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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended JUNE 30, 1998
Commission File No. 0-23100
RECONVERSION TECHNOLOGIES, INC.
(Exact name of small business issuer in its charter)
DELAWARE 22-2649848
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2 HENDERSONVILLE ROAD, SUITE E, ASHEVILLE, NORTH CAROLINA 28803
(Address of principal executive office) (Zip Code)
Issuer's telephone number - (828) 255-0307
Securities registered under Section 12 (b) of the Exchange Act:
COMMON STOCK, $0.0001 PAR VALUE
(Title of each class)
NOT APPLICABLE
(Name of each exchange on which registered)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X ; No .
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Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year. $1,690,545.
As of November 30, 1998, the registrant had outstanding 11,135,749 shares of its
Common Stock, par value of $0.0001, its only class of voting securities. The
aggregate market value of the shares of Common Stock of the registrant held by
non-affiliates on November 30, 1998, was approximately $385,934 based on the
last known trade during the second quarter of 1998. The Company's common stock
has been suspended from trading since that time.
(See Item 5).
DOCUMENTS INCORPORATED BY REFERENCE
No documents are incorporated by reference into this Report except those
Exhibits so incorporated as set forth in the Exhibit index.
Transitional Small Business Disclosure Format (Check one): Yes ; No X .
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Reconversion Technologies, Inc. (formerly Horizon Capital Corp.) (the
"Company"), a Delaware corporation organized July 25, 1985, is a holding company
principally engaged in acquiring and developing businesses. The Company had two
wholly-owned subsidiaries; Reconversion Technologies of Texas, Inc., a Texas
Corporation, organized on February 24, 1992 ("RETEX"), a Texas Corporation, and
Reconversion Products, Inc. ("RPI"), formerly Thomas Engineering, Inc., a
Georgia Corporation organized on October 9, 1992.
On March 23, 1995, the Company voluntarily filed for bankruptcy
protection in the United States Bankruptcy Court for the Northern District of
Oklahoma. During the pendency of the bankruptcy, both RETEX and RPI's operations
were ceased with no expectation of reopening the businesses and are, therefore,
no longer consolidated with the Company.
On November 20, 1997, the Company was formally reorganized pursuant to
a confirmed Bankruptcy Plan of Reorganization. As a result, the Company acquired
100% of the issued and outstanding stock of Keystone Laboratories, Inc. ("KLI"),
a Delaware corporation organized on July 20, 1987. KLI is a forensic urine drug
screening and confirmatory testing laboratory.
KEYSTONE LABORATORIES, INC.
Due to the fact that the Company had no operations during the periods
covered by this report but subsequently acquired KLI, the following is a
description of the newly acquired company, KLI.
KLI is a forensic urine drug screening and confirmatory testing
laboratory located in Asheville, North Carolina. Urine laboratory tests are used
primarily by employers to detect the use of illegal substances by employees
and/or prospective employees. Tests of this nature are presently performed by
hospitals, physician-owned laboratories and independent laboratory companies.
KLI views the urine laboratory industry as highly fragmented at present with
many local, regional and national laboratory companies currently in operation.
LABORATORY TESTING OPERATIONS & SERVICES
KLI has one laboratory and one collection station which are both
located within the Asheville facility. In addition to in-house collection
services, KLI provides on-site collection as well as receipt from its customers
through independent couriers. At its facility, each urine specimen and related
test request form is checked for completeness and assigned an identification
number, which ensures that the results are attributed to the correct patient.
The test request forms are then sent to a data entry terminal where a file is
established for each test specimen and the necessary testing and billing
information is entered. Once such billing information is entered into the
system, the tests are performed and the results posted through a computer
interface. Test results are printed and prepared for distribution by service
representatives the same day that routine testing is performed. In addition,
written reports of the test results may be generated directly in the offices of
clients with computer printers. Clients who are tested before 1 p.m. who request
that the test results be communicated by telephone are so notified the same day
while the remainder of the clients are notified of the test results the
following business day.
QUALITY ASSURANCE
KLI considers the quality of its tests to be of critical importance to
its growth and retention of client accounts. Therefore, it has established a
comprehensive quality assurance program for its laboratory designed to help
assure accurate and timely test results. KLI's laboratory also participates in a
number of proficiency testing programs which generally involves the submission
of pre-tested samples to a laboratory to verify the laboratory test results
against a
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known proficiency test value. These proficiency programs are conducted both
independently by KLI and in conjunction with groups such as the College of
American Pathology ("CAP").
The CAP is an independent non-governmental organization of board
certified pathologists which offers an accreditation program to which
laboratories may voluntarily subscribe. The CAP accreditation program involves
both on-site inspections of the laboratory and participation in the CAP's
proficiency testing program for all categories in which the laboratory is
accredited by the CAP. A laboratory's receipt of accreditation by the CAP
satisfies the Medicare requirement for participation in a proficiency testing
program administered by an external source. In addition to these compulsory
external inspections and proficiency programs, KLI has adopted a number of
additional quality assurance checks. The laboratory is equipped with
sophisticated testing equipment which is checked daily in accordance with KLI's
preventive maintenance program. In addition, the laboratory is supervised by a
scientific director who possesses a Ph.D. in toxicology and is a fellow of the
American College of Toxicology as well as an inspector for forensic urine drug
testing for the CAP. The primary role of the scientific director is to ensure
the accuracy of the laboratory's tests.
MARKETS AND MARKETING
The potential customers for KLI's services are primarily small
manufacturing companies, local hospitals and drug abuse treatment centers. The
marketing of KLI's services is accomplished primarily through direct
solicitation by its salesmen who initially meet with each new potential client.
KLI believes that this one-on-one contact has proven invaluable in customer
satisfaction and, in turn, customer retention. At the end of Fiscal 1997, KLI
had one full-time employee engaged in sales, along with three outside
salespersons who are compensated on a commission only basis. KLI intends to
continue to selectively increase the size of its sales force by expansion in
existing markets as well as by entering into new geographic areas. KLI believes
that sales force productivity is primarily due to KLI's Client Service Program.
Through these coordinators, KLI continuously monitors client activities and
attempts to identify and resolve any potential client dissatisfaction at an
early stage.
KLI has found that the three primary concerns of clients are turnaround
time, price and accuracy. KLI provides rapid turnaround time for its written
reports--24 hours in the case of negative specimens and 48 hours for positive
specimens. KLI believes the price charged for its services is competitive. With
regard to accuracy, KLI routinely performs adulteration tests such as "ph" and
"specific gravity" tests on all specimens verifying that the urine specimens are
valid. Many laboratories either do not perform these tests or charge extra fees
to clients to perform such tests if they are requested. A lack of certification
by the National Institutes on Drug Abuse ("NIDA") prevents KLI from performing
tests for certain governmental agencies. However, KLI believes that the
advantage of NIDA certification would not generate enough additional revenues to
offset the significant additional expenses which would probably be incurred with
NIDA certification.
COMPETITION
The forensic urine drug testing business is characterized by intense
competition. KLI believes that there are several laboratory companies which
provide a broad range of laboratory testing services in the same markets
serviced by KLI. Among KLI's national competitors with larger name recognition
are Allied Clinical Laboratories, Inc., National Health Care Laboratories, Inc.,
MetPath Inc., Roche Biomedical Laboratories, Inc. and SmithKline Beecham
Clinical Laboratories, Inc. According to the Health Care Financing
Administration, over 12,000 federally regulated clinical laboratories are
currently operating in the United States. As mentioned above, competition is
based primarily on accuracy of testing, price and the time required to report
results. Finally, in addition to competition for customers, there is increasing
competition for qualified personnel.
CUSTOMERS
To date, KLI has focused its marketing efforts primarily on
manufacturing companies whose orders account for approximately 95% of its net
sales. The remaining 5% of net sales is derived from hospital reference testing,
nursing homes, clinics, referrals from other clinical laboratories and other
clients. The largest client of KLI accounts for
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approximately 5% of net sales. KLI believes that the loss of any one client
would not have an adverse effect on its financial condition. Payments for
services are received directly from the clients, rather than from insurance
companies.
GOVERNMENT REGULATION
KLI is subject to regulation under the Clinical Laboratory Improvement
Act. Under this Act, KLI is subject to periodic inspections of the aspects of
its operations relating to the quality of its laboratory testing results. In
addition, applicable federal and state certification and licensing programs
establish standards for the day-to-day operation of a medical laboratory,
including, but not limited to, personnel and quality control. Compliance with
such standards is verified by periodic inspections by inspectors employed by the
appropriate federal or state regulatory agency. In addition, regulatory
authorities require participation in a proficiency testing program provided by
an external source which involves actual testing of specimens that have been
specifically prepared by the regulatory authority for testing by the laboratory.
As mentioned above in "Quality Assurance", KLI participates in a number of such
programs.
COMPLIANCE WITH ENVIRONMENTAL LAWS
Certain federal and state laws govern the handling and disposal of
infectious and hazardous wastes. Although KLI believes that it is currently in
compliance in all material respects with such federal and state laws, failure to
so comply could subject KLI to fines, criminal penalties and/or other
enforcement actions.
EMPLOYEES
As of June 30, 1998, KLI employed a total of 14 employees, 12 of whom
work full-time and 2 of whom work part-time. KLI has no collective bargaining
agreements with any unions and believes that the overall relations with its
employees are excellent.
YEAR 2000
The Company has begun the process of identifying computer systems and
software that could be affected by the "Year 2000" issue. The Year 2000 problem
is the result of computer programs being written using two digits rather than
four to define the applicable year. The Company has estimated the cost of
addressing the Year 2000 issue to be relatively nominal as it has not found any
software or equipment for which an update is required.
ITEM 2. PROPERTIES
The Company and KLI lease 4,602 square feet at its operating facility
at 2 Hendersonville Road, Suite E, Asheville, North Carolina. The lease expires
on August 31, 2003.
ITEM 3. LEGAL PROCEEDINGS
GAIA TECHNOLOGIES, INC. VS. RECONVERSION TECHNOLOGIES, INC., RECONVERSION
TECHNOLOGIES OF TEXAS, INC., RECYCLED PRODUCTS CORPORATION, JAMES E. TURNER,
BETTY ROSE TURNER, GLYN TURNER, PROGRESSIVE CAPITAL CORPORATION, DAVID GORDON,
IRA RIMER, JOEL HOLT AND RICHARD CLARK, PENDING IN THE UNITED STATES DISTRICT
COURT, SOUTHERN DISTRICT OF TEXAS, HOUSTON DIVISION, CASE NO. H-93-3334,
SUBSEQUENTLY RE-NUMBERED AS CASE NO. 94-CV-2256.
This lawsuit was filed on October 20, 1993, and alleges numerous causes
of action against the various defendants, including patent infringement,
trademark infringement, unfair competition, tortious interference with
contractual relations, conspiracy and RICO. The litigation stems from the
alleged misconduct of James E. Turner (Turner) concerning certain intellectual
property which plaintiff claims it bought from the bankruptcy estate of James
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E. Turner and Turner's former company, Entek, in 1991. The Company has
consistently maintained the position that its own proprietary processes are
demonstrably distinct from those which plaintiff claims to have acquired in
1991, and that its causes of action are baseless as it concerns the Company and
its subsidiaries. In addition to monetary gains, Plaintiff seeks a permanent
injunction enjoining the Company from manufacturing products with its
technologies.
On March 17, 1995, the Court found that the Company and RETEX as well
as Defendants Progressive Capital Corporation, David Gordon, Ira Rimer, Joel
Holt and Richard Clark were guilty of patent infringement, trademark
infringement, unfair competition, and tortious interference with contractual
relations. A total amount of approximately $21.5 million in actual damages,
pre-judgment interest and attorneys' fees was awarded against the Company, RETEX
and Progressive Capital Corporation. In addition, punitive damages in the amount
of $100,000 were awarded against David Gordon, the former President of the
Company.
The Company appealed the judgment to the United States Court of Appeals
for the Federal Circuit. The Federal Circuit reversed and vacated the judgment
and ordered the dismissal of GAIA's patent and trademark claims and also set
aside the state law claims. The Federal Circuit remanded the case back to the
District Court to determine if it had supplemental jurisdiction over the state
law claims.
Following remand, the District Court ruled over the Company's
objection, that it would assert supplemental jurisdiction over the state law
claims. On July 18, 1997, the District Court entered a judgment against the
Company and the other parties for $7,116,405.21, exclusive of interest after
July 10, 1997. The Company promptly perfected its appeal from the judgment. The
appeal has been briefed and orally argued, and is now awaiting decision by the
United States Court of Appeals for the Fifth Circuit.
The Company believes the value of the GAIA claim against the Company
will ultimately be determined to be zero, and further, that the Company may have
claims against GAIA arising as a result of the GAIA litigation, which potential
claim is not recorded pending analysis. The claim has been valued at $1,503,696,
the maximum amount allowable under the Plan based on the current judgment, in
the accompanying balance sheet and is included in obligations to be paid in
common stock.
RECONVERSION TECHNOLOGIES, INC., DEBTOR IN POSSESSION, CHAPTER 11 PROCEEDING,
UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF OKLAHOMA, CASE NO.
95-00821-W.
The Company and its wholly-owned subsidiary, Reconversion Technologies
of Texas, Inc. each filed for Chapter 11 Bankruptcy protection in the United
States Bankruptcy Court for the Northern District of Oklahoma on March 23, 1995.
This action was precipitated by a $21.5 million judgment entered against the
Company and RETEX by the United States District Court for the Southern District
of Texas on March 16, 1995. In order to appeal the judgment, the Company had no
alternative but to seek protection in the Bankruptcy Court. The filing of the
bankruptcy petition allowed the Company to reorganize its affairs and pursue its
appeal. On November 20, 1997, the Company's Plan of Reorganization was confirmed
with all creditors of the Company to be paid in either cash or by receipt of the
Company's common stock.
DONALD L. NICHOLS, ET AL. V. G. DAVID GORDON, ET AL. UNITED STATES DISTRICT
COURT FOR THE NORTHERN DISTRICT OF OKLAHOMA, CASE NO. 95-C-1126-H.
This action sought recovery arising from Mr. Nichols' purchase of over
164,000 shares of the common stock of the Company between November 1992 and
February 1993. Mr. Nichols was seeking actual damages of $393,600, interest and
attorney's fees as a result of alleged violations of federal and state
securities laws. On June 11, 1997, Judge Sven E. Holmes, the U.S. District Judge
presiding in the case dismissed the Nichols suit. However, Mr. Nichols refiled
the lawsuit alleging the same basic claims. Based upon the Company's potential
exposure as indemnitor to some of the
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defendants, the Company settled the matter by paying $40,000 and issuing 120,000
shares of restricted common stock on September 29, 1998.
RECONVERSION TECHNOLOGIES, INC. V. GEORGE D. GORDON, SR. ADVERSARY PROCEEDING
NO. 97-0101-M, UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF
OKLAHOMA.
This action was brought by the Examiner who claimed that George D.
Gordon received 75,000 shares of the common stock of the Company with a
purported value of $159,375, for which Mr. Gordon paid no consideration. After
confirmation of the Plan, the Board of Directors reviewed the Examiner's claims,
the accounting records and Mr. Gordon's canceled check, and dismissed the suit
on or about June 23, 1998.
RECONVERSION TECHNOLOGIES, INC. AND RECONVERSION TECHNOLOGIES OF TEXAS, INC. V.
KLENDA, GORDON & GETCHELL, P.C. AND G. DAVID GORDON, JR. ADVERSARY PROCEEDING
NO. 96-0330-W, UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF
OKLAHOMA.
This action was brought by the Examiner claiming the law firm of
Klenda, Gordon & Getchell, P.C. and G. David Gordon committed professional
negligence in their representation of the Company and its subsidiaries. The
Examiner, on behalf of the Company alleged damages in excess of $1,000,000.
After confirmation of the Plan of Reorganization, the new Board of Directors
engaged independent counsel to analyze the merits of the Examiner's claims,
thereupon the Examiner and his law firm resigned as counsel to the Company in
the matter. After obtaining the independent counsel's report, the Company
settled the case for $30,000 during August 1998.
RECONVERSION TECHNOLOGIES, INC. V. IRA RIMER, AN INDIVIDUAL, ADVERSARY NO.
97-0102-M, UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF OKLAHOMA.
This action was brought by the Examiner claiming that Ira Rimer had
received 8,750 shares of the Company's preferred stock with a stated value of
$24,062.50 for which Mr. Rimer paid no consideration. After confirmation of the
Plan of Reorganization, the Board of Directors reviewed the Examiner's claims
and corresponding evidence, whereupon it dismissed the suit on October 6, 1998.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the year ended June 30, 1998, there were no matters submitted to
a vote of the security holders of the Company.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
The Company's Common Stock was listed on the OTC:Bulletin Board under
the symbol "RETQ".
The following chart shows the quarterly high and low bid prices for the
Company's Common Stock for the last two fiscal years, as reported on the
OTC:Bulletin Board. The prices represent quotations by dealers without
adjustments for retail mark-ups, mark-downs or commissions and may not represent
actual transactions. In the second quarter of 1998 the Company's Common Stock
was suspended from trading on the OTC:Bulletin Board and therefore there was no
market for the Company's stock.
COMMON STOCK
<TABLE>
<CAPTION>
BID ASK
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HIGH LOW HIGH LOW
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<S> <C> <C> <C> <C>
Calendar Quarters
1996 Third Quarter .03 .03 .13 .07
1996 Fourth Quarter .07 .03 .13 .09
1997 First Quarter .06 .04 .13 .10
1997 Second Quarter .05 .03 .13 .07
1997 Third Quarter .37 .18 .50 .31
1997 Fourth Quarter .13 .06 .37 .25
1998 First Quarter .06 .06 .25 .18
1998 Second Quarter
</TABLE>
HOLDERS
As of June 30, 1998, there were approximately 367 holders of record of
the Company's common stock, an undetermined number of which represent more than
one individual participant in securities positions with the Company.
DIVIDENDS
The Company has never paid cash dividends on its common stock, and
intends to utilize current resources to expand its operations. Therefore, it is
not anticipated that cash dividends will be paid on the Company's common stock
in the foreseeable future.
The Company has not paid a cash dividend on its preferred stock since
its fiscal year ended June 30, 1995. Pursuant to the Bankruptcy Plan of
Reorganization, the outstanding preferred shares are being canceled and new
common shares will be issued on 1.1 for 1 basis.
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BANKRUPTCY PLAN
On July 3, 1997, Richard T. Clark and Joel C. Holt filed a Disclosure
Statement and Plan of Reorganization ("Plan"). On November 13, 1997, the Plan
was confirmed pursuant to 11 U.S.C. Section 1126 and filed with the Securities
and Exchange Commission on Form 8-K.
CONCEPT OF PLAN
This Plan is premised on the concept that the Claims and Interests of
Creditors and Equity Security Holders are best served by an orderly
reorganization of Debtor built around the acquisition by Debtor of Keystone
Laboratories, Inc. ("KLI") and the establishment of a less expensive procedure
for resolutions of RETEK claims.
KLI is engaged in the business of forensic drug testing. KLI's business
affairs, history and financial data are more particularly in the Disclosure
Statement. Currently, all outstanding shares of Common Stock of KLI are owned by
Richard T. Clark, Jr. and Joel C. Holt, Plan Proponents. Under this Plan,
Messrs. Holt and Clark will exchange their shares in KLI for 2,500,000 shares of
New Common Stock in Reorganized Debtor. The shares of New Common Stock issued
for KLI do not include other shares of New Common Stock to be received by
Messrs. Clark and Holt pursuant to this Plan in their capacities as either
Equity Security Holders of Common Stock and Preferred Stock or as Creditors.
In addition to the acquisition of KLI and the orderly collection of
RETEK Claims proposed herein, Reconversion Technologies of Texas, Inc.
("RETEX"), a subsidiary of Debtor, will be liquidated through a Liquidating Plan
and a RETEX Liquidating Trust in its pending Chapter 11 case. Debtor is the
principal secured creditor of RETEX. The principal asset of RETEX is the Brenham
Plant facility in Brenham, Texas ("Brenham Plant"). Pursuant to the Liquidating
Trust, the Brenham Plant would be sold. No sale is expected in the near future.
Debtor is the major secured creditor of RETEX, but under this Plan, Debtor will
agree to subordinate its allowed secured claim against RETEX in the amount of
$5,000,000 to the extent of up to $200,000 of the first dollars received from
the sale to permit payment of RETEX's allowed claims and administrative
expenses. The balance of all funds or assets of RETEX (after the lesser of the
amounts required to pay RETEX's allowed priority claims and allowed claims, or
$200,000) will be paid by the Liquidating Trust to Debtor in satisfaction of the
RETEX obligation to Debtor, and Debtor will retain such claim and enforce it
against RETEX for the benefit of Debtor's Creditors and Interest holders.
Following the acquisition of KLI and the liquidation of the principal
assets of RETEX through the RETEX Liquidating Trust and collection on any RETEK
claims. Debtor's only operating asset will be KLI. Debtor will be engaged solely
in the business of forensic drug testing through KLI unless and until Debtor
expands its business activities. Under this Plan:
(a) All Pre-Petition Shares of Common Stock will be subject to a
one-for-eight reverse stock split such that each holder of Pre-Petition shares
of Common Stock will receive the number of shares of New Common Stock equal to
the number of shares of Pre-Petition Common Stock held by the holder, divided by
eight;
(b) All Pre-Petition Shares of Preferred Stock will be reclassified as
New Common Stock and the holders of Preferred Stock will receive a pro rata
share of 1,274,172 shares of New Common Stock in exchange for Pre-Petition
Preferred Shares;
(c) Certain Creditor Claims may be converted into New Common Stock; and
(d) Warrants to purchase New Common Stock will be issued to certain
holders of interests.
This summary of the Plan, which has been filed in its entirety with the
Company's 8-K dated November 26, 1997. The Plan is binding on RETEK and all
creditors and shareholders of RETEK. The Plan provides for eleven (11) Classes
of Claims and Interests. The Plan provides for the following treatment of these
Claims and Interests:
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SUMMARY OF THE PLAN
CLASS 1 CLAIMS: ALLOWED ADMINISTRATIVE CLAIMS: Allowed Claims under
Section 503(b) of the Bankruptcy Code. The Class 1 Claims include (i) allowed
but unpaid attorneys' fees on the Effective Date for Debtor's counsel, Riggs,
Abney, Neal, Turpen Orbison & Lewis, and (ii) allowed but unpaid professional
fees due to Neal Tomlins, Examiner, and his counsel, and fees and expenses not
yet presented for payment and, therefore, not yet approved.
CLASS 2 CLAIMS: ALLOWED PRIORITY CLAIMS: Allowed Unsecured Claims
entitled to priority pursuant to Section 507(a) of the Bankruptcy Code. The
Debtor has scheduled priority claims owing in unknown amounts to the Internal
Revenue Service and the Securities and Exchange Commission. The Plan Proponents
believe that there is no liability to either of the agencies included in this
Class.
CLASS 3: DISPUTED SECURED CLAIMS. This Class consists of Creditors who
assert a secured claim against Debtor and its assets. All of such secured claims
are disputed, and all underlying claims are disputed, as they do not arise from
obligations of Debtor but instead represent, if valid, obligations of Retex. It
is believed that the joint administration of the Debtor's case and the Retex
case may have created confusion among Retex creditors who assert secured status
in this case.
CLASS 4 CLAIM: CLAIM OF TRANSFER AGENTS AST AND DEPOSITORY TRUST CO.
The Class 4 claim consists of the pre-petition unsecured Claim of American
Securities Transfer ("AST") in the amount of $3,553.66 and of the pre-petition
Unsecured Claim of Depository Trust Co. in the amount of $1,050.00. Both Claims
were incurred for stock transfer services rendered to Debtor pre-petition.
CLASS 5 CLAIMS: ADMINISTRATIVE CONVENIENCE SMALL CLAIMS. Class 5 Claims
consist of all Allowed Unsecured Claims against Debtor to which no objection has
been interposed, which are $1,000 or less in amount, and shall include Class 6
Creditors who elect to reduce their claim for Class 5 participation.
CLASS 6 CLAIMS: UNSECURED CLAIMS. Class 6 Claims consist of Allowed
Unsecured Claims against Debtor to which no objection has been interposed and
total approximately $412,625.00. Disputed Claims which would otherwise be
included within this Class will not be Allowed until allowed by Final Order of
the Bankruptcy Court. The aggregate amount of Disputed Claims is $1,353,749.00.
Expressly excluded from Class 6 Claims are the Klenda, Gordon, & Getchell
Creditor Claim and the GAIA Claim, which are separately classed.
CLASS 7 CLAIM: DISPUTED UNSECURED CLAIM OF GAIA. GAIA is the holder of
a disputed Unsecured Claim against Debtor. On March 17, 1995, GAIA obtained a
judgment against Debtor and certain individuals in the aggregate sum of $22
million dollars in the United States District Court for the Southern District of
Texas styled Gaia Technologies, Inc. v. Reconversion Technologies, Inc., et al.,
Case No. H-94-2258 and GAIA filed its Proof of Claim in this case for
$23,043,276.21. On August 19, 1996, the U.S. Court of Appeals for the Federal
Circuit reversed and vacated the judgment entirely and remanded the matter to
the U.S. District Court for the Southern District of Texas. A copy of the
Opinion of the Court of Appeals are on file in this case. The GAIA Claims is
disputed under this Plan. An objection to the GAIA claim was filed seeking a
determination of the value of the GAIA claim through the claim estimation
process pursuant to 11 U.S.C. Section 502(c). After the objection was filed, the
United States District Court for the Southern District of Texas (to which the
appeals court had remanded the matter after vacating and reversing the judgment)
entered judgment in favor of GAIA and against Debtor and others as follows:
(a) Judgment against Debtor, Retex, Progressive Capital Corporation,
David Gordon, Ira Rimer, Joel C. Holt and Richard T. Clark, Jr., jointly and
severally, for:
(i) $4,350,000;
(ii) pre-judgment interest of $2,130,192.79;
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(b) Judgment against Debtor, Retex and Progressive Capital Corporation,
jointly and severally, for:
(i) $125,000;
(ii) pre-judgment interest of $61,212.42
(c) Judgment against David Gordon, Ira Rimer, Joel C. Holt and Richard
T. Clark, Jr. for $100,000 each, in the nature of punitive damages;
(d) Attorney's fees of $450,000 against Debtor, Retex, Progressive
Capital Corporation, David Gordon, Ira Rimer, Joel C. Holt and Richard T. Clark,
Jr., jointly and severally; and
(e) Post-judgment interest after July 10, 1997, at 5.65%
The aggregate amount of the judgment against Debtor and other parties
is $7,116,405.21, exclusive of interest after July 10, 1997. Debtor and Plan
Proponents have initialized an appeal of the judgment, which it is believed was
rendered in contravention of the mandate from the Court of Appeals which vacated
the earlier judgment of $23,043,276.31. The appeal will be vigorously prosecuted
by Debtor and Plan Proponents.
Plan Proponents believe the value of the GAIA claim against the Estate
will ultimately be determined to be zero, and further that the Estate may have
claims against GAIA arising as a result of the GAIA litigation, which potential
claim is reserved pending analysis.
CLASS 8 CLAIM: TNRCC CLAIM: The TNRCC Claim against Debtor arises, if
at all, in connection with certain environmental claims which are asserted by
TNRCC against Retex from operation of the Retex plant in Brenham, Texas. TNRCC
has not filed a claim against Debtor. Debtor believes that TNRCC asserts its
claim against Retex, and as set forth in the Disclosure Statement, that Debtor
has no liability to TNRCC.
CLASS 9 CLAIM: KLENDA, GORDON & GETCHELL CREDITOR CLAIM: This Class
consists of the Claim of Klenda, Gordon & Getchell asserting an Unsecured Claim
in the amount of $128,439.37. The Estate asserted claims against Klenda, Gordon
& Getchell which on May 22, 1997, resulted in a judgment in favor of Debtor
against Klenda, Gordon & Getchell for $98,625 together with interest at 6.72%
from June 21, 1996, until paid.
CLASS 10 INTERESTS: PREFERRED STOCK: This Class consists of the
interests of the Equity Security Holders who own Pre-Petition Shares of
Preferred Stock. According to information available to Plan Proponents, there
were 1,104,081 Pre-Petition Shares of Preferred Stock issued by Debtor and held
by approximately forty-eight (48) entitles or individuals who are listed on
Exhibit E.
CLASS 11 INTERESTS: COMMON STOCK: This Class consists of the Interests
of the Equity Security Holders who own Pre-Petition Shares of Common Stock of
Debtor. According to information available to Plan Proponents, there are
outstanding 11,807,785 Pre-Petition Shares of Common Stock held by approximately
301 entities or individuals. The owners and their holdings of these shares, as
of November 17, 1994, according to the records of Debtor's stock transfer agent,
AST, are contained in "List of Equity Security Holders" filed in the office of
the United States Bankruptcy Court Clerk for the Northern District of Oklahoma
on or about April 19, 1995.
10
<PAGE> 11
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION
The following discussion and analysis should be read in conjunction
with the Financial Statements and notes thereto appearing elsewhere herein.
LIQUIDITY AND CAPITAL
Reconversion Technologies, Inc. (formerly Horizon Capital Corp.) (the
"Company"), a Delaware corporation organized July 25, 1985, was a holding
company principally engaged in acquiring and developing businesses related to
the recycling and waste management industries. The Company had three
wholly-owned subsidiaries; Reconversion Technologies of Texas, Inc., a Texas
corporation, organized on February 24, 1992 ("RETEX"), Reconversion Products,
Inc. ("RPI"), formerly Thomas Engineering, Inc., a Georgia corporation organized
on October 9, 1992 and Spectrum Recycling Technologies, Inc., ("Spectrum") a New
York corporation. Prior to the acquisition of RETEX, the Company had no
operations.
On September 28, 1992, the Company acquired 100% of the issued and
outstanding shares of RETEX. RETEX had developed a process whereby waste rubber,
post-consumer and post-industrial petro-chemically derived waste, and other
ingredients, are combined to produce a mixture used to manufacture wood and
concrete replacement products.
On January 28, 1994, the Company acquired 100% of the issued and
outstanding stock of RPI. RPI was an established business involved in the
design, manufacture, installation and sales of material recovery facilities,
conveyors and shredders. Its headquarters were located in Asheville, North
Carolina. RPI was the operator-manager of Ultra Steel, Inc. ("ULTRA"), a
manufacturing company in Travelers Rest, South Carolina, which built and
installed conveyor systems, material recovery facilities and related heavy waste
handling equipment. As part of its agreement with ULTRA, RPI had an option to
purchase ULTRA.
On July 27, 1994, the Company acquired 100% of the issued and
outstanding common stock of Spectrum, and substantially all of the assets of
Amplasco Technologies, Inc., a Virginia corporation ("Amplasco"). Spectrum was
an established business involved in the design, construction and processing of
recycled plastic cleansing operations.
As a result of the GAIA litigation, the Company and RETEX filed for
protection under Chapter 11 of the Bankruptcy Code on March 23, 1995, by filing
a petition in the United States Bankruptcy Court for the Northern District of
Oklahoma. On February 20, 1995, three days after the jury verdict was rendered
against the Company and RETEX in the GAIA litigation, the Company was required
to suspend operations of RETEX at its Brenham, Texas plant. The only
subsidiaries of the Company, which it continued to operate, were RPI and
Spectrum. However, due to the bankruptcy filings, both RPI's and Spectrum's
operations were severely hampered, and both companies were required to cease all
operations and liquidate all their assets to pay creditors. By November 1995,
neither the Company nor any of its subsidiaries had any operations.
On July 3, 1997, Richard T. Clark and Joel C. Holt filed a Disclosure
Statement and Plan of Reorganization ("Plan"). On November 13, 1997, the Plan
was confirmed pursuant to 11 U.S.C. Section 1126 and filed with the Securities
and Exchange Commission on Form 8-K. The concept of the Plan and a Summary of
the Plan are included at Item 5 hereof.
The Company has begun the process of identifying computer systems and
software that could be affected by the "Year 2000" issue. The Year 2000 problem
is the result of computer programs being written using two digits rather than
four to define the applicable year. The Company has estimated the cost of
addressing the Year 2000 issued to be relatively nominal as it has not found any
software or equipment for which an update is required.
The Company is not planning any substantial capital expenditures during
the year ending June 30, 1999.
11
<PAGE> 12
RESULTS OF OPERATIONS
The operations of the Company now consist solely of the operations of
KLI, which operates as a forensic urine drug screening and confirmatory testing
laboratory and has no other operating segments.
SALES AND COST OF SALES
During the year ended June 30, 1998, the Company increased its revenues
by $244,408 (17%) from $1,446,137 to $1,690,545. Cost of sales during the year
ended June 30, 1998 increased by $31,632 (7%) from $435,708 to $467,340. Gross
profit as a percentage of sales increased from 70% during the year ended June
30, 1997 to 72% during the year ended June 30, 1998.
The Company's increased revenues are the result of (1) an increase in
drug testing charges, which had been under pressure from outside competition the
previous two years; and (2) the marketing and sales of an onsite drug test which
was recently introduced. The cost of the drug test materials is nominal in
relation to the related revenue, accordingly, the increased revenue has been
accomplished with little additional costs. The Company expects its revenues and
related costs of sales to continue at the level experienced during the year
ended June 30, 1998.
OTHER COSTS AND EXPENSES
Selling, general and administrative expenses were $1,136,820 during the
year ended June 30,1998 as compared to $1,172,501 (a reduction of $35,681)
during the prior year. During the year ended June 30, 1997, the Company realized
bad debt expense in the amount of $168,715. During the year ended June 30, 1998,
the Company incurred costs in the amount of $76,918 for seven months operations
in ReTech. These costs are primarily legal and other professional costs
associated with completing the bankruptcy plan and operating a public company.
With these items excluded, selling, general and administrative expenses
increased approximately 5%, which is reasonable with a 17% sales increase.
During the year ended June 30, 1998, the Company entered into a sale
and leaseback transaction of the majority of its equipment. As a part of this
transaction, gain in the amount of $35,095 has been recognized as of June
30,1998 and $17,548 has been deferred and will be recognized during the year
ended June 30, 1999. The proceeds of this transaction were partially used to
implement the bankruptcy plan.
During the year ended June 30, 1998, the Company recognized an
unrealized loss from their investment in marketable equity securities in the
amount of $46,141.
During the year ended June 30, 1998, the Company had interest expense
in the amount of $16,811 as compared to the year earlier period which amounted
to $12,387. The increase is primarily due to the sale and leaseback transaction
discussed above.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of Reconversion Technologies,
Inc. and Subsidiary, together with the report thereon of Guest & Company, P.C.
dated February 5, 1999 for the year ended June 30, 1998 is set forth on pages
F-1 through F-20 hereof.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
12
<PAGE> 13
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES
The following table sets forth the names, ages and current positions
with the Company held by the Directors, Executive Officers and Significant
Employees, together with the year such positions were assumed. There is no
immediate family relationship between or among any of the Directors, Executive
Officers or Significant Employees, and the Company is not aware of any
arrangement or understanding between any Director or Executive officer and any
other person pursuant to which he was elected to his current position.
<TABLE>
<CAPTION>
Position or Office Date First
Name Age With the Company Elected
- ---- --- ---------------- -------
<S> <C> <C> <C>
Joel C. Holt 67 Director/President 1997
John B. Sams 49 Director/Vice-President 1997
Keystone Laboratories, Inc.
W. Leo Morris 76 Director 1997
Robert Garner 63 Director 1997
J. Clark Bundren, MD 44 Director 1997
</TABLE>
Business experience for the last five years and other information
relating to each Director, Executive Officer and Significant Employee is as
follows:
JOEL C. HOLT, was educated at the Medical College of Virginia with B.S.
Degrees in both Physical Therapy and Biology. Prior to attending the Medical
College of Virginia, Mr. Holt served a tour of duty in the U.S. Navy. Mr. Holt
was employed as a physical therapist for 2 years prior to joining a major
pharmaceutical company where he remained in sales and marketing for 30 years. He
was instrumental in forming Keystone Laboratories, Inc. in 1987, and has
remained as president to date. He also served as Chairman of the Board for
Proactive Technologies, Inc. during 1995. Director of the Company since November
of 1997.
JOHN B. SAMS, has been Vice President of Sales and Marketing of
Keystone Laboratories, Inc. since 1995. He was educated at Montreat-Anderson
College with a B.A. Degree. He has an extensive background in the medical and
diagnostic field. Mr. Sams was employed in marketing and sales management with a
major clinical diagnostic corporation for 19 years. He also spent 4 years in the
pharmaceutical industry. He has served on the board of directors for Proactive
Technologies, Inc. and several other private corporations, and is active with
the American Diabetes Association. Director of the Company since November of
1997.
W. LEO MORRIS, has a degree in Petroleum Engineering from Texas Tech
University. Mr. Morris has served as engineer and Production Superintendent for
Mobile Oil Corporation. He is currently Vice President of Bank of Oklahoma and
has been engaged in the banking business for 40 years, with Bank of Oklahoma and
other local, regional and national banks. Outside director of the Company since
November of 1997
ROBERT GARNER, manages several family companies in the oil and gas
business and other areas as principal of Garner Energy, Inc., and serves as
President and Chief Executive Officer of Excelco Energy, Inc. Formerly, Mr.
Garner retired as Executive Vice President of Occidental Oil and Gas Corporation
(1986-1990), Vice President of Cities Service
13
<PAGE> 14
Company from 1955-1980. Mr. Garner earned a Bachelor of Science Degree in
Petroleum Engineering from the University of Oklahoma in 1955 and has completed
graduate work at Emory University, Indiana University and the University Center
at Tulsa. Outside director of the Company since November of 1997.
J. CLARK BUNDREN, MD, is a tenured Associate Professor of Gynecology
and Obstetrics in the College of Medicine at the University of Oklahoma Health
Sciences Center - Tulsa, where he directs the division of Reproductive
Endocrinology and Infertility. He actively conducts medical teaching, research
and private practice. He is active in the Oklahoma oil and gas industry with
numerous working interests and is a member of the OIPA. He has been an active
shareholder since April 1996 in the Tulsa internet transaction company of City
Surf, Inc. doing business as BuyItNow. Outside director of the Company since
November of 1997.
ITEM 10. EXECUTIVE COMPENSATION
The following table shows the cash compensation of the Company's chief
executive officer and each officer whose total cash compensation exceeded
$100,000, for the three fiscal years ended June 30, 1998. The Company has no
long-term compensation plans.
<TABLE>
<CAPTION>
Name and Fiscal Other All
Principal Year Annual Other
Position Ended Salary($) Bonus($) Compensation Compensation
-------- ----- --------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Joel C. Holt 6/30/96 N/A N/A N/A N/A
President/ 6/30/97 N/A N/A N/A N/A
Director 6/30/98 $70,000 0 $18,500 0
Since 1997
</TABLE>
Joel C. Holt receives no salary as President of the Company. The salary above
represents the amount paid Mr. Holt during the seven months ended June 30, 1998
for his services as president of KLI. The other annual compensation represents
the value of the shares granted as director compensation pursuant to the
Bankruptcy Plan and as a part of the restricted common stock grant discussed
below.
There were no Option/SAR grants during the last fiscal year.
There were no Option/SAR exercises during the last fiscal year, and there were
no fiscal year-end Options/SAR's outstanding.
There were no long term incentive plan awards during the last fiscal year.
On October 30, 1998 the directors granted themselves an award of the restricted
common stock of the Company in the amount of 50,000 shares for each outside
director and in the amount of 125,000 shares for each inside director. As a part
of the bankruptcy plan, each of the inside directors was granted 75,000 shares
of restricted common stock and each of the outside directors was granted 150,000
shares of restricted common stock for director compensation. The shares were to
be issued one-half at the beginning of their first year of service and one-half
at the end of the first year of service. The restricted common stock grants
increased the total shares for all directors to 200,000 each.
14
<PAGE> 15
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table indicates all persons who, as of November 30, 1998,
the most recent practicable date, are known by the Company to own beneficially
more than 5% of any class of the Company's voting securities and all Directors
of the Company and all Officers who are not Directors of the Company, as a
group. Percent of class for all beneficial owners assumes that all options and
warrants have been exercised and the Preferred Stock has been converted. As of
November 30, 1998 there were 11,135,749 shares of the Company's common stock
outstanding.
<TABLE>
<CAPTION>
NAME & ADDRESS AMOUNT & NATURE
TITLE OF BENEFICIAL OF BENEFICIAL %OF
OF CLASS OWNER OWNERSHIP IN NUMBER CLASS
- -------- -------------- ------------------- -----
<S> <C> <C> <C>
Common Joel C. Holt 1,176,832 10.57%
2 Hendersonville Rd. Ste. E
Asheville, NC 28803
Common John Sams 237,500 2.13%
2 Hendersonville Rd. Ste. E
Asheville, NC 28803
Common W. Leo Morris 279,500 2.51%
5875 South Joplin
Tulsa, OK 74135
Common J. Clark Bundren 202,500 1.82%
5555 E. 71st St., Ste. 6220
Corporate Oaks, Bldg. 6
Tulsa, OK 74136
Common Robert Garner 224,850 2.02%
427 South Boston, Ste. 1207
Broken Arrow, OK 74103
Common Marianne Smith 177,420 1.59%
2 Hendersonville Rd. Ste. E
Asheville, NC 28803
Common Rick Clark (1) 1,125,678 10.11%
7633 E 63rd Place, Ste 210
Tulsa, OK 74133
Common G. David Gordon (2) 1,279,230 11.49%
7633 E 63rd Place, Ste 210
Tulsa, OK 74133
Common All officers and directors as a 2,298,602 20.64%
Group (six persons)
</TABLE>
(1) Includes 715,678 shares held directly, 100,000 held by his wife and
310,000 shares in trust for his minor children.
(2) Includes 461,471 shares held directly, 734,423 held by his wife and
83,333 shares, which represents his proportionate interest in 100,000
shares held by a corporation in which he owns 83.33% of the outstanding
common stock.
15
<PAGE> 16
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As of June 30, 1998 KLI had made loans to related parties in the
following amounts:
<TABLE>
<S> <C>
Joel C. Holt, Director and President $26,717
Marianne Smith, Secretary to the Board 20,888
Rick Clark 15,000
G. David Gordon 14,000
</TABLE>
16
<PAGE> 17
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
(a) EXHIBITS - See Exhibit Index at page 18.
(b) REPORTS ON FORM 8-K - The Company did not file any reports on Form 8-K
during the three months ended June 30, 1998.
SIGNATURES
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.
RECONVERSION TECHNOLOGIES, INC.
Date: February 18, 1999 By /S/ Joel C. Holt
----------------------------
Joel C. Holt, President and
Principal Financial and
Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
Date: February 18, 1999 /s/ Joel C. Holt
--------------------------
Joel C. Holt
Director
Date: February 18, 1999 /s/ John B. Sams
--------------------------
John B. Sams
Director
Date: February 18, 1999 /s/ W. Leo Morris
--------------------------
W. Leo Morris
Director
Date: February 18, 1999 /s/ J. Clark Bundren
--------------------------
J. Clark Bundren
Director
Date: February 18, 1999 /s/ Robert Garner
--------------------------
Robert Garner
Director
17
<PAGE> 18
EXHIBITS HAVE BEEN OMITTED FROM THIS COPY. COPIES OF EXHIBITS MAY BE OBTAINED
FROM RECONVERSION TECHNOLOGIES, INC., UPON REQUEST AND PAYMENT OF THE COSTS OF
FURNISHING SUCH COPIES. COPIES MAY ALSO BE OBTAINED FROM THE SECURITIES AND
EXCHANGE COMMISSION FOR A SLIGHT CHARGE. (The foregoing is not applicable to the
original(s) hereof.)
EXHIBIT INDEX
<TABLE>
<CAPTION>
SECURITIES
AND EXCHANGE
COMMISSION
EXHIBIT NO. TYPE OF EXHIBIT PAGE NUMBER
- ------------ --------------- -----------
<S> <C> <C>
2 Plan of Acquisition, Reorganization, N/A
Arrangement, Liquidation or Succession
3 Articles of Incorporation and Bylaws - N/A
Incorporated herein by reference to
Form 10-K for Fiscal year ended
June 30, 1987, filed October 15, 1987.
4 Instruments defining the rights of security N/A
holders, including indentures
9 Voting Trust Agreement N/A
10 Material Contracts N/A
11 Statement regarding Computation of Per N/A
Share Earnings
13 Annual Report to Security Holders N/A
16 Letter on Change in Certifying Accountant N/A
18 Letter regarding Change in Accounting Principles N/A
21 Subsidiaries of the Registrant Item 1
22 Published Report Regarding Matters Submitted N/A
to Vote of Security Holders
23 Consents of Experts and Counsel N/A
24 Power of Attorney N/A
27 Financial Data Schedule Filed herewith
99 Additional Exhibits N/A
</TABLE>
18
<PAGE> 19
RECONVERSION TECHNOLOGIES, INC. AND SUBSIDIARY
June 30, 1998 and 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditor's Report F-1
Consolidated Financial Statements:
Consolidated Balance Sheet F-2 to F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Deficit F-5
Consolidated Statements of Cash Flows F-6 to F-7
Notes to Consolidated Financial Statements F-8 to F-20
</TABLE>
<PAGE> 20
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Reconversion Technologies, Inc. and Subsidiary:
We have audited the accompanying consolidated balance sheet of Reconversion
Technologies, Inc. and subsidiary as of June 30, 1998 and the consolidated
statements of operations, stockholders' deficit and cash flows for the years
ended June 30, 1998 and 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Reconversion Technologies, Inc. and subsidiary at June 30, 1998 and the
consolidated results of their operations and their cash flows for the years
ended June 30, 1998 and 1997 in conformity with generally accepted accounting
principles.
/s/ Guest & Company, P.C.
February 5, 1999
Tulsa, Oklahoma
F-1
<PAGE> 21
RECONVERSION TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Balance Sheet
June 30, 1998
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash $124,746
Accounts receivable, less allowance for doubtful
accounts of $12,000 90,933
Due from related parties (note 3) 29,000
Due from employees 47,605
Marketable securities, less unrealized loss of $46,141 9,780
Prepaid consulting contract (note 4) 11,250
Other prepaid expenses 5,878
Deferred income tax asset (note 7) 61,647
--------
Total current assets 380,839
--------
Machinery and equipment (note 6):
Lab machinery and equipment 141,028
Computer equipment 90,422
Furniture and fixtures 20,843
--------
252,293
Less accumulated depreciation and amortization 90,517
--------
Net machinery and equipment 161,776
--------
Due from Liquidating Trust of Reconversion Technologies
of Texas, Inc. (note 2) 100,000
Goodwill, less accumulated amortization of $3,668 90,654
--------
$733,269
========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 22
RECONVERSION TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Balance Sheet, Continued
June 30, 1998
<TABLE>
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt (note 6) $ 24,912
Current installments of obligations under capital leases (note 5) 116,450
Accounts payable 112,476
Unresolved bankruptcy claims (note 2) 7,951
Obligations to be paid in common stock (note 2) 3,226,245
Accrued expenses 26,557
Deferred gain on sale-leaseback (note 5) 17,548
-----------
Total current liabilities 3,532,139
-----------
Long-term debt, excluding current installments (note 6) 58,363
Obligations under capital leases, excluding current
installments (note 5) 14,906
Deferred income tax liability (note 7) 29,236
-----------
Total liabilities 3,634,644
-----------
Stockholders' deficit (notes 2, 4, 8 and 9):
Common stock, $.0001 par value. Authorized
200,000,000 shares; issued 10,260,749 shares 1,026
Additional paid-in capital 615,093
Deficit (291,249)
Stock issuable under bankruptcy plan (3,226,245)
-----------
Total stockholders' deficit (2,901,375)
Commitments and contingencies (notes 2, 5, 9, 10 and 11)
-----------
$ 733,269
===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 23
RECONVERSION TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Statements of Operations
Years Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net sales $ 1,690,545 $ 1,446,137
Cost of sales 467,340 435,708
------------ ------------
Gross profit 1,223,205 1,010,429
Selling, general, and administrative expenses 1,136,820 1,172,501
------------ ------------
Operating income (loss) 86,385 (162,072)
------------ ------------
Other income (deductions):
Gain on sale-leaseback (note 5) 35,095 --
Unrealized loss on investment (46,141) --
Interest expense (16,811) (12,387)
Miscellaneous income 57 --
------------ ------------
(27,800) (12,387)
------------ ------------
Net income (loss) before income taxes 58,585 (174,459)
Income taxes (note 7) (49,969) 53,044
------------ ------------
Net income (loss) $ 8,616 $ (121,415)
============ ============
Net income (loss) per common share $ .00 $ (.01)
============ ============
Weighted average common shares (post-reverse split) $ 10,249,098 $ 9,394,043
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 24
RECONVERSION TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Deficit
Years Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
STOCKHOLDERS'
ADDITIONAL STOCK DEFICIT
COMMON STOCK PAID-IN SUBSCRIPTIONS (NOTES 2, 4,
SHARES * AMOUNT CAPITAL DEFICIT RECEIVABLE 8 AND 9)
----------- ----------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1996 2,500,000 $ 250 $ 597,595 $ (178,450) $ -- $ 419,395
Net loss -- -- -- (121,415) -- (121,415)
----------- ----------- ----------- ----------- ----------- -----------
Balances at June 30, 1997 2,500,000 250 597,595 (299,865) -- 297,980
Acquire Reconversion Technologies,
Inc 7,743,249 774 -- -- (3,226,245) (3,225,471)
Exercise common stock warrants 17,500 2 17,498 -- -- 17,500
Net income -- -- -- 8,616 -- 8,616
----------- ----------- ----------- ----------- ----------- -----------
Balances at June 30, 1998 10,260,749 $ 1,026 $ 615,093 $ (291,249) $(3,226,245) $(2,901,375)
=========== =========== =========== =========== =========== ===========
</TABLE>
* Post-reverse split
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 25
RECONVERSION TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN CASH
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 1,603,609 $ 1,603,404
Cash paid to suppliers and employees (1,600,725) (1,377,791)
Interest paid (16,811) (12,387)
Income taxes paid -- --
----------- -----------
Net cash provided (used) by operating activities (13,927) 213,226
----------- -----------
Cash flows from investing activities:
Proceeds from sale-leaseback of equipment 120,000 --
Capital expenditures (2,476) (26,065)
Purchase of marketable securities (54,550) (1,371)
----------- -----------
Net cash provided (used) by investing activities 62,974 (27,436)
----------- -----------
Cash flows from financing activities:
Repayment of long-term debt (22,936) (22,218)
Repayment of capital leases (7,545) (52,216)
Stock warrants exercised 17,500 --
Loans to related parties (29,000) --
Loans to employees (47,605) --
----------- -----------
Net cash used by financing activities (89,586) (74,434)
----------- -----------
Net increase (decrease) in cash (40,539) 111,356
Cash, beginning of year 165,285 53,929
----------- -----------
Cash, end of year $ 124,746 $ 165,285
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 26
RECONVERSION TECHNOLOGIES, INC. AND SUBSIDIARY
Statements of Cash Flows, Continued
Years Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH
PROVIDED (USED) BY OPERATING ACTIVITIES
1998 1997
--------- ---------
<S> <C> <C>
Net income (loss) $ 8,616 $(121,415)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation 56,320 94,688
Amortization of goodwill 3,668 --
Amortization of deferred gain on sale-leaseback (35,095) --
Unrealized loss on investments 46,141 --
(Increase) decrease in accounts receivable, net (39,841) 157,267
Uncollectible note receivable written off -- 168,715
(Increase) decrease in prepaid expenses 22,736 (95)
(Increase) decrease in deferred income tax asset 20,733 (53,044)
Decrease in accounts payable (132,709) --
Decrease in accrued expenses (1,683) (12,890)
Increase in unresolved bankruptcy claims 7,951 --
Debt paid on behalf of KLI by another company -- (20,000)
Increase in deferred income tax liability 29,236 --
--------- ---------
Net cash provided (used) by operating activities $ (13,927) $ 213,226
========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Issuance of common stock for the common stock
of KLI $ 297,980 --
Acquisition of assets under capital leases 138,900 --
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 27
RECONVERSION TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Financial Statements
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
Reconversion Technologies, Inc. (the Company), and its wholly-owned
subsidiary, Keystone Laboratories, Inc. (KLI). All material
intercompany accounts and transactions have been eliminated.
(b) ORGANIZATION
Prior to the acquisition of KLI, the Company had three wholly-owned
subsidiaries: Reconversion Technologies of Texas, Inc. (Retex), a
Texas Corporation, organized on February 24, 1992, Reconversion
Products, Inc. (RPI), formerly Thomas Engineering, Inc., a Georgia
Corporation organized on October 9, 1992, and Spectrum Recycling
Technologies, Inc. (Spectrum), a New York Corporation. On March 23,
1995, the Company voluntarily filed for bankruptcy protection in the
United States Bankruptcy Court for the Northern District of
Oklahoma. During the pendency of the bankruptcy, Retex, Spectrum,
and RPI discontinued operations. Spectrum and RPI have been
liquidated and the remaining asset of Retex, a plant facility,
located in Brenham, Texas, is discussed in Note 2.
On November 13, 1997, the Company was formerly reorganized pursuant
to a confirmed Bankruptcy Plan of Reorganization. As a result,
effective December 1, 1997, the Company acquired all of the issued
and outstanding common stock of KLI, a Delaware corporation
organized on July 20, 1987. For accounting purposes, the acquisition
has been treated as the acquisition of KLI by the Company with KLI
as the acquiror (reverse acquisition). The historical financial
statements prior to December 1, 1997 are those of KLI.
(c) NATURE OF BUSINESS
The Company is a holding company principally engaged in acquiring
and developing businesses. KLI is a forensic drug screening and
confirmatory testing laboratory.
(d) MARKETABLE SECURITIES
Marketable securities are comprised of trading securities held for
short-term investment purposes and are stated at fair value, with
the change in fair value during the period included in earnings.
F-8
<PAGE> 28
RECONVERSION TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Financial Statements, Continued
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(e) PROPERTY AND EQUIPMENT
Owned machinery and equipment are stated at cost and depreciated
using the straight-line method over the estimated useful lives of
the respective assets. Machinery and equipment under capital leases
are stated at the lower of the present value of the minimum lease
payments at the beginning of the lease term or fair value at the
inception of the lease and are amortized over the lesser of the
lease term or the estimated useful lives of the related assets.
(f) INCOME TAXES
Deferred income taxes are recognized for income and expense items
that are reported for financial purposes in different years than for
income tax purposes.
(g) NET EARNINGS/LOSS PER COMMON SHARE
Net earnings/loss per common share are computed using the weighted
average number of shares outstanding during the period. Fully
diluted earnings/loss per common share is presented if the assumed
conversion of common stock equivalents result in material dilution.
(h) USE OF ESTIMATES
The process of preparing financial statements in conformity with
generally accepted accounting principles requires the use of
estimates and assumptions regarding certain types of assets,
liabilities, revenues and expenses. Such estimates primarily relate
to unsettled transactions and events as of the date of the financial
statements. Accordingly, upon settlement, actual results may differ
from estimated amounts.
(i) FAIR VALUE DETERMINATION
Financial instruments consist of cash, accounts receivable, accounts
payable, accrued liabilities, notes payable, long-term debt and
capital lease obligations. The carrying amount of these financial
instruments approximates fair value due to their short-term nature
or the current rates which the Company could borrow funds with
similar remaining maturities.
F-9
<PAGE> 29
RECONVERSION TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Financial Statements, Continued
(2) SUMMARY OF PLAN OF REORGANIZATION
On July 3, 1997, Richard T. Clark, Jr. and Joel C. Holt, shareholders and
creditors of the Company, filed a Disclosure Statement and Plan of
Reorganization (the Plan). On November 13, 1997 the Plan was confirmed
pursuant to 11 U.S.C. Section 1126 and filed with the Securities and
Exchange Commission on Form 8-K dated November 13, 1997.
The Plan is premised on the concept that the claims and interests of
creditors and equity security holders are best served by an orderly
reorganization of the Company built around the acquisition by the Company
of Keystone Laboratories, Inc. (KLI) and the establishment of a less
expensive procedure for resolutions of the claims of the Company.
KLI is engaged in the business of forensic drug testing. Prior to December
1, 1997, Richard T. Clark, Jr. and Joel C. Holt (the Plan Proponents)
owned all outstanding shares of common stock of KLI. Under this Plan, the
Plan Proponents exchanged their shares in KLI effective December 1, 1997,
for 2,500,000 shares of new common stock in the reorganized debtor. These
shares of new common stock issued for KLI do not include other shares of
new common stock to be received by the Plan Proponents pursuant to the
Plan in their capacities as either equity security holders of common stock
and preferred stock or as creditors.
Under the Plan, in addition to the acquisition of Keystone and the orderly
collection of claims of the Company, the Company's former wholly-owned
subsidiary Reconversion Technologies of Texas, Inc. (Retex) will be
liquidated in its pending Chapter 11 case utilizing a liquidating trust .
The Company is the principal secured creditor of Retex. The principal
asset of Retex is a plant facility in Brenham, Texas (the Brenham Plant).
Pursuant to the liquidating trust, the Brenham Plant will be sold;
however, a sale is not expected in the near future. Under the Plan, the
Company agreed to subordinate $200,000 of its $5,000,000 allowed secured
claim against Retex to permit payment of Retex's allowed claims and
administrative expenses. The balance of all funds or assets of Retex
(after the lesser of the amounts required to pay Retex's allowed priority
claims and allowed claims, or $200,000) will be paid by the liquidating
trust to the Company in satisfaction of the Retex obligation to the
Company. Due to the fact that property taxes continue to accrue and
expected deterioration of the facility due to non-usage, the Company has
determined that the expected benefit from the sale of the Brenham Plant
will be approximately $100,000.
F-10
<PAGE> 30
RECONVERSION TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Financial Statements, Continued
(2) SUMMARY OF PLAN OF REORGANIZATION, CONTINUED
Following the acquisition of Keystone, the liquidation of the principal
assets of Retex through the liquidating trust and the collection of any
claims of the Company, the Company's only operating asset will be KLI. The
Company will be engaged solely in the business of forensic drug testing
through KLI unless and until the Company expands its business activities.
The Plan also includes the following:
a. All pre-petition shares of common stock are subject to a
one-for-eight reverse stock split such that each holder of
pre-petition shares of common stock will receive the number of
shares of new common stock equal to the number of shares of
pre-petition common stock held by the holder, divided by
eight;
b. All pre-petition shares of preferred stock will be
reclassified as new common stock and the holders of preferred
stock will receive a pro rata share of 1,221,329 shares of new
common stock in exchange for pre-petition preferred shares;
c. Certain creditor claims may be converted into new common
stock; and
d. Warrants to purchase new common stock will be issued to
certain holders of interests.
The Plan is binding on the Company and all creditors and shareholders of
the Company. The Plan provides for treatment of the following 11 classes
of claims and interest:
CLASS 1 CLAIMS: ALLOWED ADMINISTRATIVE CLAIMS. Allowed claims under
Section 503(b) of the Bankruptcy Code. The class 1 claims include
(1) allowed but unpaid attorneys' fees on the effective date for the
Company's counsel, Riggs, Abney, Neal, Turpen, Orbison & Lewis, and
(2) allowed but unpaid professional fees due to Neal Tomlins,
Examiner and his counsel, and fees and expenses not yet presented
for payment, and therefore, not yet approved. All class 1 claims
have been paid as of June 30, 1998.
CLASS 2 CLAIMS: ALLOWED PRIORITY CLAIMS. Allowed Unsecured Claims
entitled to priority pursuant to Section 507(a) of the Bankruptcy
Code. The Company has scheduled priority claims owing in unknown
amounts to the Internal Revenue Service and the Securities and
Exchange Commission. The Plan Proponents believe that there is no
liability to either of the agencies included in this class.
F-11
<PAGE> 31
RECONVERSION TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Financial Statements, Continued
(2) SUMMARY OF PLAN OF REORGANIZATION, CONTINUED
CLASS 3 CLAIMS: DISPUTED SECURED CLAIMS. This class consists of
creditors who assert a secured claim against the Company and its
assets. All of such secured claims are disputed and all underlying
claims are disputed, as they do not arise from obligations of the
Company but instead, represent, if valid, obligations of Retex. It
is believed that the joint administration of the Company's case and
the Retex case may have created confusion among Retex creditors who
asserted secured status in the Company's case.
CLASS 4 CLAIMS: CLAIMS OF TRANSFER AGENTS AST AND DEPOSITORY TRUST
CO. This class consists of the pre-petition unsecured claim of
American Securities Transfer (AST) in the amount of $3,554 and of
the pre-petition unsecured claim of Depository Trust Co. in the
amount of $1,050. Both claims were incurred for stock transfer
services rendered to the Company pre-petition. As of June 30, 1998,
the outstanding balance of the class 4 claims is $1,050.
CLASS 5 CLAIMS: ADMINISTRATIVE CONVENIENCE SMALL CLAIMS. This class
consists of all allowed unsecured claims against the Company which
are $1,000 or less in amount, and shall include class 6 creditors
who elect to reduce their claim for class 5 participation. As of
June 30, 1998, the outstanding balance of the class 5 claims is
$750.
CLASS 6 CLAIMS: UNSECURED CLAIMS. Class 6 claims consist of allowed
unsecured claims against the Company to which no objection has been
interposed and total approximately $412,625 and disputed claims,
which would otherwise be included within this class, but will not be
allowed until allowed by Final Order of the Bankruptcy Court. The
aggregate amount of disputed claims is $1,353,749. The allowed
claims have been valued at 40 percent of their face amount, based
upon the amount to be paid to settle the claims. The disputed claims
have also been valued at 40 percent of their face amount pending
their ultimate disposition. As of June 30, 1998, the outstanding
balance of unresolved class 6 claims is $6,151. Obligations to class
6 creditors to be paid in common stock are included in the
accompanying balance sheet as obligations to be paid in common
stock.
F-12
<PAGE> 32
RECONVERSION TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Financial Statements, Continued
(2) SUMMARY OF PLAN OF REORGANIZATION, CONTINUED
CLASS 7 CLAIM: DISPUTED UNSECURED CLAIM OF GAIA. GAIA is the holder
of a disputed unsecured claim against the Company. On March 17,
1995, GAIA obtained a judgment against the Company and certain
individuals in the aggregate sum of $22,000,000 in the U.S. District
Court for the Southern District of Texas styled GAIA Technologies,
Inc. v. Reconversion Technologies, Inc., et al., Case No. H-94-2258
and GAIA filed its proof of claim in the case for $23,043,276.21. On
August 19, 1996, the U.S. Court of Appeals for the Federal Circuit
reversed and vacated the judgment entirely and remanded the matter
to the U.S. District Court for the Southern District of Texas. The
GAIA claim is disputed under the Plan. An objection to the GAIA
claim was filed seeking a determination of the value of the GAIA
claim through the claim estimation process pursuant to 11 U.S.C.
Section 502(c). After the objection was filed, the U.S. District
Court for the Southern District of Texas (to which the appeals court
had remanded the matter after vacating and reversing the judgment)
entered judgment in favor of GAIA and against the Company and others
as follows:
1. Judgment against the Company, Retex, Progressive Capital
Corporation, G. David Gordon, Ira Rimer, Joel C. Holt
and Richard T. Clark, Jr., jointly and severally, for:
a. $4,350.000;
b. Pre-judgment interest of $2,130,193;
2. Judgment against the Company, Retex and Progressive
Capital Corporation, jointly and severally, for:
a. $125,000;
b. Pre-judgment interest of $61,212;
3. Judgment against G. David Gordon, Ira Rimer, Joel C.
Holt and Richard T. Clark, Jr. for $100,000 each, in the
nature of punitive damages;
4. Attorney's fees of $450,000 against the Company, Retex,
Progressive Capital Corporation, G. David Gordon, Ira
Rimer, Joel C. Holt and Richard T. Clark, Jr., jointly
and severally; and
5. Post-judgment interest after July 10, 1997, at 5.65%.
F-13
<PAGE> 33
RECONVERSION TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Financial Statements, Continued
(2) SUMMARY OF PLAN OF REORGANIZATION, CONTINUED
The aggregate amount of the judgment against the Company and the
other parties is $7,116,405.21, exclusive of interest after July 10,
1997. The Company promptly perfected its appeal from the judgment.
The appeal has been briefed and orally argued, and is now awaiting
decision by the United Sates Court of Appeals for the Fifth Circuit.
Plan Proponents believe the value of the GAIA claim against the
Company will ultimately be determined to be zero, and further, that
the Company may have claims against GAIA arising as a result of the
GAIA litigation, which potential claim is reserved pending analysis.
The claim has been valued at $1,503,696, the maximum amount
allowable under the Plan based on the current judgment, in the
accompanying balance sheet and is included in obligations to be paid
in common stock.
CLASS 8 CLAIM: TEXAS NATURAL RESOURCES CONSERVATION CORPORATION
(TNRCC) CLAIM. The TNRCC claim against the Company arises, if at
all, in connection with certain environmental claims, which are
asserted by TNRCC against Retex from operation of the Retex plant in
Brenham, Texas. TNRCC has not filed a claim against the Company. The
Company believes that if TNRCC asserts its claim against Retex, and
as set forth in the Disclosure Statement, that the Company has no
liability to TNRCC.
CLASS 9 CLAIM: KLENDA, GORDON & GETCHELL CREDITOR CLAIM. This class
consists of the claim of Klenda, Gordon & Getchell asserting an
unsecured claim in the amount of $128,439.37. The Company asserted
claims against Klenda, Gordon & Getchell, which on May 22, 1997,
resulted in a judgment in favor of the Company against Klenda,
Gordon & Getchell for $98,625, together with interest at 6.72% from
June 21, 1996, until paid. The class 9 claim has been settled as of
June 30, 1998.
CLASS 10 INTERESTS: PREFERRED STOCK. This class consists of the
equity security holders who own pre-petition shares of preferred
stock. According to information available to Plan Proponents, there
were 1,104,081 pre-petition shares of preferred stock issued by the
Company and held by approximately 48 entities or individuals.
F-14
<PAGE> 34
RECONVERSION TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Financial Statements, Continued
(2) SUMMARY OF PLAN OF REORGANIZATION, CONTINUED
CLASS 11 INTERESTS: COMMON STOCK. This class consists of the
interests of the equity security holders who own pre-petition shares
of common stock of the Company. According to information available
to Plan Proponents, there were 11,807,785 pre-petition shares of
common stock outstanding held by approximately 301 entities or
individuals.
(3) RELATED PARTY TRANSACTIONS
Related party transactions are as follows:
KLI advanced $14,000 to the Company's legal counsel.
KLIadvanced $15,000 to a corporation controlled by a majority
shareholder of the Company.
The Company has determined that pursuant to certain indemnity obligations
that Richard T. Clark, G. David Gordon and Joel C. Holt have expended in
excess of $1,074,978 regarding certain litigation matters which the
Company is responsible and will be reimbursed through the issuance of
2,099,999 shares of the Company's common stock.
(4) PREPAID CONSULTING CONTRACT
On November 14, 1997, the Company entered into a two-year public relations
contract. Under the contract, the Company issued 500,000 shares of common
stock to a public relations firm in November 1997 and will issue another
500,000 shares of common stock to the firm in November 1998. The contract
was recorded using a per share price of $.06.
F-15
<PAGE> 35
RECONVERSION TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Financial Statements, Continued
(5) LEASES
The Company leases equipment under capital leases which expire over the
next five years.
Following is a summary of machinery and equipment held under capital
leases:
<TABLE>
<S> <C>
Lab machinery and equipment $ 120,000
Computer equipment 18,900
---------
138,900
Less accumulated amortization (15,528)
---------
$ 123,372
=========
</TABLE>
Future minimum lease payments under noncancelable capital leases and
noncancelable operating leases having terms in excess of one year as of
June 30, 1998 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------ ------
<S> <C> <C>
Years ended June 30:
1999 $124,513 $ 70,364
2000 4,513 66,896
2001 4,513 61,789
2002 4,513 63,643
2003 3,592 54,355
-------- --------
Total future minimum lease payments 141,644 317,047
Less amount representing interest 10,288
Present value of the minimum lease payments 131,356
Less current installments 116,450
--------
Capital lease obligation, less current installments $ 14,906
========
</TABLE>
F-16
<PAGE> 36
RECONVERSION TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Financial Statements, Continued
(5) LEASES, CONTINUED
During the year ended June 30, 1998, KLI entered into a sale-leaseback
agreement under which KLI sold certain laboratory equipment and leased it
back for a period of 13 months. The lease is accounted for as a capital
lease. The gain of $52,643 on this transaction will be amortized over the
term of the lease.
(6) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<S> <C>
Note payable to bank with interest at 2.0% above the prime rate as
published in the Wall Street Journal (8.5% at June 30, 1998),
payable in monthly installments of $2,707 plus accrued interest
with unpaid principal balance due June 14, 2001; secured
by certain equipment of KLI $ 83,275
Less current installments 24,912
--------
Long-term debt, excluding current installments $ 58,363
========
</TABLE>
The aggregate maturities of long-term debt for the period ending June 30,
2001 are as follows: 1999, $24,912; 2000, $27,657; 2001, $30,706.
(7) INCOME TAXES
Income tax expense (benefit) for the years ending June 30, 1998 and June
30, 1997 consists of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -----
<S> <C> <C> <C>
1998:
Federal $ -- $ 40,791 $ 40,791
State -- 9,178 9,178
-------- -------- --------
$ -- $ 49,969 $ 49,969
======== ======== ========
1997:
Federal -- (67,249) (67,249)
State -- 14,205 14,205
-------- -------- --------
$ -- $(53,044) $(53,044)
======== ======== ========
</TABLE>
F-17
<PAGE> 37
RECONVERSION TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Financial Statements, Continued
(7) INCOME TAXES, CONTINUED
Actual income tax expense (benefit) applicable to earnings (loss) before
income taxes is reconciled with the "normally expected" federal income tax
expense (benefit) as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
"Normally expected" income tax (benefit) $ 19,919 $(59,316)
Increase (decrease) in taxes resulting from:
Utilization of net operating loss carryforward 35,409 --
State income taxes, net of Federal income
tax effect 8,476 13,118
Deduction of items in different periods for
financial accounting and income tax
purposes (14,682) (7,432)
Nondeductible meals 847 586
-------- --------
Actual income tax expense (benefit) $ 49,969 $(53,044)
======== ========
</TABLE>
The deferred income tax assets and liabilities at June 30, 1998 are
comprised of the following:
<TABLE>
<CAPTION>
CURRENT NONCURRENT
------- -----------
<S> <C> <C>
Allowance for uncollectible accounts receivable $ 4,998 --
Net operating loss carryforwards 56,649 $ 1,791,867
---------- -----------
61,647 1,791,867
Less valuation allowance -- (1,791,867)
---------- -----------
Deferred income tax assets 61,647 --
Deferred income tax liability - asset basis -- (29,236)
---------- -----------
Net deferred income tax assets (liabilities) $ 61,647 $ (29,236)
========== ===========
</TABLE>
The Company has available unused net operating loss carryforwards of
approximately $5,400,000 which will expire in 2012.
F-18
<PAGE> 38
RECONVERSION TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Financial Statements, Continued
(8) ACQUISITION
Effective December 1, 1997, the Company acquired all of the issued and
outstanding common shares of KLI in exchange for 2,500,000 shares of the
Company's common stock. For accounting purposes, the acquisition has been
treated as a reverse acquisition. Due to the limited activity of the
Company since filing bankruptcy in March 1995, pro forma financial
information is not presented.
(9) RIGHTS TO PURCHASE STOCK
Under the bankruptcy plan, the Company issued the following warrants to
purchase the Company's common stock:
Class A warrants were issued to pre-petition preferred shareholders
and creditors which allow the purchase of 1,624,172 shares of common
stock. The warrants are exercisable within 12 months after March 15,
1998 at $1.00 per share.
Class B warrants were issued to pre-petition common shareholders
which allow the purchase of 1,475,973 shares of common stock. The
warrants are exercisable within 15 months after March 15, 1998 at
$1.00 per share.
Upon the exercise of a Class B warrant, a Class C warrant will be
issued allowing the purchase of the number of shares of common stock
equal to the number of shares purchased upon the exercise of the
Class B warrants. Class C warrants are exercisable within 18 months
after March 15, 1998 at $1.75 per share. During the year ended June
30, 1998, 17,500 Class C warrants were issued.
Of the warrants mentioned above, 17,500 Class B warrants were exercised
during the year ended June 30, 1998. At June 30, 1998, there are warrants
for 3,100,145 common shares outstanding at an average exercise price of
$1.00 per share.
(10) CONCENTRATION OF CREDIT RISK
At June 30, 1998, KLI maintained a cash balance within a financial
institution which exceeded the insured limits of the Federal Deposit
Insurance Corporation.
F-19
<PAGE> 39
RECONVERSION TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Financial Statements, Continued
(11) CONTINGENCY
The Company has started the process of identifying computer systems and
software that could be affected by the "Year 2000" issue. The Year 2000
problem is the result of computer programs being written using two digits
rather than four to define the applicable year. The Company estimates the
cost of addressing the Year 2000 issue to be relatively nominal as it has
not found any software or equipment for which an update is required.
F-20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from Financial
Statements as of June 30, 1998 and for the year then ended and is qualified in
its entirety by reference to such Form 10-KSB for the year ended June 30, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 124,746
<SECURITIES> 9,780
<RECEIVABLES> 102,933
<ALLOWANCES> (12,000)
<INVENTORY> 0
<CURRENT-ASSETS> 380,839
<PP&E> 252,293
<DEPRECIATION> (90,517)
<TOTAL-ASSETS> 733,269
<CURRENT-LIABILITIES> 3,532,139
<BONDS> 0
0
0
<COMMON> 1,026
<OTHER-SE> (2,902,401)
<TOTAL-LIABILITY-AND-EQUITY> 733,269
<SALES> 1,690,545
<TOTAL-REVENUES> 1,690,545
<CGS> 467,340
<TOTAL-COSTS> 467,340
<OTHER-EXPENSES> 1,136,820
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,811
<INCOME-PRETAX> 58,585
<INCOME-TAX> 49,969
<INCOME-CONTINUING> 8,616
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,616
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
