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, 1998
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, at the latest practicable date. Common stock, no
par value 17,494,323, May 19, 1998.
2
PART I: FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
WASTE RECOVERY, INC.
Consolidated Balance Sheets
Assets March 31, 1998 December 31, 1997
------ -------------- -----------------
(unaudited)
Current Assets:
Cash and cash equivalents $ 199,699 -
Accounts receivable, less allowance for doubtful accounts
of $155,574 and $128,602, respectively 2,560,303 3,047,265
Other receivables (note 2) 2,645,274 82,180
Inventories (note 3) 140,462 186,563
Other current assets (note 4) 930,376 933,760
Restricted cash and cash equivalents (note 5) 1,147,566 2,145,362
------------ ------------
Total current assets 7,623,680 6,395,130
------------ ------------
Property, plant and equipment 24,044,269 26,451,740
Less accumulated depreciation (10,514,965) (10,429,868)
------------ ------------
Net property, plant and equipment 13,529,304 16,021,872
------------ ------------
Restricted cash and cash equivalents (note 5) 172,751 171,898
Bond and debt issuance costs, less accumulated amortization of
$201,656 and $197,580, respectively 126,678 130,754
Goodwill, less accumulated amortization of $269,169 and
$238,025, respectively 1,802,744 1,833,888
Other assets 518,866 441,866
------------ ------------
$23,774,023 $24,995,408
------------ ------------
------------ ------------
See accompanying notes to consolidated financial statements.
3
WASTE RECOVERY, INC.
Consolidated Balance Sheets
Liabilities and Stockholders' Equity March 31, 1998 December 31, 1997
------------------------------------ -------------- -----------------
(unaudited)
Current Liabilities:
Current installments of bonds payable (note 5) $ 6,689,982 $ 7,567,795
Notes payable (note 6) 1,374,933 713,861
Current installments of long-term debt (note 7) 2,354,323 2,373,858
Current installments of capital lease obligations 63,887 83,328
Accounts payable 2,746,183 3,168,128
Other accrued liabilities 2,749,630 1,652,425
Deferred revenue 66,524 -
Deferred grant revenue 386,820 386,820
------------ ------------
Total current liabilities 16,432,282 15,946,215
------------ ------------
Long-term debt, excluding current installments (note 7) 2,397,326 2,495,195
Notes payable (note 6) 171,658 170,684
Obligations under capital leases, excluding current installments 19,418 22,708
Deferred grant revenue, noncurrent 122,645 219,350
------------ ------------
Total liabilities 19,143,329 18,854,152
------------ ------------
Stockholders' Equity (note 9)
Cumulative preferred stock, $1.00 par value, 250,000 shares
authorized, 203,580 issued and outstanding in 1998 and 1997
(liquidating preference $15.48 per share, aggregating
$3,152,170, and $15.31 per share, aggregating $3,117,031,
in 1998 and 1997, respectively) 203,580 203,580
Preferred stock, $1.00 par value, authorized and unissued
9,750,000 shares in 1998 and 1997 - -
Common stock, no par value, authorized 30,000,000 shares,
17,494,323 and 17,494,323 shares issued and outstanding
in 1998 and 1997, respectively 407,800 407,800
Additional paid-in capital 18,604,904 18,604,904
Accumulated deficit (14,511,710) (13,001,148)
------------ ------------
4,704,574 6,215,136
Treasury stock, at cost, 103,760 common shares (73,880) (73,880)
------------ ------------
Total stockholders' equity 4,630,694 6,141,256
------------ ------------
Commitments and contingencies
$ 23,774,023 $ 24,995,408
------------ ------------
------------ ------------
See accompanying notes to consolidated financial statements.
4
WASTE RECOVERY, INC.
Consolidated Statements Of Operations
Three Months Ended March 31,
----------------------------
1998 1997
---- ----
(unaudited) (unaudited)
Revenues:
Tire-derived fuel sales $ 1,035,927 $ 810,165
Wire sales 327,762 125,621
Disposal fees, hauling and other revenue 4,747,445 4,918,672
----------- ----------
Total revenues 6,111,134 5,854,458
Operating expenses 4,893,545 4,625,077
General and administrative expenses 1,832,358 1,304,942
Depreciation and amortization 718,666 671,583
----------- ----------
Operating loss (1,333,435) (747,144)
----------- ----------
Other income (expense):
Interest income 24,692 38,478
Interest expense (214,496) (232,678)
Other income 96,705 226,482
Gain (loss) on involuntary conversion of assets (note 10) (84,028) 60,000
----------- ----------
(177,127) 92,282
----------- ----------
Net loss (1,510,562) (654,862)
Undeclared cumulative preferred stock dividends 35,139 35,138
----------- ----------
Net loss available to common shareholders $(1,545,701) $ (690,000)
----------- ----------
Net loss per share $(.09) $(.04)
----------- ----------
----------- ----------
Weighted average number of common shares
outstanding 17,494,323 17,270,650
----------- ----------
----------- ----------
See accompanying notes to consolidated financial statements.
5
WASTE RECOVERY, INC.
Consolidated Statements of Cash Flows
Three Months Ended March 31,
----------------------------
1998 1997
---- ----
(unaudited) (unaudited)
Cash flows from operating activities:
Net loss $ (1,510,562) $ (654,862)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 687,622 637,650
Provision for losses on accounts receivables 26,972 24,000
Loss on involuntary conversion of assets 84,028 -
Amortization of goodwill 31,144 33,933
Interest imputed on discounted note payable 974 4,503
Amortization of bond premium (17,813) (20,038)
Changes in assets and liabilities:
Accounts receivable 459,990 291,202
Note and other receivables 34,838 288,204
Inventories 46,101 277,047
Other current assets 3,384 (98,047)
Other assets (89,779) 92,951
Accounts payable (421,945) (52,196)
Accrued liabilities 454,624 69,771
Deferred grant revenue (96,705) (96,705)
Deferred revenue 66,524
Other (25,114) (8,276)
----------- ----------
Net cash provided by operating activities (265,717) 789,137
----------- ----------
Cash flows from investing activities:
Purchases of property, plant and equipment (192,464) (931,539)
Cash placed in restricted accounts (100,632) (1,273,869)
Cash payments out of restricted accounts 1,097,575 1,068,822
----------- ----------
Net cash provided (used) by investing activities 804,479 (1,136,586)
----------- ----------
Cash flows from financing activities: (860,000)
Payment of bonds payable 817,025 (805,000)
Proceeds from issuance of notes payable (155,953) -
Payment of notes payable (347,142)
Proceeds from issuance of long term debt 54,000 -
Repayment of long-term debt (171,404) (93,214)
Repayment of capital lease obligations (22,731) (20,585)
Proceeds from issuance of common stock - 62,905
----------- ----------
Net cash used by financing activities (339,063) (1,203,036)
----------- ----------
Net decrease in cash and cash equivalents 199,699 (1,550,485)
Cash and cash equivalents at beginning of period - 1,892,427
----------- ----------
Cash and cash equivalents at end of period $ 199,699 $ 341,942
----------- ----------
----------- ----------
See accompanying notes to consolidated financial statements.
6
WASTE RECOVERY, INC.
Notes to Consolidated Financial Statements
March 31, 1998
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, 1998, 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, 1997.
Note 2: OTHER RECEIVABLES
Other receivables includes approximately $2,598,000 due from an
insurance company for property damage insurance related to the Marseilles
fire (see note 10). The Company received all of this amount in May 1998.
Note 3: INVENTORIES
The components of inventories are as follows:
March 31, 1998 December 31, 1997
-------------- -----------------
Manufactured fuel inventory $ 132,180 $ 103,245
Manufactured wire inventory 2,784 8,478
Work-in-process 5,498 74,840
----------- -----------
$ 140,462 $ 186,563
----------- -----------
----------- -----------
Note 4: OTHER CURRENT ASSETS
Other current assets at March 31, 1998 and December 31, 1997 are as
follows:
March 31, 1998 December 31, 1997
-------------- -----------------
Prepaid insurance $ 371,519 $ 386,684
Parts inventory 369,546 473,473
Other 189,311 73,603
----------- -----------
$ 930,376 $ 933,760
----------- -----------
----------- -----------
Note 5: BONDS PAYABLE
In connection with the bonds issued to provide funding for the
construction of the Illinois facilities, the Company was in default with
respect to the debt service payments and sinking fund payments due February
1, 1998. As a result of the default, the principal and interest payments due
February 1, 1998 on the bonds, all of which are classified in current
liabilities, were paid out of the debt service reserve trust funds included
in current restricted cash.
Note 6: NOTES PAYABLE
On March 31, 1998, the Company was in default due to non-payment of the
final installment of promissory notes payable in the amount of $150,000
issued in connection with the acquisition of U.S. Tire Recycling Partners,
L.P. (U.S. Tire). One of the noteholders has made demand for payment.
7
Note 7: LONG-TERM DEBT
As of March 31, 1998, the Company was not in compliance with all
required covenants as a result of non-compliance with certain financial
covenants. The Company received a waiver from the bondholder which expires
November 30, 1998; however, as a result of the Company's default on the bonds
discussed in Note 5 above, the note is in default, and, accordingly, has been
classified as current.
Note 8: CONVERTIBLE SUBORDINATED NOTES
In connection with the purchase of U.S. Tire in December 1996, the
Company issued convertible subordinated notes in the aggregate amount of
$1,850,000 payable to the former equity holders of U.S. Tire. The Company
was in default on the convertible subordinated notes as a result of
non-payment of interest due January 15, 1998 and April 15, 1998. Upon
occurrence of an event of default, as defined, the noteholders may convert
the notes to common stock of the Company at a reduced price of $1.00 per
share or foreclose on the common stock of New U.S. Tire Recycling
Corporation, a wholly-owned subsidiary of the Company which owns 84% of U.S.
Tire.
Note 9 PREFERRED STOCK DIVIDENDS
Undeclared cumulative preferred stock dividends were $1,116,370 at March
31, 1998. Net income or loss is adjusted by the effect of undeclared
dividends on preferred stock of $35,139 and $35,138 for the three months
ended March 31, 1998 and 1997, respectively. The effect was to increase net
loss per common share by $.002 and by $.002 for the three months ended March
31, 1998 and 1997, respectively. Basic and diluted earnings per share are
the same in 1998 and 1997.
Note 10: INVOLUNTARY CONVERSION OF ASSETS
On March 21, 1998, the Company's Marseilles, Illinois facility was
substantially destroyed by fire. The facility is covered by replacement and
business interruption insurance. This involuntary conversion of assets was
estimated and recognized in the three months ended March 31, 1998, as follows:
Estimated insurance proceeds to be received on property $ 2,597,932
Net book value of property destroyed (2,039,379)
-----------
Gain on involuntary converstion of property 558,553
Estimated clean-up costs (642,581)
-----------
Net loss on involuntary conversion $ (84,028)
-----------
-----------
Note 11: STATEMENTS OF CASHFLOWS
The Company paid $304,787 and $336,436 for interest for the three months
ended March 31, 1998 and 1997, respectively. No income taxes were paid
during the three months ended March 31, 1998 and 1997.
Note 12 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.
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.
9
GENERAL COMMENTS
The Company suffered a net loss of $1,510,562 on revenues of $6,111,134 in
the first quarter of 1998 compared to a net loss of $654,852 on revenues of
$5,854,458 during the same period in 1997. While revenue remained
essentially static compared with the same period in 1997, there was a
significant increase in the Company's net loss which is attributable to
insufficient tire flow, the conclusion of the Texas tire subsidy program
which had the effect of reducing tipping fees, and an extraordinary reserve
taken to cover anticipated employee medical costs. Additionally, the fire
loss of the Company's Marseilles facility caused the Company to establish
reserves for remediation in the amount of $642,581, which resulted in a net
loss on involuntary conversion of $84,028.
Although the Portland plant 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 Houston facility showed reduced levels of tire flow and lower disposal
fees, which resulted in decreased TDF production and sales. While the
Company anticipated a decrease in overall activity resulting from the
termination of the State of Texas tire subsidy program, the decrease in
operating levels exceeded the Company's projections and consequently
operating expenses were not scaled down quickly enough. Despite these
problems, demand for TDF in the Houston facility's market area has increased,
along with prices. To remedy weak tire flow, the Company has diverted a
significant portion of the tires that were formerly being delivered to a
cement kiln in San Antonio to it's Houston facility.
Operations at the Company's Atlanta plant fell short of Management's targets
primarily as a result of insufficient tire flow. TDF markets in the Atlanta
facility's market area continue to be strong.
9
Operations at the Company's Philadelphia facility improved beginning in March
as a result of a new TDF customer who was brought to market. At present this
customer is capable of taking 100% of the facility's production. The Company
continues its efforts to identify and secure new TDF customers in the
Northeast Region, and is planning to make certain capital improvements to
this facility in order to increase it's processing capacity once additional
TDF customers have been identified.
On March 21, 1998 the Company's Marseilles facility was destroyed by fire.
The Company has subsequently determined that the loss is fully covered by
insurance, both with respect to the physical loss of the improvements and the
cost of remediating the property. The Company has been involved in extensive
discussions with the State of Illinois in an effort to obtain and assist in
the form of new moral obligation guarantees for bond issues, the proceeds of
which would be used to refund the two Illinois bond issues which are
presently in default, including the one secured by the Marseilles facility.
The Company has recently concluded an agreement with the State of Illinois
which would allow for new bond issues to be funded sometime in the end of
June, and as a consequence the Company has made the decision to rebuild the
destroyed Marseilles facility. Both Illinois facilities enjoy strong TDF
markets. Prior to the fire the Marseilles facility had had significant
success in increasing its tire flow which would have allowed for close to
maximum capacity utilization. The Company has decided to rebuild the
Marseilles facility, in part because of the improved outlooks in both tire
flow, and strong demand for TDF at that facility. Tire flow at the Company's
Dupo facility continues to improve but still remains below optimal levels.
The Company is working in various states contiguous to Illinois to bring
additional tires to this facility. In the interim, a significant percentage
of the tires which were formerly being processed by Marseilles are being
brought to Dupo.
While U.S. Tire fell marginally short of Management's projections for the
quarter, it remains solidly profitable with volumes of tire inflow and
product production exceeding the levels of last year's comparable period.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED
WITH THREE MONTHS ENDED MARCH 31, 1997
Total revenues of $6,111,134 for the first quarter of 1998 were 4% higher
than the $5,854,458 earned for the same period in 1996. The increase is due
primarily to the acquisitions of WR-Illinois and U.S. Tire. TDF sales were
up 28% for the first quarter of 1998 compared to 1997. TDF sales were up at
the Atlanta plant for the first quarter of 1998 compared to the same period
in 1997 due to the fact that the facility was not producing TDF during the
first quarter of 1997 as the plant was under construction during that period
as a result of the November 1996 fire. TDF sales continue to suffer in
Portland due to a week TDF market in that region. TDF sales were up at the
Illinois facilities, as well as at the Houston, Philadelphia and U.S. Tire
plants. Wire sales were up significantly with the Atlanta facility having
resumed full production after the rebuild in the first quarter of 1997, as
well as strong increases at the Illinois plants. Disposal, hauling and other
revenue was down 3% in the first quarter of 1998 compared to the same period
in 1997, primarily due to a decrease in tire flow at the Portland and Houston
plants. Tire flow in the Northwest region has suffered due to increased
competition with landfills, as well as the result of management's efforts to
control tire flow to better match the weak demand for TDF. The Houston plant
experienced a decrease in tire flow primarily as a result of the elimination
of the state subsidy in Texas for the disposal of tires. The elimination of
the subsidy affected the dynamics of the scrap tire disposal market and
resulted in a downturn in tire flow during the first quarter of 1998. Tire
flow for the Houston plant should rebound as the scrap tire disposal market
adjusts to the conversion from a subsidized industry and achieves equilibrium
in the free marketplace. Tire flow at the Illinois plants showed improvement
in the first quarter of 1998 compared to the same period in 1997 as the
plants continue to further establish themselves in the scrap tire disposal
market as well as benefit from a strong TDF market in that region.
Operating expenses for the first quarter of 1998 were $4,893,545 or 80% of
revenues, up from $4,625,077 or 79% of revenues for the first quarter of
1997. The increase in operating costs as a percentage of revenues is
primarily due to the decreased tire flow and weak TDF market in the Northwest
region. The increase is also attributable to elimination of the state
subsidized tire disposal program in Texas which had a negative impact on the
Houston facility. The Atlanta plant showed improvement in operating costs as
a percentage of revenues for the first quarter of 1998 compared to 1997 as
the plant was in full production in 1998 whereas the plant was in
reconstruction stages
10
in 1997 as discussed above. The Philadelphia plant showed improvement as the
result of cleanup projects with stronger profit margins.
General and administrative expenses of $1,832,358 for the first quarter of
1998 were higher when compared to $1,304,942 for the same period in 1997. As
a percentage of revenues, general and administrative expenses were higher at
30% for the three month periods ending March 31, 1998 compared to 22% for the
same period in 1996. The increase is primarily due to increases in corporate
management, staff, personnel and worker's compensation and medical insurance
costs, and other administrative costs resulting from higher levels of
operating activities.
Depreciation and amortization expense increased 7% to $718,666 from $671,583
in the first quarter of 1998 compared to the same period in 1997. The
increase is primarily the result of the rebuild of the Atlanta plant which
was completed in May 1997 after the November 1996 fire at that facility.
Other income decreased in the first quarter of 1998 compared to the same
period in 1997 due to the sale of a metering unit to an electric power
utility in the first quarter of 1997. No such sales occurred in 1998, with
other income in 1998 representing the amortization of deferred grant revenue
only.
Interest expense decreased 8% to $232,678 in the first quarter of 1998
compared to $232,678 in the first quarter of 1997 primarily due to debt
service on bonds payable and other debt.
FINANCIAL CONDITION AS OF MARCH 31, 1998
The Company's working capital balance at March 31, 1998 was a deficit amount
of $8,808,602. This number reflects the reclassification of virtually all
WRI's long term debt as current liabilities, due to cross default provisions
which were triggered by the February 1 payment default in the Illinois bonds.
Additionally, the Company's working capital has been adversely affected by
the operating losses that the Company has sustained during the fourth quarter
of 1997 and the first quarter of 1998. While the Company anticipates that a
substantial portion of its current liabilities will be reclassified to a long
term debt category, when the Company cures the defaults in the Illinois
bonds, the Company will still have a large working capital deficit, which
needs to be eliminated in order for the Company to operate.
Management continues to remain sensitive to the risk that the Company will
not have the financial strength to sustain itself if operating losses
continue. The Company is actively seeking additional sources of debt and
equity financing, the funding of which would go primarily to resolve the
working capital deficit.
11
PART II
OTHER INFORMATION
Form 10-Q
Part II
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
None
(b) REPORTS ON FORM 8-K
None
Item 27. FINANCIAL DATA SCHEDULE
12
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 20, 1998 /s/ DAVID G. GREENSTEIN
--------------------------------------
By: David G. Greenstein
President and Chief Executive Officer
(Principal Executive Officer)
/s/ DONALD R. PHILLIPS
--------------------------------------
By: Donald R. Phillips
Vice President (Principal Accounting
Officer)
13