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, 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, November 13, 1998.
PART I: FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
WASTE RECOVERY, INC.
Consolidated Balance Sheets
Assets September 30, 1998 December 31, 1997
------ ------------------ -----------------
(unaudited)
Current Assets:
Cash and cash equivalents $ 63,473 $ -
Accounts receivable, less allowance for doubtful accounts
of $49,426 and $128,602, respectively 2,541,105 3,047,265
Other receivables (note 2) 1,034,726 82,180
Inventories (note 3) 21,173 186,563
Other current assets (note 4) 1,241,465 933,760
Restricted cash and cash equivalents (note 5) 143,867 2,145,362
------------ -----------
Total current assets 5,045,809 6,395,130
------------ -----------
Property, plant and equipment 22,319,220 26,451,740
Less accumulated depreciation (10,984,103) (10,429,868)
------------ -----------
Net property, plant and equipment 11,335,117 16,021,872
------------ -----------
Construction in progress 2,739,250 -
Restricted cash and cash equivalents (note 5) 1,820,605 171,898
Bond and debt issuance costs, less accumulated amortization of
$209,808 and $197,580, respectively 575,793 130,754
Goodwill, less accumulated amortization of $337,035 and
$238,025, respectively 1,734,878 1,833,888
Other assets 459,885 441,866
------------ -----------
$23,711,337 $24,995,408
============ ===========
See accompanying notes to consolidated financial statements.
2
WASTE RECOVERY, INC.
Consolidated Balance Sheets
Liabilities and Stockholders' Equity September 30, 1998 December 31, 1997
------------------------------------ ------------------ -----------------
(unaudited)
Current Liabilities:
Current installments of bonds payable (note 5) $ 260,000 $ 7,567,795
Notes payable (note 6) 1,630,920 713,861
Current installments of long-term debt (note 7) 906,118 2,373,858
Current installments of capital lease obligations 33,436 83,328
Accounts payable 3,255,508 3,168,128
Other accrued liabilities 3,188,399 1,652,425
Deferred grant revenue 316,055 386,820
------------- -------------
Total current liabilities 9,590,436 15,946,215
------------- -------------
Bonds payable, non-current (note 5) 6,415,000 -
Long-term debt, excluding current installments (note 7) 3,952,052 2,495,195
Notes payable (note 6) 173,605 170,684
Obligations under capital leases, excluding current installments 12,046 22,708
Deferred grant revenue, noncurrent - 219,350
------------- --------------
Total liabilities 20,143,139 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 $15.83 per share, aggregating $3,223,618, 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 shares issued and outstanding in 1998 and 1997 407,800 407,800
Additional paid-in capital 18,604,904 18,604,904
Accumulated deficit (15,574,206) (13,001,148)
----------- ------------
3,642,078 6,215,136
Treasury stock, at cost, 103,760 common shares (73,880) (73,880)
----------- ------------
Total stockholders' equity 3,568,198 6,141,256
------------ ------------
Commitments and contingencies $ 23,711,337 $ 24,995,408
============ ============
See accompanying notes to consolidated financial statements.
3
WASTE RECOVERY, INC.
Consolidated Statements Of Operations
(Unaudited)
Three Months Ended September 30,
----------------------------------
1998 1997
----------- --------------
Revenues:
Tire-derived fuel sales $ 832,666 $ 1,099,131
Wire sales 67,769 233,676
Disposal fees, hauling and other revenue 4,654,159 6,529,426
------------ -------------
Total revenues 5,554,594 7,862,233
Operating expenses 3,962,017 5,684,919
General and administrative expenses 1,416,560 1,398,509
Depreciation and amortization 572,731 742,330
----------- ------------
Operating loss (396,714) (36,475)
----------- ------------
Other income (expense):
Interest income 33,234 12,861
Interest expense (242,915) (231,751)
Other income 153,725 96,705
Gains on sales of property and equipment 74,152 -
Gain on involuntary conversion of assets (note 10) 524,227 -
------------ ------------
542,423 (122,185)
------------ ------------
Net income (loss) 145,709 (85,710)
Undeclared cumulative preferred stock dividends (note 9) 35,919 35,919
------------ -----------
Net income (loss) available to common shareholders $ 109,790 $ (121,629)
============= ============
Net income (loss) per share $ .01 $ (.01)
============= =============
Weighted average number of common shares outstanding 17,390,563 17,339,494
============= =============
See accompanying notes to consolidated financial statements.
4
WASTE RECOVERY, INC.
Consolidated Statements Of Operations
(Unaudited)
Nine Months Ended September 30,
-------------------------------
1998 1997
------ ------
Revenues:
Tire-derived fuel sales $ 2,928,961 $ 2,909,405
Wire sales 573,283 590,697
Disposal fees, hauling and other revenue 14,476,022 17,830,320
------------ -------------
Total revenues 17,978,266 21,330,422
Operating expenses 14,095,824 15,938,044
General and administrative expenses 4,978,854 4,085,827
Depreciation and amortization 1,900,419 2,137,496
------------- ------------
(2,996,831) (830,945)
------------- ------------
Other income (expense):
Interest income 83,454 80,897
Interest expense (677,085) (696,392)
Other income 356,674 420,746
Gains on sales of property and equipment 74,152 8,510
Gain on involuntary conversion of assets (note 10) 586,578 164,918
------------- ------------
423,773 ( 21,321)
------------- ------------
Net loss (2,573,058) (852,266)
Undeclared cumulative preferred stock dividends (note 9) 106,587 106,587
------------- ------------
Net loss available to common shareholders $ (2,679,645) $ (958,853)
============ ============
Net loss per share $ (.15) $ (0.06)
============== ============
Weighted average number of common
shares outstanding 17,390,563 17,316,335
============== =============
See accompanying notes to consolidated financial statements.
5
WASTE RECOVERY, INC.
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30,
---------------------------------
1998 1997
------ -------
Cash flows from operating activities:
Net loss $ (2,573,058) $ (852,266)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 1,801,409 2,035,699
Provision for losses on accounts receivable 202,000 72,000
Gains on sales of property, plant and equipment (74,152) (8,510)
Gain on involuntary conversion of assets (586,578) -
Amortization of goodwill 99,010 101,797
Interest imputed on discounted note payable 2,921 7,626
Amortization of bond premium (40,552) (58,695)
Loss on early retirement of debt 22,562 -
Changes in assets and liabilities:
Accounts receivable 304,160 (404,021)
Other receivables 3,727,363 869,630
Inventories 165,390 304,480
Other current assets (307,705) (363,117)
Other assets (49,924) (36,584)
Payment of bond issuance costs (457,268) -
Accounts payable 87,380 351,603
Accrued liabilities 816,152 (72,688)
Deferred grant revenue (290,115) (290,115)
Deferred revenue - 14,000
Other (4,810) (49,113)
------------ -----------
Net cash provided by operating activities 2,844,185 1,621,726
------------ -----------
Cash flows from investing activities:
Proceeds received on sales of property, plant and equipment 122,000 8,510
Purchases of property, plant and equipment (3,226,317) (1,663,339)
Cash placed in restricted accounts (4,256,952) (1,394,733)
Cash payments out of restricted accounts 4,609,740 1,068,822
------------ -----------
Net cash used by investing activities (2,751,529) (1,980,740)
------------ -----------
Cash flows from financing activities:
Payment of bonds payable (7,549,805) (805,000)
Proceeds from issuance of bonds payable 6,675,000 -
Proceeds from issuance of notes payable 1,721,703 679,130
Payment of notes payable (804,644) (1,024,102)
Proceeds from issuance of long term debt 416,941 241,785
Repayment of long-term debt (427,824) (542,185)
Repayment of capital lease obligations (60,554) (141,911)
Proceeds from issuance of common stock - 64,030
------------ -----------
Net cash used by financing activities (29,183) (1,528,253)
------------ -----------
Net increase (decrease) in cash and cash equivalents 63,473 (1,887,267)
Cash and cash equivalents at beginning of period - 1,892,427
------------ -----------
Cash and cash equivalents at end of period $ 63,473 $ 5,160
============ ===========
See accompanying notes to consolidated financial statements.
6
WASTE RECOVERY, INC.
Notes to Consolidated Financial Statements
September 30, 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 and nine
months ended September 30, 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 $957,750 due from an insurance company for
property damage insurance related to the Dupo fire (see note 10). The Company
received $500,000 of this amount as of November 12, 1998.
Note 3: INVENTORIES
The components of inventories at September 30, 1998 and December 31,
1997 are as follows:
September 30, 1998 December 31, 1997
------------------ -----------------
Manufactured fuel inventory $ - $ 103,245
Manufactured wire inventory - 8,478
Work-in-process 21,173 74,840
-------- ---------
$ 21,173 $ 186,563
======== =========
Note 4: OTHER CURRENT ASSETS
Other current assets at June 30, 1998 and December 31, 1997 are as follows:
June 30, 1998 December 31, 1997
------------- -----------------
Prepaid insurance $ 957,435 $ 386,684
Parts inventory 199,133 473,473
Other 84,897 73,603
----------- ---------
$ 1,241,465 $ 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. The principal and interest payments due February 1, 1998 on the
bonds were paid out of the debt service reserve trust included in restricted
cash. In May 1998, the Company replenished all of the debt service reserve
funds and one of the two sinking funds. On August 12, 1998 the default was
cured in connection with the issuance of $6,675,000 of new bonds which
refunded the original bonds. $850,000 of the newly issued bonds carry a rate
of 6.9% and mature on February 1, 2003. The remaining $5,825,000 of new
bonds bear interest at 5.9% and mature on February 1, 2014. For all of the
bonds, interest is payable semi-annually with principal due annually.
In connection with this early extinguishment of debt, the Company
recorded a loss of $22,262 in the third quarter of 1998.
7
Note 6: NOTES PAYABLE
On September 30, 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. These
notes were extinguished on October 13, 1998 in connection with the sale of
U.S. Tire.
Note 7: LONG-TERM DEBT
As of September 30, 1998, the Company was not in compliance with all
required covenants as a result of non-compliance with a current ratio
financial covenant. The Company received a waiver from the bondholder which
expires November 30, 1999.
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, April 15, 1998 and July 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. These notes were extinguished on October 13, 1998 in connection with
the sale of U.S. Tire.
Note 9: PREFERRED STOCK DIVIDENDS
Undeclared cumulative preferred stock dividends were $1,187,818 and
$1,045,312 at September 30, 1998 and 1997, respectively. Net loss is adjusted
by the effect of undeclared dividends on preferred stock of $106,587 and
$106,587 for the nine months ended September 30, 1998 and 1997, respectively,
and by $35,919 and $35,919 for the three months ended September 30, 1998 and
1997, respectively. The effect was to increase net loss per common share by
$.006 and by $.004 for the nine months ended September 30, 1998 and 1997,
respectively, and decrease net income per common share by $.002, and increase
net loss per common share by $.002 for the three months ended September 30,
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 conversion of property 558,553
Estimated clean-up costs (642,581)
-----------
Net loss on involuntary conversion $ (84,028)
===========
On June 28, 1998, the Company's Dupo, Illinois facility was damaged 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 June 30, 1998, as follows:
Estimated insurance proceeds to be received on property $ 1,557,750
Net book value of property destroyed (1,334,131)
-----------
Gain on involuntary conversion of property 223,619
Estimated clean-up costs (77,240)
-----------
Net gain on involuntary conversion $ 146,379
===========
In August 1998, the Company received additional insurance proceeds in
connection with the Marseilles fire totalling $524,227 resulting in a net
gain on involuntary conversion for both facilities of $586,578 for the nine
months ended September 30, 1998.
8
Note 11: STATEMENTS OF CASHFLOWS
The Company paid $677,811 and $832,588 for interest for the nine months
ended September 30, 1998 and 1997, respectively. No income taxes were paid
during the nine months ended September 30, 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]
9
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, and Chicago, Illinois.
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.
On October 13, 1998 the Company sold it's North Carolina facility (U.S.
Tire) in exchange for cash, assumption of debt related to the original
acquisition of U.S. Tire, and Waste Recovery, Inc. common stock. The plant
was sold to facilitate management's plans to restructure the Company's debt
and generate additional cash flow. The Company expects to report a loss on
the sale of U.S. Tire in the fourth quarter of 1998.
On November 10, 1998 the Company entered into a loan agreement with a
third party lender that provides for a $250,000 term loan and a line of
credit which are secured by substantially all of the Company's accounts
receivable and a portion of the Company's property, plant and equipment. The
loan was obtained to provide additional working capital and facilitate the
implementation of management's plan to restructure the Company.
To date, the effects of inflation on the Company's operations have been
negligible.
GENERAL COMMENTS
The Company earned net income of $145,709 on revenues of $5,554,594 in
the third quarter of 1998 compared to a net loss of $85,710 on revenues of
$7,862,233 during the same period in 1997. Net income in the third quarter of
1998 is primarily the result of additional insurance proceeds received in
connection with the March 21, 1998 fire at the Marseilles plant. Revenues
decreased $2,307,639 or 29% in the third quarter of 1998 compared to the same
period in 1997. TDF sales were down $266,465 or 24% primarily due to the
Marseilles and Dupo plants (the "Illinois plants"), which were both under
reconstruction in the third quarter of 1998. Wire sales were also down
approximately 70% due to the Illinois plants as well as an overall softening
in the scrap steel market in the Atlanta and Houston areas. Disposal,
hauling, and other revenue decreased $1,875,267 or 29% in the third quarter
of 1998 compared to the same period in 1997. Disposal and hauling fees were
down at both Illinois plants during the third quarter of 1998 due to the fact
that the facilities were non-operational during this period as noted
previously. Disposal and hauling fees were also down at the Portland plant
due to the Company's decision to convert the plant from a TDF production
facility to a "black rubber" (a feedstock rubber) facility. Operating
expenses for the period declined $1,660,006 or 29% primarily at the Dupo,
Marseilles, and Portland plants for the same reasons discussed above.
10
Because of continued weakness in demand for TDF in the Northwest, the
Company discontinued production of that product at its Portland facility as
of June 30. In July, the Company entered into a contract with a local
manufacturer of rubber products to supply that company with a black rubber
product similar to TDF, which is used as a crumb rubber feedstock. Production
of this product comes from the recycling of truck tires only, which do not
contain any of the white walls found in automobile tires. Accordingly, as of
June 30, the Company discontinued the acceptance of automobile tires, and as
a consequence, volumes in the third quarter of 1998 at the Portland facility
were significantly lower from prior periods. In connection with the
restructuring of the Portland plant, a portion of the plant's hauling
equipment and certain of its customer base was sold to a third party on July
8, 1998 in exchange for cash and the forgiveness of debt. Disposal and
hauling revenues decreased approximately 80% in the third quarter of 1998
compared to the same period in 1997, while operating expenses decreased by
84%. While sales volumes for the plant's rubber product were down, related
revenue was down only slightly reflecting sales of the higher-margin "black
rubber" product produced by this facility in the third quarter of 1998. It is
management's objective to reduce tire flow, and thereby reduce operating
costs, to a level that is adequate for the production of the higher-margin
black rubber product.
The Houston facility has continued to show stronger levels of tire flow
and disposal fees in the third quarter of 1998 compared to the first quarter
of 1998. The decrease in activity throughout the State of Texas which was
experienced in the first quarter of 1998 stemming from the termination of the
Texas tire subsidy program has leveled off, and the Company expects that the
free market environment which now dominates the market in Texas will result
in volume levels similar to the past. While tire flow for the third quarter
of 1998 was down approximately 10% compared to the same period in 1997,
revenues were down approximately 30% reflecting the downward pressure on
tipping fees as a result of the change to a free market environment.
TDF markets in Atlanta remain strong, but as a result of production
management turnover and down time for equipment overhaul and repairs, the
Company's Atlanta facility fell short of reaching management's production
targets in the third quarter, and consequently failed to meet profitability
goals.
Operations at the Company's Philadelphia facility continued strong
during the second quarter as the Company continued to supply its new TDF
customer which was brought on in March 1998. As a result of that customer's
demand for TDF, the Philadelphia facility is aggressively seeking out
additional sources of tires in its market so that its production levels can
increase to fulfill product demand.
On June 28, the Company's Dupo facility sustained significant damage as
a result of a fire. The loss is fully covered by insurance, both with respect
to the physical loss of the improvements and the costs of remediating the
property. Despite this event, and the Marseilles fire, the Company continued
to make progress on the issuance of two new industrial revenue bond issues,
the proceeds from which were received by the Company on August 12 and used to
retire existing industrial revenue bond issues. Both Illinois facilities are
presently being rebuilt, and the Company anticipates that they will be placed
back into operation before the end of the year. TDF markets for both
facilities remain strong. The Company is continuing its efforts in several
states contiguous to Illinois to bring tires to both facilities when they
return to production.
The Company's North Carolina facility (U.S. Tire) continued to perform
well throughout the third quarter of 1998. On October 13, 1998, the Company
sold the facility in exchange for cash, assumption of debt related to the
original acquisition of U.S. Tire, and Waste Recovery, Inc. stock. The
facility was sold to facilitate management's plans to restructure the
Company's debt and provide additional cash flow.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED
WITH THREE MONTHS ENDED SEPTEMBER 30, 1997
Total revenues of $5,554,594 for the third quarter of 1998 were 29% lower
than the $7,862,233 earned for the same period in 1997. TDF sales were down
24% primarily due to decreases at the Illinois plants. Both Illinois plants
were non-operational in the third quarter of 1998, which are currently under
reconstruction, due to the fires that damaged the Marseilles plant on March
21, 1998 and the Dupo plant on June 28, 1998. TDF sales were also
11
down at the Atlanta and Portland plants in the third quarter of 1998 compared
to the same period in 1997. The Atlanta plant suffered from management
changes and downtime resulting from the overhaul and repair of the plant's
tire-processing equipment. Portland experienced decreased TDF sales due to
the conversion of that plant to the production of a black rubber product
which is sold as a feedstock rubber. TDF sales at the Philadelphia facility
improved significantly in the third quarter of 1998 compared to the same
period in 1997 reflecting continued healthy sales of TDF product to a new
customer. Wire sales for the third quarter of 1998 were down 70% compared to
the same period in 1997 primarily due to a softening in the scrap steel
market. Decreased demand for scrap steel has resulted in a significant drop
off in wire sales in the third quarter of 1998. The non-operational status of
the Illinois plants during the rebuilding phase also contributed to the sharp
decline in wire sales. Disposal, hauling, and other revenue was down 29% in
the third quarter of 1998 compared to the same period in 1997 primarily due
to the Illinois facilities which are currently under reconstruction as
discussed above. Tire flow was also significantly lower at the Portland plant
as a result of the conversion of that facility's production from TDF to black
rubber. The black rubber production process utilizes only truck tires as a
raw material which do not contain any of the white walls found in automobile
tires. Accordingly, on June 30, 1998 the Company discontinued the acceptance
of automobile tires, which has resulted in a substantially reduced tire flow
compared to prior periods. Tire flow was down at the Baytown plant in the
third quarter of 1998 compared to the same period in 1997 primarily due to
the elimination of the state subsidy in Texas for the disposal of tires.
Tipping fees were also lower due to downward pressure resulting from the
elimination of the subsidy, thus resulting in a decrease in disposal revenue
for the Baytown plant in the third quarter of 1998 compared to the same
period in 1997.
Operating expenses for the third quarter of 1998 were $3,962,017 or 71% of
revenues, down from $5,684,919 or 72% of revenues for the third quarter of
1997. The decrease in operating expenses is due to lower costs at the
Illinois facilities as both plants were under reconstruction in the third
quarter of 1998. Operating costs were significantly lower at the Portland
plant as a result of the scale-down of that plant in conjunction with the
conversion from TDF production to black rubber. Operating costs at the
Philadelphia plant were up primarily due to an increased tire flow and
increased production of TDF.
General and administrative expenses of $1,416,560 for the third quarter of
1998 were slightly higher when compared to $1,398,509 for the same period in
1997. As a percentage of revenues, general and administrative expenses were
higher at 26% for the three months ending September 30, 1998 compared to 18%
for the same period in 1997. The increase is primarily due to increases in
corporate management, staff, worker's compensation insurance costs, general
insurance, medical insurance costs, professional fees, other administrative
costs, and bad debt reserves.
Depreciation and amortization expense decreased 23% to $572,731 from $742,330
in the third quarter of 1998 compared to the same period in 1997. The
decrease is primarily due to the destruction of the Marseilles facility on
March 21, 1998 and the Dupo facility on June 28, 1998.
Interest expense increased 5% to $242,915 in the third quarter of 1998
compared to $231,751 for the same period in 1997 primarily due to increased
levels of debt.
Other income is composed primarily of non-recurring consulting fee income
received in connection with the sale of a portion of the Portland facility's
hauling equipment and customer base. The Company agreed to provide certain
consulting services to the buyer of these assets.
Gain on involuntary conversion of assets represents additional proceeds
received from an insurance company in connection with the final settlement of
the Marseilles fire insurance claim.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED
WITH NINE MONTHS ENDED SEPTEMBER 30, 1997
Total revenues of $17,978,266 for the nine months ended September 30, 1998
were 16% lower than the $21,330,422 earned for the same period in 1997. TDF
sales were slightly higher at $2,928,961 for the third
12
quarter of 1998 compared to $2,909,405 for the same period in 1997. TDF sales
were sharply higher for the Atlanta and Philadelphia plants. Atlanta posted
higher TDF sales in 1998 compared to 1997 since sales were off in 1997 while
that facility was under reconstruction following the November 1996 fire. The
Philadelphia facility reflected significantly higher TDF sales with the
addition of a significant new customer in 1998. The increases in TDF sales at
these plants were offset by decreases at the Illinois plants due to the
reconstruction efforts underway in 1998. TDF sales were also down for the
Portland plant for the nine months ended September 30, 1998 compared to the
same period in 1997 due to the weak demand for TDF in the Northwest region,
which prompted management to restructure that facility in the third quarter
of 1998. Wire sales were down 3% for the nine months ended September 30, 1998
compared to the same period in 1997, primarily due to the current
non-operational status of the Illinois plants and an overall deterioration in
the scrap steel market. Disposal, hauling and other revenue was down 19% for
the nine months ended September 30, 1998 at $14,476,022 compared to
$17,830,320 for the same period in 1997. This decrease is primarily due to
the restructuring of the Portland plant, elimination of the scrap tire
disposal subsidy in the State of Texas, and the fires at the Marseilles and
Dupo plants, as discussed previously.
Operating expenses for the nine months ended September 30, 1998 were
$14,095,824 or 78% of total revenues compared to $15,938,044 or 75% of total
revenues for 1997. Operating costs as a percent of revenues increased
primarily as a result of a decreased tire flow at the Portland plant, lower
tipping fees associated with the elimination of the Texas scrap tire disposal
subsidy, and the fires at the Illinois facilities discussed previously.
General and administrative expenses of $4,978,854 for the nine months ended
September 30, 1998 were 22% higher when compared to $4,085,827 for the same
period in 1997. The increase is primarily due to increases in corporate
management, staff, insurance costs, other administrative costs, bad debt
reserves, and professional and consulting fees. Depreciation and amortization
expense decreased 11% to $1,900,419 for the nine months ended September 30,
1998 from $2,137,496 for the same period in 1997. The decrease is due to the
decrease in depreciable assets at the Illinois facilities as a result of the
fires at those plants in 1998.
Interest expense decreased 3% to $677,085 for the nine months ended September
30, 1998 compared to $696,392 for the same period in 1997 primarily due to
debt service on bonds payable and other debt.
Other income decreased 15% in the nine months ended September 30, 1998
compared to the same period in 1997 primarily due to a non-recurring sale of
a metering unit in 1997 to an electric power utility. Gains on sales of
property, plant and equipment is due to the sale of a portion of the Portland
plant's hauling equipment and customer base to a third party in the quarter
ended September 30, 1998. Gain on involuntary conversion of assets represents
the net gain recognized on the Illinois facilities resulting from fires at
those plants in 1998.
FINANCIAL CONDITION AS OF SEPTEMBER 30, 1998
The Company's working capital deficit declined to $4,544,627 at September 30,
1998 from $9,551,085 at December 31, 1997. In August 1998, the Illinois
bonds, which were in default and accordingly classified in current
liabilities, were refunded by new bonds. As a result of the retirement of the
original Illinois bonds, the Company was no longer in default, thereby
significantly reducing the level of current liabilities and improving the
working capital deficit. Additionally, although the Company was not in
compliance with a current ratio requirement relating to its Atlanta bonds,
the Company received a waiver until November 30, 1999 from the bondholder. In
the third quarter of 1998, the Company sold a portion of the Portland plant's
hauling equipment and customer base for cash and the forgiveness of debt. In
subsequent events during the fourth quarter of 1998, the Company sold its
U.S. Tire facility in Concord, North Carolina in exchange for cash, Waste
Recovery, Inc. common stock, and the assumption of debt that was incurred
when the U.S. Tire unit was purchased in December 1996. This transaction
provided working capital and relieved debt. Additionally, in November 1998,
the Company closed a loan with a third party lender that provides for a
$250,000 term loan and a line of credit which are secured by substantially
all of the Company's accounts receivable and a portion of the Company's
property, plant and equipment. The loan was obtained to provide additional
working capital and facilitate the implementation of management's plan to
restructure the Company. Notwithstanding these events, the Company's working
capital has been adversely affected by the operating losses that the Company
has sustained in the past twelve months.
13
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.
[End of Page]
14
PART II
OTHER INFORMATION
Form 10-Q
Part II
Item 5. OTHER INFORMATION
On September 17, 1998, Martin B. Bernstein, Chairman of the Board of
Directors and Jay I. Anderson resigned from the Board of Directors. On
October 13, 1998, David G. Greenstein resigned from his positon as President
and CEO of the Company and from the Board of Directors. At November 13, 1998,
the Company had not appointed successor directors to fill these vacancies.
On October 16, 1998, the Board of Directors elected Thomas L.
Earnshaw, Vice Chairman of the Board, and the Company's former President and
CEO until August 1997, as President to fill the vacancy created by the
resignation of David G. Greenstein on October 13, 1998.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
None
(b) REPORTS ON FORM 8-K
None
Item 27. FINANCIAL DATA SCHEDULE
15
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 16, 1998 /s/ THOMAS L. EARNSHAW
----------------------
By: Thomas L. Earnshaw
President
(Principal Executive Officer)
/s/ DONALD R. PHILLIPS
----------------------
By: Donald R. Phillips
Vice President (Principal Accounting
Officer)
16