<PAGE>
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, 1999
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 [ ] No
[ X ]
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 14, 1999.
<PAGE>
PART I: FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
WASTE RECOVERY, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ - $ 69,594
Accounts receivable, less allowance for doubtful accounts
of $186,507 and $135,435, respectively 1,414,545 1,889,440
Other receivables - 6,066
Inventories 133,662 16,398
Other current assets 652,508 801,592
Restricted cash and cash equivalents - 43,640
----------- ------------
Total current assets 2,200,715 2,826,730
----------- ------------
Property, plant and equipment 16,441,631 19,190,055
Less accumulated depreciation (9,243,893) (11,113,546)
----------- ------------
Net property, plant and equipment 7,197,738 8,076,509
----------- ------------
Construction in progress 4,433,453 4,101,556
Restricted cash and cash equivalents 1,012,287 1,454,358
Bond and debt issuance costs, less accumulated amortization of
$37,081 and $197,580, respectively 446,356 576,250
Goodwill, less accumulated amortization of $330,110 and
$304,542, respectively 1,166,461 1,192,029
Other assets 309,555 319,516
----------- ------------
$16,766,565 $ 18,546,948
----------- ------------
----------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
WASTE RECOVERY, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
Current Liabilities:
Current installments of bonds payable $ 280,000 $ 260,000
Notes payable 938,153 1,270,800
Current installments of long-term debt 1,021,338 878,901
Current installments of capital lease obligations 15,265 24,938
Accounts payable 2,931,501 2,549,389
Other accrued liabilities 2,832,566 2,494,383
Deferred grant revenue 162,645 259,350
----------- -----------
Total current liabilities 8,181,468 7,737,761
----------- -----------
Bonds payable, noncurrent 6,135,000 6,415,000
Long-term debt, excluding current installments 2,861,019 3,777,629
Note payable 175,552 174,578
Obligations under capital leases, excluding current
Installments 4,153 8,167
Deferred grant revenue, noncurrent 160,000 160,000
----------- -----------
Total liabilities 17,517,192 18,273,135
----------- -----------
Stockholders' Equity:
Cumulative preferred stock, $1.00 par value, 250,000 shares
authorized, 203,580 issued and outstanding in 1999 and 1998
(liquidating preference $16.18 per share, aggregating $3,294,676,
and $16.01 per share, aggregating $3,259,537, in 1999 and 1998,
respectively) 203,580 203,580
Preferred stock, $1.00 par value, authorized and unissued
9,750,000 shares in 1999 and 1998 - -
Common stock, no par value, authorized 30,000,000 shares,
17,494,323 shares issued and outstanding
in 1999 and 1998. 407,800 407,800
Additional paid-in capital 18,604,904 18,604,904
Accumulated deficit (19,773,031) (18,748,591)
----------- -----------
(556,747) 467,693
Treasury stock, at cost, 1,603,760 common shares (193,880) (193,880)
----------- -----------
Total stockholders' equity (750,627) 273,813
----------- -----------
Commitments and contingencies $16,766,565 $18,546,948
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
WASTE RECOVERY, INC.
Consolidated Statements Of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------------
1999 1998
---------- ------------
<S> <C> <C>
Revenues:
Tire-derived fuel sales $ 926,233 $ 1,035,927
Wire sales 71,495 327,762
Disposal fees, hauling and other revenue 2,707,425 4,747,445
----------- ------------
Total revenues 3,705,153 6,111,134
Operating expenses 2,844,739 4,893,545
General and administrative expenses 1,045,054 1,832,358
Depreciation and amortization 452,209 718,666
----------- ------------
Operating loss (636,849) (1,333,435)
----------- ------------
Other income (expense):
Interest income 8,815 24,692
Interest expense (256,872) (214,496)
Other income 97,262 96,705
Loss on sale of assets (89,505) (84,028)
----------- ------------
(240,300) (177,127)
----------- ------------
Net loss before extraordinary item (877,149) (1,510,562)
Extraordinary loss on early retirement of debt 147,291 -
----------- ------------
Net loss (1,024,440) (1,510,562)
Undeclared cumulative preferred stock dividends 35,139 35,139
----------- ------------
Net loss available to common shareholders $(1,059,579) $ (1,545,701)
----------- ------------
----------- ------------
Net loss before extraordinary item per common share $ (.06) $ (.09)
Extraordinary loss per common share $ (.01) $ -
----------- ------------
Net loss per common share $ (.07) $ (.09)
----------- ------------
----------- ------------
Weighted average number of common shares outstanding 15,890,563 17,390,563
----------- ------------
----------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
WASTE RECOVERY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------
1999 1998
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,024,440) $(1,510,562)
Adjustments to reconcile net loss to net cash provided (used) by
operating activities:
Depreciation and amortization 426,641 687,622
Loss on involuntary conversion of assets - 84,028
Amortization of goodwill 25,568 31,144
Loss on sale of property, plant, and equipment 89,505 -
Interest imputed on discounted note payable 974 974
Amortization of bond premium - (17,813)
Changes in assets and liabilities:
Accounts receivable 474,895 486,962
Note and other receivables 6,066 34,838
Inventories (117,264) 46,101
Other current assets 92,210 3,384
Other assets 8,225 (89,779)
Debt issuance costs 113,091 -
Accounts payable 382,112 (421,945)
Accrued liabilities 335,183 454,624
Deferred grant revenue (96,705) (96,705)
Deferred revenue - 66,524
Other - (25,114)
------------ -----------
Net cash provided (used) by operating activities 716,061 (265,717)
------------ -----------
Cash flows from investing activities:
Proceeds from the sale of property, plant, and equipment 750,000 -
Purchases of property, plant, and equipment (640,859) (192,464)
Cash placed in restricted accounts (430,375) (100,632)
Cash payments out of restricted accounts 916,086 1,097,575
------------ -----------
Net cash provided by investing activities 594,852 804,479
------------ -----------
Cash flows from financing activities:
Payment of bonds payable (260,000) (860,000)
Proceeds from issuance of notes payable 3,183,040 817,025
Payment of notes payable (3,515,687) (155,953)
Proceeds from issuance of long term debt 553,452 54,000
Repayment of long-term debt (1,327,625) (171,404)
Repayment of capital lease obligations (13,687) (22,731)
------------ -----------
Net cash used by financing activities (1,380,507) (339,063)
------------ -----------
Net increase (decrease) in cash and cash equivalents (69,594) 199,699
Cash and cash equivalents at beginning of period 69,594 -
------------ -----------
Cash and cash equivalents at end of period $ - $ 199,699
------------ -----------
------------ -----------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
WASTE RECOVERY, INC.
Notes to Consolidated Financial Statements
March 31, 1999
Note 1: ADJUSTMENTS
The financial information presented has been prepared from the books
and records without audit, and 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, 1999, 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: INVENTORIES
The components of inventories at March 31, 1999 and December 31,
1998 are as follows:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
Manufactured fuel inventory $ 133,662 $ 16,398
Manufactured wire inventory - -
Work-in-process - -
--------- --------
$ 133,662 $ 16,398
--------- --------
--------- --------
</TABLE>
Note 3: OTHER CURRENT ASSETS
Other current assets at March 31, 1999 and December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
Prepaid insurance $ 291,443 $460,917
Parts inventory 291,807 338,590
Other 69,258 2,085
--------- --------
$ 652,508 $801,592
--------- --------
--------- --------
</TABLE>
Note 4: LONG-TERM DEBT
On January 29, 1999 the Company made a cash payment of $1,193,153 to
the bondholder of industrial revenue bonds (the Atlanta Bonds) which were
issued in 1988 for the construction of the Company's Atlanta tire processing
facility. The Atlanta Bonds carried an interest rate of 10.5%, had a
scheduled maturity date of December 1, 2007, and were secured by restricted
cash, a first lien on the Atlanta facility, and a second lien on the
Company's Portland facility. The Atlanta Bonds were extinguished with
$747,042 of proceeds from the sale of the Portland plant and $446,111 of
restricted cash which secured the Atlanta Bonds. On the date of
extinguishment, the Atlanta Bonds had an outstanding balance of $1,140,000
and accrued interest of $18,953. The Company recorded an extraordinary loss
of $147,291 on the early extinguishment of this debt. The extraordinary loss
is primarily due to the write-off of related unamortized bond issuance costs
and a 3% prepayment penalty paid to the bondholder.
Note 5: PREFERRED STOCK DIVIDENDS
Undeclared cumulative preferred stock dividends were $1,258,876 and
$1,116,370 at March 31, 1999 and 1998, respectively. Net loss is adjusted by
the effect of undeclared dividends on preferred stock of $35,139 and $35,139
for the three months ended March 31, 1999 and 1998, respectively. The effect
was to increase net loss per common share by $.002 for the three months ended
March 31, 1999 and 1998, respectively. Basic and diluted earnings per share
are the same in 1999 and 1998.
6
<PAGE>
Note 6: SALE OF PORTLAND FACILITY
On January 29, 1999 the Company sold its Portland facility for
$750,000 in cash. The Company recorded a loss of $89,505 in connection with
the sale. The proceeds were used to extinguish long-term debt relating to the
Atlanta plant.
Note 7: STATEMENTS OF CASHFLOWS
The Company paid $366,527 and $304,787 for interest for the three
months ended March 31, 1999 and 1998, respectively. No income taxes were paid
during the three months ended March 31, 1999 and 1998.
Note 8: 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]
7
<PAGE>
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, 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 various end products, which include: a supplemental fuel product,
tire-derived fuel ("TDF"), bead wire removed from the tires, which is sold as
scrap steel, and a processed rubber product for civil engineering purposes.
The Company generates revenues from scrap tire disposal fees, from hauling of
scrap tires, and from the sale of used tires collected from its tire flow and
the products described above.
On January 29, 1999 the Company sold it's Portland, Oregon facility for
$750,000 in cash, the proceeds from which were used to retire long-term
indebtedness. The plant was sold because of its marginal profitability and to
facilitate management's plans to restructure the Company's debt and generate
additional cash flow. The Company reported a loss of $89,505 in the first
quarter of 1999 in connection with the sale of this facility.
On November 10, 1998 the Company entered into a loan agreement with a third
party lender that provided for a $250,000 term loan and a line of credit in
the maximum amount of $2,500,000, which was secured by some of the Company's
accounts receivable, and a portion of the Company's property, plant and
equipment. These credit facilities were expanded in the first quarter of
1999, increasing the term portion to $600,000, and expanding the revolving
credit to include the operations of the Company's Illinois facilities. Both
the original loan and the subsequent increase were obtained to provide
additional working capital and repay term debt.
To date, the effects of inflation on the Company's operations have been
negligible.
GENERAL COMMENTS
The Company suffered a net loss of $1,024,440 on revenues of $3,705,153 in
the first quarter of 1999 compared to a net loss of $1,510,562 on revenues of
$6,111,134 during the same period in 1998. The first quarter 1999 net loss
includes an extraordinary loss of $147,291 on the early extinguishment of
debt. Revenue declined as a result of the sale of the U.S. Tire and Portland
facilities and because the first quarter of 1998 included operations of the
Company's Dupo and Marseilles, Illinois facilities, both of which were only
partially operational in the comparable period of 1999.
On January 1, 1999, the Dupo facility, which was substantially destroyed by
fire in June of 1998, resumed operations in the first quarter of 1999. By the
end of the quarter, tire flow, TDF production and TDF sales had regained
levels reached immediately prior to the fire.
8
<PAGE>
As of February 1, 1999, the Marseilles plant resumed operation of its TDF
processing system. Tire shreds stored at the site prior to the March 21, 1998
fire are being converted into TDF and being sold. The Company expects the
shredding system to be functional on or before May 15, 1999.
During the first quarter of 1999, revenue and profitability increased at the
Houston facility verses the comparable period in 1998. These events took
place despite mechanical problems which had the effect of reducing the
facility's production during the period. The increased operating levels are
attributable to sales of used tires and stronger TDF markets.
During the first quarter of 1999, operations at the Company's Philadelphia
facility continue to be hampered by equipment problems. In December 1998 a
wire recycling system, funded primarily with grant money from the state of
Pennsylvania, was put into operation. At the end of the quarter preparations
were underway to install a new shredding system. The combination of these two
mechanical changes will allow for a more efficient operating environment
starting in the second quarter of 1999. TDF sales in the period were
significantly higher than the prior year, which is attributable to one new
customer which was brought on line in June of 1998.
The Atlanta facility operated at levels in the first quarter of 1999
similar to those of the same period in 1998.
As discussed above, on January 29, 1999 the Portland facility was sold for
cash.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED
WITH THREE MONTHS ENDED MARCH 31, 1998
Total revenues of $3,705,153 for the first quarter of 1999 were 39% lower
than the $6,111,134 generated for the same period in 1998. This decrease is
attributable to the fact that: i) sales from U.S. Tire were included in the
1998 period but not in the current period; ii) neither of the Illinois
facilities operated for the full three months of the quarter in 1999 because
they were being brought on-stream after the fires; and iii) the Portland
facility was owned for one month in 1999 compared with three months in the
comparable period in 1998. Notwithstanding these events, TDF sales were up
slightly for the first quarter of 1999 compared to 1998. This is attributable
to significant increase in TDF sales at the Houston and Philadelphia
facilities Wire sales declined significantly on a consolidated basis as well
as a plant-by-plant basis, reflecting weak demand for scrap steel. Disposal,
hauling and other revenue was down 43% in the first quarter of 1999 compared
to the same period of 1998 due to: i) sales from U.S. Tire were included in
the 1998 period but not in the current period; ii) neither of the Illinois
facilities operated for the full three months of the quarter in 1999 because
they were being brought on-stream after the fires; and iii) the Portland
facility was owned for one month in 1999 compared with three months in the
comparable period in 1998. These factors were partially offset by increased
revenue at the Houston facility.
Operating expenses for the first quarter of 1999 were 2,844,739 or 77% of
revenue, down from 4,893,545 or 80% of revenue for the first quarter of 1998.
The decrease in the dollar amount reflects a lower level of operations
resulting from: i) sales from U.S. Tire were included in the 1998 period but
not in the current period; ii) neither of the Illinois facilities operated
for the full three months of the quarter in 1999 because they were being
brought on-stream after the fires; and iii) the Portland facility was owned
for one month in 1999 compared with three months in the comparable period in
1998. The decrease in operating costs as a percentage of revenues is
attributable to better operations at the Houston facility.
General and Administrative expenses of $1,045,054 for the first quarter of
1999 were significantly reduced from the $1,832,358 for the same period in
1998. This decrease is primarily attributable to: i) sales from U.S. Tire
were included in the 1998 period but not in the current period; ii) neither
of the Illinois facilities operated for the full three months of the quarter
in 1999 because they were being brought on-stream after the fires; and iii)
the Portland facility was owned for one month in 1999 compared with three
months in the comparable period in 1998. As a percentage of revenues, general
expenses were lower at 28% for the three months ending March 31, 1999
9
<PAGE>
compared to 30% for the same period in 1998. This decrease is primarily
attributable to reductions of outside services for legal services in 1999 vs.
1998.
Depreciation and amortization expense decreased 37% to $452,209 in the first
quarter of 1999 from $718,666 incurred in the same period in 1998. This
decrease is primarily due to i) depreciation expense for U.S. Tire was
included in the 1998 period but not in the current period; ii) neither of the
Illinois facilities were being depreciated for the whole 1999 period; and
iii) depreciation on the Portland facility was expensed for one month in 1999
compared with three months in the comparable period in 1998.
Interest expense increased 19% to $256,872 in the first quarter of 1999
compared to $214,496 in the comparable period in 1998. This increase is
primarily attributable to the new term financing and credit facility
previously discussed that was obtained by the Company in November 1998 and
February 1999. This new debt carries a higher interest cost which contributed
to the increase in interest expense in the first quarter of 1999 compared to
the same period in 1998.
FINANCIAL CONDITION AS OF MARCH 31, 1999
The Company's working capital balance at March 31, 1999 was a deficit of
$5,980,753. Current assets declined from $7,623,680 at March 31, 1998 to
$2,200,715 at March 31, 1999. This decline is attributable to i) the
exclusion of current assets owned by U.S. Tire; ii) decreased levels of
operating activity resulting from the two Illinois fires, and the sale of the
Portland facility. Current liabilities at March 31, 1998 decreased from
$16,432,282 to $8,181,468 at March 31, 1999. This decline is attributable to:
i) the exclusion of current liabilities by U.S. Tire, ii) decreased levels of
operating activity resulting from the two Illinois fires and the sale of the
Portland facility, and iii) the reclassification of accelerated maturities
from current liabilities to long-term liabilities as a result of: a) curing
of the defaults on the Illinois industrial revenue bonds, and b) repayment of
the Atlanta industrial revenue bonds.
While the Company believes that operating results are improving, such
improvement will be inadequate to fund its working capital and capital
expenditures for the remainder of the year. Accordingly, management believes
that term financing will be required.
[End of Page]
10
<PAGE>
PART II
OTHER INFORMATION
Form 10-Q
Part II
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
Item 27. Financial Data Schedule
[End of Page]
11
<PAGE>
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 15, 1999 /s/ THOMAS L. EARNSHAW
------------------------------------
By: Thomas L. Earnshaw
President
(Principal Executive Officer)
/s/ S. W. ARNETTE
------------------------------------
By: S. W. Arnette
Chief Financial Officer
(Principal Financial and
Accounting Officer)
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S MARCH 31, 1999 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 1,601,052
<ALLOWANCES> (186,507)
<INVENTORY> 133,662
<CURRENT-ASSETS> 652,508
<PP&E> 20,875,084
<DEPRECIATION> (9,243,893)
<TOTAL-ASSETS> 16,766,565
<CURRENT-LIABILITIES> 8,181,468
<BONDS> 6,415,000
0
203,580
<COMMON> 407,800
<OTHER-SE> (1,362,007)
<TOTAL-LIABILITY-AND-EQUITY> 16,766,565
<SALES> 3,705,153
<TOTAL-REVENUES> 3,705,153
<CGS> 2,844,739
<TOTAL-COSTS> 4,342,002
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 51,072
<INTEREST-EXPENSE> (256,872)
<INCOME-PRETAX> (877,149)
<INCOME-TAX> 0
<INCOME-CONTINUING> (877,149)
<DISCONTINUED> 0
<EXTRAORDINARY> (147,291)
<CHANGES> 0
<NET-INCOME> (1,024,440)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> (.07)
</TABLE>
