unless sooner terminated pursuant to other provisions hereof, the
Employee's period of employment under this Agreement shall be a period of four
years from the July 1, 1998 (the "Initial Term"). Prior to the expiration of
the Initial Term, the Company and the Employee may agree, in writing, to extend
the Initial Term. The Initial Term and any and all renewals thereof are
referred to herein collectively as the "Employment Period."
4. COMPENSATION AND BENEFITS.
4.1 BASE SALARY. As compensation for services to the Company, the
Company shall pay to the Employee until the Date of Termination, an annual base
salary of $280,000 (the "Base Salary"). The Board of Directors (or a committee
thereof), in its discretion, may increase the Base Salary based upon relevant
circumstances. The Base Salary shall be payable in equal semi-monthly
installments or in accordance with the Company's established policy, subject
only to such payroll and withholding deductions as may be required by law and
other deductions applied generally to employees of the Company for insurance and
other employee benefit plans.
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4.2 BONUS. In addition to the Base Salary, the Employee shall be
awarded for each fiscal year until the Date of Termination, annual performance
bonus (either pursuant to a bonus or incentive plan or program of the Company or
otherwise) in an aggregate amount of up to $60,000 based upon performance
criteria to be determined by the Board of Directors (or a committee thereof), in
its sole discretion (the "Annual Bonus").
4.3 LOCATION OF OFFICE. The Employee's primary office will be located at
the Company's headquarters in Douglas County, Colorado. The Employee will
either be present at the Company's offices, traveling on Company business or
meeting with persons on behalf of the Company in accordance with his duties
hereunder commencing at 8:00 a.m. and ending at 5:00 p.m. every Business Day,
unless Employee is on paid vacation.
4.4 VACATION. Until the Date of Termination, the Employee shall accrue
and be entitled to take during each one year period of the Employment Agreement,
two weeks of paid vacation plus an additional one week of paid vacation for each
full year of employment with the Company, not to exceed five weeks.
4.5 AUTOMOBILE. Until the Date of Termination, the Company shall provide
a sport utility vehicle or equivalent vehicle, subject to the approval of the
Compensation Committee, on behalf of the Employee.
4.6 INCENTIVE, SAVINGS AND RETIREMENT PLANS. Until the Date of
Termination, the Employee shall be eligible to participate in and shall receive
all benefits under all executive incentive, savings and retirement plans and
programs currently maintained or hereinafter established by the Company for the
benefit of its executive officers and/or employees. The Employee and/or the
Employee's family, as the case may be, shall be eligible to participate in and
shall receive all benefits under the Company's welfare benefit plans. Such
welfare benefit plans may include, without limitation, medical, dental,
disability, group life, accidental death and travel accident insurance plans and
programs.
4.7 REIMBURSEMENT OF EXPENSES. The Employee may from time to time until
the Date of Termination incur various business expenses customarily incurred by
persons holding positions of like responsibility, including, without limitation,
travel, long distance telephone charges, cellular phone charges, facsimile,
entertainment and similar expenses incurred for the benefit of the Company or
while travelling or commuting on Company business. Subject to the Company's
policy regarding the reimbursement of such expenses as in effect from time to
time during the Employment Period, the Company shall reimburse the Employee for
such expenses from time to time, at the Employee's request, and the Employee
shall account to the Company for all such expenses. In particular, the Company
shall reimburse the Employee for travel (including occasional and reasonable
first class upgrades), lodging and other out-of-pocket expenses associated with
Employee's travel and performance of services pursuant to this Agreement.
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4.8 DE-MINIMIS EXPENSES. The Employee shall be permitted to use Company
equipment, such as telephones, copy machines and facsimile machines, for
de-minimis personal matters.
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5. TERMINATION.
5.1 DEATH. This Agreement shall terminate automatically upon the death
of the Employee.
5.2 DISABILITY. The Company may terminate this Agreement, upon written
notice to the Employee delivered in accordance with Sections 5.6 and 13.1
hereof, upon the Disability of the Employee.
5.3 CAUSE. The Company may terminate this Agreement, upon written notice
to the Employee delivered in accordance with Sections 5.6 and 13.1 hereof, for
Cause. For purposes of this Agreement, "Cause" means (i) the Employee's willful
and continued refusal to perform substantially his duties and responsibilities
as contemplated in this Agreement (other than any such refusal based upon the
written advice received from the Employee's legal counsel that performance of
his duties would cause a breach of his duties to the Company or be a violation
of applicable law or regulation, or resulting from Disability or from the
Employee's termination for Good Reason); (ii) the Employee's willful engaging in
activities which would (a) constitute a breach of a material term of this
Agreement, or (b) result in a material injury to the Company or its Affiliates;
(iii) the Employee's non-appealable conviction of a felony; (iv) the Employee's
acknowledged or admitted commission of acts of fraud, embezzlement, theft or
other dishonest acts against the Company or the good faith determination by the
Board of Directors that the Employee has committed the foregoing acts; and (v)
the Employee's use of alcohol (except at Company sponsored parties or
receptions) or illegal drugs on the Company's premises. For the purposes
hereof, no act or failure or refusal to act on the Employee's part shall be
considered "willful" unless done, or omitted to be done, by the Employee not in
good faith and without belief that his action or omission was in the best
interest of the Company or any Affiliate.
5.4 WITHOUT CAUSE. The Company may terminate this Agreement Without
Cause, upon written notice to the Employee delivered in accordance with Sections
5.6 and 13.1 hereof. For purposes of this Agreement, the Employee will be
deemed to have been terminated "Without Cause" if the Employee is terminated by
the Company for any reason other than Cause, Disability or death.
5.5 GOOD REASON. The Employee may terminate this Agreement for Good
Reason, upon written notice to the Company delivered in accordance with Sections
5.6 and 13.1 hereof. For purposes of this Agreement, "Good Reason" means (i)
the assignment to the Employee of substantial duties inconsistent in any
material respect with the Employee's duties or responsibilities as contemplated
in this Agreement, provided, however, Employee acknowledges that, from time to
time, he may be required to fulfill various clerical and other tasks incidental
to his employment by the Company which are specifically considered within the
Employee's duties or responsibilities as contemplated in this Agreement, (ii)
any other action by the Company
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which results in a material diminishment in the Employee's position
(including titles and reporting requirements), authority, duties or
responsibilities, (iii) any material breach by the Company of any of the
provisions of this Agreement, (iv) upon a Change of Control, the failure of
any successor or surviving entity to adopt and assume all of the provisions
of this Agreement; including any obligations triggered by a Change of Control
or (v) any reduction, or attempted reduction, at any time during the
Employment Period, of the Base Salary of the Employee unless: (i) such
reduction is part of an overall proportional reduction in the compensation of
the Company's executive officers implemented by the Company's Board of
Directors or, (ii) in his capacity as a Director, the Employee recommends or
approves the reduction. The determination of the occurrence of any of the
foregoing shall be based upon the good faith determination by the Employee.
5.6 NOTICE OF TERMINATION.
(i) Any termination of this Agreement by the Company for Cause,
Without Cause or as a result of the Employee's Disability, or by the
Employee for Good Reason, shall be communicated by Notice of Termination to
the other party hereto given in accordance with this Agreement. For
purposes of this Agreement, a "Notice of Termination" means a written
notice which (i) indicates the specific termination provision in this
Agreement relied upon, (ii) sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for a termination of the
Employee's employment under the provisions so indicated and (iii) in the
case of termination of this Agreement by the Company for Cause, provides
the Employee, and in the case of termination of this Agreement by the
Employee for Good Reason, provides the Company, with a period of 30 days to
cure the basis of such termination, and (iv) specifies the termination
date, if such date is other than the date of receipt of such notice (which
termination date shall not be more than 30 days after the giving of such
notice).
(ii) If the Employee terminates this agreement other than for Good
Reason, the Employee shall give the Company 30 days' prior written notice.
The Board of Directors may elect to waive the period of notice, or any
portion thereof.
6. OBLIGATIONS OF COMPANY UPON TERMINATION.
6.1 CAUSE; OTHER THAN GOOD REASON. If this Agreement shall be terminated
either by the Company for Cause or by the Employee for any reason other than
Good Reason, the Company shall pay to the Employee, in a lump sum in cash within
30 days after the Date of Termination, (i) the aggregate of the Employee's Base
Salary (as in effect on the Date of Termination) through the Date of
Termination, if not theretofore paid, and, in the case of compensation
previously deferred by the Employee, all amounts of such compensation previously
deferred and not yet paid by the Company and (ii) the product of (a) the Annual
Bonus paid to the Employee for the last full
8
<PAGE>
fiscal year preceding the Date of Termination and (b) the fraction obtained
by dividing (x) the number of days between the Date of Termination and the
last day of the last full fiscal year preceding the Date of Termination and
(y) 365. All other obligations of the Company and rights of the Employee
hereunder shall terminate effective as of the Date of Termination.
6.2 DEATH OR DISABILITY.
(i) Subject to the provisions of this Section 6.2, if this
Agreement is terminated as a result of the Employee's death or Disability,
the Company shall pay to the Employee or his estate, in a lump sum in cash
within 30 days of the Date of Termination an amount equal to the Employee's
Base Salary (as in effect on the Date of Termination). The Company may
purchase insurance to cover all or any part of the obligation contemplated
in the foregoing sentence, and the Employee agrees to submit to a physical
examination to facilitate the procurement of such insurance.
(ii) Whenever compensation is payable to the Employee hereunder
during a period in which he is partially or totally disabled, and such
Disability would (except for the provisions hereof) entitle the Employee to
Disability income or salary continuation payments from the Company
according to the terms of any plan or program presently maintained or
hereafter established by the Company, the Disability income or salary
continuation paid to the Employee pursuant to any such plan or program
shall be considered a portion of the payment to be made to the Employee
pursuant to this Section 6.2 and shall not be in addition hereto. If
Disability income is payable directly to the Employee by an insurance
company under the terms of an insurance policy paid for by the Company, the
amounts paid to the Employee by such insurance company shall be considered
a portion of the payment to be made to the Employee pursuant to this
Section 6.2 and shall not be in addition hereto.
6.3 GOOD REASON; WITHOUT CAUSE. If (i) this Agreement shall be
terminated either by the Employee for Good Reason or by the Company Without
Cause and (ii) a Change of Control of the Company has not occurred within the
two year period preceding the Date of Termination:
(a) the Company shall pay to the Employee, in a lump sum in
cash within 30 days after the Date of Termination, the aggregate of
the following amounts:
(1) if not theretofore paid, the amount of the
Employee's Base Salary (as in effect on the Date of
Termination) through the Date of Termination and the bonus
payable under Section 4.3, if any, plus the amount of the Base
Salary that would have been paid to the Employee
9
<PAGE>
under this Agreement from the Date of Termination through the
expiration of the Initial Term provided, however, that for
purposes of this Section 6.3(a)(1), the remaining portion of
the Initial Term shall not be less than three years;
(2) the product of (x) the Annual Bonus paid to the
Employee for the last full fiscal year preceding the Date of
Termination and (y) the fraction obtained by dividing (i) the
number of days between the Date of Termination and the last day
of the last full fiscal year preceding the Date of Termination
and (ii) 365; and
(3) in the case of compensation previously deferred by
the Employee, all amounts of such compensation previously
deferred and not yet paid by the Company;
(b) the Company shall promptly upon submission by the
Employee of supporting documentation, pay or reimburse to the
Employee any costs and expenses paid or incurred by the Employee
which would have been payable under Section 4.8 of this Agreement if
the Employee's employment had not terminated; and
(c) until the expiration of the Initial Term or any renewal
period pursuant to Section 3 hereof (such period is sometimes
referred to herein as the "Unexpired Term") or of the 12-month period
commencing on the Date of Termination, whichever is longer, the
Company shall continue benefits to the Employee and/or the Employee's
family at least equal to those which would have been provided to them
under Section 4.8 if the Employee's employment had not been
terminated.
(d) all stock options granted to the Employee shall
immediately vest and become exercisable either by payment of the
Exercise Price or upon a cashless exercise by the Employee and the
Company shall pay to the Employee (i) a lump sum equal to the amount
of any federal, state and local taxes payable by the Employee as a
result of either the vesting or exercise of any options held by the
Employee, and (ii) a lump sum equal to the amount of any federal,
state and local taxes payable by the Employee as a result of the
preceding tax reimbursement payment. The provisions of this Section
6.3(e) shall survive the termination of this Agreement and until all
options held by the Employee have been exercised or expired and all
resulting taxes paid.
10
<PAGE>
6.4 CHANGE OF CONTROL. If this Agreement (i) shall be terminated either
by the Employee for Good Reason or by the Company Without Cause and (ii) a
Change of Control of the Company has occurred within the two year period
preceding the Date of Termination:
(i) the Company shall pay to the Employee, in a lump sum in cash
within 30 days after the Date of Termination the aggregate of the following
amounts:
(a) an amount equal to 2.99 times the sum of (a) the
Employee's Base Salary (as in effect on the Date of Termination or
such higher rate as may have been in effect at any time during the
90-day period preceding the Date of Termination) and (b) the Annual
Bonus paid to the Employee for the last full fiscal year;
(b) in the case of compensation previously deferred by the
Employee, all amounts of such compensation previously deferred and not yet
paid by the Company; and
(c) the amount of all accrued but unused vacation as provided
in Section 6.7, below.
(ii) The Company shall promptly upon submission by the Employee of
supporting documentation, pay or reimburse to the Employee any costs and
expenses paid or incurred by the Employee which would have been payable under
Section 4.10 of this Agreement if the Employee's employment had not terminated.
(iii) Until the expiration of the longer of the Unexpired Term or 12
month period commencing on the Date of Termination, whichever is longer, the
Company shall continue benefits to the Employee and/or the Employee's family at
least equal to those which would have been provided to them under Section 4.9 if
the Employee's employment had not been terminated.
(iv) All legal fees and other expenses incurred by the Employee to
enforce the terms of this Agreement.
6.5 STOCK OPTIONS. Upon a Change of Control, all stock options granted
to the Employee shall immediately vest and become exercisable either by payment
of the exercise price or upon a cashless exercise by the Employee and, provided
that during the six month period following a Change of Control the Employee has
not terminated this Agreement for any reason other than Good Reason or the
Company has not terminated the Employee for Cause, the Company shall pay to the
Employee (1) a lump sum equal to the amount of any federal, state and local
11
<PAGE>
taxes payable by the Employee as a result of either the vesting or exercise
of any options held by the Employee, and (2) a lump sum equal to the amount
of any federal, state and local taxes payable by the Employee as a result of
the preceding tax reimbursement payment. The provisions of this Section 6.5
shall survive the termination or expiration of this Agreement and until all
options held by the Employee have been exercised or expired and all resulting
taxes paid.
6.6 NO MITIGATION OBLIGATION. The Employee shall not be required to
mitigate damages or the amount of any payment provided for under this Section 6
by seeking other employment or otherwise, nor shall the amount of any payment
provided for under this Section 6 be reduced by any compensation earned by the
Employee as the result of employment by another employer after the termination
of the Employee's employment, or otherwise.
6.7 VACATION TIME. Notwithstanding anything herein to the contrary, upon
termination of this Agreement for any reason, the Company shall pay the Employee
for any accrued but not taken Vacation Time which was not expired as of the Date
of Termination on a per diem basis based on the Base Salary then in effect,
provided, however, upon termination in the event of a Change of Control the
amount of accrued vacation shall not be subject to the annual limitation and all
forfeited accrued vacation from July 1, 1998 through the date of termination
shall be deemed to be due and owing to the Employee.
7. EMPLOYEE'S OBLIGATION TO AVOID CONFLICTS OF INTEREST.
In keeping with the Employee's fiduciary duties to the Company, the
Employee agrees that he shall not knowingly become involved in a conflict of
interest with the Company, or upon discovery thereof, allow such conflict to
continue. The Employee further agrees to disclose to the Company, promptly
after discovery, any facts or circumstances which might involve a conflict of
interest with the Company.
8. EMPLOYEE'S CONFIDENTIALITY OBLIGATION.
8.1 The Employee hereby acknowledges, understands and agrees that all
Confidential Information is the exclusive and confidential property of the
Company and its Affiliates which shall at all times be regarded, treated and
protected as such in accordance with this Section 8. The Employee acknowledges
that all such Confidential Information is in the nature of a trade secret.
8.2 For purposes of this Agreement, "Confidential Information" means
information, which is used in the business of the Company or its Affiliates and
(i) is proprietary to, about or created by the Company or its Affiliates, (ii)
gives the Company or its Affiliates a competitive business advantage or the
opportunity of obtaining such advantage or the disclosure of which would be
detrimental to the interests of the Company or its Affiliates, (iii) is
designated as Confidential Information by the Company or its Affiliates, is
known by the Employee to be considered confidential by the Company or its
Affiliates, or from all the relevant circumstances should reasonably be assumed
by the Employee to be confidential and proprietary to the Company
12
<PAGE>
or its Affiliates, (iv) was not or does not become generally available to the
public other than as a result of the disclosure by the Employee or (v) was
not available or did not become available to the Employee on a
non-confidential basis prior to its disclosure to the Employee by the
Company. Such Confidential Information includes, without limitation, the
following types of information and other information of a similar nature
(whether or not reduced to writing or designated as confidential):
(a) Internal personnel and financial information of the
Company or its Affiliates, purchasing and internal cost information,
internal service and operational manuals and the manner and methods
of conducting the business of the Company or its Affiliates;
(b) Marketing and development plans, price and cost data,
price and fee amounts, pricing and billing policies, quoting
procedures, marketing techniques, forecasts and forecast assumptions
and volumes, and future plans and potential strategies (including,
without limitation, all information relating to any acquisition
prospect and the identity of any key contact within the organization
of any acquisition prospect) of the Company or its Affiliates which
have been or are being discussed;
(c) Customer services and the type, quantity, specifications
and content of products and services purchased, leased, licensed or
received by customers of the Company or its Affiliates; and
(d) Confidential and proprietary information provided to the
Company or its Affiliates by any actual or potential customer,
government agency or other third party (including businesses,
consultants and other entities and individuals).
8.3 As a consequence of the Employee's acquisition or anticipated
acquisition of Confidential Information, the Employee shall occupy a position of
trust and confidence with respect to the affairs and business of the Company and
its Affiliates. In view of the foregoing and of the consideration to be
provided to the Employee, the Employee agrees that it is reasonable and
necessary that the Employee make each of the following covenants:
(i) At any time during the Employment Period and thereafter, except
as required by law, the Employee shall not disclose Confidential
Information to any person or entity, either inside or outside of the
Company, other than as necessary in carrying out his duties and
responsibilities as set forth in Section 2 hereof, without first obtaining
the Company's prior written consent (unless such disclosure is compelled
pursuant to court orders or subpoena, and at which time the Employee shall
give notice of such proceedings to the Company).
13
<PAGE>
(ii) At any time during the Employment Period and thereafter, the
Employee shall not use, copy or transfer Confidential Information other
than as necessary in carrying out his duties and responsibilities as set
forth in Section 2 hereof, without first obtaining the Company's prior
written consent.
(iii) On the Date of Termination, upon the Company's written request,
the Employee shall promptly deliver to the Company (or its designee) all
written materials, records and documents made by the Employee or which came
into his possession prior to or during the Employment Period concerning the
business or affairs of the Company or its Affiliates, including, without
limitation, all materials containing Confidential Information.
9. DISCLOSURE OF INFORMATION, IDEAS, CONCEPTS, IMPROVEMENTS, DISCOVERIES AND
INVENTIONS.
As part of the Employee's fiduciary duties to the Company, the Employee
agrees that during his employment by the Company, the Employee shall promptly
disclose in writing to the Company all information, ideas, concepts,
improvements, discoveries and inventions, whether patentable or not, and whether
or not reduced to practice, which are conceived, developed, made or acquired by
the Employee, either individually or jointly with others, and which relate to
the business, products or services of the Company or its Affiliates,
irrespective of whether the Employee used the Company's time or facilities and
irrespective of whether such information, idea, concept, improvement, discovery
or invention was conceived, developed, discovered or acquired by the Employee on
the job, at home, or elsewhere. This obligation extends to all types of
information, ideas and concepts, including information, ideas and concepts
relating to new types of services, corporate opportunities, acquisition
prospects, the identify of key representatives within acquisition prospect
organizations, prospective names or service marks for the Company's business
activities, and the like.
10. OWNERSHIP OF INFORMATION, IDEAS, CONCEPTS, IMPROVEMENTS, DISCOVERIES AND
INVENTIONS AND ALL ORIGINAL WORKS OF AUTHORSHIP.
10.1 All information, ideas, concepts, improvements, discoveries and
inventions, whether patentable or not, which are conceived, made, developed or
acquired by the Employee or which are disclosed or made known to the Employee,
individually or in conjunction with others, during the Employee's employment by
the Company and which relate to the business, products or services of the
Company or its Affiliates (including, without limitation, all such information
relating to corporate opportunities, research, financial and sales data, pricing
and trading terms, evaluations, opinions, interpretations, acquisition
prospects, the identity of customers or their requirements, the identity of key
contacts within the customers' organizations or within the organization of
acquisition prospects, marketing and merchandising techniques, and
14
<PAGE>
prospective names and service marks) are and shall be the sole and exclusive
property of the Company. Furthermore, all drawings, memoranda, notes,
records, files, correspondence, manuals, models, specifications, computer
programs, maps and all other writings or materials of any type embodying any
of such information, ideas, concepts, improvements, discoveries and
inventions are and shall be the sole and exclusive property of the Company.
10.2 In particular, the Employee hereby specifically sells, assigns,
transfers and conveys to the Company all of his worldwide right, title and
interest in and to all such information, ideas, concepts, improvements,
discoveries or inventions, and any United States or foreign applications for
patents, inventor's certificates or other industrial rights which may be filed
in respect thereof, including divisions, continuations, continuations-in-part,
reissues and/or extensions thereof, and applications for registration of such
names and service marks. The Employee shall assist the Company and its nominee
at all times, during the Employment Period and thereafter, in the protection of
such information, ideas, concepts, improvements, discoveries or inventions, both
in the United States and all foreign countries, which assistance shall include,
but shall not be limited to, the execution of all lawful oaths and all
assignment documents requested by the Company or its nominee in connection with
the preparation, prosecution, issuance or enforcement of any application for
United States or foreign letters patent, including divisions, continuations,
continuations-in-part, reissues and/or extensions thereof, and any application
for the registration of such names and service marks.
10.3 If the Employee creates, during the Employment Period, any original
work of authorship fixed in any tangible medium of expression which is the
subject matter of copyright (such as, videotapes, written presentations on
acquisitions, computer programs, drawings, maps, architectural renditions,
models, manuals, brochures or the like) relating to the Company's business,
products or services, other than an autobiographical work concerning the
Employee or others, whether such work is created solely by the Employee or
jointly with others, the Company shall be deemed the author of such work if the
work is prepared by the Employee in the scope of his employment; or, if the work
is not prepared by the Employee within the scope of his employment but is
specially ordered by the Company as a contribution to a collective work, as a
part of a motion picture or other audiovisual work, as a translation, as a
supplementary work, as a compilation or as an instructional text, then the work
shall be considered to be work made for hire, and the Company shall be the
author of such work. If such work is neither prepared by the Employee within
the scope of his employment nor a work specially ordered and deemed to be a work
made for hire, then the Employee hereby agrees to sell, transfer, assign and
convey, and by these presents, does sell, transfer, assign and convey, to the
Company all of the Employee's worldwide right, title and interest in and to such
work and all rights of copyright therein. The Employee agrees to assist the
Company and its Affiliates, at all times, during the Employment Period and
thereafter, in the protection of the Company's worldwide right, title and
interest in and to such work and all rights of copyright therein, which
assistance shall include, but shall not be limited to, the execution of all
documents requested by the Company or its nominee and the
16
<PAGE>
execution of all lawful oaths and applications for registration of copyright
in the United States and foreign countries.
11. CERTAIN TAXES.
11.1 GROSS-UP PAYMENTS. If all or any portion of the payments and
benefits which the Employee is entitled to receive pursuant to the terms of this
Agreement or any other plan, arrangement or agreement in respect of the Company
or its affiliates (the "Payments") constitutes "excess parachute payments"
within the meaning of Section 280G of the Code, that are subject to the excise
tax (the "Excise Tax") imposed by Section 4999 of the Code (or similar tax
and/or assessment), the Company (or its successors or assigns) shall pay to the
Employee an additional amount ("Gross-Up Payment") such that the net amount
retained by the Employee, after deduction of (i) any Excise Tax on Payments,
(ii) any federal, state and local income tax and Excise Tax upon the payment
provided for by this Section 11.1, and (iii) any interest and penalties imposed
in respect of the Excise Tax shall be equal to the full amount of the Payments.
For purposes of determining the amount of the Gross-Up Payment, the Employee
shall be deemed to pay federal income taxes at the highest marginal rate of
federal income taxation in the calendar year in which the Gross-Up Payment is to
be made, and state and local income taxes at the highest marginal rates of
taxation in the state and locality of the Employee's residence on the date the
Gross-Up Payment is to be made, net of the maximum reduction in federal income
taxes which could be obtained from deduction of such state and local taxes. The
Gross-Up Payment for any Payment shall be paid to Employee within ten (10) days
after the Imposition of Excise Tax, unless the Company undertakes to indemnify
him as provided in Section 11.2. The "Imposition of Excise Tax" shall mean the
earliest of: (a) the issuance by the Internal Revenue Service of a notice
stating in effect that an Excise Tax is due with respect to the Payment; (b)
Employee's delivery to the Company of an opinion of tax counsel selected by
Employee that all or a portion of the Payment is subject to the Excise Tax and
the amount of the Excise Tax on the Payment; or (c) the Company's delivery to
Employee of an opinion of tax counsel selected by the Company and acceptable to
Employee that all or a portion of the Payment is subject to the Excise Tax and
the amount of the Excise Tax on the Payment.
11.2 DEFENSE AND SETTLEMENT OPTION. In lieu of paying the Gross-Up
Payment for any Payment, the Company may elect to undertake, at its sole
expense, the defense and settlement of any assessment by the Internal Revenue
Service of the Excise Tax on any Payment. If the Company so elects to undertake
the defense or settlement of any assessment by the Internal Revenue Service of
the Excise Tax on any Payment, the Company shall protect, defend, indemnify and
hold Employee forever harmless from and against the Excise Tax on such Payment
and any and all liabilities, demands, claims, actions, causes of action,
assessments, losses, costs, damages or expenses, including attorney's fees and
accountant's fees in connection with any thereof, and any interest and penalties
sustained by Employee as a result of or arising out of or by virtue of the
Company's undertaking.
16
<PAGE>
11.3 ADJUSTMENTS. If the Excise Tax is determined to be less than the
amount taken into account in determining the Gross-Up Payment paid pursuant to
Section 11.1, Employee shall repay to the Company, within ten days after receipt
of a refund by the Employee from the Internal Revenue Service of such
overpayment, the portion of the Gross-Up Payment attributable to such reduction
plus interest on the amount of such repayment at the rate provided in Section
1273(b)(2)(B) of the Code for debt instruments with a maturity after issuance
equal to the period beginning on the date the Gross-Up Payment was made and
ending on the date of repayment required by this sentence. If the Excise Tax is
determined to exceed the amount taken into account in determining the Gross-Up
Payment paid pursuant to Section 11.1, the Company within 10 days after the time
that the amount of such excess Excise Tax is determined shall make an additional
payment to the Employee of an amount equal to such excess plus an amount equal
to any interest and penalties payable to the Internal Revenue Service with
respect to such excess and any Excise Tax on payment pursuant to this sentence
upon payments made pursuant to this sentence.
12. EMPLOYEE'S NON-COMPETITION OBLIGATION.
12.1 Until the Date of Termination, the Employee shall not, acting alone
or in conjunction with others, directly or indirectly, in any of the business
territories in which the Company or any of its Affiliates is presently or from
time to time during the Employment Period conducting business, invest or engage,
directly or indirectly, in any business which is competitive with that of the
Company or accept employment with or render services to such a competitor as a
director, officer, agent, employee or consultant, or take action inconsistent
with the fiduciary relationship of an employee to his employer; provided,
however, that the beneficial ownership by the Employee of up to three percent of
the Voting Stock of any corporation subject to the periodic reporting
requirements of the Exchange Act shall not violate this Section 12.1.
12.2 In addition to the other obligations agreed to by the Employee in
this Agreement, the Employee agrees that until the Date of Termination, he shall
not at any time, directly or indirectly, (a) solicit any employee of the Company
to leave his employment, (b) solicit any customer or acquisition prospect of the
Company, derived from any customer list, customer lead, mail, printed matter or
other information secured from the Company or its present or past employees or
(c) in any other manner use any customer lists or customer leads, mail,
telephone numbers, printed material or other information of the Company relating
thereto.
12.3 In addition to the other obligations agreed to by the Employee in
this Agreement, the Employee agrees that if this Agreement is terminated either
by the Company for Cause or by the Employee for any reason other than Good
Reason or during the 24 month period following a change of control, then for a
period of one year following the Date of Termination, he shall not at any time,
directly or indirectly, (i) solicit any employee of the Company to leave his
employment, (ii) solicit any customer or acquisition prospect of the Company
derived from any
17
<PAGE>
customer list, customer lead, mail, printed matter or other information
secured from the Company or its present or past employees or (iii) in any
other manner use any customer lists or customer leads, mail, telephone
numbers, printed material or other information of the Company relating
thereto. Notwithstanding the foregoing, the Employee shall not be precluded
at any time after the Date of Termination from being employed by a firm or
other entity which engages in any of the activities described in the
preceding sentence; provided that Employee himself does not participate or
assist his employer in any manner in such activities.
18
<PAGE>
13. MISCELLANEOUS.
13.1 NOTICES. All notices and other communications required or permitted
hereunder or necessary or convenient in connection herewith shall be in writing
and shall be deemed to have been given when delivered by hand or mailed by
registered or certified mail, return receipt requested, as follows (provided
that notice of change of address shall be deemed given only when received):
If to the Company to:
9780 S. Meridian Blvd.
Suite 180
Englewood, CO 80112
Attention: Board of Directors
If to the Employee to:
Harold J. Rouster
3203 Country Club Parkway
Castle Rock, Colorado 80104
or to such other names or addresses as the Company or the Employee, as the case
may be, shall designate by notice to the other party hereto in the manner
specified in this Section 13.1.
13.2 WAIVER OF BREACH. The waiver by any party hereto of a breach of any
provision of this Agreement shall neither operate nor be construed as a waiver
of any subsequent breach by any party.
13.3 ASSIGNMENT. This Agreement shall be binding upon and inure to the
benefit of the Company, its successors, legal representatives and assigns, and
upon the Employee, his heirs, executors, administrators, representatives and
assigns; provided that in case of the sale of all or substantially all of the
assets and/or business of the Company, whether by merger, consolidation,
purchase or otherwise, the Company will require the purchaser or acquiror to
assume all of the Company's obligations and liabilities hereunder.
13.4 ENTIRE AGREEMENT; NO ORAL AMENDMENTS. This Agreement, together with
any exhibit attached hereto and any document, policy, rule or regulation
referred to herein, replaces and merges all previous agreements and discussions
relating to the same or similar subject matter between the Employee and the
Company and constitutes the entire agreement between the Employee and the
Company with respect to the subject matter of this Agreement. This Agreement
may not be modified in any respect by any verbal statement, representation or
agreement made
19
<PAGE>
by any employee, officer or representative of the Company or by any written
agreement unless signed by an officer of the Company who is expressly
authorized by the Company to execute such document.
13.5 ENFORCEABILITY. If any provision of this Agreement or application
thereof to anyone or under any circumstances shall be determined to be invalid
or unenforceable, such invalidity or unenforceability shall not affect any other
provisions or applications of this Agreement which can be given effect without
the invalid or unenforceable provision or application.
13.6 GOVERNING LAW. The laws of the State of Colorado shall govern the
interpretation, validity and effect of this Agreement without regard to the
place of execution or the place for performance thereof.
13.7 INJUNCTIVE RELIEF. The Company and the Employee agree that a breach
of any term of this Agreement by the Employee would cause irreparable damage to
the Company and that, in the event of such breach, the Company shall have, in
addition to any and all remedies of law, the right to any injunction, specific
performance and other equitable relief to prevent or to redress the violation of
the Employee's duties or responsibilities hereunder.
IN WITNESS WHEREOF, the undersigned, intending to be legally bound, have
executed this Agreement to be effective July 1, 1998.
RECYCLING INDUSTRIES, INC.
By:
---------------------------
Thomas J. Wiens
Chairman of the Board and
Chief Executive Officer
EMPLOYEE:
By:
---------------------------
Harold J. Rouster
20
<PAGE>
SCHEDULE A
SENIOR VICE PRESIDENT
AND CHIEF OPERATING OFFICER
SUMMARY
PRIMARY RESPONSIBILITIES:
A-1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 750
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> (1,583)
<INVENTORY> 11,473
<CURRENT-ASSETS> 48,048
<PP&E> 184,776
<DEPRECIATION> (11,823)
<TOTAL-ASSETS> 304,281
<CURRENT-LIABILITIES> 249,133
<BONDS> 0
0
23,183
<COMMON> 21
<OTHER-SE> 15,484
<TOTAL-LIABILITY-AND-EQUITY> 304,281
<SALES> 239,359
<TOTAL-REVENUES> 239,359
<CGS> 215,592
<TOTAL-COSTS> 244,570
<OTHER-EXPENSES> 35
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,406
<INCOME-PRETAX> (25,652)
<INCOME-TAX> 0
<INCOME-CONTINUING> (25,652)
<DISCONTINUED> 0
<EXTRAORDINARY> (11,807)
<CHANGES> 0
<NET-INCOME> (37,459)
<EPS-PRIMARY> (2.08)
<EPS-DILUTED> (2.08)
</TABLE>
