<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: DECEMBER 31, 1998
/ / TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-20179
RECYCLING INDUSTRIES, INC.
(Exact Name of Registrant as Specified in its Charter)
COLORADO 84-1103445
- ------------------------------- ---------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
9780 S. MERIDIAN BLVD, SUITE 180
ENGLEWOOD, COLORADO 80112
- ------------------------------------------------ ----------
(Mailing Address of Principal 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, and (2) has been subject to such filing
requirements for the past 90 days.
Yes No X
----- -----
Indicate the number of shares outstanding of each of the Issuer's classes of
common stock as of the close of the period covered by this Report.
<TABLE>
<CAPTION>
NUMBER OF SHARES OUTSTANDING AS OF:
CLASS January 31, 1999
- ------------------------------ ------------------------------------
<S> <C>
Common Stock, $.001 Par Value 21,325,249
</TABLE>
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I -- FINANCIAL INFORMATION PAGE
<S> <C>
ITEM 1. FINANCIAL STATEMENTS*
Consolidated Balance Sheets - December 31, 1998
and September 30, 1998 1-2
Consolidated Statements of Operations for the three months ended
December 31, 1998 and 1997 3
Consolidated Statements of Stockholders' Equity for the three
months ended December 31, 1998 4
Consolidated Statements of Cash Flows for the three months ended
December 31, 1998 and 1997 5
Notes to the Consolidated Financial Statements 6-8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 9-14
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 15
ITEM 2. CHANGES IN SECURITIES 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURES 16
</TABLE>
- -------------------
* The accompanying interim financial statements have not been audited by an
independent certified public accountant. Only those statements corresponding
to a fiscal year-end (September 30) are audited.
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, 1998 SEPTEMBER 30, 1998
----------------- ------------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 830 $ 750
Accounts receivable, net 23,413 31,212
Inventories 12,159 11,473
Prepaid expenses and other 4,397 4,613
--------- ---------
TOTAL CURRENT ASSETS 40,799 48,048
--------- ---------
PROPERTY AND EQUIPMENT, NET 170,116 172,953
--------- ---------
OTHER ASSETS:
Notes receivable, related party 1,925 1,925
Goodwill, net of amortization 65,852 66,296
Other assets, net of amortization 15,704 15,059
--------- ---------
TOTAL OTHER ASSETS 83,481 83,280
--------- ---------
TOTAL ASSETS $ 294,396 $ 304,281
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31, 1998 SEPTEMBER 30, 1998
----------------- ------------------
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt $ 212,588 $ 217,204
Accounts payable 10,120 9,468
Settlement liability 8,150 8,150
Accrued interest 7,150 3,575
Accrued payroll 1,914 2,081
Other current liabilities 10,552 8,655
--------- ---------
TOTAL CURRENT LIABILITIES 250,474 249,133
--------- ---------
LONG-TERM LIABILITIES:
Long-term debt, less current maturities 4,388 4,335
Other long-term liabilities 10,234 10,625
--------- ---------
TOTAL LONG-TERM LIABILITIES 14,622 14,960
--------- ---------
TOTAL LIABILITIES 265,096 264,093
--------- ---------
COMMITMENTS AND CONTINGENT LIABILITIES:
Redeemable common stock, $.001 par value,
218,400 shares issued and outstanding 1,500 1,500
--------- ---------
STOCKHOLDERS' EQUITY:
Preferred stock, no par value, 10,000,000
shares authorized 76,145 and 10,000
shares issued and outstanding 23,183 23,183
Common Stock, $.001 par value, 50,000,000
shares authorized, 21,325,249 and
14,149,780 shares issued and outstanding 21 21
Additional paid-in capital 63,354 63,628
Accumulated deficit (58,758) (48,144)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 27,800 38,688
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 294,396 $ 304,281
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
Net sales $ 45,002 $ 31,275
Cost of sales and operating expenses 41,570 26,302
----------- ------------
Gross profit 3,432 4,973
Selling, general and administrative expenses, net 6,771 2,474
----------- ------------
Operating income (loss) (3,339) 2,499
----------- ------------
OTHER INCOME (EXPENSE):
Interest expense (7,332) (2,169)
Miscellaneous 57 (55)
----------- ------------
TOTAL OTHER INCOME (EXPENSE) (7,275) (2,224)
----------- ------------
Earnings (loss) before income tax benefit (expense)
and extraordinary loss (10,614) 275
Provision for income taxes -- (87)
----------- ------------
Earnings (loss) before extraordinary loss (10,614) 188
Extraordinary loss -- (2,414)
----------- ------------
NET LOSS $ (10,614) $ (2,226)
----------- ------------
Net loss $ (10,614) $ (2,226)
Preferred stock dividends 274 84
----------- ------------
Net loss available to common shareholders $ (10,888) $ (2,310)
----------- ------------
EARNINGS (LOSS) PER SHARE:
BASIC EARNINGS (LOSS) PER COMMON SHARE
Before extraordinary item $ (0.51) $ 0.01
Extraordinary item -- (0.16)
----------- ------------
BASIC LOSS PER COMMON SHARE $ (0.51) $ (0.15)
----------- ------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 21,325,000 15,351,000
----------- ------------
DILUTED LOSS PER COMMON SHARE
Before extraordinary item $ (0.51) $ --
Extraordinary item -- (0.10)
----------- ------------
DILUTED LOSS PER COMMON SHARE $ (0.51) $ (0.10)
----------- ------------
WEIGHTED AVERAGE DILUTED COMMON SHARES OUTSTANDING 21,325,000 23,495,000
----------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ADDITIONAL
PREFERRED STOCK COMMON STOCK PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
------ ------- ---------- ------ ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, September 30, 1998 76,145 $23,183 21,325,249 $ 21 $63,628 $ (48,144) $ 38,688
Preferred stock dividends -- - - -- (274) -- (274)
Net loss -- - - -- -- (10,614) (10,614)
------ ------- ---------- ------ ---------- ----------- ---------
BALANCES, DECEMBER 31, 1998 76,145 $23,183 21,325,249 $ 21 $63,354 $ (58,758) $ 27,800
------ ------- ---------- ------ ---------- ----------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (10,614) $ (2,226)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 3,345 1,498
Extraordinary loss -- 2,414
Other operating activities 1,329 --
Changes in assets and liabilities, net of the
effect of business acquisitions:
Accounts receivable 7,800 2,501
Inventories (685) (3,960)
Prepaid expenses and other (955) (132)
Accounts payable 652 3,120
Liabilities, exclusive of debt 4,650 (1,001)
--------- --------
Net cash provided by operating activities 5,522 2,214
--------- --------
INVESTING ACTIVITIES:
Capital expenditures, net (298) (542)
Note receivable, related party -- (1,440)
Other assets (290) (2,382)
Acquisitions, net of equity issued -- (114,947)
Cash acquired in acquisitions -- 1,835
--------- --------
Net cash provided by (used in) investing activities (588) (117,476)
--------- --------
FINANCING ACTIVITIES:
Proceeds from borrowings 669 147,868
Principal payments on borrowings (5,513) (32,697)
Other long-term liabilities -- 324
Prepayment penalty on debt -- (2,532)
Loan fees paid -- (8,600)
Dividends paid (10) (84)
Net proceeds from issuance of stock -- 11,735
--------- --------
Net cash provided by financing activities (4,854) 116,014
--------- --------
Increase (decrease) in cash 80 752
Cash, beginning of period 750 746
--------- --------
Cash, end of period $ 830 $ 1,498
--------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. COMMENCEMENT OF BANKRUPTCY PROCEEDING
On February 26, 1999, the Company and each of its operating subsidiaries filed
voluntary petitions for relief under Chapter 11 of the Federal Bankruptcy
Code in the United States Bankruptcy Court for the District of Colorado (the
"Chapter 11 Proceeding"). Although the Company plans to reorganize and emerge
from the Chapter 11 Proceeding, there is no assuarance that this will occur
or, if it does, that the Company will be able to successfully operate in the
future.
2. The consolidated financial statements included herein have been prepared
by the Company without audit except the September 30, 1998 balance sheet,
which was audited. The statements have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission and reflect all
adjustments, consisting of only normal recurring accruals which are, in the
opinion of management, necessary for a fair statement of the results of
operations for the periods shown. These financial statements should be read
in conjunction with the financial statements and notes thereto included in
the Company's latest report on Form 10-K, dated September 30, 1998.
3. The results of operations for the three months ended December 31, 1998
and 1997 are not necessarily indicative of the results to be expected for
the full year.
4. Inventories as of December 31, 1998 and September 30, 1998, consisted of
the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 SEPTEMBER 30, 1998
----------------- ------------------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Raw Materials $ 6,485 $ 6,634
Finished Goods 5,134 4,213
Other 540 626
-------- --------
Total $ 12,159 $ 11,473
-------- --------
</TABLE>
6
<PAGE>
5. SUPPLEMENTAL DISCLOSURES FOR EARNINGS (LOSS) PER SHARE
<TABLE>
<CAPTION>
Three Months Ended
December 31,
------------------------------
(THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS) 1998 1997
------------ ------------
<S> <C> <C>
BASIC LOSS PER COMMON SHARE:
NUMERATOR
Earnings (loss) before extraordinary loss $ (10,614) $ 188
Preferred stock dividends (274) (84)
------------ ------------
Earnings (loss) before extraordinary loss
available to common shareholders (10,888) 104
Extraordinary loss -- (2,414)
------------ ------------
Net loss available to common shareholders $ (10,888) $ (2,310)
------------ ------------
DENOMINATOR
Weighted average common shares outstanding 21,325,000 13,351,000
------------ ------------
PER SHARE AMOUNTS
Basic earnings (loss) before extraordinary loss $ (0.51) $ 0.01
Extraordinary loss -- (0.16)
------------ ------------
Basic loss $ (0.51) $ (0.15)
------------ ------------
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
NUMERATOR
Earnings (loss) before extraordinary loss
available to common shareholders $ (10,888) $ 104
Extraordinary loss -- (2,414)
------------ ------------
Net loss available to common shareholders
and assumed conversions outstanding $ (10,888) $ (2,310)
------------ ------------
DENOMINATOR
Weighted average common shares outstanding 21,325,000 15,351,000
Effect of dilutive securities:
Options and warrants -- 8,032,000
Redeemable common shares -- 112,000
------------ ------------
Weighted average common shares and
assumed conversions outstanding 21,325,000 23,495,000
------------ ------------
PER SHARE AMOUNTS
Diluted loss before extraordinary loss $ (0.51) $ --
Extraordinary loss -- (0.10)
------------ ------------
Diluted loss $ (0.51) $ (0.10)
------------ ------------
</TABLE>
Potentially dilutive issues not included in the computation of diluted
earnings per common share:
For the three months ended December 31, 1998, warrants and options to acquire
9,380,239 shares of common stock at exercise prices of $1.375 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
2,316,615 shares of common stock at exercise prices of $0.01 to $1.31 were
not included in the computation of diluted EPS as the effect would be
anti-dilutive. Preferred shares convertible into 12,100,793 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
9,200,000 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.
7
<PAGE>
For the three months ended December 31, 1997, warrants and options to acquire
425,936 shares of common stock at exercise prices of $7.50 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 678,030 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
1,272,388 common shares was not included in the computation of diluted EPS as
the effect would be anti-dilutive.
COMMENCEMENT OF BANKRUPTCY PROCEEDING
On February 26, 1999, the Company and each of its operating subsidiaries
filed voluntary petitions for relief under Chapter 11 of the Federal
Bankruptcy Code in the United States Bankruptcy Court for the District of
Colorado (the "Chapter 11 Proceeding"). Although the Company plans to
reorganize and emerge from the Chapter 11 Proceeding, there is no assurance
that this will occur or, if it does, that the Company will be able to
successfully operate in the future.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ALL STATEMENTS CONTAINED HEREIN, AS WELL AS STATEMENTS MADE IN PRESS RELEASES
AND ORAL STATEMENTS THAT MAY BE MADE BY THE COMPANY OR ITS OFFICERS,
DIRECTORS, OR EMPLOYEES ACTING ON ITS BEHALF, THAT ARE NOT STATEMENTS OF
HISTORICAL FACT CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT. SUCH
FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND
OTHER FACTORS THAT COULD CAUSE THE ACTUAL RESULTS OF THE COMPANY TO BE
MATERIALLY DIFFERENT FROM HISTORICAL RESULTS OR FROM ANY FUTURE RESULTS
EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS AND RISK FACTORS
DESCRIBED FROM TIME TO TIME IN THE COMPANY'S REPORTS FILED WITH THE
COMMISSION. IN ADDITION TO STATEMENTS THAT EXPLICITLY DESCRIBE SUCH RISKS
AND UNCERTAINTIES, READERS ARE URGED TO CONSIDER STATEMENTS THAT INCLUDE THE
TERMS "BELIEVES," "BELIEF," "EXPECTS," "PLANS," "ANTICIPATES," "INTENDS" OR
THE LIKE TO BE UNCERTAIN AND FORWARD-LOOKING. ALL CAUTIONARY STATEMENTS MADE
HEREIN SHOULD BE READ AS BEING APPLICABLE TO ALL FORWARD-LOOKING STATEMENTS
WHEREVER THEY APPEAR.
GENERAL
The largest portion of the Company's operations involves the collection,
processing and sale of ferrous scrap, the primary raw material for mini-mill
steel producers who utilize 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, ordnance 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 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:
8
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
December 31,
-------------------
STATEMENT OF OPERATIONS DATA: 1998 1997
-------- --------
<S> <C> <C>
Net Sales 100.0% 100.0%
Cost of sales and operating expenses 92.4 84.1
------ ------
Gross profit 7.6 15.9
Selling, general and administrative expenses 15.0 7.9
------ ------
Operating income (loss) (7.4) 8.0
Interest expense and other 16.2 7.1
------ ------
Earnings (loss) before income taxes and
extraordinary loss (23.6) 0.9
Income tax provision -- (0.3)
Extraordinary loss -- (7.7)
------ ------
Net loss (23.6) (7.1)
------ ------
EBITDA (1) -- 12.2
------ ------
</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.
RESULTS OF OPERATIONS
The Company's operating results, for the three months ended December 31, 1998
compared to 1997, 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.
Operating margins declined as a result of significant declines in the average
sales price of processed ferrous and non-ferrous material and insufficient
liquidity to purchase and process material at normal operating levels.
NET SALES. Net sales for the three months ended December 31, 1998, were $45.0
million an increase of $13.7 million or 440% compared to the same period one
year earlier. The increase was primarily related to increased processing
capacity resulting from acquisitions completed in December 1997, April 1998
and May 1998. Total tons processed of ferrous material for the three
9
<PAGE>
months ended December 31, 1998 increased by approximately 61% to 265,000 tons
compared to the same period one year earlier. Total pounds processed of
non-ferrous material for the three months ended December 31, 1998 increased
by approximately 169% to 41,563,000 pounds compared to the same period one
year earlier. The increase in non-ferrous quantities processed was primarily
related to the acquisitions completed during fiscal 1998.
The average sales price of prepared ferrous material for the three months
ended December 31, 1998 was $92 per ton a decline of $52 per ton or
approximately 36% compared to the same period one year earlier. The Company's
average sales price of prepared non-ferrous material for the three months
ended December 31, 1998 was $0.37 per pound representing a decrease of 16% or
$0.07 per pound compared to the same period one year ago. 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 three months ended December 31,
1998 was $1.9 million, an increase of approximately 104% compared to the same
period one year earlier. The increase was primarily related to acquisitions
completed during fiscal 1998.
GROSS PROFIT. Gross profit for the three months ended December 31, 1998 was
$3.4 million a decrease of $1.6 million compared to the same period one year
earlier. Gross profit margin for the three months ended December 31, 1998
was 7.6% as a percentage of net sales compared to 15.9% for the same period
in 1997. The decrease in gross profit was primarily related to the
significant declines in the average sales price and demand of processed
ferrous and non-ferrous scrap and the ability of the Company to procure and
process material at normal operating levels. During the quarter, the Company
has not been able to purchase sufficient quantities of ferrous and
non-ferrous scrap due to insufficient cash flow resulting from prolonged
price declines of processed ferrous and non-ferrous material. Tons processed
of ferrous scrap declined during the quarter by 123,000 ton compared to the
fourth quarter ended September 30, 1998.
SELLING, GENERAL, AND ADMINISTRATIVE. Selling, general, and administrative
(SG&A) expenses increased to $6.8 million for the three months ended December
31, 1998 from $2.5 million during the three months ended December 31, 1997,
an increase of $4.3 million or 173%. The increase was primarily the result
of acquisitions completed during fiscal 1998 and staffing and other related
administrative expenses in anticipation of planned growth. As a percent of
net sales, SG&A increased to 15.0% for the three months ended December 31,
1998 compared to 7.9% for the three months ended December 31, 1997.
OPERATING INCOME (LOSS). The Company reported an operating loss for the
three months ended December 31, 1998 of $3.3 million compared to operating
income of $2.5 million for the three months ended December 31, 1997, a
decrease of $5.8 million. The decrease is principally the result of declines
in the average selling prices and demand of ferrous and non-ferrous material.
As a result of prolonged price declines of ferrous and non-ferrous material,
the Company's results of operations have not been sufficient to generate
liquidity to allow the Company to purchase and process material at normal
operating levels. 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's second quarter 1999 results continued to be adversely
effected from insufficient cash flow which has resulted in the Company not
being able to procure and process
10
<PAGE>
material at normal operating levels. As a result of these factors, the
Company sought relief under Chapter 11 of the United States Bankruptcy Code.
INTEREST EXPENSE. Interest expense increased to $7.3 million for the three
months ended December 31, 1998 from $2.2 million for the three months ended
December 31, 1997 an increase of $5.2 million or 238%. The increase was
primarily related to increases in long-term debt to finance the acquisitions
completed in December 1997, April 1998 and May 1998 and the amortization of
transaction costs associated with the Company's Senior Credit Facility and
Senior Subordinated Debt.
EARNINGS BEFORE EXTRAORDINARY LOSS. Net loss for the three months ended
December 31, 1998 was $10.6 million compared to earnings of $0.2 million for
the same period one year earlier. During the first quarter of 1998, the
Company recorded a $2.4 million extraordinary loss from early extinguishment
of debt.
INCOME TAX EXPENSE. At December 31, 1998, the Company has a federal income
tax loss carryforward of approximately $68.4 million which expires at various
amounts and dates through the year 2013. The Company has not recorded a
deferred tax asset at December 31, 1998 since it is more likely than not the
tax assets will not be realized.
The Internal Revenue Service has completed an examination of the Company's
federal income tax return for the year ended September 30, 1996 with a no
change ruling.
The Company does not believe its businesses have been adversely affected by
general inflation.
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS) DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Current ratio .16:1 3.6:1
Working capital (deficiency) $(209.7) $ 34.8
</TABLE>
At December 31, 1998 and September 30, 1998, the Company was in default under
certain provisions of the senior credit agreement. On December 31, 1998, the
Company failed to make the scheduled interest payments due on its Senior
Subordinated Debt resulting in a default under the terms of the Senior
Subordinated Debt. In connection with the default, all amounts due under the
senior credit agreement and senior subordinated debt agreement have been
classified as a component of current liabilities.
The Company invested $0.3 million in property and equipment, not including
property and equipment acquired in business acquisitions, during the three
months ended December 31, 1998 for expansion of the Company's ferrous and
non-ferrous processing capacity and general modernization and efficiency
upgrades. Planned capital expenditures for the remainder of the fiscal year
for the Company's existing facilities are estimated to be $1.0 million.
Included in this amount are capital expenditures for the Company's shredders
and materials handling
11
<PAGE>
equipment designed to increase capacity and improve operating efficiencies.
Management anticipates the capital expenditures will be paid with long-term
debt financing, if available.
At December 31, 1998, approximately $12.1 million was outstanding under the
$45 million revolving credit facility. During the quarter ended December 31,
1998, the Company at times was restricted from advancing funds under the
credit facility due to insufficient availability resulting from declines in
accounts receivable, inventories and negative operating results. Funding
under the credit facility is restricted to the Company's eligible accounts
receivable and inventory balances which have declined as a result of
prolonged price declines of ferrous and non-ferrous material. The Company
was unable to fund expenditures incurred in the normal course of operations.
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.
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 subsidiary's 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
12
<PAGE>
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 commence its Year 2000 compliance
projects.
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
During the quarter, the Company was required to implemented FAS No. 130
"Reporting Comprehensive Income". 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. The implementation of FAS
No. 130 has no material impact on the financial presentation of the Company.
The Company is required to implement FAS No. 131 "Disclosures about Segments
of an Enterprise and related Information" for the year ended September 30,
1999. 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 131 require comparative information for earlier years to be
restated. Because of the recent issuance of the standards, management has
been unable to fully evaluate the impact, if any, the standard may have on
the future financial statement disclosures. Results of operations and
financial position, however, will be unaffected by implementation of this
standard.
13
<PAGE>
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 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.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. - LEGAL PROCEEDINGS.
Caside Associates/John Silvia, Jr. Litigation
On January 7, 1999, the Company paid $7.0 million to the Caside Associates
and Environmental Recovery Systems of Somerset, Inc. bankruptcy trustees in
accordance with the amended stipulation of settlement described in the
Company's Form 10-K for the year ended September 30, 1998. As a result, all
pending and potential claims of investors in the Caside and ERSS
bankruptcies, including all investors in Caside, ERSS and the Company who
claim they were defrauded, are permanently enjoined against the Company, its
officers and directors. In addition, each of the following actions is
permanently enjoined against the Company, its officers and directors:
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.
2. William C. Mitchell, et al., Plaintiffs v. Recycling Industries, Inc.,
Defendant, Mass. Superior Court, Bristol Div., Civil Action No. C97-00845.
3. Dwight Silvia, et al., Plaintiff, v. Recycling Industries, Inc.,
Defendant, U.S.D. Ct., D. Mass Civil Action No. 97-12015-JLT.
4. Ferreira, et al., Plaintiffs, v. Recycling Industries, Inc., Defendant,
U.S.D. Ct., D. Mass, Civil Action No. 97-12660-JLT.
5. Rocha, Plaintiff, v. John Silvia, Jr. et al., Defendants, Mass. Superior
Court, Bristol Div., Civil Action No. 9501347.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
None
REPORTS ON FORM 8-K
Current report on Form 8-K dated October 9, 1998, reporting the appointment
of AJ. Robbins, P.C.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Recycling Industries, Inc.
Date: March 31, 1999 By: /s/ Thomas J. Wiens
-----------------------------------
Thomas J. Wiens, Chairman & Chief
Executive Officer
Date: March 31, 1999 By: /s/ Brian L. Klemsz
-----------------------------------
Brian L. Klemsz, Principal Financial
Officer
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 830
<SECURITIES> 0
<RECEIVABLES> 25,035
<ALLOWANCES> (1,622)
<INVENTORY> 12,159
<CURRENT-ASSETS> 40,799
<PP&E> 184,708
<DEPRECIATION> 14,592
<TOTAL-ASSETS> 294,396
<CURRENT-LIABILITIES> 250,474
<BONDS> 0
0
23,183
<COMMON> 21
<OTHER-SE> 4,596
<TOTAL-LIABILITY-AND-EQUITY> 294,396
<SALES> 45,002
<TOTAL-REVENUES> 45,002
<CGS> 41,570
<TOTAL-COSTS> 6,771
<OTHER-EXPENSES> (57)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,332
<INCOME-PRETAX> (10,614)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,614)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,614)
<EPS-PRIMARY> (.51)
<EPS-DILUTED> (.51)
</TABLE>
