<PAGE>
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, 1997
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,
1997: 28,865,938
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
PART I - FINANCIAL DATA
Item 1 -- Financial Statements:
Consolidated Balance Sheets
as of June 30, 1997 and December 31, 1996 1
Consolidated Statement of Operations:
for the Three (3) Months ended June 30, 1997 & 1996 3
Consolidated Statement of Operations:
for the Six (6) Months ended June 30, 1997 & 1996 4
Consolidated Statement of Cash Flows for the Six (6) Months
ended June 30, 1997 & 1996 5
Notes to consolidated financial statements 6
Item 2 - Management's discussion and analysis of
financial condition and results of operations. 7
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 8
Item 2 - Changes in Securities 9
Item 3 -- Defaults on Senior Securities 9
Item 4 - Submissions of Matters to a Vote of Security Holders 9
Item 6 - Exhibits and Reports on Form 8-K 9
Item 27 - Financial Data Schedule 11
<PAGE>
METAL RECOVERY TECHNOLOGIES, INC
CONSOLIDATED BALANCE SHEETS
AS OF
JUNE 30, 1997 AND DECEMBER 31, 1996
Jun 30 Dec 31
1997 1996
------ ------
(Unaudited)
-----------
ASSETS:
Current Assets:
Cash & equivalents $ 5,708 $ 6,778
Accounts Receivable 9,213 -
Inventories 62,600 65,370
Other current assets 9,137 97,355
---------------------------
Total current assets 86,658 169,503
---------------------------
Property & equipment:
Leasehold improvements 348,255 348,255
Equipment and Construction-in-progress 2,275,911 2,178,823
Vehicles 8,136 31,062
Furniture & Fixtures 33,845 33,845
---------------------------
Total property and equipment 2,666,147 2,591,985
Less accumulated depreciation, depletion
and amortization - -
---------------------------
Net property & equipment 2,666,147 2,591,985
---------------------------
Other assets:
Concessions, rights, patents, goodwill 12,905,749 12,905,749
Organization costs 3,650,999 2,112,367
Other assets 26,122 53,400
---------------------------
Total other assets 16,582,870 15,071,516
---------------------------
TOTAL ASSETS $ 19,335,675 $ 17,833,004
---------------------------
---------------------------
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METAL RECOVERY TECHNOLOGIES, INC
CONSOLIDATED BALANCE SHEETS - CONTINUED
Jun 30 Dec 31
1997 1996
------ ------
(Unaudited)
-----------
LIABILITIES:
Current liabilities:
Current maturities of long-term
indebtedness $ 1,054,128 $ 4,580
Notes payable 36,972 49,894
Accounts payable 2,619,905 1,503,991
Due to Former officer & director - 55,098
Convertible loans 3,108,345 3,288,010
---------------------------
Total current liabilities 6,819,350 4,901,573
---------------------------
Long-term liabilities:
DOE Grant 505,000 505,000
Legal settlement (See Item 1(b) in Part II) 2,200,000 -
Capital lease 2,400 4,182
---------------------------
Total long-term liabilities 2,707,400 509,182
---------------------------
TOTAL LIABILITIES 9,526,750 5,410,755
---------------------------
STOCKHOLDERS' EQUITY:
"Series A" Preferred stock, $10 par value;
100,000 shares authorized; zero
and 46,965 shares outstanding at
June 30, 1997 and December 31,1996,
respectively - 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; 28,865,938
and 20,707,597 issued and outstanding at
June 30, 1997 and December 31, 1996,
respectively 28,865 20,707
Additional paid-in capital 64,098,158 62,355,161
Retained deficit (54,362,471) (50,467,642)
---------------------------
TOTAL STOCKHOLDERS' EQUITY 9,808,925 12,422,249
---------------------------
TOTAL LIABILITIES & STOCKHOLDERS'
EQUITY $ 19,335,675 $ 17,833,004
---------------------------
---------------------------
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE STATEMENTS
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<PAGE>
METAL RECOVERY TECHNOLOGIES, INC
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE
THREE (3) MONTHS ENDED JUNE 30, 1997 & 1996
Jun 30 Jun 30
1997 1996
------ ------
(Unaudited)
-----------
Sales (see Part I, Item 2,
"Statement of Operations") $ - $ -
Cost of sales - -
---------------------------
Gross profit - -
---------------------------
Operating expenses:
Total operating expenses 305,188 57,756
---------------------------
Loss from operations (305,188) (57,756)
---------------------------
Non operating income (expense):
Legal settlement (see Item 1(b)
in Part II) (3,250,000) -
Interest expense (13,442) (13,750)
---------------------------
Total non operating expense (3,263,442) (13,750)
---------------------------
Net loss $ (3,568,630) $ (71,506)
---------------------------
---------------------------
Weighted average number of
Common shares outstanding 26,567,879 14,709,653
Loss per share $ (0.1343) $ (0.0048)
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE STATEMENTS
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<PAGE>
METAL RECOVERY TECHNOLOGIES, INC
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE
SIX (6) MONTHS ENDED JUNE 30, 1997 & 1996
Jun 30 Jun 30
1997 1996
------ ------
(Unaudited)
-----------
Sales (see Part I, Item 2,
"Statement of Operations") $ - $ -
Cost of sales - -
---------------------------
Gross profit - -
---------------------------
Operating expenses:
Selling, general & administrative 618,448 146,434
---------------------------
Total operating expenses 618,448 146,434
---------------------------
Loss from operations (618,448) (146,434)
---------------------------
Non operating income (expense):
Legal settlement (see Item 1(b) in Part II) (3,250,000) -
Interest expense (26,381) (27,500)
---------------------------
Total non operating expense (3,276,381) (27,500)
---------------------------
Net loss $ (3,894,829) $ (173,934)
---------------------------
---------------------------
Weighted average number of
Common shares outstanding 24,908,741 14,237,153
Loss per share $ (0.1564) $ (0.0122)
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE STATEMENTS
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<PAGE>
METAL RECOVERY TECHNOLOGIES, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE
SIX (6) MONTHS ENDED JUNE 30, 1997 & 1996
<TABLE>
<CAPTION>
Jun 30 Jun 30
1997 1996
------ ------
(Unaudited)
-----------
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED FOR)
OPERATIONS:
Net loss $ (3,894,829) $ (173,934)
Net changes in current assets
and liabilities excluding
long-term indebtedness 1,142,591 (121,064)
---------------------------
NET CASH USED BY OPERATING ACTIVITIES (2,752,238) (294,998)
---------------------------
CASH FLOWS PROVIDED BY (USED FOR)
INVESTMENT ACTIVITIES:
Net changes to plant & equipment (74,162) (927,029)
Additions, deletions to Organization costs (1,538,632) -
Decrease in Other assets 27,278 -
---------------------------
NET CASH USED BY INVESTING ACTIVITIES (1,585,516) (927,029)
---------------------------
CASH FLOWS PROVIDED BY (USED FOR)
FINANCING ACTIVITIES:
Increase in long-term debt 3,247,766 -
Increase (decrease) in convertible debt (179,665) 431,384
Decrease in notes payable (12,922) (68,500)
Redemption of "Series A" Preferred Stock (469,650) -
Issued Common stock 8,158 2,835
Received from Additional Paid-in Capital 1,742,997 930,733
---------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,336,684 1,296,452
---------------------------
Increase (decrease) in cash (1,070) 74,425
Cash & equivalents at beginning of year 6,778 200,855
---------------------------
CASH & EQUIVALENTS AT JUNE 30, 1997 & 1996 $ 5,708 $ 275,280
---------------------------
---------------------------
</TABLE>
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE STATEMENTS
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<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.
(c) INVENTORIES
Inventories consist of zinc bearing solutions, other chemicals and scrap steel
at the company's plant in East Chicago, Indiana.
(d) ORGANIZATION COSTS
The company has elected to continue its practice of capitalizing all of its
expenses associated with the raising of capital, obtaining financing, locating
and acquiring equipment, obtaining customers and suppliers, installing and
testing equipment, and certain other administrative activities through the
second quarter of 1997.
(e) DEPRECIATION AND AMORTIZATION
Metal Recovery Industries (US), Inc. is in the developmental stage and therefore
no depreciation nor amortization was taken in the accounting periods shown in
this report.
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(f) CONVERTIBLE LOANS
Continued operations have, and will (see "Liquidity" below), require loans from
various entities. During 1995, 1996 and 1997 MRTI issued convertible debt in
exchange for funds used to administer and construct its operations. As of June
30, 1997, this indebtedness was $2,814,409, plus accrued interest of $293,936,
for a total amount payable of $3,108,345. Loans with principal balances
amounting to $2,699,409 are exercisable at rates ranging from 25 to 43.33 per
share, at various times, contain anti-dilution provisions, and are secured, pro
rata, by liens on the shares of MRI(US), as well as its assets.
PART I - FINANCIAL INFORMATION
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CONSOLIDATED FINANCIAL CONDITION AND STATEMENT OF OPERATIONS
FINANCIAL CONDITION
The increase in property and equipment and other assets at June 30, 1997,
compared to December 31, 1996 is due to additional cash expended in the
development of the Company's facility in East Chicago.
LIQUIDITY
As of December 31, 1996, the Company had, in addition to its existing cash on
hand, unused convertible loan facilities aggregating approximately $1.7 million.
During the first quarter of this year, $520,000 of this unused facility was
drawn down and used to administer and construct the Company's operations. At
June 30, 1997, the Company had unused convertible loan facilities of $1.2
million, however, there have been ongoing negotiations with lenders over
conversion terms owing to the weakness in the Company's share price which has
meant delays in receiving funds. The Company believes it can resolve these
difficulties and that it will have sufficient working capital, existing, or
proposed new facilities available to allow the Company to reach full production
and to pay off trade creditors.
During the current reporting period, two additional convertible loans of
$100,000 each were entered into with two offshore entities. Both loans are
convertible at any time prior to December 31, 1997, into common shares of the
Company under Regulation S at varying conversion prices.
An additional $100,000 was raised during the reporting quarter under a
subscription agreement resulting in the issuance of 500,000 shares at $0.20 per
share.
During the prior reporting period, $200,000 was raised by a subscription
agreement under Regulation S resulting in the initial issuance of 571,428 shares
at $0.35 per share to an offshore entity. The amount of shares issued under
this agreement was based however on the lower of $0.35 per share or a 30%
reduction of the closing bid price of the Company's common stock on March 3,
1997. This resulted in the issuance of an additional 180,451 shares during the
current reporting period for a per share price of $0.266.
STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 VS.
SIX MONTHS ENDED JUNE 30, 1996
There was no change in "Revenues" compared to the same period a year ago. The
company had sales/revenues of $108,945 during the first quarter and $207,801
during the second quarter of 1997, but because of the election to capitalize all
organization costs during the development stage of the Company, these revenues
were offset against the costs capitalized.
-7-
<PAGE>
The increase in "operating expenses" is mainly due to litigation expenses, the
non-capitalized expenditures of the officers, and the costs associated with
public relation activities. The Company had adopted the policy of capitalizing
all costs associated with the development of its East Chicago facility until the
plant reached full production levels. These costs included the development,
marketing, installing and testing equipment and administrative activities.
Because the officers are involved in matters other than those costs applicable
to be capitalized, an increase in the current period's operating expenses has
occurred.
Owing to delays and problems with production, the Company has continued, for the
first and second quarter of 1997, its policy of capitalizing costs associated
with the commissioning of the plant in East Chicago, Indiana. For the quarter
ended March 31, 1997 and the quarter ended June 30, 1997, the costs associated
with capitalized equipment and organization costs amounted to $804,556 and
$808,238, respectively. Management will continually review this policy but has
set a target for the first quarter of 1998 to discontinue this policy when the
plant is processing steel scrap on an operational basis.
The Company reported a net loss for the six months of $0.1564 per weighted
average number of shares outstanding compared to a loss of $0.0122 per weighted
average number of shares outstanding for the same period the previous year.
Besides the increased operating expenses from the previous year, the Company
settled a lawsuit in the amount of $3,250,000 which is reflected in the current
operating period's Income Statement. Details concerning this lawsuit are found
in Part II, Item 1(b).
During the reporting period, the Company announced that the results of an
internal production review showed that an additional investment of $2,000,000
would be necessary to achieve a monthly production target of 9,000 tons of
scrap, and that the East Chicago, Indiana facility can become profitable as soon
as production reaches 45% of capacity. The ability to produce high quality
black scrap and marketable zinc products has been demonstrated by the existing
facility but the need to optimize the current facility while continuing to
produce creates operational difficulties. Accordingly, the Company has scaled
back its operations with the intention of making some major operational and
processing additions and improvements to its plant operating equipment. These
improvements will last approximately four to five months, once they are
commenced. During this retrofit and capacity expansion the plant will have
little to no operating activity while major equipment installation or renovation
occurs.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
(a) MR. JACK ALEXANDER AND "MORTON BLUE"
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 had re-negotiated the terms of
payment to Mr. Alexander several times. At the time of the final settlement the
Company owed Mr. Alexander a total of approximately $551,129. 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.
During 1996, Mr. Alexander assigned his interest in the settlement, including
the shares of preferred stock to an entity identified as "Morton Blue" (with an
address in the British Virgin Islands). The Company, having no ability to
settle the amount owed to Morton Blue in cash, negotiated an agreement with
Morton Blue to settle the liability and redeem the "Series A" Preferred shares.
This occurred by the issuance of 2,550,000 shares of the Company's common stock
under Regulation S of the Securities and Exchange Commission. Based on this
settlement, Morton Blue holds 8.8% of the total number of shares outstanding at
June 30, 1997.
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<PAGE>
(b) LEVINE/CLASS ACTION
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.
Without admitting liability, the Company has reluctantly agreed to settle these
actions. This decision was primarily taken to avoid mounting legal costs, to
free management from the burdensome time involved in dealing with this matter,
and to achieve certainty as to the outcome of the proceedings. The uncertainty
of these proceedings has been negatively affecting or delaying potential
business transactions by the Company's subsidiary, Metal Recovery Industries
(US), Inc.
The agreed settlement, which was finalized during the current reporting period,
is $3.25 million. The payment terms are over a four year period, are detailed
in the Form 10-Q for the period ended March 31, 1997, and are hereby
incorporated by reference. The Company has reflected the provisions of these
agreements in the financial statements presented herein.
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.
ITEM 2 - CHANGES IN SECURITIES
During the current reporting period, the Company redeemed all of its outstanding
"A Series" preferred stock. The holders of the "A Series" preferred stock had
the right to elect the Board of Directors. The redemption of this class of
stock materially modified the rights of the holders of the remaining classes of
registered securities.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
The Company has not been involved in any material default in the payment of
principal or interest with respect to any senior indebtedness.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
covered by this report.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
During the current reporting period the Company filed two reports on Form 8-K,
which are hereby incorporated by reference.
ITEM 27 - FINANCIAL DATA SCHEDULE
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<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.
\s\ Michael S. Lucas
By:
------------------------------------
Michael S. Lucas, Chairman and CEO
Date: August 8, 1997
-----------------------------------
\s\ Roy Pearce
By:
------------------------------------
Roy Pearce, Chief Financial Officer
Date: August 8, 1997
-----------------------------------
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS OF METAL RECOVERY TECHNOLOGIES INC. FOR ITS
FISCAL SECOND QUARTER ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 6
<SECURITIES> 0
<RECEIVABLES> 9
<ALLOWANCES> 0
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<CURRENT-ASSETS> 9
<PP&E> 2,666
<DEPRECIATION> 0
<TOTAL-ASSETS> 19,336
<CURRENT-LIABILITIES> 6,819
<BONDS> 0
0
44
<COMMON> 29
<OTHER-SE> 64,098
<TOTAL-LIABILITY-AND-EQUITY> 19,336
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<TOTAL-COSTS> 618
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