<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM 10-K
_______________
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1935
For the Transition Period From N/A to N/A
Commission File No.: 0-15543
METAL RECOVERY TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
Delaware 71-0628061
(State of Incorporation) (I.R.S. Employer Identification No.)
415 East 151st Street
East Chicago, Indiana 46312
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (219) 397-6261
Securities Registered Pursuant to Section 12 (b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Common Stock NASD OTC Bulletin Board
Securities Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 12, 13, or 15 (d) of the Securities Exchange Act of 1939
during the proceeding 12 months (or for such shorter period that the Registrant
was required to file such report(s), and (2) has been subject to such filing
requirements for the past 90 days:
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The market value of the voting stock, based on the mean value of the closing bid
and ask price, held by non-affiliates of the Registrant as of April 4, 1997
$9,274,072
Number of shares outstanding of the Registrant's Common Stock as of December 31,
1996
20,707,597
Exhibit Index begins on page 13.
<PAGE>
PART 1
ITEM 1. BUSINESS
CURRENT OPERATIONS
Metal Recovery Technologies, Inc., a Delaware Corporation, (formerly Malvy
Technology, Inc.), hereafter "the Company" or "MRTI", acquired its wholly owned
subsidiary, Metal Recovery Industries (US), Inc., hereafter "MRI(US)", in April
1995. MRI(US) is engaged in the development of the first commercially viable
means of recovering the zinc coating from steel scrap through a dezincing
process. Over the last 15 years, the steel industry has seen a rapid increase
in the world wide use of galvanized (zinc coated) steel, especially in the
automotive and appliance industries. This increase has created a new problem in
the industry - an ever increasing amount of galvanized steel scrap. The
presence of zinc in the steel scrap supply creates problems in the melting and
casting of new steel and an environmental issue to clean or dispose of zinc
laden dusts.
Since the acquisition, MRTI has been involved in the re-commissioning of the
MRI(US) plant in East Chicago, Indiana. The East Chicago Plant began test
production runs in October 1996. MRTI considered these operations as
developmental and, through the end of 1996, capitalized all of its expenditures
related to putting the plant into regular production.
The application of zinc to steel to inhibit corrosion has created a rapidly
growing market for zinc over the last two decades. Current world consumption of
zinc is approximately 7,000,000 tons per year, half of which is used to protect
steel.
By far the largest market for galvanized steel scrap is the automotive industry.
Through obsolescence, recycling and the production of prompt scrap from the auto
stamping processes, there is now a rapidly increasing amount of galvanized steel
scrap. Galvanized steel scrap causes environmental problems for the steel mills
and foundries due to air or water emissions laden with zinc. Clean "black"
(non-coated) scrap eliminates these problems associated with galvanized (zinc
coated) scrap.
For each ton of galvanized sheet steel supplied to auto stamping plants, 1/4
ton becomes scrap immediately. Most bundles of such high quality prompt scrap
contain a minimum of 40% coated material.
MRI(US)'s current competition comes from the waste treatment recycling industry
who process or stabilize the wastes generated from the furnace emissions in the
steel and foundry industries.
However any recycling system which does not involve dezincing the steel prior to
melting, allows the production of large quantities of hazardous waste and incurs
punitive recycling and waste disposal costs, as well as exposure to the risk of
future environmental liability penalties.
The Company believes that its technology will allow for the removal of zinc from
scrap metal without the production of hazardous bi-products.
The Company's dezincing process is environmentally benign, but continuous
management of air quality is necessary, and when in full production,
environmental procedures require continuous monitoring. The Company's
activities are subject to a variety of federal, state and local environmental
regulations.
Close attention is paid to compliance with all environmental regulations. The
Company believes that it is in compliance with applicable regulations.
During the last quarter of 1996, MRI(US) successfully dezinced over 100 tons of
scrap. Over 560 tons were dezinced during the first quarter of 1997. The
Company sold its black scrap through a scrap dealer to one of the nation's
largest owners of foundries at a premium over the current market price of
equivalent grade galvanized scrap.
<PAGE>
Until the last quarter of 1996, all dezincing by MRI(US) had been carried out as
a batch process on different grades and types of galvanized scrap. A production
line had never before been established for the MRI(US) process. However,
although the Company has, since October, 1996, run production lines on a limited
basis, the full-scale commercial viability of the MRI(US) process remains
unproven and there can be no assurance that the process will be technologically
successful, or even if technologically successful, that the Company will be able
to obtain financing on acceptable terms and in sufficient amounts to bring the
process to the point of commercial success.
The degree to which the Company's process is protected by patents is also
uncertain. Accordingly, even if successful, the Company's technology may be
subject to appropriation by competition from third parties, having significantly
greater financial resources.
To date, the Company has obtained the majority of its raw materials directly
from an auto manufacturer. The Company has also obtained materials from other
local broker sources. The Company believes that at such time as the Company's
facility is fully operational, there will be substantial competition among scrap
brokers, metals and mining companies and manufacturers of galvanized steel
product both to provide scrap for dezincing and to purchase both recovered zinc,
in powder and ingot form, and clean "black" scrap. However, there can be no
assurance as to the terms and conditions upon which scrap can be purchased or,
recovered zinc or "black" scrap sold, or whether the Company's operations will
be necessarily be profitable.
FINANCING OF BUSINESS
The MRI(US) process has been developed in cooperation with the Argonne National
Laboratory ("Argonne") and the US Department of Energy("DOE"). DOE helped
provide some of the initial capital required for the development of the
MRI(US) process. Since June 1, 1992, DOE has made available a total of
$1,141,411 for research and development regarding the dezincification
technology being developed by MRI(US).
The original collaborative research and development contract estimated a
contribution of $1.4 million from the DOE. The funds have been provided to
Argonne and have been expended, both by MRI(US) and Argonne, on research and
development of the dezincing technology. The Company is awaiting the approval
by the DOE for additional funds to be used by MRI(US) and Argonne totaling
$5,466,000 to be made available for work already performed and to be performed
through 1999. Based upon the Memorandum of Understanding entered into between
the DOE and MRI(US), the Company has a contingent repayment obligation, equal to
150% of the government's total payments to the project, which arises if and when
the technology developed becomes commercially feasible. The payments must be
made out of the percentage of future net royalty payments received by the
Company from the exploitation of the technology, if successful.
Development of the dezincing technology to the point of full commercial
application will require substantial funds in addition to those made available
through DOE.
The Company has had no ability to arrange bank financing and has therefore, had
to arrange convertible term loans with a number of private overseas venture
capital investment companies.
<PAGE>
As of December 31, 1996, the Company had outstanding the following loan
facilities, having the balances, set forth below; the aggregate balance of these
loans was $3,288,010. Each loan, at the option of the lender, is convertible
into common stock of the Company. Interest is payable at the rate of 10% per
annum; the Company has the option to capitalize the interest ( which becomes
convertible into additional shares).
LENDER NUMBER OF COMMON OUTSTANDING BALANCE
------ SHARES ISSUABLE -------------------
UPON CONVERSION
---------------
Sovereign Trust Services loan convertible into 1,666,667
shares of common stock. $ 680,036
Sundorn Holding, SA loan convertible into 1,666,667
shares of common stock. 715,154
Osbourne Ltd. loan convertible into 1,000,000 shares
of common stock. 220,000
Plenbrick Ltd. loan convertible into 2,000,000 shares
of common stock. 604,688
Alcaria Investments, Ltd. loan convertible into 331,692
shares of common stock. 100,398
Jepherson Ltd. loan convertible into 331,692 shares of
common stock. 98,521
Anthemis Ltd. loan convertible into 332,972 shares of
common stock. 96,384
Pangea Ltd. loan convertible into 1,666,667 shares of
common stock. 504,706
Quested Ltd. loan convertible into 883,666 shares of
common stock. 268,123
-----------
$ 3,288,010
-----------
-----------
The number of common shares into which such loans are convertible is subject to
adjustment pursuant to anti-dilution provisions. During 1996, the Company, and
MRI(US), at the insistence of lenders whose loans were then outstanding, as a
condition to the extension of the maturity of such loans and the waiving of
certain defaults thereunder, entered into a pledge and security agreement with
Plenbrick, Ltd., for itself, and as agent for the other existing lenders,
whereby the loans then outstanding would, together with future loans made with
the approval of a majority in interest of the lenders, be secured by a blanket
lien upon, and security interest in the assets of the Company and in the assets
and shares of MRI(US). The lenders also have the right, under certain
contingencies, to exchange loans for a majority interest in MRI(US). Since
December 31, 1996 the Sovereign Trust Services loan has been converted into
common stock. The remaining loans were scheduled to mature on March 31,
1997, with the exception of the loans from Pangea Ltd. and Quested Ltd., which
mature on December 31, 1997.
Based on past experience, the Company expects that it will require additional
financing during the current year. There can be no assurance that such
financing will be available, or as to the terms and conditions upon which
financing, if available, will be provided. However, the Company anticipates
that any financing will be available only from lenders who will require the
right to an equity participation in the Company, either in the form of
convertible loans or loans with accompanying warrants; and in either case this
will likely lead to a dilution of existing shareholders equity.
<PAGE>
In addition to obtaining required capital from lenders, the Company has also
sought to obtain needed financing through long-term arrangements with industrial
companies interested in the utilization of its technology. These companies
include both those engaged in the mining and processing of zinc for sale to
users, as well as industrial companies (such as automobile manufacturers),
engaged in the manufacture of products utilizing galvanized steel who seek ways
to dispose of the resulting scrap. These discussions are all in preliminary
stages, and there can be no assurance that they will culminate in a transaction,
or that a transaction, if completed, will prove profitable. The discussions
include possible investment in MRI(US) or construction of dezincing facilities
at or near plants operated by such third-parties pursuant to either long-term
contracts to supply scrap to be dezinced, or possible joint venture
arrangements.
ACQUISTION OF MRI(US)
The acquisition of MRI(US) in 1995 was effected as follows:
a). By the issue of 11,000,000 common shares under Regulation S, having a
nominal value of $12,000,000, including 10,000,000 of shares at an assigned
value of $1.20 each, plus 1,000,000 shares representing the fee to
underwriters.
b). An additional 7,000,000 common shares will be issuable only at such
time as the dezincification technology of MRI(US) shall have been approved
by an independent third-party, as evidenced by such party's entering into a
contract with the Company for the processing of a minimum of 50,000 tons
per annum of steel scrap utilizing the Company's technology, which contract
shall be on commercially reasonable terms consistent with a bona fide
arm's-length relationship between the parties, and, pursuant thereto,
processing in commercial quantities shall have commenced and scrap so
processed shall have been accepted and paid for by such third-party.
c). An additional 7,000,000 Common Shares shall be issuable only at such
time or times as contracts utilizing the dezincification technology of
MRI(US) shall have been entered into with one or more independent third
parties, providing for the processing of an aggregate minimum of 1,000,000
tons per annum of steel scrap, which contracts shall be on commercially
reasonable terms consistent with a bona fide arm's-length relationship
between the parties.
d). $25,000,000 of Convertible Redeemable Preference Shares ("CRP"
Shares), shall be issuable upon the following conditions:
(1) at the rate of $5.00 of CRP Shares for each ton of capacity in
dezincing plants established by the Company or by any subsidiary
(excluding the East Chicago, IN plant) which is certified as being
operable at full capacity and
(2) at the rate of $5.00 of CRP Shares for each ton of such plant
capacity, which achieves normal operation of at least 80% of its
specified throughput capacity over an aggregate of three consecutive
months.
These CRP Shares, if issued, will be convertible at the option of the holder
into shares of common stock of the Company, or the Company may be required to
redeem such CPR Shares over a period of four years, commencing on the second
anniversary of issue to the extent of 50% thereof and on each of the third and
fourth anniversaries to the extent of 25% thereof. Issuance of additional
common shares on conversion of CRP Shares, if issued, would result in
additional dilution of shareholders equity.
Determinations as to certification of a plant as being operational, and as to
the attainment of requisite 80% of operational capacity, shall be made by the
Company in its reasonable good faith judgment.
<PAGE>
DISCONTINUED OPERATIONS
MRTI was from 1993 to the middle of 1995 primarily engaged in the development
and testing of the Malvy Anti-Theft device and the marketing of the Malvy device
concept to the public and automotive manufacturers through its two foreign
subsidiaries, Malvy Technology S.A. and Malvy Technology (UK) Ltd. This
division, however, went into receivership in October, 1995. The Company does
not expect to recover any portion of its investment. Prior thereto, the Company
was engaged primarily in the business of mining and developing precious metals
in Alaska, the production of oil and gas in Oklahoma and New Mexico and the
transmission of gas through a pipeline operated in Oklahoma. These operations
were disposed of, or written down, during 1994 and 1995. The historical
financial information in the consolidated financial statements, shown in Part
IV, Item 14(a) of this 10-K include historical information from these
discontinued operations.
ITEM 2. PROPERTIES
The Company occupies under license its only facility, in East Chicago, Indiana,
from ASK Corporation (see Item 13 as to Certain Relationships and Related Party
Transactions). The license agreement expired January 31, 1997, and the parties
to the license have agreed to a three year extension, at the same annual rental
of $60,000 currently payable. (In addition, the Company is responsible for all
real estate taxes, utility costs, and costs of maintenance.)
ITEM 3. LEGAL PROCEEDINGS
In September, 1994, the Company reached a settlement with a former chairman and
chief executive officer of the Company, Jack Alexander, and certain entities
related to him, in respect of amounts claimed to be owed to them by the Company
on accounts of notes payable, loans and the redemption price of preferred stock.
Under the terms of the settlement, Mr. Alexander was to be paid $1.3 million
over a period ending May, 1995. The Company has renegotiated several times the
terms of payment to Mr. Alexander. At December 31, 1996, the Company owed Mr.
Alexander a total of approximately $524,748 regarding this settlement. Mr.
Alexander also owned all of the shares of a class of preferred stock which gave
Mr. Alexander the right to elect the majority of the board of directors of the
Company. Upon final payment to Mr. Alexander, these shares will be canceled.
The Company is presently in default in its obligations to Mr. Alexander. Mr.
Alexander on behalf of an entity identified only as "Morton Blue" (with an
address in the British Virgin Islands), to which Mr. Alexander has purportedly
assigned his interest in the settlement including the shares of preferred stock,
has demanded that the Company call a shareholders' meeting at which a majority
of the directors are to be elected by the holder of the said shares of preferred
stock. The Company does not believe that Mr. Alexander, or his assignee, has
the right to call such a meeting (although the holder of such shares of
preferred stock may be entitled to designate a majority of the directors). The
lenders under the pledge and security agreement described in Item 1 - Business
have the right, should Mr. Alexander or his assignee continue to assert a right
to control the Company, to exchange such loans, provided they aggregate at least
$2 million in principal amount, for outright ownership of a majority of the
common shares of MRI(US). They have advised the Company that they expect to
exercise such right should Mr. Alexander or his assignee take any steps to
control the Company. They also have the right to foreclose upon their security
interest in the common shares of MRI(US), which have been pledged as collateral
security of their loans.
On November 6, 1995, an action entitled LEVINE VS. METAL RECOVERY TECHNOLOGIES,
INC., was filed in the United States District Court of Delaware by a shareholder
against the Company and certain present and former directors, alleging breaches
of the federal securities laws, by reason of alleged material misrepresentations
by the Company and the Company's alleged failure to make timely disclosure
relating to its Malvy operations. In November, 1996, the Court certified the
proposed class. On October 31, 1996, a second action was commenced by the same
plaintiff against the same defendants and others, including a number of
brokerage firms and their representatives, alleging a conspiracy to inflate
prices at which the shares of the Company's common stock traded during the
period specified therein. The Company has been involved in extensive
negotiations concerning the possible settlement, on behalf of the Company and
its present and former officers and directors, of both of such actions. The
Company believes that a settlement, if obtainable upon terms agreeable to the
Company, would be in the best interests of the Company and its shareholders.
<PAGE>
The Company is involved in other maters of litigation in the normal course of
business. Management believes that none of these matters, upon their ultimate
resolution, will involve amounts material to the Company's financial statements.
The Company maintains insurance in an amount which management believes to cover
its risks.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Until August, 1995, the Company's Common Stock had been quoted under the symbol
MRTI on the over-the-counter market system of the National Association of
securities Dealers, Inc., Automated Quotations system (NASDAQ). Since August,
1995, the Company's Common Stock has been quoted under MRTI on the over-the-
counter market system of the Bulletin Board (NASD OTC BB).
The following table sets forth the range of high and low closing bid quotations
for the Common Stock as reported by the NASDAQ and NASD OTC BB Monthly
Statistical Report for the periods indicated. Such quotations represent inter-
dealer prices without retail markup, markdown, or commission, and may not
necessarily represent actual transactions.
Calendar Years by Quarter Closing Bid Price
------------------------- -----------------
(in US Dollars)
High Low
---- ---
1995 First 3.375 0.75
Second 1.875 0.65625
Third 1.12875 0.1875
Fourth 1.12875 0.1875
1996 First 1.09375 0.43
Second 1.35 0.46
Third 1.12 0.51
Fourth 0.875 0.30
As of December 31, 1996, the Company had in excess of 2,000 common shareholders
of record.
The Company has not paid cash dividends to date on its Common Stock and intends,
for the foreseeable future, to continue its policy of retaining earnings which
may otherwise be available for such dividends.
The Company has outstanding a number of loans convertible into common stock as
well as warrants to purchase its common stock. Information on these loans and
warrants is more fully described in Notes 5 & 11 of the financial statements
found in Part IV, Item 14 (a) of this filing. See also "Item 1- Business",
regarding such convertible loans and shares of common stock that may be issuable
in connection with the acquisition of MRI(US).
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA ($,000'S OMITTED)
Year Ended December 31
----------------------
<TABLE>
<CAPTION>
For the Year Ended: 1996 1995 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ - $ - $ 1,044.8 $ 867.0
Net Income (loss)
from operations (1,046.8) (177.2) (4,976.6) (1,861.2)
Income (loss) from
operations per
common share (0.0617) (3.1670) (0.2065) (0.1155)
At year ended:
Total assets $ 17,833.0 $ 14,832.2 $ 35,068.3 $ 32,063.1
Long-term debt 509.2 505.0 302.4 302.4
Total liabilities 5,410.8 3,548.8 1,888.5 3,136.5
Working Capital
(deficiency) (4,732.1) (2,819.0) 338.6 (843.4)
Stockholders equity 12,422.2 11,284.0 33,179.8 28,926.6
(Footnote 4)
Pro forma financial
information
Revenues $ - $ - $ 1,044.8 $ 867.0
Net income (loss)
from operations (1,046.8) (177.2) (4,976.6) (1,861.2)
Income (loss) from
operations per
common share (0.0617) (3.1670) (0.2065) (0.1155)
(Footnotes 2 and 3)
</TABLE>
Footnotes:
1. The selected financial data presented are not necessarily indicative
of future financial position or results from future operations.
1. The computations of earning (loss) per common share considers the
weighted average number of shares outstanding during the year, plus
any common stock options and warrants if dilutive.
1. The weighted average number of shares reflects the twenty to one share
consolidation, which occurred in February 1995.
4. Shareholders' equity of $12,422,249 includes goodwill, patents, etc.
of $12,905,749.
ITEM 7. MANAGEMENT'S DISCUSSION & ANALYSIS
1996 VS. 1995
Because the East Chicago, Indiana, processing plant was not in commercial
operation, but was in the process of being commissioned, through the end of
1996, the Company had no sales in either 1996 or 1995. The increase in the
Selling, General and Administrative expenses from $177,180 to $1,046,761 is due
to litigation expense and primarily to increased costs associated with a full
year of commissioning the plant. The 1995 numbers also reflect losses on
discontinued operations and losses on the disposal of operations. These
conditions did not exist in 1996.
<PAGE>
During 1996 and 1995, the Company spent $3,001,766 and $481,332, respectively on
the commissioning of the plant in East Chicago, Indiana. These costs include
equipment purchase and installation, development and testing of its technology,
obtaining customers, suppliers, and financing, installing and testing equipment,
and administrative activities, all of which were capitalized and included as
assets on the accompanying financial statements.
Commencing in late 1996 the dezincing process was, for the first time,
successfully carried out on a limited production basis, and the Company believes
that the process is technologically sound. The Company has, however,
experienced problems in its ability to operate the production line continuously,
and without interruptions, largely, it believes, because of unforeseen
mechanical problems, as distinct from infirmities in the basic technology
itself. There is the need for a number of improvements, upgrades and plant and
equipment expansions if the process is to become commercially viable. Although
management has identified a number of particular problems in this regard, there
is no assurance that others, not presently anticipated, will not develop so as
further to delay commercial production.
The commercial viability of the MRI(US) process will necessarily remain unproven
until a point in time where production targets are achieved to verify the
Company's projections. The degree to which the Company's process is protected
by patents is also uncertain. Patent applications have been made and are
pending. Even if successful, the Company's technology may be subject to
appropriation by and competition from third parties, having significantly
greater financial resources.
The Company has experienced favorable interest in its technology from the steel
industry. Several major corporations are in various stages of investigation of
using the Company's technology. Initial sales of the product in 1997 have
substantiated the ability to obtain premium prices for the non-coated "black"
scrap produced by dezincing. Improvements in production methods are continually
being achieved. But, because this type of line has never before been assembled,
additional problems may arise as the process moves forward.
Because of the commissioning of the East Chicago plant, the Company has incurred
operating losses over the last two years from its on-going business activities.
For the last several years the Company has not generated positive cash flows
from its operations. At December 31, 1996, the Company had negative working
capital of $4,732,070. The Company's independent auditors have qualified their
opinion on the Company's financial statements for the fiscal year ended December
31, 1996, to the effect that there is substantial doubt about the ability of the
Company to continue as a going concern.
REQUIREMENT FOR ADDITIONAL FINANCING:
The Company presently has, in addition to its existing cash on hand, unused loan
facilities aggregating approximately $1.7 million. The Company believes that
additional amounts may be necessary to allow the Company to reach production
levels at a high enough level to operate profitably.
Such financing will be required both to fund production-line improvements and to
defray operating expenses pending sufficient revenues from commercial
production. Because of the unavailability of conventional financing due to the
lack of historical positive cash flow to repay loans, the Company is dependent
upon other sources. In the past, it has raised funds from the placement of
convertible loans with overseas investors. It anticipates that it will be able
to continue to do so, although there can be no assurance. The Company is also
engaged in negotiations with potential users of the Company's dezincing
services, and potential purchasers of its end products of clean "black" scrap
and recovered zinc, respecting possible long-term commercial agreements, as well
as direct investments, which would provide needed capital, although there can be
no assurance that such negotiations will be successful.
<PAGE>
The Company is also required to make necessary arrangements with respect to the
retirement of the indebtedness and preferred shares in the amount of
approximately $524,748 owed to Jack Alexander, which is presently due and
payable. Additionally , the Company is seeking to resolve pending class action
litigation brought by certain shareholders, and the resolution of such
litigation is expected to impose financial obligations on the Company, although
the ongoing costs of litigation would be eliminated. The Company is reviewing
proposals to dispose of these matters through the possible issuance of
additional common shares instead of the payment of cash; although this will
dilute shareholders' equity, the resolution of these matters in this fashion
would substantially enhance corporate liquidity, as well as eliminate the
distraction and burden on management's time and effort. There is however, no
assurance that these matters can be settled on satisfactory terms. See "Item 3
- - Legal Proceedings" for additional information respecting these matters.
1995 VS. 1994
The majority of differences in the financial performance of the Company from
1994 to 1995 stems from operations which were discontinued over various times in
1994 and 1995.
- - MINING OPERATIONS (DISPOSED FEBRUARY 1995) -- Although gold mining
activities during 1994 were slightly better than the 1993 mining levels, it
was not possible to trade profitably and after closing the mine down in
September, 1994, the property was actively marketed for sale and eventually
sold in February, 1995, for $425,000. This adjustment was made in the
December, 1994 consolidated financial statements, which resulted in a loss
on disposal of $407,748.
- - GAS PIPELINE D/B/A SPHINX INTERNATIONAL PETROLEUM CO. (DISPOSED JUNE 1995)
-- Gross revenues from the sale of gas were $171,371 in 1995,and $430,065
in 1994. The decrease in gas sales as of December 31, 1995 is due to the
Company disposing of this subsidiary for a nominal amount. After writing
down the assets and liabilities of the subsidiary to zero, this has
resulted in a net loss at December, 1995 of $7,841. In June 1995, the
Company disposed of its interest in Sphinx International Petroleum for a
nominal amount.
- - MALVY TECHNOLOGY SA & UK - Though sales commenced in 1994 ($181,371), it
was difficult in 1995 for this division to become profitable. During the
first few months of 1995, sales were slow, as the ability to sell was
hampered by the inability of the French hub manufacturer to supply enough
of a variety of hubs. Prospects seemed to be improving after a new hub
manufacturer was located in the UK. A franchise network was set up in
France and the UK, in anticipation of the manufacturer being able to
overcome the problem. As the year passed by, however, it became more and
more obvious that the technology could not be converted into more sales
without a substantial amount of further capital investment. The board
considered this option, but with the limited financial resources available,
had no alternative but to allow the subsidiaries to be forced into
liquidation following petitions filed by its creditors. As a result of
this, the assets and liabilities of Malvy have been eliminated from the
Company's 1995 balance sheet, resulting in the write off of concessions,
rights, patents & goodwill of $33,883,238, together with an operating loss
of $725,562.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item are set forth in Part IV, Item
14(a) hereof.
ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
There have been no disagreements between the Company and its auditors that would
warrant disclosure pursuant to this item.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company has three directors, who are also executive officers of the Company.
The following table sets forth the names and ages of all executive officers of
the Company, all positions and offices presently held by them, the year each
person first became an officer and the term of each person office.
Name Age Office Principal Occupation Officer Since
- ---- --- ------ -------------------- -------------
Michael S. Lucas 49 Chairman, Chairman, October 1994
President & Chief President & Chief
Executive Officer Executive Officer
Roy Pearce 36 Chief Financial Chief Financial April 1993
Officer, Director Officer
Dr. William Morgan 67 Executive Vice Executive Vice May 1995
President, Director President
Mr. Lucas joined the Company on October 14, 1994, for five years prior thereto,
Mr. Lucas was Chairman Executive President of BGMB (USA), Inc. (an investment
group), and prior thereto was Chairman of BOM Holdings, a public company
registered in Great Britain. Mr. Pearce joined the Company on April 26, 1993.
For five years prior thereto, he was Treasurer of Sharedane Limited, an
investment and property company registered in Great Britain. Dr. Morgan joined
the Company on May 10, 1995. For five years prior thereto, Dr. Morgan was
Chairman of MDZ Recycling Corporation, an environmental process development
company incorporated in Canada.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION - During 1996, Michael Lucas, Director, Chairman and CEO was paid
$240,000 and was the Company's most highly paid executive. Roy Pearce, Director
and CFO was paid $150,000, and Dr. William Morgan was paid $105,000.
During 1996 the Company paid on behalf of Michael Lucas $2,622 in premiums on a
term-life insurance policy.
STOCK OPTION COMPENSATION - As of the fiscal year ended December 31, 1996, there
were no outstanding employee stock options in existence.
No employees are employed pursuant to employment contract. No director's fees
have been paid to date and the Company does not intend to pay directors fees
during the current fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
A former director and officer of the Company, Jack Alexander, has assigned the
beneficial ownership of all of the shares of a class of preferred stock to an
entity named Morton Blue, not otherwise identified, having an address of PO Box
362, Nannycay Tortola, British Virgin Islands. The ownership of the preferred
stock gives the holder the right to elect the majority of the board of directors
of the Company. See "Item 3 - Legal Proceedings", for further information
respecting claims being made on behalf of the holder of the said preferred stock
respecting control of the Company.
<PAGE>
Michael Lucas, President, Chairman & Chief Executive Officer of the Company has
a direct interest in 20,000 shares of common stock, or 0.12% of the outstanding
shares. 1,000,000 common shares (representing 4.8% of the outstanding shares)
in the Company are owned by a trust, of which Mr. Lucas currently serves as
trustee and of which Mr. Lucas' four children are beneficiaries. Mr. Lucas has
no ownership of the shares.
Roy Pearce, currently Chief Financial Officer has a direct interest in 10,000
shares of common stock, or 0.06% of the outstanding shares.
Dr. William Morgan, a director, has a direct or indirect interest in 75% of MDZ
Recycling Corporation, a company which may in the future receive CRP shares of
the Company of a face value of up to $12,500,000, dependent on the success of
the dezincification technology. The obligation to issue such shares was assumed
by the Company in connection with its initial acquisition of MRI(US); see "Item
1 - Business". Such CPR Shares, if issued, are convertible into common shares
of the Company.
Subsequent to December 31, 1996, Sovereign Trust Services, Ltd., located at 4
Inns Court Wine Tavern Street, Dublin 8 Eire (Ireland), a former lender to the
Company, converted their loan of $680,036, plus accrued interest and anti-
dilution provisions, into 2,801,191 common shares. Accordingly, Sovereign Trust
Services, Ltd.'s total ownership is 11.2% of the total outstanding shares as of
April 4, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MRI(US) occupies under license an 11 acre site and building for its plant
facility at East Chicago, Indiana from a corporation of which Dr. William
Morgan, a director of the Company, has an indirect interest of 30.75%. The
Company pays an annual rental of $60,000, plus additional expenses relating to
the property. See "Item 2 - Property". MDZ Recycling Company, in which Dr.
Morgan holds a direct and indirect interest of 75%, is entitled to receive
royalty payments of $1.00 per ton on the annual "throughput" of all dezincing
plants operated by MRI(US), other than the East Chicago, Indiana plant, pursuant
to arrangement in effect at the time the Company acquired MRI(US). See "Item 1
- - Business". To date, no such payments have become due.
During the year the Company had made a loan to Michael Lucas, the Chairman and
Chief Executive Officer, which was repaid in full in January, 1997.
See also Note 13 of the audited financial statements in Part IV, Item 14(a) of
this filing, with respect to related party transactions in which the Company
participated.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)
1 The following financial statements and supplementary data are filed as part
of this Annual Report on Form 10-K:
Page
----
CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------
Independent Auditor's Report F-1 - F-2
Consolidated Balance sheets at December 31, 1996 and 1995 F-3
Consolidated Statements of operations for each of the
three years in the period ended December 31, 1996 F-4 - F-5
Consolidated Statements of stockholders' equity for each of
the three years in the period ended December 31, 1996 F-6
Consolidated Statements of cash flows for each of the three
years in the period ended December 31, 1996 F-7
Notes to Consolidated financial statements F-8 - F-18
Other Auditors' Opinions F-19 - F-20
EXHIBITS
- --------
3(i) Certificate of Incorporation of Registrant (incorporated by reference to
Exhibit 3(i) to form 10-K for the year ended December 31, 1990).
3(ii) Certificates of Amendment of Preferred Stock Designation (incorporated
by reference to Exhibit 3(ii) to Form 10-K for the year ended December 31,
1995), as follows:
(A) January 28, 1991
(B) July 5, 1991
(C) September 23, 1991
(D) October 20, 1992
(E) November 2, 1992
(F) March 19, 1993
(G) April 15, 1993
(H) June 17, 1993
4. Instruments Defining the Rights of Security Holders are included under the
items listed in Exhibit 3(ii) above and therefore are incorporated by
reference to the Form 10-k for the year ended December 31, 1995.
<PAGE>
10(ii). Material Contracts -- Convertible loan agreements have been entered
into with the following lenders:
1. Sovereign Trust Services, Limited
2. Sundorne Holdings, Limited
3. Osbourne, Limited
4. Plenbrick, Limited
5. Alcaria Investments, Limited
6. Jepherson Limited
7. Anthemis Limited
8. Pangea Limited
9. Quested Limited
Such loan agreements are in substantially all the same form as shown in
the exhibit attached hereof - Exhibit 10(A).
The lenders are parties to a pledge and security agreement with the
Company and MRI(US), dated February 1, 1996, whereby such loans,
together with future loans, are secured by a pledge of and security
interest in all assets of the Company (including the shares of MRI(US))
and of MRI(US). See Exhibit 10(B)
11. Computation of per share earnings is included in the Consolidated
Statements of Operations found on page F-5 of this filing.
13. Form 10-Q for the periods ending March 31, June 30, and September 31,
1996 are attached herein and shown as Exhibit 13(A), 13(B) and 13(C),
respectively
21. Subsidiary of the Registrant:
1. Metal Recovery Industries (US), Inc. a Delaware corporation.
27. Financial Data Schedule
All other schedules have been omitted because either the required information is
not present, or it is not present in amounts sufficient to require submission of
the schedule, or because the information is included in the consolidated
financial statements and notes thereto.
<PAGE>
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.
METAL RECOVERY TECHNOLOGIES, INC.
BY: /s/ Michael S. Lucas
--------------------------------------
Michael S. Lucas
President, Chairman & CEO
Date: April 9, 1997
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 date indicated.
NAME CAPACITIES DATE
- ---- ---------- ----
/s/ Michael S. Lucas Chairman, President & CEO April 14, 1997
- -----------------------------
/s/ Roy Pearce Chief Financial Officer April 14, 1997
- -----------------------------
/s/ William A. Morgan Executive Vice President April 14, 1997
- -----------------------------
<PAGE>
METAL RECOVERY TECHNOLOGIES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
METAL RECOVERY TECHNOLOGIES, INC.
Part IV
Item 14. Consolidated Financial Statements and Financial
Statement Schedules
(a) The following documents are filed as a part of this Annual Report on Form
10-K:
REFERENCE
---------
PAGE
----
1. CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditor's Report F-1 - F-2
Consolidated Balance Sheets at December 31, 1996 and 1995 F-3
Consolidated Statements of Operations for each of the
three years in the period ended December 31, 1996, 1995,
and 1994 F-4 - F-5
Consolidated Statements of Stockholders' Equity for each of
the three years in the period ended December 31, 1996, 1995,
and 1994 F-6
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 1996, 1995, and 1994 F-7
Notes to Consolidated Financial Statements F-8 - F-18
Other Auditors' Opinions F-19 - F-20
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Metal Recovery Technologies, Inc.
We have audited the consolidated balance sheets of Metal Recovery Technologies,
Inc. (MRTI), as of December 31, 1996 and 1995, and the related statements of
operations, stockholders' equity, and cash flows for the years ending December
31, 1996, 1995 and 1994. The financial statements are the responsibility of
MRTI's management. Our responsibility is to express an opinion on the financial
statements based on our audits.
We did not audit the statement of operations of Malvy Technology SA (a French
corporation), a wholly-owned subsidiary purchased October 24, 1993 which
statements reflect total revenues of $181,371 for the year then ended December
31, 1994. Also, we did not audit the statement of operations of Malvy UK (an
United Kingdom corporation), a wholly-owned subsidiary which statements reflect
total revenues of $0 for the year ended December 31, 1994. Those statements
were audited by other auditors whose reports have been furnished to us, and our
opinion, insofar as it relates to the amounts included for Malvy Technology SA
and Malvy UK, is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit and the reports of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors for
1994, the financial statements referred to above present fairly, in all material
respects, the financial position of MRTI, as of December 31, 1996 and 1995, and
the results of their operations, stockholders' equity and cash flows for the
years ended December 31, 1996, 1995 and 1994, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that MRTI will
continue as a going concern. As shown in the consolidated financial statements,
MRTI's current assets are $169,503 while current liabilities total $4,901,573
and MRTI incurred a net operating loss for the year ended December 31, 1996,
which raise substantial doubt about its ability to continue as a going concern.
Management's plan in regard to these matters is also discussed in Note 18. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
MRTI is involved with the development of a dezincing process and the success of
the development is dependent on future operating market conditions and
acceptance. The ultimate outcome of this uncertainty cannot presently be
determined. As discussed in Note 1, the recovery of the costs for intangible
costs for concessions, rights, patents, and goodwill totaling $12,905,749 and
$12,893,394 for 1996 and 1995, respectively, and the recovery of costs for
property and equipment totaling $2,591,985 and $1,160,509 for 1996 and 1995,
respectively is dependent on future profitable operations. Accordingly, the
consolidated financial statements do not include any adjustment that might
result from the outcome of this uncertainty.
As discussed in Note 17, MRTI is a defendant in several lawsuits. The ultimate
outcome of the lawsuits is not presently determinable. During 1995, MRTI
discontinued efforts to realize any value for the Malvy Technology SA automobile
anti-theft device as discussed in Notes 1 and 16.. Accordingly, no provisions
for liability, if any, has been made in the financial statements for any
potential lawsuits or other liabilities that may arise.
F-1
<PAGE>
Board of Directors and Stockholders
Metal Recovery Technologies, Inc.
Page 2
As shown in the financial statements and discussed in Note 13 and elsewhere in
the financial statements, MRTI has engaged in various substantive business
activities and agreements with related parties. Currently, MRTI is in default
of the agreement previously covering a former officer and director and entities
controlled by him.
/s/ Mikunda, Cottrell & Co.
March 25, 1997
F-2
<PAGE>
Metal Recovery Technologies, Inc.
Consolidated Balance Sheets
December 31, 1996 and 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
------ ---- ----
<S> <C> <C>
Current assets:
Cash and equivalents (note 14) $ 6,778 $ 200,855
Inventories 65,370 24,000
Other current assets 97,355 -
------------- ------------
Total current assets 169,503 224,855
------------- ------------
Property and equipment (note 3) 2,591,985 1,160,519
------------- ------------
Other assets:
Concessions, rights, patents and goodwill (note 15) 12,905,749 12,893,394
Organizational costs, net of amortization (note 3) 2,112,367 554,422
Other assets 53,400 -
------------- ------------
Total other assets 15,071,516 13,447,816
------------- ------------
$ 17,833,004 $ 14,833,190
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilties:
Current maturities of long-term indebtedness (note 4) $ 4,580 -
Notes payable (note 6) 49,894 $ 136,203
Accounts payable 1,432,128 867,137
Payable to former officer and director (note 13) 55,098 147,258
Notes from others (note 5) 3,288,010 1,893,176
Payroll and related liabilities 71,863 -
------------- ------------
Total current liabilities 4,901,573 3,043,774
------------- ------------
Long-term liabilities:
Long-term debt (note 4) 505,000 505,000
Capital lease (note 4) 4,182 -
------------- ------------
Total long-term liabilites 509,182 505,000
------------- ------------
Total liabilites 5,410,755 3,548,774
------------- ------------
Stockholders' equity (note 8 and 9):
"Series A" Preferred stock, $10 par value,
100,000 shares authorized; 46,965 shares
outstanding for 1995 and 1994 469,650 469,650
"Series B" Preferred stock, $10 par value,
2,500,000 shares authorized; 21,375
issued and outstanding for 1995 and 1994 44,373 44,373
Common stock, par value of $.001; 100,000,000
shares authorized; 20,707,597 and
13,764,653 shares issued and outstanding for
1996 and 1995, respectively 20,707 13,764
Additional paid-in capital 62,355,161 60,112,998
Retained earnings (deficit) (50,467,642) (49,356,369)
------------- ------------
Total stockholders' equity 12,422,249 11,284,416
------------- ------------
$ 17,833,004 $ 14,833,190
------------- ------------
------------- ------------
</TABLE>
See accompanying notes which are an integral part of these statements.
F-3
<PAGE>
Metal Recovery Technologies, Inc.
Consolidated Statements of Operations
Years Ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues:
Revenue from gold production - - $ 433,341
Pipeline - - 430,065
Sales - - 181,371
------------ ------------ -----------
Total revenues - - 1,044,777
Cost of production - - 1,412,138
------------ ------------ -----------
Gross profit (loss) - - (367,361)
------------ ------------ -----------
Operating expenses:
Selling, general and administrative $ 1,046,761 $ 177,180 3,773,755
------------ ------------ -----------
Depreciation, depletion and amortization - - 835,456
------------ ------------ -----------
Total operating expenses 1,046,761 177,180 4,609,211
------------ ------------ -----------
Loss from operations (1,046,761) (177,180) (4,976,572)
------------ ------------ -----------
Nonoperating income (expense):
Gain (loss) on disposition of assets - - (369,974)
Income from investments - - 16,881
Interest expense (64,512) (76,955) (259,764)
Gain on foreign exchange - - 16,506
Other- net - - (76,556)
------------ ------------ -----------
Total nonoperating income (expense) (64,512) (76,955) (672,907)
------------ ------------ -----------
Net income (loss) before discontinued operations (1,111,273) (254,135) (5,649,479)
Gain (Loss) on Discontinued Operations:
Seminole pipeline - (7,841)
Malvy France and Malvy UK - (725,562) -
Gain (Loss) on Disposal of Discontinued Operations:
Malvy France and Malvy UK (note 16) - (33,883,238) -
------------ ------------ -----------
Net loss $(1,111,273) $(34,870,776) $(5,649,479)
------------ ------------ -----------
------------ ------------ -----------
</TABLE>
F-4
<PAGE>
Consolidated Statements of Operations, continued
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Primary earnings (loss) per share:
Net income (loss) before discontinued operations $ (0.0655) $ (0.0232) $ (0.2345)
Income (loss) from operations of discontinued - (0.0668)
segment -
Loss on disposal - (3.0878) -
----------- ----------- -----------
Net income (loss) $ (0.0655) $ (3.1778) $ (0.2345)
Fully diluted earnings (loss) per share * * *
-- -- --
-- -- --
Weighted average number of common
shares outstanding:
Primary 16,968,009 10,973,132 24,096,508
----------- ----------- -----------
----------- ----------- -----------
Fully diluted * * *
-- -- --
-- -- --
* Anti-Dilutive
</TABLE>
F-5
<PAGE>
Metal Recovery Technologies, Inc.
Consolidated Statement of Stockholders' Equity
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Series A Series B
Preferred Stock Preferred Stock Common Stock
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 76,962 $ 769,620 165,125 $ 520,185 18,616,264 $ 18,616
Additional from 1993 - - - - - -
Preferred Series A redeemed (29,997) (299,970) - - - -
Common stock issued for debt
June 30, 1994 - - - - 2,000,000 2,000
November 15, 1994 - - - - 10,000,000 10,000
November 30, 1994 - - - - 12,500,000 12,500
Redeem Series B stock
for common stock - - (143,750) (475,812) 7,137,931 7,138
Option shares not redeemed by
prior employees - - - - (375,000) (375)
Cumulative foreign currency
translation adjustment - - - - - -
Net loss - - - - - -
-------- ---------- --------- ---------- ------------ ---------
Balance, December 31, 1994 46,965 469,650 21,375 44,373 49,879,195 49,879
Reverse split 20 for 1 - - - - (47,364,542) (47,365)
Common stock issued:
February 1995 - - - - 250,000 250
April 1995 for MRI - - - - 11,000,000 11,000
Cumulative foreign currency
translation adjustment - - - - - -
Net loss - - - - - -
-------- ---------- --------- ---------- ------------ ---------
Balance, December 31, 1995 46,965 469,650 21,375 44,373 13,764,653 13,764
Common stock issued (note 9):
April 1996 - - - - 1,335,000 1,335
May 1996 - - - - 1,500,000 1,500
August 1996 - - - - 500,000 500
September 1996 - - - - 1,163,500 1,164
October 1996 - - - - 2,444,444 2,444
Net loss - - - - - -
-------- ---------- --------- ---------- ------------ ---------
Balance, December 31, 1996 46,965 $ 469,650 21,375 $ 44,373 $ 20,707,597 $ 20,707
-------- ---------- --------- ---------- ------------ ---------
-------- ---------- --------- ---------- ------------ ---------
<CAPTION>
Cumulative
Foreign
Additional Currency Retained
Paid-In Translation Earnings
Capital Adjustment (Deficit) Total
------- ---------- --------- -----
<S> <C> <C> <C> <C>
Balance, December 31, 1993 $ 36,293,357 $ 160,943 $ (8,836,114) $ 28,926,607
Additional from 1993 3,542,500 - - 3,542,500
Preferred Series A redeemed - - - (299,970)
Common stock issued for debt
June 30, 1994 1,998,000 - - 2,000,000
November 15, 1994 1,990,000 - - 2,000,000
November 30, 1994 2,487,500 - - 2,500,000
Redeem Series B stock
for common stock 468,674 - - -
Option shares not redeemed by
prior employees (103,148) - - (103,523)
Cumulative foreign currency
translation adjustment - 263,656 - 263,656
Net loss - - (5,649,479) (5,649,479)
------------- ---------- ------------- -------------
Balance, December 31, 1994 46,676,883 424,599 (14,485,593) 33,179,791
Reverse split 20 for 1 47,365 - - -
Common stock issued:
February 1995 199,750 - - 200,000
April 1995 for MRI 13,189,000 - - 13,200,000
Cumulative foreign currency
translation adjustment - (424,599) (424,599)
Net loss - - (34,870,776) (34,870,776)
------------- ---------- ------------- -------------
Balance, December 31, 1995 60,112,998 - (49,356,369) 11,284,416
Common stock issued (note 9):
April 1996 521,731 - - 523,066
May 1996 411,000 - - 412,500
August 1996 146,985 - - 147,485
September 1996 464,847 - - 466,011
October 1996 697,600 - - 700,044
Net loss - - (1,111,273) (1,111,273)
------------- ---------- ------------- -------------
Balance, December 31, 1996 $ 62,355,161 $ - $ (50,467,642) $ 12,422,249
------------- ---------- ------------- -------------
------------- ---------- ------------- -------------
</TABLE>
See accompanying notes which are an integral part of these statements.
F-6
<PAGE>
Metal Recovery Technologies, Inc.
Consolidated Statements of Cash Flows
Year Ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows provided by (used for) operations:
Net loss $(1,111,273) $(34,870,776) $ (5,649,479)
Adjustments to reconcile net loss to net
cash provided by (used for) operating activiites:
Depreciation, depletion and amortization - 835,456
Loss (gain) on disposition of assets - - 369,974
Common stock issued in exchange for services
or reduction of debt 662,218 - -
Change in foreign currency
translation adjustment - (424,599) -
Net changes in current assets and liabilities
excluding long-term indebtedness 405,969 616,430 (991,011)
------------ ------------- -------------
Net cash provided by (used for) operating activities (43,086) (34,678,945) (5,435,060)
------------ ------------- -------------
Cash flows provided by (used for) investing activities:
Reserve for pipeline cleanup - (60,787) -
Net changes to property and equipment (1,431,466) (222,853) (201,701)
Net changes in organization cost (1,557,945) (554,422) -
(Increase) decrease in notes receivable - - 283,523
(Additions) deletions to concessions, rights,
patents and goodwill (12,355) 19,086,253 (3,691,359)
Decrease (increase) in other assets (53,400) 214,639 (47,480)
------------ ------------- -------------
Net cash provided by (used for)
investing activities (3,055,166) 18,462,830 (3,657,017)
------------ ------------- -------------
Cash flows provided by (used for) financing activities:
Increase (decrease) in notes payable (86,309) 136,203 (626,841)
Increase (reduction) in long-term debt 8,762 275,028 (72,689)
Increase (decrease) in notes to investors 1,394,834 1,893,176 -
Issued (reduction) of common stock 6,943 (36,115) 10,414,789
Received from additional stock and
paid-in capital issues - 13,436,115 -
Reduction in Series A preferred stock - - (299,970)
Reduction in Series B preferred stock - - (475,812)
Cash received for common stock issued 1,579,945 - -
Decrease in dividend payable - - (37,151)
------------ ------------- -------------
Net cash provided by (used for) financing activities 2,904,175 15,704,407 8,902,326
------------ ------------- -------------
Increase (decrease) in cash (194,077) (511,708) (189,751)
Cash and cash equivalents at beginning of year 200,855 712,563 902,314
----------- ------------ ------------
Cash and cash equivalents at end of year $ 6,778 $ 200,855 $ 712,563
------------- -------------- -------------
------------- -------------- -------------
Supplemental Information:
Cash paid for interest $ 47,926 $ 76,955 $ 170,979
------------- -------------- -------------
------------- -------------- -------------
Cash paid for income taxes $ - $ - $ -
------------- -------------- --------------
------------- -------------- --------------
</TABLE>
See accompanying notes which are an integral part of these statements.
F-7
<PAGE>
Metal Recovery Technologies, Inc.
Notes to Consolidated Financial Statements
December 31, 1996, 1995 and 1994
(1) THE COMPANY AND BASIS OF PRESENTATION OF FINANCIAL STATEMENTS
PRINCIPAL ACTIVITIES
METAL RECOVERY TECHNOLOGIES, INC. (MRTI)
During 1990, Sphinx Mining, Inc. (Sphinx), originally a Canadian
corporation, reorganized and became a U.S. corporation incorporated in
the state of Delaware. In 1991, Sphinx formally changed its name to
Sphinx Natural Resources, Inc. In June, 1993 the company's name was
changed to Malvy Technology, Inc. (Malvy) and in July 1995 the company
changed its name to Metal Recovery Technologies, Inc.
MRTI has a wholly-owned subsidiary, Metal Recovery Industries, (US), Inc. a
developmental stage company that intends to market the service of
dezincing scrap metal.
METAL RECOVERY INDUSTRIES, (US), INC. (MRI(US))
MRTI acquired MRI(US), in April 1995 for $12,000,000 which was raised by
the offshore sale under a placing and escrow agreement of 10,000,000
shares of MRTI's stock, together with a fee of 1,000,000 shares. The
shares were placed at a value of $1.20 per share. In addition,
$25,000,000 of Convertible Redeemable Preference shares, and
14,000,000 Common shares may be issued contingent upon several
factors, including, but not limited to, the building of subsequent
plants and the achievement of production goals of said plants. The
acquisition has been accounted for using the purchase method with the
excess of cost over assets acquired being attributed to concessions,
rights, patents, and goodwill. As of December 31, 1995 and 1996, the
value of concessions, rights, patents, and goodwill was $12,893,394
and $12,905,749, respectively. The ultimate value of these assets
depends on future profitable operations and market conditions for the
MRI(US) dezincing process. As of December 31, 1996 MRI(US) is still
in the developmental stage and expenses are being capitalized as
incurred.
DISCONTINUED AND DISPOSED OF OPERATIONS
SPHINX INTERNATIONAL PETROLEUM COMPANY (SIPCO), (A WHOLLY SUBSIDIARY OF
SPHINX)
In December 1992, SIPCO, a wholly-owned subsidiary of Sphinx, acquired a
pipeline operation (Seminole Pipeline) located in Oklahoma in exchange
for 143,750 shares of Malvy Series B preferred stock. (Footnote 8)
The acquisition was accounted for using the purchase method and
accordingly the acquired assets were recorded at their fair value at
the date of acquisition. In 1994, 143,750 preferred Series B shares
were redeemed for 7,137,731 shares of common stock. In 1995 SIPCO was
sold for a nominal price.
MALVY TECHNOLOGY S.A., A FRENCH CORPORATION (MALVY FRANCE)
In 1993 Malvy agreed to acquire 100% of the capital stock of Malvy
Technology S.A., a French corporation. 100% ownership was completed
January 15, 1994. The acquisition was effected for a price of
$32,500,000 which was raised by the offshore sale of 16,250,000 shares of
MRTI's common stock. The acquisition has been accounted for using the
purchase method with the excess of cost over assets acquired being
attributed to concessions, rights, patents and goodwill. As of December
31, 1994, total value of concessions, rights, patents, and goodwill was
$31,979,647. The ultimate value of these assets depended on future
profitable operations and market conditions for the Malvy automobile
anti-theft device. The operations of Malvy France for 1994 has been
included in the consolidated financial statements.
In October, 1995, Malvy France was placed into liquidation under the
control of a government liquidator. Management does not expect to
receive any funds from this liquidation.
MALVY TECHNOLOGY UK, LIMITED, A BRITISH CORPORATION (MALVY UK)
Malvy UK was incorporated November 15, 1993, as a wholly-owned subsidiary
of Malvy Technology, Inc. There was no activity in 1993. Malvy UK was
established to aid in business development and sales of the anti-theft
device in the United Kingdom. In October, 1995, Malvy UK was placed in
liquidation under the control of a government liquidator and management
does not expect to receive any funds from the liquidation.
F-8
<PAGE>
Metal Recovery Technologies, Inc.
Notes to Consolidated Financial Statements, continued
(2) SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
PRINCIPLES OF CONSOLIDATION
The 1996 statements consist of the accounts of MRTI and MRI(US). The 1995
statements consist of the accounts of MRTI and MRI(US) and the results of
the discontinued and disposed of operations for Malvy France, Malvy UK
and SIPCO. The 1994 statements consist of the accounts of MRTI, SIPCO,
Malvy UK and Malvy France.
CASH EQUIVALENTS
For the purposes of the statement of cash flows, all highly liquid debt
instruments purchased with a maturity of three months or less are
considered to be cash equivalents.
INVENTORIES
Inventories for MRI(US) consist of steel scrap, zinc bearing solutions, and
other chemicals valued at lower of cost or market.
PROPERTY AND EQUIPMENT
Assets are recorded at historical cost. Depreciation is computed using the
straight-line method based on the estimated useful lives of the related
assets. Expenditures for maintenance and repairs are charged to expense
as incurred whereas expenditures for renewals and betterments are
capitalized. The cost and related accumulated depreciation of assets
sold or otherwise disposed of during the period are removed from the
accounts. (See Footnote 3.)
INTANGIBLE ASSETS
Intangible assets will be amortized using the straight line method over the
estimated life of the related assets as follows:
Concessions, rights, patents, and goodwill 15 Years
Organizational costs 5 Years
(See Footnote 15.)
DEPRECIATION AND AMORTIZATION
Depreciation and amortization is provided using the straight-line method
over the useful lives of the related assets. (See Footnote 3 and 15.)
OTHER ASSETS
Other current assets consist primarily of a note receivable from one of
MRTI's officers. (See Footnote 13.) Other non-current assets consist of
deposits placed with vendors for capital leases to begin in 1997 and
utility deposits.
LOSS PER SHARE
The computation of earnings (loss) per common share considers the weighted
average number of shares outstanding during the year. Common stock
options, and warrants, if dilutive, are considered in the computation of
earnings per share (unless anti-dilutive). The treasury method of
accounting for the dilutive outstanding common stock options and warrants
is used in the earnings per share calculation.
INCOME TAXES
MRTI files consolidated federal and state income tax returns. MRTI
computes provisions for income taxes if any in the consolidated financial
statements using the liability method of accounting prescribed by
Financial Accounting Standards Board Statement No. 109. (See Footnote 7.)
F-9
<PAGE>
Metal Recovery Technologies, Inc.
Notes to Consolidated Financial Statements, continued
SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES, CONTINUED
DEVELOPMENT STAGE OPERATIONS
Development operations consisting of raising capital, obtaining financing,
locating and acquiring equipment, obtaining customers and suppliers,
installing and testing equipment and certain administrative activities
have been capitalized as incurred.
BASIS FOR PRESENTATION
MRTI presents all financial statements in United States dollars and under
generally accepted accounting principles as practiced in the United
States.
FOREIGN CURRENCY TRANSLATION
Foreign entities translate monetary assets and liabilities at year end
exchange rates while non-monetary items are translated at historical
rates. Revenue and expense accounts are translated at the average rates
in effect during the year. Gains and losses from changes in exchange
rates are recognized in consolidated income (loss) in the year of
occurrence. Adjustments resulting from translation of assets and
liabilities are reflected in the stockholders' equity section titled
"Cumulative foreign currency translation adjustment."
RECLASSIFICATIONS
Certain amounts for prior years may have been reclassified to conform with
the current year presentation.
RISKS AND UNCERTAINTIES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(3) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
----------------------------------- ---------------------------------------
Accumulated Book Accumulated Book
Cost Depreciation Value Cost Depreciation Value
MRI(US): ---- ------------ --------- ---- ------------ -----------
--------
<S> <C> <C> <C> <C> <C> <C>
Equipment and capitalized expenses $2,178,823 - 2,178,823 1,382,076 - 1,382,076
Furniture and fixtures 33,845 - 33,845 12,835 - 12,835
Leasehold improvements 348,255 - 348,255 288,968 - 288,968
Vehicles 31,062 - 31,062 31,062 - 31,062
---------- --- --------- --------- --- ----------
$2,591,985 - 2,591,985 1,714,941 - 1,714,941
---------- --- --------- --------- --- ----------
---------- --- --------- --------- --- ----------
</TABLE>
MRI(US) is in the developmental stage and therefore no depreciation was
taken in 1995 or 1996.
F-10
<PAGE>
Metal Recovery Technologies, Inc.
Notes to Consolidated Financial Statements, continued
Property and Equipment, continued
Organizational Costs
Organizational costs consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
------------------------------------ ---------------------------------
Accumulated Book Accumulated Book
Cost Amortization Value Cost Amortization Value
---- ------------ --------- ---- ------------- -------
MRI(US):
--------
<S> <C> <C> <C> <C> <C> <C>
Organizational costs $ 2,112,367 - 2,112,367 554,422 - 554,422
--------- ----------- --------- ------- ------- -------
--------- ----------- --------- ------- ------- -------
</TABLE>
MRI(US) is in the developmental stage and therefore no depreciation was
taken in 1995 or 1996. Organizational costs consists of raising
capital, obtaining financing, locating and acquiring equipment,
obtaining customers and suppliers, installing and testing equipment
and certain administrative activities.
(4) Long-Term Indebtedness
Long-term indebtedness at December 31, 1996 and 1995 was as follows:
<TABLE>
<CAPTION>
1996 1995
MRI(US) ---- ----
-------
<S> <C> <C>
United States Department of Energy (D.O.E.), $ 505,000 505,000
provided a research grant to the Argonne
National Laboratory of $1,400,000 to conduct research
and pilot plant work on the dezincing of steel. The total
benefits of this work to accrue to MRI(US). Of this amount,
MRI(US) was paid $505,000 and under a Memorandum of
Understanding with the D.O.E., will be responsible to repay
1.5 times this grant, i.e., $2,100,000 to the D.O.E. out of
future royalty receipts from the process. Management
anticipates no repayment funds will be paid in the current
period.
Capital lease for equipment. Principal and interest 8,762 -
payments due monthly for 24 months with a $1 buyout
option at end of lease. ------- -------
513,762 505,000
Less current installments 4,500 -
------- -------
Total long-term indebtedness $ 509,182 505,000
------- -------
------- -------
</TABLE>
(5) Continuing Operations - Liquidity
Continued operations require continuing loans from various entities. At
December 31, 1996, the balance of these loans were $3,288,010. These
loans are scheduled to be converted into common shares on March 31,
1997 and December 31, 1997. Conversion of notes is subject to anti-
dilution provisions and interest of 10% per annum. Following is a
schedule of these notes:
F-11
<PAGE>
Metal Recovery Technologies, Inc.
Notes to Consolidated Financial Statements, continued
Continuing Operations - Liquidity, continued
Note Amount
---- ------
Sovereign Trust Services loan convertible into 1,666,667
shares of common stock. $ 680,036
Sundorn Holding, SA loan convertible into 1,666,667
shares of common stock. 715,154
Osbourne Ltd. loan convertible into 1,000,000 shares
of common stock. 220,000
Plenbrick Ltd. loan convertible into 2,000,000 shares
of common stock. 604,688
Alcaria Investments, Ltd. loan convertible into 331,692
shares of common stock. 100,398
Jepherson Ltd. loan convertible into 331,692 shares of
common stock. 98,521
Anthemis Ltd. loan convertible into 332,972 shares of
common stock. 96,384
Pangea Ltd. loan convertible into 1,666,667 shares of
common stock. 504,706
Quested Ltd. loan convertible into 883,666 shares of
common stock. 268,123
---------
$3,288,010
---------
---------
Interest payments for 1996 of $229,673 were capitalized.
(6) Notes Payable
As of December 31, 1996, notes payable consisted of the following:
MRI(US)
------
American National Bank & Trust Co. of Chicago note obtained
prior to MRTI's acquisition, expected to be paid in 1997. $49,894
------
------
F-12
<PAGE>
Metal Recovery Technologies, Inc.
Notes to Consolidated Financial Statements, continued
(7) INCOME TAXES
As of December 31, 1996, MRTI has income tax net operating loss
carryforwards available to offset future federal taxable income, which
expire in future years. The use of these operating losses are
dependent upon MRTI having taxable net earnings.
MRTI unused net operating losses carryforward to offset future taxable
income for income tax reporting purposes which expire as follows:
Years Ending Net Operating Loss
2001 $ 134,077
2002 208,223
2003 55,337
2004 694,177
2005 128,994
2006 232,623
2007 291,834
2008 1,746,945
2009 1,682,025
2010 1,111,273
Neither MRTI nor its subsidiaries had any taxable net income in 1996, 1995,
or 1994. Management has elected not to recognize any value for
operating loss carryforwards for income tax purposes in the financial
statements.
(8) PREFERRED STOCK
SERIES A PREFERRED
DESCRIPTION
The Series A stock confers the following rights: (1) A preference upon
liquidation, (2) A 12% dividend payable at MRTI's discretion either in
additional preferred stock, common shares, cash, or gold, (3) MRTI has
the right to redeem at any time upon notice to the preferred holder,
(4) The right to convert into common shares at a ratio of 0.625 common
shares for each preferred one, and (5) The holders of the Series A
preferred shares have the right to elect a majority of the Board of
Directors and can vote the total number of common shares into which
the Series A can be converted.
As of December 31, 1996 and 1995, the total of Series A preferred stock
outstanding was 46,965. All Series A preferred shares are held by an
entity as assigned by a prior officer and director.
SERIES B PREFERRED
DESCRIPTION
The Series B stock confers the following rights: (1) A preference upon
liquidation, except not as to the Series A Preferred Stock, (2) An 8%
cumulative cash dividend, (3) The corporation has the right to redeem
at any time upon notice to the preferred holder and subject to certain
other conditions, (4) The right to convert into common shares at a
ratio of 0.3 common shares for each preferred share, which ratio is
subject to adjustment in certain events, and (5) The holders of the
Series B preferred shares shall as a class elect one member of the
Board of directors and have other voting rights as granted by law.
At December 31, 1996 and 1995, there were 21,375 Series B preferred shares
outstanding. Management is pursuing the future retirement of these
shares.
F-13
<PAGE>
Metal Recovery Technologies, Inc.
Notes to Consolidated Financial Statements, continued
(9) COMMON STOCK
REVERSE SPLIT
On February 21, 1995 MRTI announced a 20 for 1 reverse split effective
immediately. This reduced the number of shares outstanding by
47,364,542.
PURCHASE OF MRI(US)
In April 1995, as more fully described in Footnote (1), MRTI issued
11,000,000 shares to an underwriter to be placed with offshore
investors. The proceeds were used for the acquisition of MRI(US).
Reconciliation of outstanding MRTI common stock is as follows:
Outstanding Stock
As of December 31
-------------------------
1996 1995
---- ----
Beginning balance 13,764,653 49,879,195
Reverse split (1 to 20) - (47,364,542)
Shares issued 6,942,944 11,250,000
---------- ----------
Total outstanding
common stock 20,707,597 13,764,653
---------- ----------
---------- ----------
In 1996, MRTI issued stock for the following purposes:
Month Shares Purpose
------------ -------
April 1,335,000 Conversion of debt
May 1,500,000 Exercise of warrants
August 500,000 Exercise of warrants
September 513,500 Conversion of debt
September 50,000 Exercise of warrants
September 600,000 Shares sold in private placement
October 2,000,000 Exercise of warrants
October 444,444 Shares sold in private placement
(10) KEY EMPLOYEE QUALIFIED INCENTIVE STOCK OPTION PLAN
There is currently no key employee incentive stock plans.
F-14
<PAGE>
Metal Recovery Technologies, Inc.
Notes to Consolidated Financial Statements, continued
(11) WARRANTS OUTSTANDING
Warrants outstanding as of December 31, 1996, are
as follows:
<TABLE>
<CAPTION>
Date No. of Price
Holder Issued Life Expires Shares Per Share
------ ------ ---- ------- ------ ---------
<S> <C> <C> <C> <C> <C>
Sovereign Trust Services, Ltd. October, 1994 3 years September, 1997 50,000 $20.00
Cleanwater Enterprises, Ltd. October, 1994 3 years September, 1997 50,000 20.00
Sovereign Trust Services, Ltd. November, 1994 3 years October, 1997 62,500 4.00
Sovereign Trust Services, Ltd. November, 1994 3 years October, 1997 250,000 4.00
Cleanwater Enterprises, Ltd. November, 1994 3 years October, 1997 250,000 4.00
Monarch Assets Management, Ltd. November, 1994 3 years October, 1997 250,000 4.00
World Publishing, Ltd. November, 1994 3 years October, 1997 250,000 4.00
Sundorn Holdings, S.A. November, 1994 3 years October, 1997 62,500 4.00
Sovereign Trust Services, Ltd. February, 1995 3 years January, 1998 125,000 0.80
Sundorn Holdings, S.A. February, 1995 3 years January, 1998 125,000 0.80
Saxby October, 1994 3 years September, 1997 25,000 50.00
Manzur July, 1994 3 years June, 1997 2,500 50.00
Beyts July, 1994 3 years June, 1997 2,500 50.00
Accounting Services, Ltd. September, 1995 3 years August, 1998 500,000 0.50
Vistaquest, Inc. January, 1996 5 years December, 2001 1,000,000 0.30
R. G. Advisory Services September, 1995 3 years August, 1998 250,000 0.50
Accounting Services, Ltd. July, 1995 3 years June, 1998 500,000 0.50
Elwin Smith International September, 1995 3 years August, 1998 100,000 0.50
Venaus August, 1996 2 years August, 1998 100,000 0.35
---------
3,955,000
---------
---------
</TABLE>
F-15
<PAGE>
Metal Recovery Technologies, Inc.
Notes to Consolidated Financial Statements, continued
(12) SUPPLEMENTAL CASH FLOW INFORMATION
The following provides additional information concerning the supplemental
disclosures of cash flow activities for the years ended December 31,
1996, 1995 and 1994:
NONCASH INVESTING AND FINANCING ACTIVITIES
The effects on the balance sheets of noncash investing and financing
activities for the years ended December 31, 1996, 1995 and 1994,
consist of the following:
1996 1995 1994
---- ---- ----
Loss on disposal of assets $ - 33,883,238 -
Foreign currency translation
adjustment - (424,599) -
Issued common stock
for debt 413,269 199,750 7,126,841
Issued common stock in exchange
for goods or services 248,949 - -
Reserve for pipeline
cleanup adjustment $ - 60,787 -
Management has shown net amounts in the Consolidated Statement of Cash
Flows.
(13) RELATED PARTY TRANSACTIONS
PAYMENTS TO FORMER DIRECTOR AND OFFICER
In 1995, the Company reached a settlement with a former officer and
director (Mr. Jack Alexander), and certain entities related to him in
respect of amounts claimed to be owed to them by the Company on
accounts of notes payable, loans and the redemption price of the
Company's Series A Preferred stock. Payments of $275,316 and $150,000
were made in 1995 and 1996, respectively. At December 31, 1996, there
is an amount due in respect of notes payable and interest of $55,098
together with an amount due of $469,650 to redeem the Series A
Preferred stock. Mr. Alexander has assigned beneficial ownership of
all interest described herein to an entity named Morton Blue.
LEASED PLANT FACILITY
MRI(US) leases its plant facility from an entity in which one of the MRTI
directors has a partial beneficial interest. Lease expenses amounted
to $60,000 in 1996 and 1995. The lease agreement expired on January
31, 1997. A three-year extension has been agreed to at $60,000 per
year.
OFFICER AND DIRECTOR COMPENSATION
During the year ended December 31, 1996, compensation for current officers
and directors was $495,000 and $490,000 of expenses incurred by the
officers and directors in their normal course of business. At
December 31, 1996, MRTI had accrued expenses of $219,958 payable to
officers and directors.
LOAN TO OFFICER
During October, 1996, MRTI loaned the chairman and president $130,000. At
December 31, 1996, the balance of this loan was $74,966. MRTI
received complete payment on the loan in January, 1997.
F-16
<PAGE>
Metal Recovery Technologies, Inc.
Notes to Consolidated Financial Statements, continued
(14) CASH AND EQUIVALENTS
At December 31, the cash and cash equivalents balances were:
1996 1995
---- ----
Cash in checking accounts $ 6,778 200,855
------- ---------
------- ---------
MRTI demand deposits are held at high credit quality financial
institutions. Balances insured by the FDIC may exceed insured limits.
At December 31, 1996, MRTI did not exceed the insured FDIC limit.
(15) CONCESSIONS, RIGHTS, PATENTS AND GOODWILL
Concessions, rights, patents and goodwill relate to the purchase of MRI(US)
in 1995 and patent development in 1996 as follows:
Balance at Balance at
December 31, 1996 Accumulated December 31,
1995 Additions Amortization 1996
------------ --------- ------------ ------------
MRI(US)
Concessions, rights,
patents and goodwill $ 12,893,394 12,355 - 12,905,749
------------ ------ ----- ----------
------------ ------ ----- ----------
MRI(US) is in the developmental stage and therefore no amortization was
taken in 1995 or 1996.
(16) DISCONTINUED OPERATIONS
SIPCO
In December 1992, SIPCO acquired a pipeline operation (Seminole Pipeline)
located in Oklahoma, U.S. in exchange for 143,750 shares of MRTI
Series B preferred stock. In 1994, 143,750 Preferred Series B shares
were redeemed for 7,137,731 shares of common stock. In 1995, SIPCO
was sold for a nominal price, all assets and liabilities have been
removed from the 1995 financial statements.
MALVY FRANCE
The success of Malvy France depended solely on the success of the Malvy
auto anti-theft device. In September, 1995, it was determined that
without substantial future investment the device was not marketable.
Malvy France was closed and turned over to French government
liquidators. MRTI does not expect to receive any funds from this
liquidation. A loss on disposal of assets was recorded for
$33,883,238.
MALVY UK
Malvy UK was created with the sole purpose of facilitating the marketing of
the Malvy auto anti-theft locking device. In September, 1995, it was
determined that the device was not a marketable asset and Malvy UK was
closed. Management does not expect any recovery of the past investment
in Malvy UK.
MINING ACTIVITY
Malvy had been negotiating for the sale of all gold mining interests and
activity prior to December 31, 1994. The sale was finalized in
February, 1995, for a total price of $425,000. An adjustment was made
in the 1994 consolidated financial statements to value the mining
claims and equipment at $425,000 and recorded a loss on the disposal
of assets of $407,748.
F-17
<PAGE>
Metal Recovery Technologies, Inc.
Notes to Consolidated Financial Statements, continued
(17) CONTINGENCIES
At December 31, 1996, MRTI was involved in several matters of litigation,
regarding past and present business activities. These matters were
initiated by creditors and former employees. Subsequent to December
31, 1996, some of he matters involving creditors and former employees
were settled or ruled in favor of the Company and provided for in the
accompanying financial statements. It is the opinion of management
that the ultimate outcome of the remaining litigation would not be
material to the financial statements except as described below. The
outcome of these cases is unknown at this time and, accordingly, no
provision for any liability that might result has been made in the
accompanying financial statements.
In 1995, an action initiated by a shareholder, was made against the Company
and certain present and former directors. In 1996, this action became
a "class-action" suit. The action alleges that breaches of the
federal securities laws, by reason of alleged material
misrepresentations by the Company and the Company's alleged failure to
make timely disclosure relating to its Malvy auto anti-theft device
operations. Court dates have been provisionally set for mid-1997.
The Company is attempting to negotiate a possible settlement in order
to limit the Company's exposure to costs and eliminate the need for
management to divert its attention from its main business objectives.
The outcome of this litigation or settlement is unknown at the present
time and, accordingly, no provision for any liability that might
result has been made in the accompanying financial statements.
(18) GOING CONCERN
As shown in the accompanying financial statements, MRTI incurred
substantial net losses in 1996 and 1995. At December 31, 1996,
current liabilities exceeded current assets by $4,732,070. Operations
for 1997 will consist of further development and administrative costs
which will be funded from conditional convertible loans with existing
and new entities (Footnote 5). Further, in 1997, MRTI plans to
generate new revenue by beginning production at their dezincing plant.
Absent receiving new financing and generating new revenue, there is
uncertainty about MRTI's ability to continue as a going concern. The
financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
(19) SUBSEQUENT EVENTS
Subsequent to year end, MRI(US) entered into a capital leases and an
operating lease for equipment. Monthly payments will total $20,000.
At December 31, 1996, MRI(US) had $39,000 in deposits for the leases.
F-18
<PAGE>
MALVY TECHNOLOGY
PARC TECHNOLOGIES DE SAINT AUTIN
LES ALGORITHMES - BATIMENT EPICURE
91190 GIF--SUR-YVETTE
INDEPENDANT AUDITOR'S REPORT
We have audited the accompanying balance sheets of MALVY TEC+HNOLOGY SA as of
December 31, 1993 and 1994, and the related statements of income, retained
earnings, and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of MALVY TECHNOLOGY SA as of
December 31, 1994 and 1993, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
Paris, May 10th, 1995
/s/
CHD CONSEIL
Gerard DELPRAT
F19
<PAGE>
AUDITORS' REPORT TO THE SHAREHOLDERS OF
MALVY TECHNOLOGY (UK) LIMITED
We have audited the financial statements on pages 4 to 9 which have been
prepared under the historical cost convention and the accounting policies set
out on page 7.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
As described on page 2, the Company's Director is responsible for the
preparation of financial statements. It is our responsibility to form an
independent opinion, based on our audit, on those statements and to report our
opinion to you.
BASIS OF OPINION
We conducted our audit in accordance with Auditing Standards issued by the
Auditing Practices Board. An audit includes examination, on a test basis, of
evidence relevant to the amounts and disclosures in the financial statements.
It also includes an assessment of the significant estimates and judgments made
by the Director in the preparation of the financial statements, and of whether
the accounting policies are appropriate to the Company's circumstances,
consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary to order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.
OPINION
In our opinion the financial statements give a true and fair view of the state
of the Company's affairs as at 31st December 1994 and of the loss and cashflows
for the period then ended and have been properly prepared in accordance with the
Companies Act 1985.
/s/
Slater & Co.
7 Royal Parade
Dawes Road CHARTERED ACCOUNTANTS
LONDON SW6 7RE AND REGISTERED AUDITORS
19th May 1995
F-20
<PAGE>
Exhibit 10(A) - Material Contracts
LOAN AGREEMENT
1. BORROWER: Metal Recovery Technologies, Inc. (MRTI) (hereinafter called
"Borrower"), a Delaware corporation.
2. LENDER: (hereinafter called "Lender")
3. AMOUNT: a loan not exceeding US $ ( US Dollars) to assist
MRTI (Borrower) to finance its subsidiary MRIUS, Inc.
4. SECURITY:
a) The borrower will grant to the lender a first secured interest in
100% of the share capital of its subsidiary MRI(US), Inc. The
borrower will provide the share certificate of its subsidiary to the
lender together with a signed transfer of its 100% interest in the
shares of its subsidiary prior to any loans being made.
b) The borrower will, upon receipt of any loan from the lender, enter
into a loan agreement with its subsidiary MRI(US), similar to this
agreement. The subsidiary, MRI(US) will have loan obligations to its
parent company equal to those of MRTI to the lender. MRTI will as
part of this agreement assign the rights to collect such loan to the
lender with the express purpose of giving the lender a secured
interest in the assets of the subsidiary MRI(US), Inc.
5. DRAWDOWN: Drawdown to be denominated in US Dollars and to be in such
amounts as are agreed from time to time the Lender and the Borrower (subject to
the maximum herein before specified). Each drawdown shall be treated as a
separate advance and shall be repayable not later than twelve (12) months after
the date of drawdown of such particular advance.
6. INTEREST:
a) The interest rate for each advance shall be 10% per annum and shall
be deemed to accrue from day to day.
b) Interest shall be payable annually, on the anniversary hereof.
c) Any interest period which would otherwise terminate on a day which
is not a business day shall be extended to the next following business
day.
d) Interest will be calculated on the basis of a 365 day year.
<PAGE>
e) Overdue advances will be rolled over on a day to day basis after
the maturity date following which interest will be charged at 12%
per annum.
7. NOTICE OF DRAWDOWN: The Borrower shall give at least 24 hours notice of
drawdown in writing or by telefax which shall be irrevocable unless the
Lender agrees otherwise.
8. PAYMENTS: All payments by the Borrower of principal and interest will be
made no later than 11 a.m. on the day on which repayment should be effected
to an account specified by the Lender.
9. WARRANTIES: The Borrower warrants that:
a)It has the power to borrow and its subsidiary MRI(US), Inc. has the power
to borrow and has taken all necessary action to authorize the borrowing
upon the terms and conditions of this loan agreement and that drawings made
hereunder will not exceed authorized limits.
b)It is not in default under any agreement, document or other obligations
where such default might have a material adverse affect on its business,
assets or trading conditions taken as a whole.
c)It has obtained all necessary consents to the borrowing and the borrowing
will not constitute a breach of any restrictions contained in its by-laws
of certificate and incorporation.
d)The acceptance of this offer by the Borrower constitutes a legally
binding obligation on the Borrower enforceable in accordance with its terms
and there are no actual, pending or threatened actions or proceedings which
may materially adversely affect its financial condition or operation.
These warranties are deemed to be given in respect of each drawdown of the
facility hereby granted.
10. TERMINATION: The Lender shall have the right to terminate this facility
and demand repayment of advances and payment of accrued interest if:
a) the Borrower makes any default in any payments hereunder;
b) any advance to the Borrower becomes repayable at a date earlier than
its normal due date;
c) the warranties prove inaccurate in a material way; or
d) a default as specified in clause 11 shall occur.
11. COVENANTS: The Borrower hereby covenants and undertakes with the Lender
that until all amounts whether in respect of principal or interest due or
to become due under this facility have been paid in full to the Lender:
<PAGE>
a) to furnish to the Lender as soon as practicable and in any event not
later than 90 days after the close of each annual accounting period a copy
of its audited consolidated accounts for each period;
b) to furnish to the Lender as soon as practicable and in any event not
later than 45 days after the close of each quarterly accounting period a
copy of its management accounts together with quarterly management reports;
c) not to enter into any transaction which in the reasonable opinion of the
Lender would or might materially adversely affect its business, property,
assets, operation, financial condition or the Borrower's ability to perform
its obligations hereunder; or
d) will not amend its corporate charter in a manner which in the reasonable
opinion of the Lender would be prejudicial to the interest of the Lender.
e) not to use any of the loaned funds for any purpose other than for
investment in its subsidiary MRI(US), Inc. Under no circumstances are any
of the funds to be invested in Malvy Technology, or for the repayment of
any liabilities the corporation has to Jack Alexander to redemption of A
Preference shares or payments to entities connected with Jack Alexander or
any other obligations of the corporation.
f) will retain corporate separation of the MRI(US) subsidiary and will not
permit guarantees, cross guarantees or any other confusion to occur which
would give rise to any creditors of MRTI having any claim over the assets
of MRI(US), Inc.
12. EVENTS OF DEFAULT: Each of the following shall constitute an event of
default:
a) If the Borrower defaults in the repayment of the principal or interest
due on the advances and such default continues for five (5) business days
after notice.
b) If any indebtedness or obligation of the Borrower for payment of
borrowed money becomes due and payable and is demanded by the lender
thereof prior to the specified maturity date thereof, due to any default
on the part of the Borrower or is otherwise not paid when due.
c) If any representation or warranty made by Borrower proves to have been
materially untrue and inaccurate.
d) Borrower files a voluntary petition for relief under any chapter of the
U.S. Bankruptcy Code, or under any state debtor's act law, or if such a
petition is filed against Borrower under the Code or any such law and is
not stayed or dismissed within 30 days.
e) If the Borrower ceases or threatens to cease to carry on its business or
any part thereof or changes the nature of its business or any part thereof
material to the Borrower which would in the opinion of the Lender affect
its ability to discharge its commitments under this facility.
<PAGE>
f) If any distress, execution, sequestration attachment or other process is
levied or enforced upon or sued out against the Borrower for an amount in
excess of $25,000 and is not discharged or bonded within seven days.
g) If the Borrower enters into any arrangement or composition with its
creditors.
h)If encumbrances take possession of or a receiver or trustee is appointed
over any material portion of the assets of the Borrower.
i) If in the opinion of the Lender there has occurred a material or
adverse change in circumstances affecting the Borrower which would in the
Lender's sole opinion affect the ability of the Borrower to discharge its
commitments under this facility.
j) The Lender reserves the right to review or revoke the maintenance of
this facility herein contained should further information material to the
facility and which might be prejudicial to the Lender's interest become
available.
<PAGE>
10. CONVERSION OPTION:
a) The Lender shall on the occasion of each drawdown of the facility have
the option of subscribing for common shares of the Borrower at a conversion
price of one share for each $ of loan previously advanced or to be
advanced, which price shall be paid by reducing Borrower's then outstanding
indebtedness to Lender, as set forth below.
b) The said option may be exercisable at any time during the period when
this facility shall remain extant or the indebtedness incurred hereunder
shall remain outstanding and unpaid.
c) The said option may be exercised by notice in writing from the Lender to
the Borrower to that effect specifying the amount of advances to be paid by
issuance to Lender of shares of common stock of the Borrower.
d) Such shares shall be issued pursuant to Regulation S of the U.S.
Securities and Exchange Commission, and subject to all terms and conditions
thereof.
14. NOTICES:
The address of the Borrower for purposes of serving all notices hereunder shall
be the address set forth above, unless and until Borrower notifies Lender of
another address by written notice given by certified U.S. mail, postage prepaid,
return receipt requested.
Should the terms and conditions of this offer be acceptable to you please
evidence your acceptance by signing the form of acceptance endorsed on the copy
of this letter enclosed and returning it to us together with:
1) Certified copy of the Certificate of Incorporation of the Borrower.
Yours faithfully,
- -------------------------------------------- -----------------------------
Accepted: Metal Recovery Technologies, Inc. For and on behalf of
By:
---------------------------
Dated:
------------------------
<PAGE>
Exhibit 10(B) - Material Contracts
PLEDGE AND SECURITY AGREEMENT, dated as February 1, 1996, by and among
METAL RECOVERY TECHNOLOGIES, INC., a Delaware corporation, having an address at
415 E. 151st Street, East Chicago IN 46312 (herein referred to as "MRTI" or
"Debtor"), PLENBRICK, LTD., having an address at The Creche Building, Upper Main
Street, P.O. Box 116 Road Town, Tortola B.V.I., individually and as agent for
certain other parties, and METAL RECOVERY INDUSTRIES (U.S.), INC., a Delaware
corporation, having an address at 415 E. 151st Street, East Chicago, IN 46312
(herein referred to as "MRIUS"), and the Secured Parties (as hereinafter
defined) identified on Exhibit A hereto.
WITNESSETH:
WHEREAS, Debtor owns all of the issued and outstanding capital stock of
MRIUS, a Delaware corporation (herein referred to as "MRIUS" or the
"Subsidiary"); and
WHEREAS, the Secured Parties (as hereinafter defined) have made, or have
agreed to make, certain loans to Debtor which are convertible into shares of
common stock of Debtor; and
WHEREAS, Debtor wishes to extend the maturities of such loans; and
WHEREAS, the Secured Parties are concerned about continuing delays in the
completion and operation of the Debtor's dezincification facility located in
East Chicago, Indiana (the "Facility") and desire, as a condition of extending
their loans and the maturities thereof, to be assured as to the timely
completion of the Facility and against changes in the control and management of
Debtor; and
WHEREAS, the Secured Parties also desire that repayment of their loans be
secured; and
WHEREAS, Debtor is willing, in order to induce the Secured Parties (i) to
make or extend loans to Debtor, and (ii) to make loans and extend credit to
Subsidiary, the repayment of which will be guaranteed by Debtor, to grant to the
Collateral Agent (as hereinafter defined), for the PRO RATA benefit of the
Secured Parties, a security interest under the Uniform Commercial Code in all of
Debtor's assets and properties, tangible and intangible, now existing or
hereafter acquired, for the purpose of securing (x) the timely repayment by
Debtor of all such loans and extensions of credit and (y) the full and complete
performance by Debtor of Debtor's obligations under guarantees by Debtor of the
timely repayment of loans and extensions of credit made to Subsidiary; and
WHEREAS, Debtor is also willing to provide certain protections to the
Secured Parties against changes in the control and management of MRIUS; and
<PAGE>
WHEREAS, Plenbrick, Ltd. has agreed to hold the Collateral under this
Agreement for itself and as agent for all other Secured Parties (Plenbrick,
Ltd., in such capacity, being herein referred to as the "Collateral Agent"), as
hereinafter set forth;
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants hereinafter set forth and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged and intending to be
legally bound hereby, the parties hereto do hereby agree as follows:
1. LOANS.
(a) The parties whose names and addresses are set forth on Exhibits A
and B have heretofore made loans to MRTI or have agreed to make loans to MRTI.
Exhibit A sets forth the names of parties having made, or having agreed to make,
loans, the respective amounts lent or to be lent, and the maturities, interest
rates and conversion rights with respect thereto. All of the foregoing parties
are hereinafter sometimes referred to as the "Secured Parties." The Secured
Parties have designated Plenbrick, Ltd. as the Collateral Agent hereunder, with
the rights, powers and obligations set forth in this Agreement.
(b) Debtor has requested, and the Secured Parties have agreed, that
the terms of their existing loans or commitments referred to on Exhibit A, shall
be modified as set forth on Exhibit A. In order to induce the Secured Parties
to enter into the loan amendments or modifications described on Exhibit A,
Debtor has agreed to execute and deliver this Agreement, to grant and create
the security interest granted and arising hereunder, and to create certain
rights in favor of the Secured Parties respecting the exchange of indebtedness
of Debtor to the Secured Parties for shares of common stock of MRIUS, all as
more particularly set forth. New promissory notes or other evidences of
indebtedness may be issued to the Secured Parties to evidence the modified terms
of such loans, but the failure to do so shall not affect the validity or
enforceability of the loans as so modified hereby.
(c) The Secured Parties and Debtor hereby agree that, with the
consent of Debtor and of either the Collateral Agent or of Secured Parties at
the time owning a majority in interest of the aggregate principal amount of
indebtedness owed by Debtor to all Secured Parties, parties hereafter making
loans or advances, or renewals thereof, to Debtor may become entitled to the
benefits of this Agreement and in such event shall be deemed to be Secured
Parties hereunder with the same force and effect as though they were Secured
Parties as of the date of this Agreement. The Secured Parties identified on
<PAGE>
Exhibit A and all other persons or entities who hereafter make loans or extend
credit to Debtor and become entitled to the benefits of this Agreement are
hereinafter collectively referred to as Secured Parties, and individually as a
Secured Party.
2. RIGHT TO CONVERT LOANS.
In order to induce the Secured Parties to extend, modify or renew their
existing loans to Debtor, or to extend new loans to Debtor or to Subsidiary (the
said loans being herein individually and collectively termed "Indebtedness"),
the Debtor hereby agrees that, in addition to any rights which a Secured Party
may have to convert Indebtedness into common shares of MRTI ("MRTI Shares"), the
Collateral Agent, acting on behalf of the Secured Parties, shall have the
additional rights hereinafter set forth in the event that (i) holders of Class A
Preferred Stock of MRTI exercise, or threaten or purport to exercise, the right
to elect a majority of the directors of MRTI, or (ii) Collateral Agent shall
determine that any litigation now or hereafter pending against Debtor would, if
adversely determined have a material adverse affect on Debtor's financial
condition or business. Following the occurrence of such an event (an "Exchange
Event") and during its continuance, the Collateral Agent, on behalf of the
Secured Parties, shall have a one-time right (the "Exchange Right"), exercisable
by written notice to Debtor, to exchange Indebtedness having an aggregate
principal amount of not less than $2,000,000 for that number of fully-paid and
non-assessable shares of the common stock of MRIUS ("MRIUS Shares") as shall
represent a majority of all then issued and outstanding shares of MRIUS (giving
effect to the issuance of MRIUS Shares hereunder). The Collateral Agent shall
exercise the Exchange Right on behalf of Secured Parties so electing, provided
that Secured Parties owning a majority in principal amount of the Indebtedness,
but not less than $2,000,000, so direct. A Secured Party may not elect to
exercise the Exchange Right as to less than all Indebtedness owned by it.
Exchange of Indebtedness for MRIUS Shares shall be effected by the
Collateral Agent (acting for such purpose as agent for Debtor) causing to be
issued and delivered, free and clear of the security interest created hereby, to
the Secured Parties so electing, the respective number of MRIUS Shares to which
each is entitled, which shall be pro rata to their respective shares of the
total Indebtedness outstanding, calculated as of the date when the Exchange
Right is exercised. The Indebtedness owned by a Secured Party shall be deemed
canceled upon delivery to it of MRIUS Shares hereunder, and the Secured Party
shall so confirm in writing.
<PAGE>
Following the occurrence of an Exchange Event, the MRIUS Shares, if not
required to be issued to the Collateral Agent, shall continue to be held in
pledge by the Collateral Agent, upon all of the terms and conditions hereof.
MRTI and Debtor each covenant that they shall, at their sole cost and
expense, take all corporate and other actions, including all necessary filings
with the SEC and any other regulatory authorities, required in order that there
shall be issued to each party hereto the number of MRIUS Exchange Shares to
which such Secured Party is entitled as aforesaid, in consideration of the
cancellation of the Indebtedness. The Collateral Agent, acting on behalf of the
Secured Parties, may enforce the provisions hereof by appropriate action for
equitable relief. MRIUS hereby appoints the Collateral Agent as the agent and
attorney-in-fact of MRIUS, with power of substitution, for purposes of doing all
acts and things, and executing all documents, necessary or convenient to effect
the exercise of the Exchange Right and the transfer of the MRIUS shares into the
names of the Exchange Agent and of the Secured Parties. Such agency shall be
deemed coupled with an interest and irrevocable until payment in full of the
Indebtedness. Debtor shall reimburse the Collateral Agent for all costs and
expenses incurred in enforcing the provisions hereof and the Collateral Agent
shall retain a security interest to secure Debtor's obligations for
reimbursement hereunder.
3. DEBTOR'S GRANT OF SECURITY INTEREST IN COLLATERAL.
Debtor hereby grants to the Collateral Agent, for its benefit and for the
benefit of all of the Secured Parties, as security for the repayment of the
Indebtedness, including all interest due or to become due thereon and of all
other sums payable hereunder and the performance of (a) all obligations of
Debtor under this Agreement (b) the payment and performance of all obligations
arising under and pursuant to any loans or extensions of credit which, by their
terms, are entitled to the benefit hereof and (c) the payment and performance of
all obligations arising under any guarantees by Debtor of loans or extensions of
credit made to Subsidiary which, by their terms, are entitled to the benefits
hereof (all such obligations and indebtedness being herein collectively referred
to as the "Obligations") a security interest in all of the Debtor's right, title
and interest in the following described property (collectively referred to as
the "Collateral"):
(i) (A) All shares of the capital stock of the Subsidiary and of any
other corporations which are subsidiaries of Debtor (the "Pledged
Securities"), together with any additional securities or other property
hereafter issued by way of a dividend or distribution thereon and any
<PAGE>
proceeds thereof and any securities issued in exchange for the Pledged
Securities; and
(B) All other proceeds or other distributions in respect of any
or all of the Pledged Securities or any replacements or substitutions
thereto or therefor and all proceeds generated by the sale or disposition
thereof.
(ii) all of Debtor's personal property and fixtures, wherever located,
whether now owned or hereafter acquired or created, including, without
limitation, all of Debtor's right, title and interest in and to the items
and types of property described below and the products and proceeds
thereof:
(A) all accounts, accounts receivable, all rights to receive the
payment of money or other consideration under present or future
contracts or by virtue of services rendered, merchandise sold or
leased, advances made or other consideration given, whether or not
earned by performance and whether or not evidenced by or set forth in
or arising out of any present or future chattel paper, note, draft,
lease, acceptance, writing, bond, insurance policy, instrument,
document or general intangible, and all extensions and renewals of any
thereof, all rights under or arising out of present or future
contracts, agreements or general intangibles, including, without
limitation, all payments under licensing agreements or arrangements,
and all claims for tax refunds, if any, all claims or causes of action
which it may now or hereafter have whether arising in connection with
or under any agreement or document or by operation of law or
otherwise, including, without limitation, all present and future
indebtedness and obligations of any affiliate or subsidiary to it,
including specifically, but without limitation, indebtedness of the
Subsidiary to the Debtor arising pursuant to loans or advances made to
the Subsidiary from the proceeds of the Indebtedness wherever any of
the foregoing may be located and whether the same are owned by the
Debtor on the date hereof or are hereafter acquired or created;
(B) all inventories of every nature, including, without
limitation, all goods held for sale or lease or furnished or to be
<PAGE>
furnished under contracts of service, all raw materials, work in
process and finished goods, and all supplies, materials and products
of every nature and description used or usable, consumed or consumable
in connection with the manufacture, packing, shipping, advertising,
selling, leasing or furnishing of such goods and all right, title and
interest in merchandise which gives rise to any or all of the
foregoing, wherever any of the foregoing may be located and whether
the same are owned by the Debtor on the date hereof or are hereafter
acquired or created;
(C) all equipment, machinery, apparatus, chattels, tools, dies,
jigs, molds, parts, machine tools, trucks, automobiles, vehicles,
rolling stock, furniture, furnishings, fixtures and supplies, of every
nature, wherever any of the foregoing may be located and whether the
same are owned by the Debtor on the date hereof or are hereafter
acquired or created, and all additions, accretions and accessories
thereto and substitutions and replacements of any of the foregoing and
all parts and equipment which may be attached to or usable in any way
in connection with or which are necessary for the operation and use of
such personal property wherever any of the foregoing may be located
and whether the same are owned by the Debtor on the date hereof or are
hereafter acquired or created;
(D) all documents and chattel paper, wherever any of the
foregoing may be located and whether the same are owned by the Debtor
on the date hereof or are hereafter acquired or created;
(E) all general intangibles of every nature, including, without
limitation, patents, patent applications, trademarks, licensing
agreements, royalty payments, copyrights, service names, service
marks, logos, goodwill and rights of indemnification, whether the same
are owned by the Debtor on the date hereof or are hereafter acquired
or created;
(F) all books, correspondence, credit files, customer lists,
records and other documents relating to the above-described types of
property, including, without limitation, all tapes,
<PAGE>
cards, runs and other papers and documents in the possession or
control of the Debtor, or any affiliate or subsidiary of the Debtor or
any computer service bureau, wherever any of the foregoing may be
located and whether the same are owned by the Debtor on the date
hereof or are hereafter acquired or created;
(G) all rights in, to and under policies of insurance of every
kind and nature covering the Collateral, including, without
limitation, claims or rights to payment and proceeds heretofore or
hereafter arising therefrom with respect to the above-described types
of property, whether the same are owned by the Debtor on the date
hereof or are hereafter acquired or created;
(H) all fixtures;
(I) all rights in and to any proceeds from any condemnation, in
whole or in part, of all or any of the above-described property; and
(J) all proceeds, product, offspring, rents or profits of any or
all of the property described above in clauses (A) through (I) of this
Subsection (ii) and any replacements, additions, accessions or
substitutions thereto or therefor, afteracquired property in respect
thereof and proceeds generated by the sale, casualty loss or
disposition thereof.
The Security interest created hereunder shall be held by the Collateral Agent
for the respective PRO RATA benefit of all parties who are from time to time
Secured Parties hereunder, determined based on the respective principal amounts
of Indebtedness held by all such Secured Parties at any time and from time to
time; and the PRO RATA interests of all such Secured Parties shall be PARI PASSU
in priority of payment.
4. DELIVERY OF PLEDGED SECURITIES.
The Pledged Securities shall be evidenced by certificates, all of which
shall be delivered to and held in the possession of the Collateral Agent or such
other person as the Collateral Agent may designate. In the event that the
Collateral Agent so designates any such person to take possession of the
<PAGE>
Pledged Securities, such person shall be entitled to all rights and benefits of
the Collateral Agent contained in this Pledge and Security Agreement, and all
references herein to the "Collateral Agent" shall be deemed to include
references to such other person. Upon delivery to the Collateral Agent, any
Pledged Securities in certificated form shall be in suitable form for transfer
by delivery or shall be accompanied by duly executed instruments of transfer or
assignment in blank, with signatures appropriately guaranteed, all in form and
substance satisfactory to the Collateral Agent. All other property comprising
part of the Collateral shall be accompanied by proper instruments of assignment
duly executed by the Debtor and such other instruments or documents as the
Collateral Agent may reasonably request.
5. WARRANTIES, COVENANTS AND AGREEMENTS OF THE DEBTOR AND THE COOPERATIVE
CORPORATION.
Debtor warrants, covenants and agrees that:
(a) Except for the security interest granted hereby, the Debtor is,
and as to the collateral acquired after the date hereof the Debtor shall
and will be at the time of acquisition, the owner and holder of the
Collateral free from any adverse claim, security interest, encumbrance,
lien, charge, or other right, title or interest of any person other than
the Collateral Agent and covenants that at all times the Collateral will be
and remain free of all such adverse claims, security interests or other
liens or encumbrances; the Debtor has full power and lawful authority to
enter into this Pledge and Security Agreement and to sell, assign and
transfer the Collateral to the Collateral Agent and to grant to the
Collateral Agent a first and prior security interest therein as herein
provided, all of which have been authorized by all necessary corporate
action; the execution and delivery and the performance hereof are not in
contravention of any charter or by-law provision or of any indenture,
agreement or undertaking to which the Debtor is a party or by which its
property or the Pledged Securities are bound; this Pledge and Security
Agreement constitutes the legal, valid and binding obligation of the
Debtor, enforceable in accordance with its terms, subject to bankruptcy,
insolvency, reorganization and other laws of general applicability relating
to or affecting creditors' rights and to general equity principles; and the
Debtor will defend the Collateral against all claims and demands of all
persons at any time claiming the same or any interest therein. Any
officer, agent or
<PAGE>
representative acting for or on behalf of the Debtor in connection with
this Pledge and Security Agreement or any aspect hereof, or entering into
or executing this Pledge and Security Agreement on behalf of the Debtor,
has been duly authorized so to do, and is fully empowered to act for and
represent the Debtor in connection with this Pledge and Security Agreement
and all matters related thereto or in connection therewith.
(b) (i) As long as any amount remains unpaid on the Indebtedness,
(a) the Debtor will not enter into or execute any security agreement or any
financing statement covering the Collateral, other than those security
agreements and financing statements in favor of the Collateral Agent
hereunder, and further (b) there will not be on file in any public office
any financing statement or statements (or any documents or papers filed as
such) covering the Collateral, other than financing statements in favor of
the Collateral Agent hereunder, unless in any case the prior written
consent of the Collateral Agent shall have been obtained.
(ii) Debtor hereby authorizes the Collateral Agent to file, in
its discretion, in jurisdictions where this authorization will be given
effect, a financing statement signed only by the Collateral Agent covering
the Collateral, and hereby appoints the Collateral Agent as the Debtor's
attorney-in-fact to sign and file any such financing statements covering
the Collateral. At the request of the Collateral Agent, the Debtor will
join the Collateral Agent in executing such documents as it may determine,
from time to time, to be reasonably necessary or desirable under provisions
of the Indiana Uniform Commercial Code or of any law in any other
jurisdiction which the Collateral Agent deems applicable to the Collateral;
without limiting the generality of the foregoing, the Debtor agrees to join
the Collateral Agent, at its request, in executing one or more financing
statements in form satisfactory to it, and the Debtor will pay the costs of
filing or recording the same, or of filing or recording this Pledge and
Security Agreement, in all public offices at any time and from time to
time, whenever filing or recording of any such financing statement or of
this Pledge and Security Agreement is deemed by the Collateral Agent to be
necessary or desirable. In connection with the foregoing, it is agreed and
understood between the parties hereto (and the Collateral Agent is hereby
authorized to carry out and implement this agreement and understanding and
the Debtor hereby agrees to pay the costs thereof)
<PAGE>
that the Collateral Agent may, at any time or times, file as a financing
statement any counterpart, copy or reproduction of this Pledge and Security
Agreement. The Debtor hereby acknowledges that the duties of the Collateral
Agent with respect to the collateral are ministerial in nature and,
notwithstanding anything in this Pledge and Security Agreement to the
contrary, neither the Collateral Agent nor any of its employees, directors,
or agents shall be liable to any party whatsoever in respect of any duties
hereunder absent willful misconduct or gross negligence.
(c) All dividends, payments of interest or principal and other
distributions of every character made upon or in respect of the Collateral
or any part thereof shall be deemed to be Collateral and shall be paid
directly to and shall be held by the Collateral Agent as additional
Collateral pledged under and subject to this Pledge and Security Agreement.
(d) The chief executive offices of and other places of business of
the Debtor are located, and the books and records relating to the
Collateral are located, as of the date hereof, at the address set forth,
and the Debtor will not change any of the same or its name without 30 days'
prior written notice to and consent of the Collateral Agent (which consent
will not be unreasonably withheld);
(e) All Uniform Commercial Code filings required to perfect the
security interest (to the extent perfectable by such filings) of the
Collateral Agent in the Collateral have been made or will be made within
one day of the date hereof, and evidence thereof has been or will be
delivered to the Collateral Agent within seven days of the date received by
Debtor.
6. EVENTS OF DEFAULT.
(a) The occurrence of any one of the following events shall constitute a
default ("Event of Default") by Debtor under this Agreement: (a) if Debtor fails
or neglects to perform, keep or observe any term, provision, condition,
covenant, warranty or representation contained in this Agreement or in the Other
Agreements, which is required to be performed, kept or observed by Debtor; (b)
if the Collateral Agent or any Secured Party demands payment when due under any
note or other evidence of indebtedness representing
<PAGE>
indebtedness executed by Debtor, a true copy of which shall have been delivered
to Collateral Agent; (c) if Debtor fails to pay any of Debtor's liabilities,
when due and payable or declared due and payable; (d) if the Collateral or any
other of Debtor's assets are attached, seized, subjected to a writ of distress
warrant, or are levied upon, or become subject to any lien, or come within the
possession of any receiver, trustee, custodian or assignee for the benefit of
creditors; (e) if Debtor or any Guarantor of Debtor's liabilities becomes
insolvent or generally fails to pay, or admits in writing its inability to pay,
debts as they become due, if a petition under Title 11, United States Code or
any similar law or regulation shall be filed by or against Debtor or if Debtor
shall make an assignment for the benefit of its creditors or if any case or
proceeding is filed by or against Debtor for its dissolution or liquidation or
if Debtor is enjoined, restrained or in any way prevented by court order from
conducting all or any material part of its business affairs; (f) if a notice of
lien, levy or assessment is filed of record or given to Debtor with respect to
all or any of Debtor's assets by any federal, state or local department or
agency; (g) if a contribution failure occurs with respect to any pension plan
maintained by Debtor or any corporation, trades or business that is, along with
Debtor, a member of a controlled group of corporations or controlled group of
tracks or businesses (as described in Section 414(b) and (c) of the Internal
Revenue Code of 1986 or Section 4001, of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA") sufficient to give rise to a lien under
Section 302(f) of ERISA; (h) if Debtor is in default in the payment of any
obligations; indebtedness or other liabilities to any third parties and such
default is declared and is not cured within the time, if any, specified therefor
in any agreement governing the same; (i) the death or incompetency of Debtor, or
the appointment of a conservator for all or any portion of Debtor's assets; (j)
the reasonable insecurity of the Collateral Agent; (k) the failure of Debtor (A)
to complete the Facility on or before April 15, 1996, or (B) to commence active
operations at the Facility on or before May 1, 1996, unless Debtor shall,
immediately upon demand of the Collateral Agent, take all steps necessary and
effective, in the reasonable judgment of the Collateral Agent, forthwith to
remedy the circumstances giving rise to any such failure; or (l) a "change of
control" of Debtor (as hereinafter defined) shall occur; or (m) Collateral Agent
shall determine that any litigation now or hereafter pending against Debtor
would, if adversely determined, have a material adverse affect on debtor's
financial condition or business.
<PAGE>
(b) As used herein, the following terms shall have the following meanings:
(i) "Change of Control" shall mean a change in control of a nature
that would be required to be reported by Debtor in response to either (i) Item
5(f) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), or (ii) Item 1(a) of a Current
Report on Form 8-K, each as in effect on the date hereof; provided that, without
limitation, a Change in Control shall be deemed to have occurred if, while any
of the Indebtedness is outstanding:
(A) there shall be consummated (i) any consolidation,
merger, or recapitalization of MRTI or any similar transaction involving MRTI,
in which MRTI is not the continuing or surviving corporation or pursuant to
which shares of MRTI's common stock ("Common Stock"), would be converted into
cash, securities or other property, other than a merger of MRTI in which the
holders of MRTI's Common Stock immediately prior to the merger have the same
proportion and ownership of common Stock of the surviving corporation
immediately after the merger, (ii) any sale, lease, exchange or other transfer
(in one transaction or a series of related transactions) of all, or
substantially all, of the assets of MRTI, (iii) the adoption of a plan of
complete liquidation of MRTI (whether or not in connection with the sale of all
or substantially all of MRTI's assets) or a series of partial liquidations of
MRTI that is DE JURE or DE FACTO part of a plan of complete liquidation of MRTI,
or (iv) any other transaction after which Common Stock is no longer to be
publicly traded, provided (x) that the divestiture of less than substantially
all of the assets of MRTI in one transaction or a series of related
transactions, whether effected by sale, lease, exchange, spin-off, sale of the
stock or merger of a subsidiary or otherwise, or (y) a transaction solely for
the purpose of reincorporating MRTI in another jurisdiction, shall not
constitute a Change in Control; (iv) if a majority of the members of the Board
of Directors of MRTI shall consist of persons who were not elected either (A) by
vote of the holders of the requisite number of shares of common stock of MRTI
entitled to vote for the election of directors (i) acting at a meeting called
for such purpose or (ii) acting by written consent, or (B) by the then acting
directors of MRTI; or (v) an Exchange Event of the type defined in clause (i) of
Section 2 hereof shall occur.
<PAGE>
(B) any "person" or "group", within the meaning of Sections
13(d) and 14(d) (2) of the Exchange Act, (i) becomes the "beneficial owner" as
defined in Rule 13d-3 under the Exchange Act of 50% or more of the combined
voting power of the then outstanding voting securities of MRTI, otherwise than
through a transaction or transactions arranged by, or consummated with the prior
approval of, the Board of Directors of MRTI, or (ii) acquires by proxy or
otherwise, 50% or more of the combined voting securities of MRTI, granting the
right to vote for the election of directors of MRTI, for any merger or
consolidation of MRTI or for any other matter or question other than through an
arrangement or arrangements consummated with the prior approval of the Board of
Directors of MRTI.
(ii) an "Affiliate" of a specified person shall mean a person who
directly, or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, the person specified.
7. RIGHTS OF THE COLLATERAL AGENT AND THE DEBTOR RELATED TO COLLATERAL.
Upon the occurrence and during the continuance of an Event of Default after
the expiration of any grace period applicable thereto hereunder:
(a) The Collateral Agent shall be entitled to exercise against any
account debtor or obligor, any or all rights, power and remedies of an
obligee under any deferred payment obligation or account, accounts
receivable, note, document, instrument or general intangible constituting
part of the Collateral, including, without limitation, the right to notify
such account debtor or obligor to make all payments under such account,
account receivable, note, document, instrument or general intangible
directly to Collateral Agent and to exercise such other rights and remedies
as are provided for herein, at law, in equity or under the Uniform
Commercial Code, or to restrain from doing so; and shall be entitled to
prosecute any action, suit or proceeding with respect to such accounts,
accounts receivable, documents, instruments or general intangibles, settle,
compromise or release, in whole or in part, any amounts owing on any such
account, account receivable, document, instrument or general intangible or
any property securing the payment of same, make allowances thereon and
adjustments thereto, file proofs of claim with respect thereto and take
such other steps as the Agent, in
<PAGE>
its sole and absolute discretion, deems to be necessary in order to realize
thereon, and
(b) shall be entitled to exercise in respect of the Collateral, in
addition to all other rights, powers and remedies specifically provided for
herein, all rights and remedies of a secured party on default under the
Uniform Commercial Code and under any other applicable law as in effect in
any relevant jurisdiction, all without liability except to account for
property actually received by it,
but the Collateral Agent shall have no duty to exercise, and the Secured Parties
shall have no duty to request the exercise of, any of the aforesaid rights,
privileges or options and neither the Collateral Agent nor any Secured Party
shall be responsible for any failure to do so or delay in so doing.
Unless an Event of Default then exists, or unless otherwise provided by the
provisions of the Credit Agreement, the Debtor shall have the right to receive
all income from or dividends (other than dividends arising out of a complete or
partial liquidation of the payor thereto) on or interest or principal payment on
the Collateral, and if the Collateral Agent receives any such income or
dividends or interest or principal payment prior to the occurrence of an Event
of Default, the Collateral Agent shall pay the same promptly to the Debtor,
except that in the case of securities or other property distributed by way of a
dividend or otherwise with respect to the Collateral, such securities or other
property shall be promptly delivered to the Collateral Agent in the manner
described in Section 2 hereof to be held as Pledged Securities or other
Collateral hereunder. Upon the occurrence and during the continuance of an
Event of Default, the Debtor will not demand or receive any income from or
dividends or interest or principal payment on the Collateral, and if the Debtor
receives any such income or interest or principal payment without any demand by
it, the same shall be held by the Debtor in trust for the Collateral Agent in
the same medium in which received, shall not be commingled with any assets of
the Debtor and shall be delivered to the Collateral Agent in the form received,
properly endorsed to permit collection, not later than the next business day
following the day of its receipt. The Collateral Agent may apply the net cash
received from such income or interest or principal payment to payment of the
Obligations, provided that the Collateral Agent shall account for and pay over
to the
<PAGE>
Debtor any such income or interest remaining after payment in full of the
Obligations then outstanding.
8. COLLATERAL AGENT'S APPOINTMENT AS ATTORNEY-IN-FACT.
The Debtor hereby irrevocably constitutes and appoints the Collateral Agent
and any officer or agent thereof, with full power of substitution, as its true
and lawful attorney-in-fact with full irrevocable power and authority in the
place and stead of the Debtor and in the name of the Debtor or in its own name,
from time to time in the Collateral Agent's discretion, for the purpose of
carrying out the terms of this Pledge and Security Agreement, to take any and
all appropriate action and, provided that Debtor's obligations are not thereby
enlarged beyond those contained herein or required to protect Collateral Agent's
rights hereunder, to execute any and all document and instruments which may be
necessary or desirable to accomplish the purposes of this Pledge and Security
Agreement. Without limiting the generality of the foregoing, Debtor hereby
gives the Collateral Agent the power and right, on behalf of the Debtor, without
notice to or assent by the Debtor to do the following:
(i) To ask, demand, collect, receive and give acquittances and
receipts for any and all monies due and to become due under any Collateral
and, in the name of the Debtor or its own name, the name of its nominee, or
otherwise, to take possession of and endorse and collect any checks,
drafts, notes, acceptances or other instruments for the payment of monies
due under any Collateral and to file any claim or to take any other action
or proceeding in any court of law or equity or otherwise deemed appropriate
by the Collateral Agent for the purpose of collection any and all such
monies due under any Collateral whenever payable;
(ii) To pay or discharge taxes, liens, security interests or other
encumbrances levied or placed on or threatened against the Collateral, to
effect any repairs or any insurance called for by the terms of this Pledge
and Security Agreement and to pay all or any part of the premiums therefor
and the costs thereof; and
(iii) (A) To direct any party liable for any payment under any of
the Collateral to make payment of any and all monies due and to become due
thereunder directly to the Collateral Agent or as the Collateral Agent
shall direct;
<PAGE>
(B) In addition to other rights provided for herein, to
receive payment of and receipt or any and all monies, claims and other
amounts due and to become due at any time in respect of or arising out of
any Collateral;
(C) To sign and endorse any assignments and notices in
connection with accounts and other documents relating to the Collateral;
(D) To commence and prosecute any suits, actions or
proceedings at law or in equity in any court of competent jurisdiction to
collect the Collateral or any part thereof and to enforce any other right
in respect of any Collateral;
(E) To defend any suit, action or proceeding brought against
such Debtor with respect to any Collateral;
(F) To settle, compromise or adjust any suit, action or
proceeding described above and, in connection therewith, to give such
discharges or releases as the Collateral Agent may deem appropriate;
(G) To assign, license or, to the extent permitted by an
applicable license, sublicense, whether general, special or otherwise, and
whether on an exclusive or nonexclusive basis any copyright, service mark,
patent or trademark owned by the Debtor (along with the goodwill of the
business to which such trademark pertains), throughout the world for such
term or terms, on such conditions, and in such manner, as the Collateral
Agent shall in its reasonable discretion determine; and
(H) Generally to sell, transfer, pledge, make any agreement
with respect to or otherwise deal with any of the Collateral in such manner
as is consistent with the Uniform Commercial Code or applicable law and as
fully and completely as though the Collateral Agent were the absolute owner
thereof for all purposes and to do, at the Collateral Agent's option and
the Debtor's expense, at any time, or from time to time, all acts and
things which the Collateral Agent deems necessary to protect, preserve or
realize upon the Collateral and the Collateral Agent's security interest
therein, in order to effect the intent of this Pledge and Security
Agreement, all as fully and effectively as the Debtor might do. The
Collateral Agent agrees to forbear from exercising the power granted by the
Debtor under this Section 6 as long as no Event of Default shall have
occurred and be continuing. The Debtor hereby ratifies all that said
attorney-in-fact
<PAGE>
shall lawfully and without violation of the rights of any third party do or
cause to be done by virtue hereof. This power of attorney is a power
coupled with an interest and shall be irrevocable until full and
indefeasible payment and satisfaction of the Obligations.
(a) The powers conferred on the Collateral Agent hereunder
are solely to protect its interests in the Collateral and shall not
impose any duty upon it to exercise any such powers. The Collateral
Agent shall be accountable only for amounts that it actually receives
as a result of the exercise of such powers and neither it nor any of
its officers, directors, employees or agents shall be responsible to
the Debtor for any act or failure to act, except for their own gross
negligence or willful misconduct.
(b) The Debtor also authorizes the Collateral Agent, at any
time from and after the occurrence and during the continuation of an
Event of Default, (i) to communicate in its own name with any party to
any contract, agreement or arrangement to which the Debtor is a party
and which constitutes Collateral with regard to the continuation,
amendment, assignment, notation, discharge or termination thereof and
other matters relating thereto and (ii) to execute, in connection with
any sale provided for in this Pledge and Security Agreement, any
endorsements, assignments or other instruments of conveyance or
transfer with respect to the Collateral.
(c) If the Debtor fails to perform or comply with any of
its agreements contained herein and the same continues after notice of
Collateral Agent's intention to do so, and the Collateral Agent, as
provided for by the terms of this Pledge and Security Agreement, may
itself perform or comply, or otherwise cause performance or
compliance, with such agreement, the expenses of the Collateral Agent
incurred in connection with such performance or compliance (together
with interest thereon from and after the date of payment of such
expenses by the Collateral Agent at the Default Rate (hereinafter
defined) shall be payable by the Debtor to the Collateral Agent on
demand and shall constitute Obligations secured hereby.
9. SPECIAL PROVISIONS FOR PLEDGED SECURITIES, ETC.
<PAGE>
The Debtor hereby acknowledges that the sale by the Collateral Agent of any
Pledged Securities pursuant to the terms hereof in compliance with the
Securities Act of 1933 (as now in effect or as hereafter amended), or any
similar stature hereafter adopted with similar purpose or effect (the
"Securities Act"), as well as applicable blue sky or other state securities
laws, may require strict limitations as to the manner in which the Collateral
Agent or any subsequent transferee of the Pledged Securities may dispose of such
securities. The Debtor acknowledges that to the extent the Pledged Securities
are sold in a private sale, the sales price therefor may be less than a sales
price that might have been otherwise obtainable. The Debtor acknowledges the
reasonableness of a sale in such a manner under such circumstances.
10. FURTHER ASSURANCES.
The Debtor agrees to take such actions and to execute such stock or bond
powers and such other or different instruments and writings as the Collateral
Agent may request (and irrevocably authorizes the Collateral Agent to execute
such writings as the Debtor's agent and attorney-in-fact) further to perfect,
confirm and assure the Collateral Agent's security interest in the Collateral
and to assist the Collateral Agent's realization thereon in accordance with the
terms of this Pledge and Security Agreement, including, without limitation the
right to receive, endorse, and collect all instruments made payable to the
Debtor representing any dividend, interest payment or other distribution in
respect of the Collateral or any part thereof.
11. RIGHTS AND REMEDIES OF THE COLLATERAL AGENT UPON DEFAULT.
If an Event of Default shall have occurred and be continuing:
(a) The Collateral Agent shall have and may exercise with reference
to the Collateral and the Obligations, in addition to all other rights, powers
and remedies provided for in this Agreement, any or all of the rights and
remedies of a secured party under the Uniform Commercial Code in effect in the
State of Indiana, and as otherwise granted herein or under any other applicable
law or under any other agreement now or hereafter in effect executed by the
Debtor, including, without limitation, the right and power to sell, at public or
private sale or sales, or otherwise dispose of, or otherwise utilize the
Collateral and any part or parts thereof in any manner authorized or permitted
under said Uniform Commercial Code after default by a debtor, and to apply the
proceeds thereof toward payment of any costs and
<PAGE>
expenses and attorney's fees and expenses thereby incurred by the Collateral
Agent and toward payment of the Obligations. Specifically and without limiting
the foregoing, the Collateral Agent shall have the right to take possession of
all or any part of the Collateral or any security therefor and all books,
records, papers and documents of the Debtor or in the Debtor's possession or
control relating to the Collateral which are not already in the Collateral
Agent's possession, and for such purpose may enter upon any premises upon which
any of the Collateral or any security therefor or any of said books, records,
papers and documents are situated and remove the same therefrom without any
liability for trespass or damages thereby occasioned. The Debtor agrees that,
to the extent permitted by law, notice given in the manner provided in Paragraph
hereof at least thirty (30) days before the time of the sale or disposition
of any of the Collateral (or any agreement related thereto) shall be deemed
reasonable and shall fully satisfy any requirement for giving of said notice,
such notice being intended to permit the Debtor an opportunity for it or any of
its designees to bid on and purchase any such Collateral or to otherwise cure
the Event of Default hereunder precipitating such proposed sale or disposition.
The Collateral Agent shall not be obligated to make any sale of Collateral
regardless of notice of sale having been given. The Collateral Agent may
adjourn any public or private sale.
(b) The Collateral Agent or its nominee or nominees shall have the
sole and exclusive right (but not obligation) to exercise all voting and
consensual powers pertaining to the Collateral or any part thereof and may
exercise such powers in such manner as the Collateral Agent may elect.
(c) All dividends, payments of interest or principal and other
distributions of every character made upon or in respect of the Collateral or
any part thereof shall be deemed to be Collateral and shall be paid directly to
and shall be held by the Collateral Agent as additional Collateral pledged under
and subject to this Pledge and Security Agreement.
(d) All rights to marshaling assets of the Debtor, including any such
right with respect to the Collateral, are hereby waived by the Debtor.
<PAGE>
(e) All recitals in any instrument of assignment or any other
instrument executed by the Collateral Agent incident to sale, transfer,
assignment or other disposition of the Collateral or any part thereof hereunder
shall be full proof of the matters stated therein and no other proof shall be
requisite to establish full legal propriety of the sale or other action taken by
the Collateral Agent or of any fact, condition or thing incident thereto and all
prerequisites of such sale or other action or of any fact, condition or thing
incident thereto shall be presumed conclusively to have been performed or to
have occurred.
So long as no Event of Default shall have occurred and be continuing:
(a) The Debtor shall be entitled to exercise any and all voting and
other consensual rights pertaining to the Pledged Securities or any part thereof
for any purpose not inconsistent with the terms of this Pledge and Security
Agreement; and
(b) The Collateral Agent shall execute and deliver (or cause to be
executed and delivered) to the Debtor all such proxies and other instruments as
the Debtor may reasonably request for the purpose of enabling the Debtor to
exercise the voting and other rights which it is entitled to exercise pursuant
to this Paragraph 9.
12. USURY, ETC.
Nothing in this Agreement or in any agreement governing or
applicable to the Indebtedness between any Secured Party and the Debtor shall
require the Debtor to pay, or the Collateral Agent to accept, interest in an
amount which would exceed the maximum rate permitted under applicable law or
which would subject the Collateral Agent to any penalty or forfeiture under
applicable law. In the event that the payment of any charges, fees or other
sums due hereunder or under any such other agreement, which are held to be in
the nature of interest would subject the Collateral Agent to any penalty or
forfeiture under applicable law, then, IPSO FACTO, the obligations of Debtor or
the Debtor to make such payment shall be reduced to the highest rate authorized
under applicable law. Should the Collateral Agent receive any payment which is
or would be in excess of the highest rate authorized under law, such payment
shall have been, and shall be deemed to have been, made in
<PAGE>
error, and shall automatically be applied to reduce the outstanding principal
balance of the Indebtedness.
13. RIGHT TO ASSIGN.
The Collateral Agent has the right to assign this Agreement and the
Collateral Agent's security interest in the Collateral without consent of
Debtor.
14. NO RIGHT TO REDEEM.
Debtor shall have no right to redeem the Collateral after a sale, and
Debtor absolutely and irrevocably specifically waives and releases any such
right.
15. REPAYMENT OF EXPENSES.
The Collateral Agent has the right, upon a default hereunder, to make
payments on Debtor's behalf or to take any action needed to protect the
Collateral or to defend any of the Collateral Agent's rights under this
Agreement. If Collateral Agent makes any payments or incurs any expenses in
taking such action, which may include reasonable attorney's fees, the Debtor
shall repay the Collateral Agent with interest at the lesser of (i) the maximum
rate of interest which can lawfully be charged to Debtor and (ii) the rate of
15% per annum (the "Default Rate"). Debtor shall be obligated to repay to
Collateral Agent upon demand all such payments and expenses, and the obligation
to do so shall constitute additional obligations ("Obligations") hereunder,
repayable to Collateral Agent from the proceeds of any sale of the Collateral.
If the principal balance of the Indebtedness or any other Obligation is not paid
when due, whether at maturity or by acceleration after a default or otherwise
the outstanding balance shall bear interest from the due date to the date of
payment at the Default Rate.
16. APPLICATION OF PROCEEDS BY THE COLLATERAL AGENT.
In the event the Collateral Agent sells or otherwise disposes of the
Collateral in the course of exercising the remedies provided herein, any amounts
held, realized or received by the Collateral Agent pursuant to the provisions
hereof, including the proceeds of the sale of any of the Collateral or any part
thereof, shall be applied by the Collateral Agent, FIRST, toward the payment of
any costs and expenses incurred by the Collateral Agent in
<PAGE>
enforcing this Pledge and Security Agreement, in realizing on or protecting any
Collateral and in enforcing or collecting the Obligations, including, without
limitation, the reasonable attorneys' fees and expenses incurred by the
Collateral Agent, all of which costs and expenses are secured by the Collateral
and all of which costs and expenses the Debtor agrees to pay; SECOND, to all
accrued and unpaid interest on the Indebtedness; THIRD, to the unpaid principal
of the Indebtedness; FOURTH, to any other unpaid Obligations; and, FIFTH, to the
Debtor or to whomsoever may be lawfully entitled to receive the same or as a
court of competent jurisdiction may direct. Any amounts and any Collateral
remaining after such application and after payment to the Collateral Agents of
all of the Obligations in full shall be paid or delivered to the Debtor, its
successor or assigns, or as a court of competent jurisdiction may direct.
The Collateral Agent shall be deemed to have exercised reasonable care in
the custody and preservation of the Collateral in its possession if the
Collateral is accorded treatment substantially equal to that which the
Collateral Agent accords its own property, it being understood, without
limitation that the Collateral Agent shall not have any responsibility for
taking any necessary steps to preserve rights against any parties with respect
to any Collateral.
17. ABSOLUTE INTEREST.
(a) All rights of the Collateral Agent hereunder, and all obligations
of the Debtor hereunder, shall be absolute and unconditional irrespective of (i)
any lack of validity or enforceability of any agreement with respect to the
Indebtedness; (ii) any change in the time, manner or place of payment of or in
any other term of, any payment required hereby or by any promissory note
evidencing the Indebtedness or any part thereof, or any other amendment or
waiver of or any consent to any departure from any agreement or instrument;
(iii) any exchange, release or non-perfection of any Collateral, or any release
or amendment or waiver of or any consent to or departure from, any guarantee for
all or part of the Obligation; (iv) any other circumstance which might
constitute a defense available to, or a discharge of, the Debtor or the Debtor
in respect of the Indebtedness or any part thereof or this Pledge and Security
Agreement.
(b) This Pledge and Security Agreement shall not be construed as
relieving the Debtor from full liability on the Obligations and for any
deficiency thereon.
<PAGE>
(c) The Collateral Agent is hereby subrogated to all of the Debtor's
interests, rights and remedies in respect to the Collateral and all security now
or hereafter existing with respect thereto and all guaranties and endorsement
thereof and with respect thereto, but only to the extent necessary to satisfy
the Obligations in accordance with the terms of this Pledge and Security
Agreement.
18. ADDITIONAL INFORMATION.
The Debtor agrees to furnish the Collateral Agent from time to time with
such additional information and copies of such documents relating to this Pledge
and Security Agreement, the Collateral, the Obligations and their respective
financial condition as the Collateral Agent may reasonably request, and upon
request, to certify the amount of the Indebtedness at the time outstanding,
including both interest and principal.
19. NOTICES.
Any communication, notice or demand to be given hereunder shall be duly
given if delivered or mailed by certified or registered mail at the applicable
address set forth on the first page of this Pledge and Security Agreement, or
such other address as shall be designated by any party hereto to the other
parties hereto in a written notice delivered in accordance with the terms
hereof.
20. INDEMNITY AND EXPENSES.
The Debtor agrees to indemnify the Collateral Agent, the Secured Parties
and their officers, directors and employees from and against any and all claims,
losses and liabilities growing out of or resulting from this Pledge and Security
Agreement (including, without limitation, enforcement of this Pledge and
Security Agreement and all claims and demands of all persons at any time
claiming the Collateral or any interest therein), except claims, losses or
liabilities resulting from the Collateral Agent's or its officers', directors',
or employees' or agents gross negligence or willful misconduct. The Debtor
agrees to pay on demand all out-of-pocket expenses (including the reasonable
fees and expenses of the Collateral Agent or its officers, directors, employees,
counsel, or agents) relating to the enforcement or protection of the rights of
the Collateral Agent or the Secured Parties hereunder, and further agrees that
the Collateral secures such payment.
<PAGE>
21. NO WAIVER; CUMULATIVE RIGHTS.
No failure on the part of Collateral Agent to exercise, and no delay in
exercising any right, remedy or power hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise by the Collateral Agent of any
right, remedy or power hereunder preclude any other or future exercise of any
other right, remedy or power. Each and every right, remedy and power hereby
granted to the Collateral Agent or allowed it by law or other agreement shall be
cumulative and not exclusive of any other, and may be exercised by the
Collateral Agent from time to time.
22. GOVERNING LAW.
This Pledge and Security Agreement and the rights and obligations of the
parties hereunder shall be governed by, and construed in accordance with, the
internal laws of the State of New York except as otherwise specifically provided
herein.
23. TERMINATION.
This Pledge and Security Agreement shall terminate upon the repayment in
full of the Obligations (which term shall include, without limitation, the
Indebtedness) at which time the Collateral Agent shall reassign and deliver to
the Debtor such of the Collateral (if any) as shall not have been sold or
otherwise applies pursuant to the terms hereof and shall still be held by it
hereunder, together with appropriate instruments of reassignment and release.
24. EXECUTION IN COUNTERPARTS.
This Pledge and Security Agreement may be executed in any number of
counterparts, each of which shall be an original, but such counterparts shall
together constitute one and the same instrument.
25. DEFINITIONS.
All non-capitalized terms used herein which are defined in the Uniform
Commercial Code of the State of Indiana shall have the meanings ascribed thereto
herein.
26. SUCCESSORS AND ASSIGNS.
This Pledge and Security Agreement shall inure to the benefit of any
successors and assigns of the Secured Parties and the Collateral Agent.
<PAGE>
27. RIGHTS OF THE COLLATERAL AGENT.
(a) The Collateral Agent shall have no duties or responsibilities except
those expressly set forth in this Pledge and Security Agreement. The Collateral
Agent shall not have by reason of this Agreement a fiduciary relationship in
respect of Debtor or and Secured Party and nothing in this Agreement, expressed
or implied, is intended to or shall be construed as to impose upon the
Collateral Agent any obligations in respect of this Pledge and Security
Agreement except as expressly set forth herein.
(b) The collateral Agent shall not be responsible to any Secured Party for
any recitals, statements, information, representations or warranties herein or
in any agreement, document, certificate or a statement delivered in connection
herewith or for the execution, effectiveness, genuineness, validity,
enforceability, collectibility or sufficiency of this Pledge and Security
Agreement, or be required to make any inquiry concerning either the performance
or observance of any of the terms, provisions or conditions of this Pledge and
Security Agreement, or the existence of any Event of Default or any condition,
event or act which, with notice or lapse of time or both, would constitute such
and Event of Default. The Collateral Agent may resign on thirty days' written
notice to each of the Secured Parties (a copy of which notice shall be provided
to Debtor but shall not be a condition to resignation) and upon such resignation
Secured Parties holding a majority of the outstanding principal amount of the
Indebtedness (the "Required Secured Parties") will designate a successor
Collateral Agent.
(c) If the Collateral Agent shall request instructions from the Secured
Parties with respect to any act or action (including failure to act) in
connection with this Agreement, the Collateral Agent shall be entitled to
refrain from such act or taking such action unless and until the Collateral
Agent shall have received instructions from the Required Secured Parties; and
the Collateral Agent shall not incur liability to any person by reason of so
refraining. Without limiting the foregoing, no Secured Party shall have any
right of action whatsoever against the Collateral Agent as a result of its
acting or refraining from acting hereunder in accordance with the instructions
of the Required Secured Parties.
(d) The Collateral Agent shall be entitled to rely, and shall be fully
protected in relying, upon any note, writing, resolution, notice, statement,
certificate, telex, teletype or telecopier message, cablegram, order or other
document or telephone message believed by it to be genuine and correct and to
have been signed, sent or made by the proper person or entity, and, with
<PAGE>
respect to all legal matters pertaining to this Pledge and Security Agreement
and its duties hereunder, upon advice of counsel selected by it (including,
without limitation, special counsel to the Collateral Agent).
(e) To the extent the Collateral Agent is not reimbursed and indemnified
by the Debtor, the Secured Parties will reimburse and indemnify the Collateral
Agent in proportion to the outstanding amounts of the Notes held by them, for
and against any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements of any kind or
nature whatsoever which may be imposed on, incurred by or asserted against the
Collateral Agent in performing its duties hereunder, or in any way relating to
or arising out of this Pledge and Security Agreement; provided that no Secured
Party shall be liable for any portion of such liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses or disbursements
resulting from the Collateral Agent's gross negligence or willful misconduct.
(f) With respect to the rights of the Collateral Agent as a holder of
Indebtedness and of any note issued to Debtor by the Collateral Agent, the
Collateral Agent shall have the same rights and powers hereunder as any other
Secured Party and as if it were not performing the duties as Collateral
<PAGE>
Agent specified herein; and the terms "Secured Party" or "holders of
Indebtedness" or any similar terms shall, unless the context clearly otherwise
indicates, include the Collateral Agent in its individual capacity.
IN WITNESS WHEREOF, the parties have caused this Pledge and Security
Agreement to be duly executed as of the date first above written.
METAL RECOVERY TECHNOLOGIES, INC.
BY: /S/
-----------------------------
TITLE:
ADDRESS:
PLENBRICK, LTD., as
Collateral Agent and in its
individual capacity
BY: /S/
-----------------------------
TITLE:
ADDRESS:
METAL RECOVERY INDUSTRIES
(U.S.), INC.
BY: /S/
-----------------------------
TITLE:
ADDRESS:
<PAGE>
ALCARIA, LTD.
BY: /S/
----------------------------
TITLE:
ADDRESS:
ANTHEMIS, LTD.
BY: /S/
----------------------------
TITLE:
ADDRESS:
JEPHERSON LTD.
BY: /S/
----------------------------
TITLE:
ADDRESS:
SUNDORNE HOLDINGS S.A.
BY: /S/
----------------------------
TITLE:
ADDRESS:
SOVEREIGN TRUST SERVICES, LTD.
BY: /S/
----------------------------
TITLE:
ADDRESS:
OSBOURNE LTD.
BY: /S/
----------------------------
TITLE:
ADDRESS:
<PAGE>
EXHIBIT A
To be Present Interest Conversion
Lender Loaned Loaned Maturity Rate Price
- ------ ------ ------ -------- -------- ----------
Alcaria, Ltd. $250,000 2/28/97 10% $0.25
Anthemis, Ltd. $250,000 12/31/96 10% $0.25
Jepherson Ltd. $250,000 2/28/97 10% $0.25
Sundorne
Holdings S.A. $650,000 6/30/96
Sovereign Trust
Services, Ltd. $116,523 9/30/96
Osbourne Ltd. $200,000 10/31/96
Plenbrick,
Ltd. $550,000 11/30/96
All loans have been extended so as to mature March 31, 1997
<PAGE>
Exhibit 13(A) - Form 10-Q for the period ending March 31, 1996
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1935
FOR THE TRANSITION PERIOD FROM N/A to N/A
----------------------
Commission File No.: 0-15543
METAL RECOVERY TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
415 East 151st Street, East Chicago, Indiana 46312
Telephone: (219) 397-6261
A Delaware Corporation Employer Identification No.: 71-0628061
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 12, 13 or 15 (d) of the Securities Exchange Act of 1939
during the proceeding 12 months (or for such shorter period that the Registrant
was required to file such report(s), and (2) has been subject to such filing
requirements for the past 90 days:
YES (X) NO ( )
Number of shares outstanding of the Registrant's Common Stock as of March, 1996:
13,764,653
The Securities and Exchange commission has not approved or disapproved the Form
10-Q, or passed on the accuracy or adequacy or of this report.
<PAGE>
TABLE OF CONTENTS
ITEM 1 PAGE
Financial Statements
Consolidated balance sheets
March 31, 1996 and December 31, 1995 1
Consolidated statement of operations
Three months ended March 31, 1996 & March 31, 1995 3
Notes to consolidated financial statements 4
ITEM 2
Management's discussion and analysis of financial condition
and results of financial condition and results of operations
<PAGE>
METAL RECOVERY TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEET
MARCH 31, 1996 AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
March 31 Dec 31
-------- ------
1996 1995
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash & equivalents 13,830 200,855
Accounts receivable:
Trade
Suppliers
Inventories 24,000 24,000
Other current assets - -
---------- ----------
Total current assets 37,830 224,855
---------- ----------
---------- ----------
Property & equipment
Property 298,555 288,968
Equipment 1,699,876 1,382,076
Vehicles 31,062 31,062
Furniture & fixtures 12,835 12,835
---------- ----------
Total property & equipment 2,042,328 1,714,941
Less accumulated depreciation, depletion
and amortization - -
---------- ----------
Net property & equipment 2,042,328 1,714,941
---------- ----------
Other assets;
Concessions, rights, patents, goodwill 12,893,394 12,893,394
---------- ----------
Total other assets 12,893,394 12,893,394
TOTAL ASSETS 14,973,552 14,833,190
---------- ----------
---------- ----------
</TABLE>
-1-
<PAGE>
METAL RECOVERY TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEET - CONTINUED
<TABLE>
<CAPTION>
March 31 Dec 31
-------- ------
1996 1995
---- ----
(Unaudited)
<S> <C> <C>
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Note payable 72,078 136,203
Accounts payable:
Trade 953,093 867,137
Former officers & directors 161,008 147,258
----------- -----------
Total current liabilities 1,186,179 1,150,598
Other liabilities:
Loans & long term debt 2,605,385 2,398,176
----------- -----------
TOTAL LIABILITIES 3,791,564 3,548,774
----------- -----------
Stockholders' equity:
"Series A" Preferred stock, $10 par value
100,000 shares authorized 46,965 shares
outstanding 469,650 469,650
"Series B" Preferred stock, $10 par value
2,500,000 shares authorized, 21,375 shares
outstanding 44,373 44,373
Common stock, par value of $.001;
100,000 shares authorized 13,764,653
issued and outstanding 13,764 13,764
Additional paid-in capital 60,112,998 60,112,998
Retained deficit (49,458,797) (49,356,369)
----------- -----------
Total stockholders' equity 11,181,988 11,284,416
----------- -----------
TOTAL LIABILITIES &
STOCKHOLDERS EQUITY 14,973,552 14,833,190
----------- -----------
----------- -----------
</TABLE>
-2-
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE STATEMENTS
<PAGE>
METAL RECOVERY TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
March 31 Dec 31
-------- ------
1996 1995
---- ----
(Unaudited)
<S> <C> <C>
Pipeline revenue - -
Malvy Anti Theft Device - -
----------- -----------
TOTAL REVENUE - -
Cost of production - -
----------- -----------
Gross profit (loss) - -
Operating expenses:
Selling, general & administrative 88,678 177,180
Depreciation, depletion & amortization - -
----------- -----------
Total operating expenses 88,678 177,180
Income (loss) from operations (88,678) (177,180)
Non operating income (expense):
Interest expense (13,750) (76,955)
Seminole Pipeline - 7,841
Malvy France & Malvy UK - 725,562
----------- -----------
Total non operating income (expense) (13,750) (987,538)
Gain (loss) on disposal of discontinued operations-
Malvy France & Malvy UK - (33,883,238)
----------- -----------
Net loss (102,428) (34,870,776)
----------- -----------
----------- -----------
</TABLE>
-3-
<PAGE>
METAL RECOVERY TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of presentation
Metal Recovery Technologies, Inc., ("MRTI") presents all financial statements in
United States dollars and under generally accepted accounting principles as
practiced in the United States.
Metal Recovery Technologies, Inc. (formerly Malvy Technology, Inc. - the
Company), was from 1993 to the middle of 1995 primarily engaged in the
development and testing of the Malvy anti-theft device and the marketing of the
Malvy device concept to the public and automotive manufacturers. This division,
however, went into receivership in October, 1995. Prior thereto, the Company
was engaged primarily in the business of mining and developing precious metals
in Alaska, the production of oil and gas in Oklahoma and New Mexico and the
transmission of gas through a pipeline operating in Oklahoma. These operations
were disposed of during 1995.
On April 27, 1995, the Company completed the acquisition of all of the capital
of Metal Recovery Industries (international), Inc. and its wholly owned
subsidiary, Metal Recovery Industries (US), Inc. (hereafter referred to as
"MRI(US)"), a US corporation engaged in the recovery of zinc form galvanized
steel. To reflect the importance of the acquisition of this business, the
Company's name was changed from Malvy Technology, Inc. to Metal Recovery
Technologies, Inc. Dr. William Morgan, the inventor of the process joined the
Board of Directors on May 10, 1995.
The acquisition was effected as follows:
a). $12,000,000 satisfied by the issue of 11,000,000 common shares under
Regulation S. 10,000,000 shares at $1.20, plus 1,000,000 shares (10%) fee
to underwriters.
b). An additional 7,000,000 Common Shares shall be issuable only at such
time as the dezincification technology of MRI(US) shall have been approved
by an independent third party, as evidenced by such party's entering into a
contract with the Company for the processing of a minimum of 50,000 tons
per annum of steel scrap utilizing the Company's technology, which contract
shall be on commercially
-4-
<PAGE>
reasonable terms consistent with a bon fide arm's-length relationship
between the parties, and, pursuant thereto, processing in commercial
quantities shall have commenced and scrap so processed shall have been
accepted and paid for by such third party.
c). An additional 7,000,000 Common Shares shall be issuable only at such
time or times as contracts utilizing the dezincification technology of
MRI(US) shall have been entered into with one or more independent third
parties, providing for the processing of an aggregate minimum of 1,000,000
tons per annum of steel scrap, which contracts shall be on commercially
reasonable terms consistent with a bona fide arm's-length relationship
between the parties.
d). $25,000,000 of Convertible Redeemable Preference Shares (CRP),
issuable upon the following conditions:
(1) at the rate of $10.00 of CRP Shares for each ton of capacity in
dezincing plants established by the Company or by any subsidiary (excluding
the East Chicago, IN plant), which is certified as being operable at full
capacity and (2) at the rate of $10.00 of CRP Shares for each ton of such
plant capacity, which achieves normal operation of at least 80% of its
specified throughput capacity over an aggregate of three consecutive
months. These shares, if issued, will be convertible at the option of the
holder into common stock of the Company, or the Company may be required to
redeem same over a period of four years, commencing on the second
anniversary of issue to the holder 50%, and on each of the third and fourth
anniversaries 25%.
Determinations as to certification of a plant as being operational, and as to
the attainment of requisite 80% of operation capacity, shall be made by the
Company in its reasonable good faith judgment.
(b) Interim financial statements
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q. Accordingly, the
consolidated financial statements do not include all the information and
disclosures required by generally accepted accounting principles for complete
financial statements. In management's opinion, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for interim periods are not necessarily
indicative of results to be expected for the full year. While the Company
believes that the disclosures presented are adequate to make the information not
misleading it is suggested that these consolidated financial statements and
notes included in the Company's Form 10-K.
-5-
<PAGE>
(c) Inventories
Inventories consist of zinc bearing solutions and other chemicals at the
Company's plant in East Chicago.
(d) Reclassifications
Certain amounts for prior periods have been reclassified to conform with the
current period presentation.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND STATEMENT OF OPERATIONS
FINANCIAL CONDITION
The increase in property and equipment at March 31, 1996, compared to December
31, 1994, is due to additional cash expended in the recommissioning of the
Company's facility in East Chicago.
LIQUIDITY
The Company presently has, in addition to its existing cash on hand, unused loan
facilities aggregating approximately $1.1 million. The Company believes that
these represent sufficient working capital to allow the Company to reach
production.
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH, 31 1996 VS.
THREE MONTHS ENDED DECEMBER, 31 1995
"Revenues" decreased in the current three month period compared to the same
period a year ago, due to the elimination of Malvy France SA, which went into
liquidation October, 1995, together with the sale of the corporation's gas
interests, which were sold in June, 1995.
The decrease in "operating expenses" is due to the elimination of Malvy France
SA, which went into liquidation in October, 1995, together with the sale of the
corporation's gas interest, which were sold in June, 1995.
During the quarter assembly of the dezincing production line has continued.
Owning to the fact that this is the first time a production line of this nature
has been erected and the relative inexperience of the staff involved and the
newness of the technology, progress has been slower than planned. We
originally anticipated being in production by March
-6-
<PAGE>
31st but now believe that mid July is a more realistic target. Electrowinning of
zinc should commence at a commercial level sometime in June but after existing
solutions have been treated this part of the process will await completion of
the dezincing line.
Depreciation of property and equipment has reduced, as the Company's policy
adopted following the acquisition of MRI(US) is not to depreciate assets until
the Company is in production. Once the Company is in production, the assets
will be depreciated using the straight-line method over their estimated useful
lives as follows:
Leasehold improvements 15 years
Equipment 7 years
Furniture & fixtures 7 years
The Company reported a net loss for the three months of $0.0074 per share
compared to a loss of $0.277 per share for the same period the previous year.
SEGMENTS
MRI(US)
The application of zinc to steel to inhibit corrosion has created a rapidly
growing market for zinc over the last two decades. Current world consumption of
zinc is approximately 7,000,000 tons per year, half of which is used to protect
steel.
By far the largest market for galvanized steel is the automotive industry.
Through obsolescence, recycling, and the production of prompt scrap from auto
stamping processes, there is now a rapidly increasing amount of galvanized steel
scrap. This causes problems for the steel mills and lenders, which have a need
for clean black scrap, to avoid producing environmentally difficult air or water
emissions with zinc coated scrap.
For each ton of galvanized sheet steel supplied to auto stamping plants, 1/4
ton becomes scrap immediately. Most bundles of such high quality prompt scrap
contain a minimum of 40% coated material.
MRI(US)'s current competition comes from the waste treatment and recycling
industry, who process or stabilize the wastes generated form the furnace
emissions in the steel and foundry industry.
However any recycling system which does not involve dezincing the steel prior to
melting, allows the production of large quantities of hazardous waste and incurs
punitive recycling and waste disposal costs, as well as exposure to the risk of
future environmental liability penalties.
The Company believes that its technology will allow for the removal of zinc from
scrap metal without the production of hazardous bi-products.
-7-
<PAGE>
DEPARTMENT OF ENERGY/ARGONNE NATIONAL LABORATORY
The Company, under a Memorandum of Understanding with the U.S. Department of
Energy, has expended since June 1, 1992, the sum of $1,141,411 for research and
development.
The original Collaborative Research and Development Contract estimated a
contribution of $1.4 million from the Department of Energy. The funds have been
provided to the Argonne National Laboratory and have been expended, both by
Metal Recovery Industries (US), Inc. and Argonne on research and development of
the dezincing technology.
Based upon the Memorandum of Understanding entered into between the Department
of Energy and MRI(US), the Company has a contingent repayment obligation, equal
to 150% of the government's total payments to the project, which arises is and
when the technology developed becomes commercially feasible. Repayments must be
made out of a percentage of future net royalty payments received by the Company
from the exploitation of the technology, if successful.
During the first three months of 1996, the Company spent $317,800 on the
recommissioning of the plant at East Chicago. These costs include development,
obtaining customers and suppliers, installing and testing equipment, and
administrative activities.
MALVY OPERATION
In October, 1995, the Company's foreign subsidiaries, Malvy Technology, SA and
Malvy Technology, (UK), Ltd. Were placed into liquidation. This action was the
result of petitions filed by the subsidiaries creditors.
MINING OPERATIONS
For several years, the Company operated one producing mine, an open pit placer
mine located approximately 200 miles west of Fairbanks, Alaska and 40 miles
south of Ruby, Alaska. The mine produced unrefined gold which was refined by an
unaffiliated metal refiner and sold to metal trading companies at market prices.
The assets and mining rights to this property were sold in February, 1995.
OIL AND GAS PIPELINE
The Company, through its wholly owned subsidiary, Sphinx International Petroleum
Company operated a gas gathering system and processing plant located in Central
-8-
<PAGE>
Oklahoma. In June, 1995, the Company disposed of its interest in Sphinx
International Petroleum for a nominal amount.
LEGAL PROCEEDINGS
In September, 1994, the Company reached a settlement with a former Chairman and
CEO of the Company, Jack Alexander and certain entities related to him in
respect of amounts claimed to be owed to them by the Company on account of notes
payable, loans and the redemption price of Preferred stock. Under the terms of
the settlement, Mr. Alexander was to be paid $1.3 million over a period ending
May, 1995. The Company has renegotiated several times, the term of payment to
Mr. Alexander. At March 31, 1996, the Company owed Mr. Alexander a total of
approximately $630,658. The Company has reached an agreement to pay the balance
to Mr. Alexander in two installments, due in June and July, 1996. At the
present time, Mr. Alexander still owns all of the shares of a class of preferred
stock, which would give Mr. Alexander the right to elect the majority of the
board of directors of the Company. Upon final payment to Mr. Alexander, these
shares will be deemed redeemed and canceled.
On November 6, 1995, an action entitled Levine vs. Metal Recovery Technologies,
Inc. was filed in the United States District Court of Delaware by a shareholder
against the Company and certain present and former directors, alleging breaches
of federal securities laws, by reason of alleged material misrepresentations by
the Company and the Company's alleged failure to timely make disclosures
relating to its Malvy operations.
The Company is involved in other matters of litigation in the normal course of
business. Management believes that none of these matters, upon their ultimate
resolution, will involve amounts material to the Company's financial statements.
The Company maintains insurance in an amount which management believes is
sufficient to cover its risks.
-9-
<PAGE>
PART II
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.
Metal Recovery Technologies, Inc.
/s/ Michael S. Lucas
By:
---------------------------------
Michael S. Lucas, Chairman and CEO
-10-
<PAGE>
Exhibit 13(B) - Form 10-Q for the period ending June 30, 1996
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1935
FOR THE TRANSITION PERIOD FROM N/A to N/A
----------------------
Commission File No.: 0-15543
METAL RECOVERY TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
415 East 151st Street, East Chicago, Indiana 46312
Telephone: (219) 397-6261
A Delaware Corporation Employer Identification No.: 71-0628061
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 12, 13 or 15 (d) of the Securities Exchange Act of 1939
during the proceeding 12 months (or for such shorter period that the Registrant
was required to file such report(s), and (2) has been subject to such filing
requirements for the past 90 days:
YES (X) NO ( )
Number of shares outstanding of the Registrant's Common Stock as of June 30,
1996: 16,599,653
The Securities and Exchange commission has not approved or disapproved the Form
10-Q, or passed on the accuracy or adequacy or of this report.
<PAGE>
TABLE OF CONTENTS
ITEM 1 PAGE
Financial Statements
Consolidated balance sheets
June 30, 1996 and December 31, 1995 1
Consolidated statement of operations
Six months ended June 30, 1996 & June 30, 1995 3
Three months ended June 30, 1996 & June 30, 1995 4
Consolidated statement of cash flows 5
Notes to consolidated financial statements 6
ITEM 2
Management's discussion and analysis of financial condition
and results of operations.
<PAGE>
METAL RECOVERY TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEET
JUNE 30, 1996 AND DECEMBER 31, 1995
June 30 Dec 31
1996 1995
---- ----
(Unaudited)
ASSETS
Current Assets:
Cash & equivalents 275,280 200,855
Accounts receivable:
Trade - -
Suppliers - -
Inventories 24,000 24,000
Other current assets - -
--------- ---------
Total current assets 299,280 224,855
--------- ---------
--------- ---------
Property & equipment
Property 323,555 288,968
Equipment 2,360,238 1,382,076
Vehicles 31,062 31,062
Furniture & fixtures 19,886 12,835
--------- ---------
Total property & equipment 2,734,741 1,714,941
Less accumulated depreciation, depletion - -
and amortization
--------- ---------
Net property & equipment 2,734,741 1,714,941
--------- ---------
Other assets;
Concessions, rights, patents, goodwill 12,893,394 12,893,394
---------- ----------
Total other assets 12,893,394 12,893,394
TOTAL ASSETS 15,927,415 14,833,190
---------- ----------
---------- ----------
-1-
<PAGE>
METAL RECOVERY TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEET - CONTINUED
JUNE 30 Dec 31
1996 1995
---- ----
(Unaudited)
LIABILITIES & STOCKHOLDERS' EQUITY
- ----------------------------------
Current liabilities:
Notes payable 67,703 136,203
Accounts payable:
Trade 716,573 867,137
Former officers & directors 174,758 147,258
--------- ---------
Total current liabilities 959,034 1,150,598
Other liabilities:
D.O.E. contingent grant 505,000 505,000
Convertible loans 2,417,331 1,893,176
--------- ---------
TOTAL LIABILITIES 3,881,365 3,548,774
--------- ---------
Stockholders' equity:
"Series A" Preferred stock, $10 par value
100,000 shares authorized 46,965 shares
outstanding 469,650 469,650
"Series B" Preferred stock, $10 par value
2,500,000 shares authorized, 21,375 shares
outstanding 44,373 44,373
Common stock, par value of $.001;
100,000,000 shares authorized 16,599,653
issued and outstanding 16,599 13,764
Additional paid-in capital 61,045,731 60,112,998
Retained deficit (49,530,303) (49,356,369)
Total stockholders' equity 12,046,050 11,284,416
---------- ----------
TOTAL LIABILITIES &
STOCKHOLDERS EQUITY 15,927,415 14,833,190
---------- ----------
---------- ----------
-2-
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE STATEMENTS
<PAGE>
METAL RECOVERY TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996 AND JUNE 30, 1995
June 30 June 30
------- -------
1996 1995
---- ----
(Unaudited)
-----------
Revenues:
Pipeline revenue - 171,371
Malvy Anti Theft Device - 207,444
---------- ----------
TOTAL REVENUE - 378,815
Cost of production - (301,664)
---------- ----------
Gross profit (loss) - 77,151
Operating expenses:
Selling, general & administrative 146,434 1,252,516
Depreciation, depletion & amortization - 234,191
---------- ----------
Total operating expenses 146,434 1,486,707
Income (loss) from operations (146,434) (1,409,556)
Non operating income (expense):
Interest (expense) received (27,500) 410
Write down Pipeline - (264,214)
Other 823,624
Total non operating income (expense) (27,500) 559,820
Net loss (173,934) (849,763)
---------- ----------
---------- ----------
Weighted average number of
common shares outstanding 14,237,153 6,389,652
(Loss) per share $(0.0122) $(0.1329)
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE STATEMENTS
-3-
<PAGE>
METAL RECOVERY TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1996 AND JUNE 30, 1995
June 30 June 30
------- -------
1996 1995
---- ----
(Unaudited)
-----------
Revenues:
Pipeline revenue - 90,995
Malvy Anti Theft Device - 156,256
--------- ----------
TOTAL REVENUE - 247,251
Cost of production - (186,559)
--------- ----------
Gross profit (loss) - 60,692
Operating expenses:
Selling, general & administrative 57,756 866,692
Depreciation, depletion & amortization - 115,912
--------- ----------
Total operating expenses 57,756 982,604
Income (loss) from operations (57,756) (921,912)
Non operating income (expense):
Interest expense (13,750) 410
Other - 823,624
Total non operating income (expense) (13,750) 824,034
Net loss (71,506) (97,878)
--------- ----------
--------- ----------
Weighted average number of
common shares outstanding 14,709,653 10,097,986
(Loss) per share $(0.0048) $(0.0096)
-4-
<PAGE>
METAL RECOVERY TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1996 & JUNE 30, 1995
June 30 June 30
------- -------
1996 1995
---- ----
CASH FLOWS PROVIDED BY (USED FOR)
OPERATIONS:
Net loss (173,934) (849,736)
Depreciation 156,913
Net changes in current assets
and liabilities (121,064) (974,831)
--------- ----------
Total: (294,998) (1,667,654)
CASH FLOWS PROVIDED BY (USED FOR)
INVESTMENT ACTIVITIES:
Net changes to plant & equipment (927,029) (427,216)
Additions, deletions to concessions,
rights, patents & goodwill (11,083,274)
--------- ----------
(927,029) (11,510,490)
Cash flows provided (used for)
financing activities:
Increase (decrease) in notes payable (68,500) -
Increase (decrease) in long term debt 431,384 323,991
Issued common stock 2.835 (36,115)
Received from additional stock &
paid in capital 930,733 12,209,419
--------- ----------
Total: 1,296,452 12,497,295
Increase (decrease) in cash 74,425 (680,849)
Cash & equivalents at beginning of year 200,855 712,563
--------- ----------
Cash & equivalents at June 30, 1996 275,280 31,714
-5-
<PAGE>
METAL RECOVERY TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of presentation
Metal Recovery Technologies, Inc., ("MRTI") presents all financial statements in
United States dollars and under generally accepted accounting principles as
practiced in the United States.
Metal Recovery Technologies, Inc. (formerly Malvy Technology, Inc. - the
Company), was from 1993 to the latter part of 1995 primarily engaged in the
development and testing of the Malvy anti-theft device and the marketing of the
Malvy device concept to the public and automotive manufacturers. This division,
however, went into receivership in October, 1995. Prior thereto, the Company
was engaged primarily in the business of mining and developing precious metals
in Alaska, the production of oil and gas in Oklahoma and New Mexico and the
transmission of gas through a pipeline operating in Oklahoma. These operations
were disposed of during 1995.
On April 27, 1995, the Company completed the acquisition of all of the capital
of Metal Recovery Industries (International), Inc. and its wholly owned
subsidiary, Metal Recovery Industries (US), Inc. (hereafter referred to as
"MRI(US)"), a US corporation engaged in the recovery of zinc from galvanized
steel. To reflect the importance of the acquisition of this business, the
company's name was changed from Malvy Technology, Inc. to Metal Recovery
Technologies, Inc. Dr. William Morgan, the inventor of the process, joined the
Board of Directors on May 10, 1995.
The acquisition was effected as follows:
a). $12,000,000 satisfied by the issue of 11,000,000 common shares under
Regulation S. 10,000,000 shares at $1.20, plus 1,000,000 shares (10%) fee
to underwriters.
b). An additional 7,000,000 Common Shares shall be issuable only at such
time as the dezincification technology of MRI(US) shall have been approved
by an independent third party, as evidenced by such party's entering into a
contract with the company for the processing of a minimum of 50,000 tons
per annum of steel scrap utilizing the Company's technology, which contract
shall be on commercially reasonable terms consistent with a bona fide arm's
length relationship between the
-6-
<PAGE>
parties, and, pursuant thereto, processing in commercial quantities shall
have commenced and scrap so processed shall have been accepted and paid for
by such third party.
c). An additional 7,000,000 Common Shares shall be issuable only at such
time or times as contracts utilizing the dezincification technology of
MRI(US) shall have been entered into with one or more independent third
parties, providing for the processing of an aggregate minimum of 1,000,000
tons per annum of steel scrap, which contracts shall be on commercially
reasonable terms consistent with a bona fide arm's-length relationship
between the parties.
d). $25,000,000 of Convertible Redeemable Preference Shares (CRP), shall
be issuable only upon the following conditions:
(1) at the rate of $10.00 of CRP Shares for each ton of capacity in
dezincing plants established by the Company or by any subsidiary
(excluding the East Chicago, IN plant), which is certified as being
operable at full capacity and (2) at the rate of $10.00 of CRP Shares
for each ton of such plant capacity, which achieves normal operation
of at least 80% of its specified throughput capacity over an aggregate
of three consecutive months. These shares, if issued, will be
convertible at the option of the holder into common stock of the
Company, or the Company may be required to redeem same over a period
of four years, commencing on the second anniversary of issue to the
holder 50%, and on each of the third and fourth anniversaries 25%.
Determinations as to certification of a plant as being operational, and as to
the attainment of requisite 80% of operational capacity, shall be made by the
Company in its reasonable good faith judgment.
(b) Interim financial statements
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q. Accordingly, the
consolidated financial statements do not include all the information and
disclosures required by generally accepted accounting principles for complete
financial statements. In management's opinion, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for interim periods are not necessarily
indicative of results to be expected for the full year. While the Company
believes that the disclosures presented are adequate to make the information not
misleading, it is suggested that these consolidated financial statements be read
in conjunction with the latest audited financial statements and notes included
in the Company's Form 10-K.
-7-
<PAGE>
(c) Inventories
Inventories consist of zinc bearing solutions and other chemicals at the
company's plant in East Chicago.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND STATEMENT OF OPERATIONS
FINANCIAL CONDITION
The increase in property and equipment at June 30, 1996, compared to December
31, 1995 is due to additional cash expended in the development of the Company's
facility in East Chicago.
LIQUIDITY
The Company presently has, in addition to its existing cash on hand, unused
convertible loan facilities aggregating approximately $437,000. During the
reporting quarter, but effective February 1, 1996, the corporation entered into
a consolidated loan agreement with its various overseas lenders. The agreement
gives enhanced security rights to the lenders, provides anti dilution
protection, but agrees that all such lenders are bound by a new collateral
agreement and enables the corporation to only negotiate with one entity in the
future. Repayment of all of the loans are extended to dates between November
30, 1996 and May 31, 1999. The Company believes that it has sufficient working
capital or facilities to allow the Company to reach production, although
additional funding may be necessary to redeem its A preferred shares and to pay
off all trade creditors.
STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996 VS.
SIX MONTHS ENDED JUNE 30, 1995
"Revenues" decreased in the current six month period compared to the same period
a year ago, due to the elimination of Malvy France, SA, which went into
liquidation in October, 1995, together with the sale of the corporation's gas
interests, which were sold in June, 1995. The Company expects to commence
earning revenues from its East Chicago operation during the third quarter of
1996, once the plant is in production.
The decrease in "operating expenses' is due to the elimination of Malvy France
SA, which went into liquidation in October, 1995, together with the sale of the
corporation's gas interest, which were sold in June, 1995. The Company has
adopted the policy of capitalizing all costs associated with the development of
its East Chicago facility until the
-8-
<PAGE>
facility reaches production. These costs include development, marketing,
installing and testing equipment and administrative activities. "Operating" and
"non-operating" expenses of $173,934 expended during the six months to June 30,
1996 relate to costs not directly associated with development, such as investor,
public relations and corporate and financial advisory services. Depreciation of
property and equipment has reduced, as the Company's policy adopted following
the acquisition of MRI(US) is not to depreciate assets until the Company is in
production. Once the Company is in production, the assets will be depreciated
using the straight-line method over their estimated useful lives as follows:
Leasehold improvements 15 years
Equipment 7 years
Furniture & fixtures 7 years
The Company reported a net loss for the six months of $0.0122 per weighted
average number of shares outstanding compared to a loss of $0.1329 per weighted
average number of shares outstanding for the same period the previous year.
On June 27, 1996, the Company signed an Agreement with the University of
California, Berkeley, to carry out further research to determine the
applicability of the University's patented spouted bed electrode, for zinc
recovery, from degalvanizing solutions. The Company is supporting a two year
program costing $182,500, per year, which will give the Company a time limited
first right to negotiate an exclusive, royalty bearing license to make, use, and
sell any patentable inventions conceived and first actually reduced to practice
in the performance of research under the agreement.
During the first six months of 1996, the Company capitalized $927,029 of
expenditure relating to the recommissioning of the plant at East Chicago. These
costs include development, obtaining customers and suppliers, installing and
testing equipment, and administrative activities.
LEGAL PROCEEDINGS
In September, 1994, the Company reached a settlement with a former Chairman and
CEO of the Company, Jack Alexander and certain entities related to him in
respect of amounts claimed to be owed to them by the Company on account of notes
payable, loans and the redemption price of Preferred stock. Under the terms of
the settlement, Mr. Alexander was to be paid $1.3 million over a period ending
May, 1995. The Company has renegotiated several times, the term of payment to
Mr. Alexander. At June 30, 1996, the Company owed Mr. Alexander a total of
approximately $644,408. The Company hopes to pay the balance to Mr. Alexander
during the third quarter of 1996. At the present time, Mr. Alexander still owns
all of the shares of a class of preferred stock, which would give Mr. Alexander
the right to elect the majority of the board of directors of the Company. Upon
payment to Mr. Alexander, these shares will be deemed, redeemed and canceled.
-9-
<PAGE>
On November 6, 1995, an action entitled Levine vs. Metal Recovery Technologies,
Inc. was filed in the United States District Court of Delaware by a shareholder
against the Company and certain present and former directors, alleging breaches
of federal securities laws, by reason of alleged material misrepresentations by
the Company and the Company's alleged failure to timely make disclosures
relating to its Malvy operations.
The Company is involved in other matters of litigation in the normal course of
business. Management believes that none of these matters, upon their ultimate
resolution, will involve amounts material to the Company's statements.
The Company maintains insurance in an amount which management believes is
sufficient to cover its risks.
PART II
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.
METAL RECOVERY TECHNOLOGIES, INC.
By: /s/ Michael S. Lucas
--------------------------------
Michael S. Lucas, Chairman and CEO
By: /s/ Roy Pearce
-------------------------------
Roy Pearce, Chief Financial Officer
-10-
<PAGE>
Exhibit 13(C) - Form 10-Q for the period ending September 30, 1996
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1935
FOR THE TRANSITION PERIOD FROM N/A to N/A
______________________
Commission File No.: 0-15543
METAL RECOVERY TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
415 East 151st Street, East Chicago, Indiana 46312
Telephone: (219) 397-6261
A Delaware Corporation Employer Identification No.: 71-0628061
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 12, 13 or 15 (d) of the Securities Exchange Act
of 1939 during the proceeding 12 months (or for such shorter period that the
Registrant was required to file such report(s), and (2) has been subject to such
filing requirements for the past 90 days:
YES (X) NO ( )
Number of shares outstanding of the Registrant's Common Stock as of September
30, 1996: 17,663,153
The Securities and Exchange commission has not approved or disapproved the Form
10-Q, or passed on the accuracy or adequacy or of this report.
<PAGE>
TABLE OF CONTENTS
PAGE
ITEM I
Financial Statements:
Consolidated Balance Sheets
as of September 30, 1996 and December 31, 1995 1
Consolidated Statement of Operations:
for the Nine (9) Months ended September 30, 1996 & 1995 3
for the Three (3) Months ended September 30, 1996 & 1995 4
Consolidated Statement of Cash Flows for the Nine (9) Months
ended September 30, 1996 & 1995 5
Notes to consolidated financial statements 6
ITEM 2
Management's discussion and analysis of financial condition
and results of operations. 7
<PAGE>
METAL RECOVERY TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
AS OF
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
Sept 30 Dec 31
1996 1995
---- ----
(Unaudited)
ASSETS
Current Assets:
Cash & equivalents $203,963 $200,855
Accounts receivable:
Trade - -
Suppliers - -
Inventories 46,682 24,000
Other current assets - -
--------- ---------
Total current assets 250,645 224,855
--------- ---------
Property & equipment:
Property 343,910 288,968
Equipment 3,289,137 1,382,076
Vehicles 31,062 31,062
Furniture & fixtures 22,671 12,835
--------- ---------
Total property & equipment 3,686,780 1,714,941
Less accumulated depreciation, depletion
and amortization - -
--------- ---------
Net property & equipment 3,686,780 1,714,941
--------- ---------
Other assets:
Concessions, rights, patents, goodwill 12,893,394 12,893,394
---------- ----------
Total other assets 12,893,394 12,893,394
---------- ----------
TOTAL ASSETS $16,830,819 $14,833,190
---------- ----------
---------- ----------
-1-
<PAGE>
METAL RECOVERY TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS - CONTINUED
Sept 30 Sept 30
------- ------
1996 1995
---- ----
(Unaudited)
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $51,828 $136,203
Accounts payable:
Trade 1,000,132 867,137
Former officers & directors 45,078 147,258
----------- -----------
Total current liabilities 1,097,038 1,150,598
Other liabilities:
D.O.E. contingent grant
505,000 505,000
Convertible loans 2,965,364 1,893,176
----------- -----------
TOTAL LIABILITIES 4,567,402 3,548,774
----------- -----------
Stockholders' equity:
"Series A" Preferred stock, $10 par value
100,000 shares authorized 46,965
shares outstanding 469,650 469,650
"Series B" Preferred stock, $10 par value
2,500,000 shares authorized, 21,375
shares outstanding 44,373 44,373
Common stock, par value of $.001;
100,000,000 shares authorized
17,663,153 issued and outstanding 17,663 13,764
Additional paid-in capital 61,358,168 60,112,998
Retained deficit (49,626,437) (49,356,369)
----------- -----------
Total stockholders' equity 12,263,417 11,284,416
----------- -----------
TOTAL LIABILITIES &
STOCKHOLDERS EQUITY $16,830,819 $14,833,190
----------- -----------
----------- -----------
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE STATEMENTS
-2-
<PAGE>
METAL RECOVERY TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE
NINE (9) MONTHS ENDED SEPTEMBER 30, 1996 & 1995
Sept 30 Sept 30
------- ------
1996 1995
---- ----
(Unaudited)
Revenues:
Pipeline revenue - $171,371
---------- -----------
TOTAL REVENUE - 171,371
Cost of production - (164,686)
---------- -----------
Gross profit - 6,685
---------- -----------
Operating expenses:
Selling, general & administrative $222,218 722,175
---------- -----------
Total operating expenses 222,218 722,175
---------- -----------
Income (loss) from operations (222,218) (715,490)
---------- -----------
Non operating income (expense):
Interest (expense) received (47,850) (57,752)
Write down Pipeline - (264,214)
Other - (1,247,162)
Write off of Malvy France/Malvy (UK) - (33,431,976)
---------- -----------
Total non operating income (expense) (47,850) (35,001,104)
---------- -----------
Net Income (loss) ($270,068) ($35,716,594)
---------- -----------
---------- -----------
Weighted average number of
common shares outstanding 14,410,875 10,070,209
(Loss) per share $(0.0187) $(3.5468)
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE STATEMENTS
-3-
<PAGE>
METAL RECOVERY TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE
NINE (9) MONTHS ENDED SEPTEMBER 30, 1996 & 1995
Sept 30 Sept 30
------- ------
1996 1995
---- ----
(Unaudited)
Operating expenses:
Selling, general & administrative $70,421 $528,841
---------- ------------
Total operating expenses 70,421 528,841
---------- ------------
Income (loss) from operations (70,421) (528,841)
---------- ------------
Non operating income (expense):
Interest expense (20,350) (57,752)
Other - (410,000)
Other prior period adjustment - (1,100,000)
Write off Malvy France/Malvy (UK) - (32,770,265)
---------- ------------
Total non operating income (expense) (20,350) (34,338,017)
---------- ------------
Net Income (loss) ($90,771) ($34,866,858)
---------- ------------
---------- ------------
Weighted average number of
common shares outstanding 14,758,319 13,764,653
(Loss) per share $(0.0061) $(2.5330)
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE STATEMENTS
-4-
<PAGE>
METAL RECOVERY TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE
NINE (9) MONTHS ENDED SEPTEMBER 30, 1996 & 1995
Sept 30 Sept 30
1996 1995
------- -------
CASH FLOWS PROVIDED BY (USED FOR)
OPERATIONS:
Net loss $(270,068) $(35,716,594)
Net changes in current assets
and liabilities 8,133 496,035
Change in foreign currency
translation adjustment - (424,599)
---------- ----------
(261,935) (35,645,158)
---------- ----------
CASH FLOWS PROVIDED BY (USED FOR)
INVESTMENT ACTIVITIES:
Reserve for pipeline cleanup - (60,787)
Net changes to plant & equipment (1,971,839) (171,377)
Additions, deletions to concessions,
rights, patents & goodwill - 20,286,253
Decrease in other assets - 214,639
---------- ----------
(1,971,839) 20,268,728
CASH FLOWS PROVIDED BY (USED FOR) ---------- ----------
FINANCING ACTIVITIES:
Increase (decrease) in notes payable (84,375) -
Increase (decrease) in long term &
convertible debt 1,072,188 1,290,563
Issued common stock 3,899 (36,115)
Received from additional
paid-in capital 1,245,170 13,409,419
---------- ----------
2,236,882 14,663,867
---------- ----------
Increase (decrease) in cash 3,108 (712,563)
Cash & equivalents at beginning of year 200,855 712,563
---------- ----------
Cash & equivalents at September 30, 1996 $203,963 $0.00
========= =========
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE STATEMENTS
-5-
<PAGE>
METAL RECOVERY TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of presentation
Metal Recovery Technologies, Inc., ("MRTI") presents all financial statements
in United States dollars and under generally accepted accounting principles
as practiced in the United States.
Metal Recovery Technologies, Inc. (formerly Malvy Technology, Inc. - the
Company), was from 1993 to the latter part of 1995 primarily engaged in the
development and testing of the Malvy anti-theft device and the marketing of
the Malvy device concept to the public and automotive manufacturers. This
division, however, went into receivership in October, 1995. Prior thereto,
the Company was engaged primarily in the business of mining and developing
precious metals in Alaska, the production of oil and gas in Oklahoma and New
Mexico and the transmission of gas through a pipeline operating in Oklahoma.
These operations were disposed of during 1995.
On April 27, 1995, the Company completed the acquisition of all of the
capital of Metal Recovery Industries (International), Inc. and its wholly
owned subsidiary, Metal Recovery Industries (US), Inc. (hereafter referred to
as "MRI(US)"), a US corporation engaged in the recovery of zinc from
galvanized steel. To reflect the importance of the acquisition of this
business, the company's name was changed from Malvy Technology, Inc. to Metal
Recovery Technologies, Inc. Dr. William Morgan, the inventor of the process,
joined the Board of Directors on May 10, 1995.
(b) Interim financial statements
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q.
Accordingly, the consolidated financial statements do not include all the
information and disclosures required by generally accepted accounting
principles for complete financial statements. In management's opinion, all
adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for interim
periods are not necessarily indicative of results to be expected for the full
year. While the Company believes that the disclosures presented are adequate
to make the information not misleading, it is suggested that these
consolidated financial statements be read in conjunction with the latest
audited financial statements and notes included in the Company's Form 10-K.
-6-
<PAGE>
(c) Inventories
Inventories consist of zinc bearing solutions, other chemicals and scrap steel
at the company's plant in East Chicago.
(d) Other liabilities: Convertible loans
Continued operations have, and will (see "liquidity" below), require loans from
various entities. During 1995 and 1996, MRTI issued convertible debt in
exchange for funds used to administer and construct its operations. As
of September 30, 1996, this indebtedness, including interest, amounted to
$2,965,364. These loans are exercisable at various rates, from 20 cents to 43
cents per share, and at various times. They also contain anti-dilution
provisions and are secured, pro rata, by liens on the shares of MRI(US), as well
as its assets.
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CONSOLIDATED FINANCIAL CONDITION AND STATEMENT OF OPERATIONS
Financial Condition
The increase in property and equipment at September 30, 1996, compared to
December 31, 1995 is due to additional cash expended in the development of
the Company's facility in East Chicago.
LIQUIDITY
As of June 30, 1996, the Company had, in addition to its existing cash on
hand, unused convertible loan facilities aggregating approximately $437,000.
These funds were used during the reporting quarter. Subsequent to the
reporting quarter, additional facilities of $1.5 million were raised. The
Company believes that it has sufficient working capital, existing or proposed
new facilities available to allow the Company to reach full production,
redeem its "Series A" Preferred shares and to pay off all trade creditors.
STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 VS.
NINE MONTHS ENDED SEPTEMBER 30, 1995
"Revenues" decreased in the current nine month period compared to the same
period a year ago, due to the elimination of Malvy France, SA, which went
into liquidation in October, 1995, together with the sale of the
corporation's gas interests, which were sold in June, 1995. The Company
expects its East Chicago plant to begin production and commence earning
revenues during the fourth quarter of 1996.
-7-
<PAGE>
The decrease in "operating expenses" is due to the elimination of Malvy
France SA, which went into liquidation in October, 1995, together with the
sale of the corporation's gas interest, which were sold in June, 1995. The
Company has adopted the policy of capitalizing all costs associated with the
development of its East Chicago facility until the facility reaches full
production. These costs include development, marketing, installing and
testing equipment and administrative activities. "Operating" and
"non-operating" expenses of $222,218 expended during the nine months to
September 30, 1996 relate to costs not directly associated with development,
such as investor, public relations and corporate and financial advisory
services. The reduction in depreciation, depletion and amortization is a
result of the Company's policy, adopted following the acquisition of MRI(US),
not to depreciate assets until the Company is in full production. Once the
Company is in full production, the assets will be depreciated using the
straight-line method over their estimated useful lives as follows:
Leasehold improvements 15 years
Equipment 7 years
Furniture & fixtures 7 years
The Company reported a net loss for the nine months of $0.0187 per weighted
average number of shares outstanding compared to a loss of $3.5468 per
weighted average number of shares outstanding for the same period the
previous year.
During the first nine months of 1996, the Company capitalized $1,971,839 of
expenditures relating to the recommissioning of the plant at East Chicago.
These costs include development, obtaining customers and suppliers,
installing and testing equipment, and administrative activities.
LEGAL PROCEEDINGS
In September, 1994, the Company reached a settlement with a former Chairman
and CEO of the Company, Jack Alexander and certain entities related to him in
respect of amounts claimed to be owed to them by the Company on account of
notes payable, loans and the redemption price of Preferred stock. Under the
terms of the settlement, Mr. Alexander was to be paid $1.3 million over a
period ending May, 1995. The Company has renegotiated several times, the
term of payment to Mr. Alexander. At September 30, 1996, the Company owed
Mr. Alexander a total of approximately $514,728. The Company hopes to pay
the balance to Mr. Alexander during the fourth quarter of 1996, but is
currently in default under the terms of the settlement. At the present time,
Mr. Alexander still owns all of the "Series A" preferred stock, which would
give Mr. Alexander the right to elect the majority of the board of directors
of the Company. Upon payment to Mr. Alexander, these shares will be deemed,
redeemed and canceled.
On November 6, 1995, an action entitled Levine vs. Metal Recovery
Technologies, Inc. was filed in the United States District Court of Delaware
by a shareholder against the Company and certain present and former
directors, alleging breaches of federal securities
-8-
<PAGE>
laws, by reason of alleged material misrepresentations by the Company and the
Company's alleged failure to timely make disclosures relating to its Malvy
operations.
The Company believes that it has a good defense against this action. Because
of the uncertainty of the outcome, and the inability to reasonably determine
or estimate any liability, the Company has not recorded or accrued any
liability related to this suit.
The Company is involved in other matters of litigation in the normal course
of business. Management believes that none of these matters, upon their
ultimate resolution, will involve amounts material to the Company's
statements.
PART II
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.
METAL RECOVERY TECHNOLOGIES, INC.
\s\ Michael S. Lucas
By: _____________________________
Michael S. Lucas, Chairman and CEO
\s\ Roy Pearce
By: _______________________________
Roy Pearce, Chief Financial Officer
-9-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
FINANCIAL STATEMENTS OF METAL RECOVERY TECHNOLOGIES INC. FOR ITS FISCAL YEAR
ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 7
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 65
<CURRENT-ASSETS> 170
<PP&E> 2592
<DEPRECIATION> 0
<TOTAL-ASSETS> 17833
<CURRENT-LIABILITIES> 4902
<BONDS> 0
470
44
<COMMON> 21
<OTHER-SE> 62355
<TOTAL-LIABILITY-AND-EQUITY> 17833
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 1047
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 64
<INCOME-PRETAX> (1111)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1111)
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<EPS-PRIMARY> (.066)
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<FN>
<F1>ANTI-DILITIVE
</FN>
</TABLE>
