SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act
of 1934
For The Quarter Ended March 31, 1996
Commission File Number 0-14881
WASTE RECOVERY, INC.
(Exact Name of Registrant as Specified in its Charter)
TEXAS 75-1833498
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
309 S. PEARL EXPRESSWAY, DALLAS, TX 75201
(Address of Principal Executive Offices) (Zip Code)
(214) 741-3865
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months or for such shorter period that the
registrant was required to file such reports, and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as the latest practicable date. Common stock, no par
value 10,851,310, April 30, 1996.
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
WASTE RECOVERY, INC.
Consolidated Balance Sheets
Assets March 31, 1996 December 31, 1995
------ -------------- -----------------
(Unaudited)
Current Assets:
Cash and cash equivalents $ 313,693 $ 726,562
Accounts receivable, less allowance for doubtful accounts
of $31,726 and $27,083, respectively 1,540,526 1,887,426
Note and other receivables 88,386 5,758
Inventories (note 3) 739,046 645,651
Other current assets 213,356 149,912
-------------- --------------
Total current assets 2,895,007 3,415,309
-------------- --------------
Property, plant and equipment 12,146,720 11,700,255
Less accumulated depreciation 7,073,359 6,840,820
-------------- --------------
Net property, plant and equipment 5,073,361 4,859,435
-------------- --------------
Restricted cash and cash equivalents (note 2) 507,635 998,035
Investment in Waste Recovery - Illinois 16,403 258,539
Bond and debt issuance costs, less accumulated amortization of
$169,045 and $153,287, respectively 159,288 175,046
Deferred income taxes 447,543 447,543
Goodwill, less accumulated amortization of $54,866 and 493,973 507,695
$41,164,
respectively
Other assets (note 2) 590,062 70,797
-------------- --------------
$10,183,272 $10,732,399
=========== ===========
See accompanying notes to consolidated financial statements.
WASTE RECOVERY, INC.
Consolidated Balance Sheets
Liabilities and Stockholders' Equity March 31, 1996 December 31, 1995
------------------------------------ -------------- -----------------
(unaudited)
Current Liabilities:
Notes payable $ 36,442 $ 28,945
Convertible subordinated debentures (note 4) 495,000 40,000
Current installments of long-term debt (note 5) 711,984 427,552
Current installments of capital lease obligations 94,274 93,423
Accounts payable 2,018,645 1,996,857
Accrued wages and payroll taxes 202,334 174,753
Other accrued liabilities 393,994 372,800
Deferred revenue 43,476 43,476
--------------- ---------------
Total current liabilities 3,996,149 3,177,806
--------------- ---------------
Convertible subordinated debentures, noncurrent (note 4) - 495,000
Long-term debt, excluding current installments (note 5) 3,239,728 3,591,376
Obligations under capital leases, excluding current
installments 177,570 178,797
Deferred revenue, noncurrent 235,470 246,338
Note payable 148,578 144,076
--------------- ---------------
Total liabilities 7,797,495 7,833,393
--------------- ---------------
Stockholders' Equity (notes 4 and 7):
Cumulative preferred stock, $1.00 par value, 250,000 shares
authorized, 203,580 issued and outstanding in 1996 and
1995 (liquidating preference $14.08 per share,
aggregating $2,867,158) 203,580 203,580
Preferred stock, $1.00 par value, authorized and unissued
9,750,000 shares in 1996 and 1995
Common stock, no par value, authorized 30,000,000 shares,
10,955,070 and 10,830,170 shares issued and outstanding
in 1996 and 1995, respectively 407,800 407,800
Additional paid-in capital 13,391,591 13,320,410
Accumulated deficit (11,543,314) (10,958,904)
2,459,657 2,972,886
Treasury stock, at cost, 103,760 common shares (73,880) (73,880)
Total stockholders' equity 2,385,777 2,899,006
$10,183,272 $10,732,399
=========== ===========
See accompanying notes to consolidated financial statements.
WASTE RECOVERY, INC.
Consolidated Statements Of Operations
Three Months Ended March 31,
1996 1995
(unaudited) (unaudited)
Revenues:
Tire-derived fuel sales $ 340,193 $ 257,514
Wire sales (note 6) 30,329 -
Disposal fees, hauling and other revenue 2,808,448 2,927,198
--------- ---------
Total revenues 3,178,970 3,184,712
Operating expenses 2,319,237 2,306,079
--------- ---------
859,733 878,633
General and administrative expenses 709,880 524,986
Depreciation and amortization 425,489 211,083
--------- ---------
(275,636) 142,564
Other income (expense):
Interest income 12,110 7,698
Interest expense (128,417) (112,565)
Other income 44,612 15,672
Gains on sales of property and equipment 5,057 -
Equity in loss from partnership operations (242,136) (27,215)
--------- ---------
(308,774) (116,410)
Net income (loss) (584,410) 26,154
Undeclared cumulative preferred stock dividends 35,529 35,138
--------- --------
Net loss available to common shareholders $(619,939) $ (8,984)
========= =============
Net income (loss) per share $ (.06) $ 0.00
============= ===============
Weighted average number of common and dilutive
common equivalent shares outstanding 10,955,070 7,414,946
========== =========
See accompanying notes to consolidated financial statements.
WASTE RECOVERY, INC.
Consolidated Statements of Cash Flows
Three Months Ended March 31,
1996 1995
---- ----
(unaudited)
Cash flows from operating activities:
Net income (loss) $ (584,410) $ 26,154
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Depreciation and amortization 249,413 299,933
Gain on sale of property, plant and equipment (5,057) -
Amortization of goodwill 13,722 -
Interest imputed on discounted note payable 4,502 -
Equity in loss from partnership operations 242,136 27,215
Stock issued to Directors and on debenture conversion 13,995 12,000
Changes in assets and liabilities:
Accounts receivable 346,900 220,396
Note and other receivables (5,145) -
Receivable from affiliate (77,483) -
Inventories (93,395) (246,995)
Other current assets (63,616) (30,023)
Other assets (19,265) (7,725)
Accounts payable 21,788 (338,866)
Accrued liabilities 48,775 (51,793)
Deferred revenue (10,868) -
------- -------
-
Net cash provided (used) by operating activities 81,992 (89,704)
------- -------
Cash flows from investing activities:
Proceeds received on note and other receivables - 332,137
Proceeds received on sale of property, plant and equipment 6,000 -
Purchases of property, plant and equipment (407,048) (256,535)
Purchase of Domino Salvage, Tire Division, Inc.,
net of cash received of $16,165 - (116,339)
Cash placed in restricted accounts (9,600) (3,200)
Net cash used by investing activities (410,648) (43,937)
Cash flows from financing activities:
Proceeds from issuance of notes payable 32,953 21,347
Payment of notes payable (25,456) (76,834)
Proceeds from issuance of convertible subordinated debentures 85,000 -
Payment upon maturity of convertible subordinated debentures (85,000) -
Proceeds from issuance of long-term debt - 44,114
Repayment of long-term debt (67,216) (43,318)
Repayment of capital lease obligations (41,680) (34,731)
Proceeds from issuance of common stock 17,186 -
-------- --------
Net cash used by financing activities (84,213) (89,422)
Net decrease in cash and cash equivalents (412,869) (223,063)
Cash and cash equivalents at beginning of period 726,562 261,118
-------- --------
Cash and cash equivalents at end of period $ 313,693 $ 38,055
=========== ===========
See accompanying notes to consolidated financial statements.
WASTE RECOVERY, INC.
Notes to Consolidated Financial Statements
March 31, 1996
Note 1: Adjustments
The financial information presented as of any date other than December
31 has been prepared from the books and records without audit. Financial
information as of December 31 has been derived from the audited financial
statements of the Company, but does not include all disclosures required by
generally accepted accounting principles. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial information for the periods indicated, have
been included. The results of operations for the three months ended March 31,
1996, are not necessarily indicative of operating results for the entire year.
For further information regarding the Company's accounting policies, refer to
the consolidated financial statements and related notes included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1995.
Note 2: Note Receivable
On January 30, 1996, the Company advanced Waste Recovery - Illinois
$500,000 for the Illinois partnership's February 1, 1996 debt payment (the
Company owns a 45% interest in this partnership). The loan was approved by the
Executive Committee of the Illinois partnership. This $500,000 was included in
restricted cash at December 31, 1995, and is in other noncurrent assets as a
note receivable at March 31, 1996, as the funds will be restricted as to use
after repayment by Waste Recovery-Illinois. Terms of the note are in the process
of being finalized.
Note 3: Inventories
The components of inventories are as follows:
March 31, 1996 December 31, 1995
-------------- -----------------
Finished Inventory $ 240,351 $ 274,454
Work-In-Process 130,117 134,162
Parts Inventory 368,578 415,171
--------- ---------
$ 739,046 $ 823,787
========= =========
Note 4: Convertible Subordinated Debentures
As of the original maturity date, March 15, 1996, $40,000 of the
convertible subordinated debentures plus interest of $1,995 were converted at
the rate of $.875 per share into 47,994 shares of common stock. $85,000 plus
interest of $4,238 of the debentures were repurchased by the Company and
subsequently sold to an unaffiliated individual under the exchange terms of the
debenture agreement. The remaining $410,000 in debentures were exchanged for new
debentures which carry an interest rate of 18% and mature on January 31, 1997.
Other terms and conversion privileges are the same as in the original
debentures.
Note 5: Long-term debt
As of March 31, 1996, the Company was out of technical compliance with
its current ratio calculation which is required by the 10.5% industrial
development revenue bond debt covenants. The debt agreement allows for a grace
period of sixty days within which this noncompliance may be cured before default
can occur. Management of the Company believes that due to the direction of
current operations, the Company will be in compliance within this sixty day
period. If the covenant is not satisfied within the sixty day period, then
$1,560,000 of long-term debt on the Atlanta bonds must be reclassified to
current debt; no other debt would be affected.
Note 6: Wire Sales
Beginning in February 1996, the installation of the wire system was
completed at the Baytown plant. This system allows the Company to recycle the
bead wire from the tires into a marketable material. For the three months ended
March 31, 1996, the Company had $30,329 in wire sales.
Note 7: Preferred Stock Dividends
Cumulative preferred stock dividends in arrears were $831,358 at March
31, 1996. Net income or loss is adjusted by the effect of undeclared dividends
on preferred stock of $35,529 and $35,138 for the three months ended March 31,
1996 and 1995, respectively. The effect was to increase net loss per common
share by $.003 for the three months ended March 31, 1996, and to decrease net
income per common share by $.004 for the three months ended March 31, 1995.
Primary and fully diluted earnings per share are the same in 1996 and 1995.
Note 8: Purchase of Domino Salvage, Tire Division, Inc.
The following unaudited pro forma summary presents the consolidated
results of the Company's operations as if the acquisition of Domino Salvage,
Tire Division, Inc. as of March 21, 1995, had occurred at the beginning of the
period presented. The information does not purport to be indicative of the
results that actually would have been obtained if the operations were combined
during the periods presented and is not intended to be a projection of future
results or trends.
For the three months
ended March 31, 1995
Revenues $ 3,471,900
============
Net income (loss) $ (32,833)
============
Earnings per share $ .00
============
Note 9: The registrant has no material pending legal proceedings.
Other notes have been omitted pursuant to Rule 10-01 (a)(5) of Regulation S-X.
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations
Waste Recovery, Inc., ("the Company") owns and operates plants in Houston,
Texas; Atlanta, Georgia; Portland, Oregon; and Conshohocken (Philadelphia),
Pennsylvania, the latter plant being owned by a subsidiary ("Domino") which was
purchased on March 21, 1995. The two new tire processing plants in central and
southern Illinois ("the Illinois facilities") began operations in September
1995. These plants are owned by Waste Recovery - Illinois, a general partnership
("WR-Illinois") in which the Company owns a 45% interest and is the managing
partner. The Company operates the Illinois facilities in close coordination with
its national system.
Regional services are coordinated from the operating bases mentioned above.
Operations encompass full-service scrap tire disposal and the recycling of tires
into a supplemental fuel form. The Company generates revenues from scrap tire
disposal fees, from the hauling of scrap tires, from the sale of tire-derived
fuel ("TDF"), and most recently, from the sale of bead wire removed from the
tires. At the plants, scrap tires are converted and refined into TDF, a high BTU
supplemental fuel that is sold primarily to major domestic cement and paper
manufacturers and, recently, also sold to electric power companies. The TDF
output of the Illinois facilities is initially being dedicated to use in
electrical power generating boilers of Illinois Power Company.
To date, the effects of inflation on the Company's operations have been
negligible.
General Comments
Results for the first quarter of 1996 continued to reflect the Company's
struggle with growth. Forty percent of the $584,410 loss was generated from the
45% equity position the Company has in WR-Illinois. This partnership continues
to operate at a significant loss as its revenue generation is severely limited
by a tire flow that is too minimal to cover the fixed costs of the two plants.
In April 1996, these plants were successful in winning two tire pile clean-ups
in the State of Kentucky which will provide the Dupo plant approximately 540,000
PTE's in the second and third quarters of 1996. Also, a competitor has agreed to
dispose of over 600,000 tires at the Dupo plant beginning in the second quarter
of 1996. This additional tire flow of over 1,000,000 PTE's should improve the
financial position of the Illinois partnership. Current legislative changes in
the State of Illinois have positively affected the Marseilles location as a
large competitor is no longer able to receive scrap tires in substantial
amounts.
Another 25% of the first quarter loss was contributed by Domino which, although
improving monthly, started off 1996 with a heavy loss in January due to weather
conditions and low tire flow. This subsidiary is now experiencing increased tire
flow and revenue generation on a monthly basis and should continue this positive
trend throughout 1996.
The Portland facility continues to maintain a strong position in the market in
the Northwest and averaged approximately 440,000 passenger tire equivalents or
PTE's per month during the first three months of 1996. This facility recently
won a bid from the State of Washington for a $2 million tire pile clean-up which
began April 15, 1996. This project involves the clean-up of approximately four
million PTE's and 22 million pounds of shredded tires, and should continue for
approximately two years. The Company completed a similar large tire abatement
project for the State of West Virginia in mid-February 1996 which involved the
clean-up of approximately four million PTE's.
The Houston (Baytown, Texas) facility showed significant signs of improvement
during the first quarter. The wire recycling system was installed during the
first six weeks of the quarter, and although this caused the plant to be shut
down for almost half of the first quarter, the last half of February and March
began to demonstrate the capabilities of this facility as it processed over
5,000 tons of PTE's and generated over $500,000 in revenues. Also, Baytown has
been able to sell/recycle the wire removed from the tires as the wire recycling
system is successfully transforming this facility into a substantially
waste-free plant. This not only generates revenue, but allows the Company to
avoid dump fees for wire that had been too contaminated to be recyclable.
The Atlanta facility, which had a net loss of $200,000 during the first quarter,
is struggling to increase its monthly tire flow and to control its production
costs. With the addition of the Vice President of Operations April 1, 1996, this
plant is undergoing several changes to address its current shortcomings, as
implementing cost and overhead reductions.
Results of Operations
Three Months Ended March 31, 1996 Compared
with Three Months Ended March 31, 1995
The table below summarizes the physical activity of the Company as well
as the basic revenue categories for the first quarter of the last three
fiscal years.
First Three Months Of:
1996 1995 1994
---- ---- ----
TDF Tons Sold 22,107 14,781 19,727
======= ====== ======
Passenger Tire Equivalents Received (Tons) 32,135 23,554 24,319
======= ====== ======
TDF Sales $ 340,193 $ 257,514 $ 343,330
========== ========== ==========
Disposal & Hauling Fees $2,808,448 $2,927,198 $2,015,382
========== ========== ==========
Revenues from TDF tonnage sold increased by approximately 32% during the first
quarter of 1996 when compared to the same period of 1995. This increase is
primarily due to the sale of TDF from the Atlanta plant which increased by over
3,600 tons. The Houston facility also sold over 4,000 tons of TDF whereas for
the same period last year, it contributed 1,500 tons to the Illinois partnership
as a capital contribution. Domino, which was purchased March 21, 1995, sold over
2,000 tons of TDF in the first quarter of 1996. Overall, the Company is
experiencing increased sales of TDF to a diversified customer base, although at
a slightly lower average price per ton, indicating a broader acceptance by
industrial users of the Company's fuel product.
Revenues received from disposal fees, hauling and other revenues dropped off
because of two events, 1) the West Virginia tire pile abatement project for the
State of West Virginia was completed mid-February 1996, and 2) the Houston plant
was shut down for almost one half of the first quarter as the wire system was
being installed. As the Houston plant is now 100% operational, significant
revenues are being generated during March and April 1996 and are expected to
continue. This, plus the addition of the Domino plant, should allow the Company
to continue to grow its revenue base. Additionally, as mentioned above, the
Portland plant has started a $2 million tire pile clean-up that will continue
through the remainder of 1996 and all of 1997.
PTE's received have increased at all of the facilities through an increased
customer base. The State of Texas continues to provide the greatest immediate
opportunity for growth as the State discontinued its allocation program in late
1995, and current legislation requires that all material must be consumed by an
end-user for a processor to participate in the State's program. The Company's
Houston facility continues to add to its customer base as other processors in
the State are decreasing their business activities due to a lack of end-users
for their product, where the Company has a demand for additional material.
Operating expenses for the first quarter of 1996 remained at 72% of revenues.
Labor and contract hauling continue to be major components of this expense.
Several measures have been taken to help reduce labor costs by rearranging
shifts and controlling overtime at each of the facilities.
General and administrative expenses increased $184,894 and are 22% of revenues,
as compared to 16% of revenues for the same quarter in 1995. Increases are
primarily due to the addition of Domino which added approximately $100,000 to
the Company's general and administrative expenses during this first quarter. The
Company has increased its corporate accounting staff, and several of the plants
have added administrative personnel. Salaries and health insurance costs also
continue to increase.
Depreciation and amortization have doubled in the last year as the Houston
rebuild from the fire, the Atlanta rework of major equipment and the addition of
Domino all resulted in significant capital additions. The Company has added over
$1,900,000 in plant, property and equipment since the beginning of 1995, which
is now being depreciated. Interest expense for 1996 increased 14% from the
amount experienced in the first quarter of 1995 and is primarily due to the
addition of the debt incurred with the purchase of Domino.
As discussed previously, the equity interest in the Illinois partnership
continues to generate large losses as these two plants are still struggling with
low tire flow.
Financial Condition as of March 31, 1996
The Company's working capital balance at March 31, 1996, was a deficit amount of
$1,101,142. This deficit reflects the classification, to current, of its
convertible subordinated debentures in accordance with the restructured terms,
and the classification of over $350,000 of the Domino debt in current
liabilities. In February 1996, the Company also restructured its long-term debt
of $1.1 million with a different financial institution, which, while decreasing
the annual interest rate by 1 1/2 percent, increased the current portion of the
amount due. Accounts payable and accrued liabilities are also slightly higher as
due to the timing of transactions. As mentioned in note five in the accompanying
financial statements, the Company was out of technical compliance with its
current ratio calculation which is required by the Atlanta bonds debt covenants,
but management of the Company believes that due to the direction of current
operations, the Company will be in compliance within the sixty day grace period.
Management continues to remain sensitive to the risk that the Company will not
have the financial strength to take advantage of the opportunities that are
developing. It is anticipated that with operating results beginning to improve,
the Company will be able to adequately fund its working capital requirements and
capital expenditures for at least the next twelve months. However, the Company
is aware that each facility must remain closely monitored and costs must be
controlled. More importantly, additional revenues must be generated to cover the
fixed costs and allow the Company a chance to improve its profit margin with its
existing capabilities.
Significant capital expenditures for the remainder of 1996 will be limited to
completing the installation of the wire systems at the Atlanta and Portland
plants which are scheduled for May and July, respectively.
PART II
Other Information
Form 10-Q
Part II
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Form of Convertible Debenture Agreement as of March 15, 1996
(b) Reports on Form 8-K
None
Item 27. Financial Data Schedule
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant had duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WASTE RECOVERY, INC.
DATE: May 13, 1996 /s/ THOMAS L. EARNSHAW
----------------------
By:Thomas L. Earnshaw
President and Chief Executive Officer
(Principal Executive)
DATE: May 13, 1996 /s/ SHARON K. PRICE
-------------------
By: SHARON K. PRICE
Vice President of Finance