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 September 30, 1997
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 [ ]
At November 14, 1997, 17,494,323 shares of the registrant's common
stock, no par value per share, were outstanding.
PART I: FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
WASTE RECOVERY, INC.
Consolidated Balance Sheets
September 30, December 31,
Assets 1997 1996
------ ---- ----
(Unaudited)
Current Assets:
Cash and cash equivalents $ 5,160 $ 1,892,427
Accounts receivable, less allowance for doubtful
accounts of $103,361 and $51,017, respectively 3,068,409 2,736,388
Other receivables 192,328 1,061,958
Inventories (note 2) 860,233 1,239,483
Other current assets 793,845 355,958
Restricted cash and cash equivalents 1,604,106 -
----------- -----------
Total current assets 6,524,081 7,286,214
----------- -----------
Property, plant and equipment 26,002,967 24,226,392
Less accumulated depreciation (9,889,787) (7,923,939)
----------- -----------
Net property, plant and equipment 16,113,180 16,302,453
----------- -----------
Restricted cash and cash equivalents 636,600 1,914,795
Bond and debt issuance costs, less accumulated
amortization of $193,503 and $181,275, respectively 134,831 147,059
Deferred income taxes 447,543 447,543
Goodwill, less accumulated amortization of $204,584
and $102,787, respectively 1,867,328 1,895,678
Other assets 434,642 398,058
----------- -----------
$26,158,205 $28,391,800
----------- -----------
----------- -----------
See accompanying notes to consolidated financial statements.
2
WASTE RECOVERY, INC.
Consolidated Balance Sheets
September 30, December 31,
Liabilities and Stockholders' Equity 1997 1996
------------------------------------ ---- ----
(Unaudited)
Current Liabilities:
Current installments of bonds payable (note 3) $ 7,587,124 $ 883,024
Notes payable 464,531 632,003
Current installments of long-term debt (note 4) 911,697 998,719
Current installments of capital lease obligations 122,210 111,982
Accounts payable 3,443,403 3,269,300
Bond interest payable 79,192 219,781
Accrued wages and payroll taxes 149,239 247,576
Other accrued liabilities 804,074 637,836
Deferred revenue 30,071 16,071
Deferred grant revenue 386,820 296,940
----------- -----------
Total current liabilities 13,978,361 7,313,232
----------- -----------
Bonds payable, noncurrent (note 3) - 7,567,795
Long-term debt, excluding current installments
(note 4) 3,856,120 4,069,498
Obligations under capital leases, excluding
current installments 73,624 104,017
Deferred grant revenue, noncurrent 316,055 696,050
Notes payable 319,711 312,085
----------- -----------
Total liabilities 18,543,871 20,062,677
----------- -----------
Commitments and contingencies
Stockholders' Equity (notes 5 and 7):
Cumulative preferred stock, $1.00 par value,
250,000 shares Authorized, 203,580 issued and
outstanding in 1997 and 1996 (liquidating
preference $15.13 per share, aggregating
$3,081,112, and $14.61 per share, aggregating
$2,974,525, in 1997 and 1996, respectively) 203,580 203,580
Preferred stock, $1.00 par value, authorized and
unissued 9,750,000 shares in 1997 and 1996 - -
Common stock, no par value, authorized 30,000,000
shares, 17,494,323 and 17,322,121 shares issued
and outstanding in 1997 and 1996, respectively 407,800 407,800
Additional paid-in capital 18,604,904 18,467,427
Accumulated deficit (11,528,070) (10,675,804)
----------- -----------
7,688,214 8,403,003
Treasury stock, at cost, 103,760 common shares (73,880) (73,880)
----------- -----------
Total stockholders' equity 7,614,334 8,329,123
----------- -----------
$26,158,205 $28,391,800
----------- -----------
----------- -----------
See accompanying notes to consolidated financial statements.
3
WASTE RECOVERY, INC.
Consolidated Statements Of Operations
(Unaudited)
Three Months Ended September 30,
-------------------------------
1997 1996
---- ----
Revenues:
Tire-derived fuel sales $1,099,131 $ 402,737
Wire sales 233,676 146,146
Disposal fees, hauling and other revenue 6,529,426 3,698,062
---------- ----------
Total revenues 7,862,233 4,246,945
Operating expenses 5,684,919 2,763,814
General and administrative expenses 1,398,509 758,307
Depreciation and amortization 742,330 273,170
---------- ----------
36,475 451,654
---------- ----------
Other income (expense):
Interest income 12,861 36,972
Interest expense (231,751) (107,793)
Other income - 12,207
Grant Income 96,705 -
Gains on sales of property and equipment - 2,400
Equity in loss from partnership operations - (192,056)
---------- ----------
(122,185) (248,270)
---------- ----------
Net income (loss) before income taxes (85,710) 203,384
Provision for income taxes - -
---------- ----------
Net income (loss) (85,710) 203,384
Undeclared cumulative preferred stock
dividends (note 5) 35,919 35,919
---------- ----------
Net income (loss) available to common shareholders $ (121,629) $ 167,465
---------- ----------
---------- ----------
Net income (loss) per common share $ (0.01) $ 0.01
---------- ----------
---------- ----------
Weighted average number of common and dilutive
common equivalent shares outstanding 17,339,494 11,966,896
---------- ----------
---------- ----------
See accompanying notes to consolidated financial statements.
4
WASTE RECOVERY, INC.
Consolidated Statements Of Operations
(Unaudited)
Nine Months Ended September 30,
-------------------------------
1997 1996
---- ----
Revenues:
Tire-derived fuel sales $ 2,909,405 $ 991,968
Wire sales 590,697 263,855
Disposal fees, hauling and other revenue 17,830,320 10,582,023
----------- -----------
Total revenues 21,330,422 11,837,846
Operating expenses 15,938,044 8,064,243
General and administrative expenses 4,085,827 2,196,284
Depreciation and amortization 2,137,496 811,202
----------- -----------
(830,945) 766,117
----------- -----------
Other income (expense):
Interest income 80,897 56,620
Interest expense (696,392) (369,923)
Other income 130,631 61,768
Grant income 290,115 -
Gain on involuntary conversion of assets
(note 9) 164,918 -
Gains on sales of property and equipment 8,510 7,457
Equity in loss from partnership operations - (596,629)
----------- -----------
(21,321) (840,707)
----------- -----------
Net loss before income taxes (852,266) (74,590)
Provision for income taxes - -
----------- -----------
Net loss (852,266) (74,590)
Undeclared cumulative preferred stock dividends
(note 5) 106,587 106,977
----------- -----------
Net loss available to common shareholders $ (958,853) $ (181,567)
----------- -----------
----------- -----------
Net loss per share $ (0.06) $ (0.02)
----------- -----------
----------- -----------
Weighted average number of common and dilutive
common equivalent shares outstanding 17,316,335 11,046,395
----------- -----------
----------- -----------
See accompanying notes to consolidated financial statements.
5
WASTE RECOVERY, INC.
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30,
-------------------------------
1997 1996
---- ----
Cash flows from operating activities:
Net loss $ (852,266) $ (74,590)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 2,035,699 772,165
Provision for losses on accounts receivable 72,000 -
Gain on sale of property, plant and equipment (8,510) (7,457)
Amortization of goodwill 101,797 41,165
Interest imputed on discounted note payable 7,626 13,507
Amortization of bond premium (58,695) -
Equity in loss from partnership operations - 596,689
Stock issued to Directors and on debenture
conversion - 13,995
Other (49,113) -
Changes in assets and liabilities:
Accounts receivable (404,021) 172,447
Note and other receivables 869,630 (4,822)
Inventories 379,250 (327,183)
Other current assets (437,887) (345,287)
Other assets (36,584) (4,023)
Accounts payable 351,603 462,056
Accrued liabilities 67,901 111,119
Bond interest payable (140,589) -
Deferred grant revenue (290,115) -
Deferred revenue 14,000 (32,604)
----------- -----------
Net cash provided by operating activities 1,621,726 1,387,177
----------- -----------
Cash flows from investing activities:
Proceeds received on sale of property, plant and
equipment 8,510 6,000
Purchases of property, plant and equipment (1,663,339) (1,010,749)
Cash placed in restricted accounts (1,394,733) (25,493)
Cash payments out of restricted accounts 1,068,822 500,000
Receivable from affiliate - (1,201,667)
----------- -----------
Net cash used by investing activities (1,980,740) (1,731,909)
----------- -----------
Cash flows from financing activities:
Payment of bonds payable (805,000) -
Proceeds from issuance of notes payable 679,130 298,405
Payment of notes payable (1,024,102) (91,393)
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 241,785 -
Repayment of long-term debt (542,185) (220,095)
Repayment of capital lease obligations (141,911) (78,758)
Proceeds from issuance of common stock 64,030 28,512
----------- -----------
Net cash used by financing activities (1,528,253) (63,329)
----------- -----------
Net decrease in cash and cash equivalents (1,887,267) (408,061)
Cash and cash equivalents at beginning of period 1,892,427 726,562
----------- -----------
Cash and cash equivalents at end of period $ 5,160 $ 318,501
----------- -----------
----------- -----------
See accompanying notes to consolidated financial statements.
6
WASTE RECOVERY, INC.
Notes to Consolidated Financial Statements
September 30, 1997
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 and nine
months ended September 30, 1997, 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, 1996.
Note 2: INVENTORIES
The components of inventories are as follows:
September 30, 1997 December 31, 1996
------------------ -----------------
Manufactured fuel inventory $ 172,956 $ 281,938
Manufactured wire inventory 4,164 27,761
Work-in-process 121,169 293,070
Parts inventory 561,944 636,714
---------- ----------
$ 860,233 $1,239,483
---------- ----------
---------- ----------
Note 3: BONDS PAYABLE
In connection with the bonds issued to provide funding for the
construction of the Illinois facilities, the indenture trustee determined in
August of 1997 that, although the debt service reserve fund was fully funded,
that the supplementary sinking fund had not been adequately funded, resulting
in a default, and the reclassification of the bonds to current liabilities.
The Company has entered into an agreement with the bondholders which provides
for a cure of this default through periodic payments.
Note 4: LONG-TERM DEBT
Although the Company was not in compliance with its current ratio
calculation as of September 30, 1997 which is required by the 10.5%
industrial development revenue bond debt covenants, the Company received a
waiver from the bondholder. The waiver expires November 30, 1998. If the
covenant is not satisfied upon expiration of the waiver, then $1,480,000 of
long-term debt on the Atlanta bonds must be reclassified to current debt; no
other debt would be affected.
Note 5: PREFERRED STOCK DIVIDENDS
Undeclared cumulative preferred stock dividends were $1,045,312 at
September 30, 1997. Net income or loss is adjusted by the effect of
undeclared dividends on preferred stock of $106,587 and $106,977 for the nine
months ended September 30, 1997 and 1996, respectively, and by $35,919 and
$35,919 for the three months ended September 30, 1997 and 1996, respectively.
The effect was to increase net loss per common share by $.006 and $.009 for
the nine months ended September 30, 1997 and 1996, respectively, and increase
net loss per common share by $.002, and decrease net income per common share
by $.003 for the three months ended September 30, 1997 and 1996,
respectively. Primary and fully diluted earnings per share are the same in
1997 and 1996.
Note 6: ACQUISITIONS
In December 1996, the Company acquired from Riverside Caloric Company
(RCC) its 55% interest in the Waste Recovery-Illinois general partnership, in
which the Company had owned the remaining 45% interest. The Company also
acquired in December 1996 all of the partnership interests in U.S. Tire
Recycling Partners, L.P. (U.S. Tire), which collects and processes scrap
tires, and operates a scrap tire monofill near Charlotte, North Carolina.
7
Note 7: COMMON STOCK
As a result of the Atlanta fire (see note 9), the Company agreed to
amend its agreement with the equity holders of U.S. Tire and to issue
additional common stock and notes payable to the former equity holders of
U.S. Tire in connection with the acquisition of U.S. Tire (see note 6). The
agreement called for additional consideration in the form of common stock and
notes payable based on any uninsured reconstruction costs and on certain cash
flow requirements of the Atlanta facility during the period of
reconstruction. As a result of this agreement, the Company issued 50,202
shares of common stock to the former equity holders of U.S. Tire.
Note 8: EARNINGS PER SHARE
In February 1997, the FASB issued FAS No. 128, Earnings per Share ("FAS
128"), which is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods. Effective December 31,
1997, the Company will adopt FAS 128, which establishes standards for
computing and presenting earnings per share (EPS). The statement requires
dual presentation of basic and diluted EPS on the face of the income
statement for entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the basic EPS computation,
to the numerator and denominator of the diluted EPS computation. Basic EPS
excludes the effect of potentially dilutive securities while diluted EPS
reflects the potential dilution that would occur if securities or other
contracts to issue common stock were exercised, converted into, or resulted
in the issuance of common stock that then shared in the earnings of the
entity. For the three months and nine months ended September 30, 1997 and
1996, the pro forma basic and diluted EPS amounts calculated assuming
adoption of this statement would be the same as EPS presented on the
consolidated statements of operations.
Note 9: INVOLUNTARY CONVERSION OF ASSETS
On November 26, 1996 the Company's Atlanta plant sustained damage due to
a mechanical fire. As a result, TDF and wire production ceased for a period
of time. The shredding machinery and equipment was not damaged, thus
allowing the plant to continue accepting scrap tires for disposal which were
then shredded and disposed of. The rebuild was completed in late May 1997,
at which time the plant became fully operational. This involuntary
conversion of assets was estimated and recognized in the year ending December
31, 1996. An additional $164,918 gain for property damage was recognized in
the six months ended June 30, 1997 in connection with this involuntary
conversion of assets, as well as $333,332 in insurance proceeds from business
interruption insurance.
Note 9: STATEMENT OF CASHFLOWS
The Company paid $832,588 and $284,351 for interest for the nine months
ended September 30, 1997 and 1996, respectively. No income taxes were paid
during the nine months ended September 30, 1997 and 1996.
Note 10: LITIGATION
The registrant has no material pending legal proceedings.
Other notes have been omitted pursuant to Rule 10-01 (a)(5) of Regulation S-X.
[End of Page]
8
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q under "Item 2. Management's Discussion
and Analysis of Financial Condition and Results of Operations", constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"). Such forward-looking
statements involve known and unknown risks, uncertainties, and other factors
which may cause the actual results, performance or achievements of Waste
Recovery, Inc. (the "Company" or "Registrant") to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among others, the
following: general economic and business conditions; competition; success of
operating initiatives; development and operating costs; adverse publicity;
changes in business strategy or development plans; quality of management;
availability, terms and deployment of capital; business abilities and
judgment of personnel; availability of qualified personnel; labor and
employee benefit costs; changes in, or failure to comply with, government
regulations; and other factors referenced in this Form 10-Q.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company owns and operates plants in or geographically near Houston,
Texas, Atlanta, Georgia, Portland, Oregon, Philadelphia, Pennsylvania, St.
Louis, Missouri, Chicago, Illinois, and Charlotte, North Carolina. Until
December 1996, the St. Louis and Chicago plants were owned by a partnership
(Waste Recovery-Illinois) in which the Company held a 45% partnership
interest. In December 1996, the Company acquired the remaining 55%
partnership interest at which time Waste Recovery-Illinois (WR-Illinois)
became a wholly-owned subsidiary. Prior to the acquisition, the Company did
not consolidate WR-Illinois' financial statements; the investment in
WR-Illinois was accounted for under the equity method of accounting. The
Company also acquired U.S. Tire Recycling Partners, L.P. (U.S. Tire) in
December 1996. U.S. Tire owns and operates a scrap tire processing facility
and shredded tire monofill in Charlotte, North Carolina.
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
processed rubber product for civil engineering purposes, from the sale of
shredded tires as tire-derived fuel ("TDF"), and from the sale of bead wire
removed from the tires.
To date, the effects of inflation on the Company's operations have been
negligible.
GENERAL COMMENTS
The Company suffered a net loss of $85,710 on revenues of $7,862,233 in the
third quarter of 1997 compared to net income of $203,384 on revenues of
$4,246,945 during the same period in 1996. The increase in total revenues
from the prior period was primarily due to the acquisition of the 55%
partnership interest in WR-Illinois not owned by the Company and the
resulting consolidation of its financial results, and the acquisition of U.S.
Tire. The increase in TDF sales to $1,099,131 for the third quarter of 1997
from $402,737 for the same period in 1996, and the increase in scrap tire
flow to 86,360 tons for the third quarter of 1997 from 41,415 tons for the
same period in 1996, were also the result of these acquisitions. Tire flow
for the 1997 third quarter was slightly down at the Portland, Atlanta and
Philadelphia plants, while the Baytown plant had an increased tire flow for
an overall increase of approximately 3,790 tons for these plants combined for
the three months ended September 30, 1997 compared to the same period in 1996.
Although the Portland facility continues to maintain a strong position in the
scrap tire market in the Northwest, TDF markets in this region continue to be
weak, thus limiting the Company's ability to sell all of the TDF produced at
this facility. Consequently, the Company's efforts continue to be focused on
managing tire inflow to achieve an equilibrium between TDF demand and tire
inflow so as to mitigate costly diversion costs associated with any excess
inventory. The Portland facility began a 5 million PTE tire remediation
project located in the State of Washington in April 1996 which is expected to
be completed at the end of the fourth quarter of this year.
9
The Company's Houston facility showed improvement in TDF sales and disposal
fees, as well as a strong increase in tire flow for the third quarter of 1997
compared to the same period in 1996. The increased tire flow in 1997
compared to 1996 is primarily due to the Company's efforts in tire
procurement throughout the State of Texas as a result of the elimination of
the State's allocation program last year which had limited the number of
scrap tires the Company could collect. Scrap tire collection efforts have
expanded into areas of North and South Texas. Increased demand from the TDF
customers has increased sales, and margins have improved as hauling costs
have decreased due to the proximity of these customers to the Houston plant.
Wire sales increased significantly in the third quarter of 1997 compared to
the same period last year.
In November 1996 the Atlanta plant was damaged from a mechanical fire which
limited production to six inch rubber chips during the first five months of
1997. These shreds were transported to the Company's U.S. Tire facility in
North Carolina where a portion were further processed and sold as drainfill
material, and the balance landfilled there. The Atlanta facility was rebuilt
with insurance proceeds and recommenced full operation in late May 1997.
Since the Company had the ability to shred and landfill scrap tires during
the reconstruction period, the Atlanta plant continued to maintain disposal
service to its customers and experienced little interruption in tire flow.
As a result, the plant quickly returned to an operating level comparably
similar to operating levels experienced just prior to the fire. While TDF
sales were up slightly, disposal fees and tire flow were slightly down in the
third quarter of 1997 compared to the same period in 1996.
The Philadelphia plant continues to suffer from a weak TDF market. The
Company is continuing its efforts to obtain new TDF customers in the
Northeast region. Tire flow and disposal fees were slightly higher in the
second quarter of 1997 compared to the same period in 1996 due to the
completion in July 1997 of a tire remediation project for the Commonwealth of
Pennsylvania. A significant portion of these tires was sent to the Company's
St. Louis facility for processing into TDF. Management anticipates the
commencement of additional remediation projects in the fourth quarter of 1997.
The Illinois facilities continue to show improvement with increases in TDF
sales and tire flow for the third quarter of 1997 compared to the same period
last year. TDF sales continue to be strong at the St. Louis plant with sales
for the third quarter of 1997 comparable to the same period last year. TDF
sales for the Chicago plant were significantly improved in the third quarter
of 1997 compared to the same period in 1996 due to new TDF customers obtained
in 1997, and demand for TDF at this plant continues to be strong. Tire flow
for both plants showed marked improvement in the third quarter of 1997
compared to the same period in 1996. This improvement is primarily due to an
expanding customer base, as well as the performance of remediation projects
for the States of Illinois, Indiana and Texas. While TDF sales at the
Illinois plants continue to be strong, there exists and excess demand for the
product from the current customer base as well as other potential customers.
Management continues to focus on improving tire flow which should provide the
Illinois plants with the ability to take advantage of this demand for TDF.
U.S. Tire, which was acquired by the Company in December 1996, is a scrap
tire processor located near Charlotte, North Carolina that operates a scrap
tire collection network throughout the state and surrounding Eastern corridor
as well as a scrap tire monofill. The U.S. Tire facility also generates
revenues through tire grading activities where collected tires are sold in
used tire markets, and the sale of processed scrap tires as tire-derived
product primarily for civil engineering purposes. The U.S. Tire facility
continues to show a very strong tire flow and net disposal fee. The facility
is expected to collect over 5 million PTE's in 1997.
RESULTS OF OPERATIONS
THIRD QUARTER ENDED SEPTEMBER 30, 1997 COMPARED
WITH THE THIRD QUARTER ENDED SEPTEMBER 30, 1996
Total revenues of $7,862,233 for the third quarter of 1997 were 85% higher
than the $4,246,945 earned for the same period in 1996. TDF sales were up
173%, wire sales were up 60%, and disposal fees, hauling and other revenue
were up 77% for the three months ended September 30, 1997 compared to the
same period in 1996. The increase is due primarily to the acquisitions of
WR-Illinois and U.S. Tire. TDF sales at the Atlanta plant were up slightly,
while wire sales and tire flow were slightly down for the third quarter of
1997 compared to 1996. TDF sales for the Portland plant were unchanged for
the third quarter of 1997 compared to the same period last year as the TDF
10
market in that region continues to be soft. Wire sales were up with the
acquisition of WR-Illinois, a third full quarter of wire production at the
Portland plant, and continued strong wire sales from the Houston plant. The
Houston plant showed strong increases in tire flow and TDF sales as well in
the third quarter of 1997 compared to the same period in 1996.
Operating expenses for the third quarter of 1997 were $5,684,919 or 72% of
revenues, up from $2,763,814 or 65% of revenues for the third quarter of
1996. Operating expenses increased primarily due to the acquisitions of
WR-Illinois and U.S. Tire described above. Although operating costs for the
Portland plant were down slightly for the third quarter of 1997 compared to
the same period last year, operating expense as a percentage of revenues
increased due to a decreased tire flow and sluggish TDF sales. Operating
expense at the Atlanta plant was up primarily as a result of the rebuilding
efforts completed in late May 1997. The Houston plant's operating expense
increased with increased TDF sales and stronger tire flow, but was unchanged
as a percentage of revenues for the third quarter of 1997 compared to 1996.
General and administrative expenses of $1,398,509 for the third quarter of
1997 were 84% higher when compared to $758,307 for the same period in 1996.
The increase is primarily due to the acquisitions of WR-Illinois and U.S.
Tire, as well as increases in corporate management, sales and other staff,
personnel costs, professional fees, and other administrative costs resulting
from the Company's expansion and higher levels of operating activities.
General and administrative expense as a percentage of revenues was unchanged
at 18% for the third quarter of 1997 compared to the same period last year.
Depreciation and amortization expense increased 172% to $742,330 from
$273,170 in the third quarter of 1997 compared to the same period in 1996.
The increase is primarily the result of the acquisitions of WR-Illinois and
U.S. Tire, the additions of the new wire recycling systems installed in 1996,
as well as an increase in property, plant and equipment at the Atlanta
facility due to the rebuild following the fire in the fourth quarter of 1996.
Interest expense increased 115% in the third quarter of 1997 compared to the
same period last year as a result of the WR-Illinois acquisition. Interest
expense increased primarily due to the bonds payable assumed in the
acquisition of WR-Illinois. Grant income represents the amortization of
deferred grant revenue received by WR-Illinois from the State of Illinois in
connection with the construction of the Illinois plants.
Equity from partnership operations is not reflected in the third quarter of
1997 since this partnership, WR-Illinois was acquired in December 1996, and
as a wholly-owned subsidiary was consolidated in the financial statements of
the Company for the three month and nine month period ending September 30,
1997.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED
WITH THE NINE MONTHS ENDED SEPTEMBER 30, 1996
Total revenues for the Company of $21,330,422 for the nine months ended
September 30, 1997 were 80% higher than the $11,837,846 received by the
Company for the same nine-month period in 1996. TDF sales were up 193%, wire
sales were up 124%, and disposal fees, hauling and other revenue were up 68%
for the nine months ended September 30, 1997 compared to the same period in
1996. This increase is primarily the result of the WR-Illinois and U.S. Tire
acquisitions, which accounted for 31% of total revenues for the nine months
ended September 30, 1997. TDF sales at the Portland plant were flat for the
nine months ended September 30, 1997 compared to the same period last year,
while disposal fees decreased due to a decrease in related tire flow. TDF
sales and disposal fees decreased at the Atlanta plant due to the rebuilding
efforts as a result of the November 1996 fire. The Houston plant had
increased TDF and wire sales, increased tire flow, and higher disposal fees
for the nine months ended September 30 1997 compared to the same period in
1996. The Philadelphia plant also showed strong improvement in tire flow and
disposal fees as a result of a scrap tire cleanup project for the
Commonwealth of Pennsylvania.
Operating expenses for the nine months ended September 30, 1997 were
$15,938,044 or 75% of total revenues compared to $8,064,243 or 68% of total
revenues for 1996. Operating expense were higher with the acquisitions of
WR-Illinois and U.S. Tire. Operating expense as a percentage of revenues
increased primarily as a result of the Atlanta plant rebuild, a decreased
tire flow in Portland, and increased operating costs at the Houston plant due
to
11
further expansion and increased tire collection efforts in Texas. General
and administrative expenses increased $1,889,543 to $4,085,827 for the nine
months ended September 30, 1997 from $2,196,284 in the comparable period in
1996, and as a percentage of total revenues was unchanged at 19% for the nine
months ended September 30, 1997 compared to the same period in 1996. The
increase in general and administrative expenses is primarily due to the
acquisitions of WR-Illinois and U.S. Tire, as well as increases in overall
corporate activities as a result of the Company's expansion. Depreciation
and amortization expense increased by 163% primarily as a result of the
consolidation of WR-Illinois and U.S. Tire, the installation of the wire
systems in the Houston and Portland plants, and the rebuild of the Atlanta
plant.
Interest expense increased 88% for the nine months ended September 30, 1997
compared to the same period in 1996 primarily due to the bonds payable
assumed by the Company in connection with the acquisition of WR-Illinois.
Other income increased by 111% in the nine months ended September 30, 1997
compared to the same period in 1996 due to the sale of a metering unit to an
electric power utility. Grant income also increased due to the amortization
of deferred grant revenue acquired in connection with the acquisition of
WR-Illinois. Gain on involuntary conversion of assets represents the gain
recognized upon final settlement of the Company's insurance claim in
connection with the Atlanta fire.
FINANCIAL CONDITION AS OF SEPTEMBER 30, 1997
The Company's working capital balance at September 30, 1997 was a deficit
amount of $7,454,280. This deficit is primarily due to the reclassification
of the WR-Illinois bonds payable to current liabilities. As discussed in
note 3 of the accompanying financial statements, the supplementary sinking
fund required by the State of Illinois in consideration of its moral
obligation guarantee has been inadequately funded, which is an event of
default under the Loan Agreement and Indenture of Trust, and which has
necessitated the reclassification of the bonds as current liabilities. The
Company has entered into an agreement with the bondholders under which it
will cure the sinking fund shortfall through periodic payments over a period
of time. As discussed in note 4 of the accompanying financial statements,
the Company was out of compliance with its current ratio covenant as required
by the Atlanta bonds indenture. However, the Company has received a waiver
from the bondholder of this event which waiver runs until November 1998.
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.
Cash flow from operations for the Company improved for the nine months ended
September 30, 1997 compared to the same period in 1996. Management is also
considering other sources of capital to meet the Company's future
commitments, as well as the Company's future working capital needs. 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 fixed costs and allow the Company a chance to improve its profit
margin with its existing capabilities.
The Company does not anticipate any significant capital expenditures for the
remainder of 1997.
12
PART II: OTHER INFORMATION
Item 5. OTHER INFORMATION
-----------------
On July 30, 1997, the Company's Board of Directors appointed Thomas L.
Earnshaw, formerly President and Chief Executive Officer of the Company, as
Vice Chairman of the Board of Directors. David Greenstein, formerly
President of the Company's U.S. Tire subsidiary, was appointed President and
Chief Executive Officer of the Company.
On August 6, 1997 and August 4, 1997, respectively, David Walls and
Andrew Bodner resigned from the Board of Directors to focus on their outside
business activities. At November 14, 1997, the Company had not appointed
successor directors to fill these vacancies.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) EXHIBITS
--------
None
(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: November 14, 1997 /s/ DAVID G. GREENSTEIN
------------------------------------------
By: DAVID G. GREENSTEIN
President and Chief Executive Officer
(Principal Executive Officer)
/s/ THOMAS L. EARNSHAW
------------------------------------------
By: THOMAS L. EARNSHAW
Vice Chairman
(Principal Financial and
Accounting Officer)
14