UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter ended APRIL 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-5276
PROLER INTERNATIONAL CORP.
(Exact name of registrant as specified in its charter)
Delaware 76-0494529
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
4265 San Felipe, Suite 900 77027
Houston, Texas (Zip Code)
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: [713] 627-3737
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 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 Registrant's classes of
stock, as of June 10, 1996:
COMMON 4,717,356
---------------- ------------------------------
(Title of Class) (Number of Shares Outstanding)
<PAGE>
PROLER INTERNATIONAL CORP. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
--------
Condensed Consolidated Balance Sheet at April 30, 1996 and
January 31, 1996..................................................... 1
Condensed Consolidated Statement of Operations for the three
months ended April 30, 1996 and 1995................................. 2
Condensed Consolidated Statement of Cash Flows for the three
months ended April 30, 1996 and 1995................................. 3
Notes to Condensed Consolidated Financial Statements................. 4
Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................ 9
PART II. OTHER INFORMATION.......................................... 15
SIGNATURE PAGE....................................................... 16
<PAGE>
PART I
PROLER INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS)
ASSETS APRIL 30, 1996 JANUARY 31, 1996
------ -------------- ----------------
Current assets:
Cash and cash equivalents ................ $ 959 $ 1,161
Accounts receivable, net ................. 2,274 2,118
Inventories .............................. 2,854 2,776
Maintenance parts ........................ 662 669
Prepaid expenses ......................... 398 510
-------- --------
Total current assets ............. 7,147 7,234
Investments in joint operations, at equity ... 47,641 39,359
Property, plant and equipment, net ........... 15,796 15,845
Other assets ................................. 4,350 4,334
-------- --------
Total assets .................. $ 74,934 $ 66,772
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Short-term bank borrowings ............... $ 20,000 $ --
Accounts payable, trade .................. 2,635 1,956
Accrued liabilities ...................... 1,620 1,776
-------- --------
Total current liabilities ........ 24,255 3,732
Long-term bank borrowings .................... -- 9,700
Other liabilities ............................ 3,846 3,876
Contingencies
Stockholders' equity:
Common stock ............................. 5,351 5,351
Capital in excess of par value ........... 192 192
Retained earnings ........................ 47,347 49,978
-------- --------
52,890 55,521
Less treasury stock, at cost ............. (6,057) (6,057)
-------- --------
Total stockholders' equity ....... 46,833 49,464
-------- --------
Total liabilities and
stockholders' equity ........... $ 74,934 $ 66,772
======== ========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
1
<PAGE>
PROLER INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED APRIL 30,
----------------------------
1996 1995
------- -------
Net sales ....................................... $ 3,609 $ 3,525
Cost of sales ................................... 3,764 3,343
------- -------
Gross profit (loss) .......................... (155) 182
Earnings (loss) from joint operations ........... (243) 1,753
Selling, general and administrative expense ..... (1,574) (1,210)
Research and development expense ................ (302) (253)
------- -------
Operating income (loss) ..................... (2,274) 472
------- -------
Other income (expense):
Interest income ............................. 89 48
Interest expense ............................ (264) (50)
Other, net .................................. (115) 66
------- -------
(290) 64
------- -------
Income (loss) before income taxes ............... (2,564) 536
Provision for income taxes ...................... 51 62
------- -------
Net income (loss) ............................... $(2,615) $ 474
======= =======
Weighted average shares outstanding ............. 4,717 4,714
======= =======
Net income (loss) per share ..................... $ (0.55) $ 0.10
======= =======
The accompanying notes are an integral part of the condensed
consolidated financial statements.
2
<PAGE>
PROLER INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED APRIL 30,
----------------------------
1996 1995
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ....................................... $ (2,615) $ 474
Adjustments to reconcile net income (loss) to cash:
Depreciation ......................................... 394 220
(Earnings) loss from joint operations ................ 243 (1,753)
Advances to joint operations, net of distributions and
income taxes ...................................... (8,525) (18)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable ......... (156) 29
Increase in inventories and maintenance parts ...... (71) (305)
Decrease in prepaid expenses ....................... 112 203
(Increase) decrease in other assets ................ (16) 47
Increase (decrease) in accounts payable, trade ..... 679 (237)
Increase (decrease) in accrued liabilities ......... (156) 6
Decrease in other liabilities ...................... (30) (44)
-------- -------
Net cash used in operating activities ................... (10,141) (1,378)
-------- -------
Cash flows from investing activities:
Purchases of property, plant and equipment .............. (345) (2,441)
-------- -------
Net cash used in investing activities ................... (345) (2,441)
-------- -------
Cash flows from financing activities:
Net bank borrowings ..................................... 10,300 2,000
Redemption of preferred stock purchase rights ........... (16) --
-------- -------
Net cash provided by financing activities ............... 10,284 2,000
-------- -------
Net decrease in cash and cash equivalents ................. (202) (1,819)
Cash and cash equivalents, beginning of period ............ 1,161 3,829
-------- -------
Cash and cash equivalents, end of period .................. $ 959 $ 2,010
======== =======
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
3
PROLER INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Proler International Corp. and subsidiaries (the "Company") have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting
only of normal, recurring adjustments considered necessary for a fair
presentation, have been included. For further information, refer to the
consolidated financial statements and footnotes thereto for the year ended
January 31, 1996, included in the Company's 1996 Annual Report on Form 10-K
filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
The results for the three months ended April 30, 1996 are not necessarily
indicative of the results of operations for the entire year.
NOTE 2: INVENTORIES
The Company's inventories are stated at the lower of cost or market using
the first-in, first-out (FIFO) method. As of April 30, 1996 and January 31, 1996
inventories were comprised of the following:
APRIL 30, 1996 JANUARY 31, 1996
-------------- ----------------
(In Thousands)
Processed scrap ..................... $ 955 $ 742
Unprocessed scrap and other ......... 1,899 2,034
------ ------
$2,854 $2,776
====== ======
NOTE 3: COMBINED JOINT OPERATIONS
A condensed summary of the financial position of the combined joint
operations (100% basis) is as follows:
APRIL 30, 1996 JANUARY 31, 1996
-------------- ----------------
(In Thousands)
Current assets, primarily inventory .......... $ 61,339 $ 82,121
Property and other assets, net ............... 33,838 33,265
-------- --------
$ 95,177 $115,386
======== ========
Current liabilities .......................... $ 9,698 $ 12,480
Other liabilities ............................ 3,551 2,739
Stockholders' and partners' equity ........... 81,928 100,167
-------- --------
$ 95,177 $115,386
======== ========
4
PROLER INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Two of the 50%-owned joint operations account for inventories using the
last-in, first-out (LIFO) method while the other joint operations follow FIFO.
Such LIFO inventories are carried at $40.6 million and $42.7 million at April
30, 1996 and January 31, 1996, respectively, and the excess of replacement cost
over the LIFO value at both of those dates was approximately $24.3 million. The
determination of inventory under the LIFO method can be made only at the end of
the year when year-end quantities and costs are known. As of April 30, 1996,
approximately $0.9 million of LIFO income, net to the Company's interest,
generated by these two joint operations has been deferred since management
cannot currently estimate their year-end inventory quantities and costs with
certainty.
The Company's investment in the joint operations and its percentage interest
in their assets and liabilities as of April 30, 1996 and January 31, 1996 are
set forth below:
APRIL 30, 1996 JANUARY 31, 1996
-------------- ----------------
(In Thousands)
Current assets, primarily inventory .......... $ 27,987 $ 37,762
Property and other assets, net ............... 15,053 14,825
Liabilities .................................. (6,100) (7,127)
Adjustment to conform reporting periods ...... 10,701 (6,101)
-------- --------
Net investment ............................... $ 47,641 $ 39,359
======== ========
A summary of the results of operations of the combined joint operations is
as follows (in thousands):
Combined 100% Basis:
THREE MONTHS ENDED APRIL 30,
----------------------------
1996 1995
-------- -------
Net sales .............................. $ 87,562 $78,628
======== =======
Gross profit ........................... $ 938 $ 6,066
======== =======
Earnings (loss) ........................ $ (959) $ 4,145
======== =======
Company Percentage Interest:
THREE MONTHS ENDED APRIL 30,
----------------------------
1996 1995
-------- -------
Net sales .............................. $ 40,860 $33,113
======== =======
Gross profit ........................... $ 629 $ 2,770
======== =======
Earnings (loss) ........................ $ (243) $ 1,753
======== =======
5
PROLER INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 4: INCOME TAXES
The provision for income taxes for the three months ended April 30, 1996 is
for the Company's share of income taxes attributable to its corporate joint
operations. For the three months ended April 30, 1995, the provision for federal
income taxes otherwise payable by the Company was eliminated by the utilization
of net operating loss carryforwards.
NOTE 5: BANK CREDIT FACILITIES
In April, 1996, the Company amended its credit facilities to provide for a
$23 million revolving line of credit, an additional $5 million revolving line of
credit and a $6.5 million letter of credit facility. The agreements are
collateralized by substantially all of the Company's assets, including its
rights to cash distributions from certain joint operations. As of April 30,
1996, $20.0 million in borrowings were outstanding on the $23 million revolving
line of credit and $5.7 million of letters of credit were outstanding.
As amended in June, 1996, the combined commitment levels of the revolving
lines of credit reduce from $28.0 million to the following: $17.5 million on
August 31, 1996; $15.0 million on September 30, 1996; $12.5 million on December
31, 1996; and $10.0 million on January 31, 1997. The $23 million line of credit
terminates on February 28, 1997, the $5 million line of credit terminates on
August 31, 1996 and the $6.5 million letter of credit facility terminates on
June 30, 1997. Amounts available under the lines of credit are computed in
accordance with a borrowing base formula and are generally limited by values
assigned to accounts receivable and inventory. A commitment fee of 1/2 percent
per annum is charged on the unused portion of the revolving lines of credit.
Borrowings under the revolving lines of credit bear interest at either the
bank's prime rate plus one percent or a Eurodollar-based rate, at the Company's
option.
Under the terms of the credit agreements, the Company must maintain, among
other things, a minimum net worth, specified ratios of current assets to current
liabilities and specified levels of earnings before interest, taxes,
depreciation and amortization as computed in accordance with the agreements. In
addition, the Company is limited as to incurring additional indebtedness,
limited to incurring capital expenditures in excess of certain amounts, and
prohibited from paying cash dividends.
The joint operations have recently experienced lower prices and demand from
foreign steel mills and higher levels of inventory purchases, resulting in the
accumulation of excess inventories and increased financing requirements by the
Company. As of June 12, 1996, outstanding bank borrowings totalled $26.3
million, down from a high on June 10, 1996 of $28 million, the current combined
commitment level of the facilities. The Company expects that its outstanding
borrowings will continue to fluctuate as current joint venture export sales
orders are completed and new sales are made and collected. Management believes
that the amounts available under its credit facilities, together with
distributions from joint
6
PROLER INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
operations, should be sufficient to meet its current working capital and
short-term inventory financing requirements, provided that inventories at the
joint ventures are reduced by additional sales and/or reduced levels of
inventory purchases. However, those requirements could increase if inventory
accumulations at the joint ventures continue.
NOTE 6: CONTINGENCIES
Certain materials resulting from the Company's operations must be handled
consistent with federal and state environmental laws and regulations. Compliance
with such laws and regulations were an area of concern to the Company as
questions were being raised as to whether automobile shredder residue, ("ASR" or
"fluff") contains excessive concentrations of certain heavy metals,
polychlorinated biphenyls ("PCBs") and other contaminants. A 1988 United States
Environmental Protection Agency ("EPA") study released in 1990 concerning
potential contamination in ASR indicated that the potential risk depends on the
constituent make up of the fluff and the management practices at the sites where
the fluff is generated. Pending further study, the EPA recognized that shredding
operations that are well managed and conducted in an environmentally sound
manner provide valuable environmental benefits. The Company has successfully
implemented source control programs to identify and to reduce the sources of
lead and certain other heavy metals in ASR. To date, tests of ASR generated by
the Company and its joint operations indicate that levels of PCBs, lead,
cadmium, and other contaminants are generally within acceptable levels under EPA
and state procedures. The Company continues to evaluate additional methods of
further reducing contaminants in ASR. As with any business that produces
significant amounts of industrial wastes, the Company could face substantial
additional costs if past or present disposal practices would no longer be deemed
acceptable by Federal or state regulatory agencies, although it does not
currently expect this result. The Company could also be required to clean-up
sites now or formerly used in its operations.
As reported earlier, the EPA contacted MRI Corporation, an indirect
wholly-owned subsidiary of the Company, in August 1989 regarding testing for
possible contamination at a site in Tampa, Florida previously operated by MRI.
The EPA took split soil and groundwater samples from the site for analysis. The
Company learned that in late 1990, an EPA consultant issued a report
recommending that further consideration be given to possibly ranking this site
using the EPA's hazardous ranking package. Based on that recommendation, the EPA
took additional samples at the site in 1992. The EPA visited the site in April,
1996 to observe site conditions. In June, 1996 MRI received a General Notice
Letter and Request for Information from the EPA advising MRI that it may be a
responsible party with respect to any required clean-up at the site and
requesting certain information about the site. MRI is preparing its response to
the request and has had discussions with the EPA regarding this matter. MRI had
previously conducted extensive clean-up operations at the Tampa site when it was
closed in 1988. The financial implications of any agency action are uncertain at
this time and the Company is continuing to evaluate whether any further
corrective action is necessary or appropriate.
Hugo Neu-Proler Company ("HNP"), a 50% owned joint operation of the Company,
and the Port of Los Angeles (the "Port") are in the final stages of negotiating
a renewal of HNP's lease, the original term of which expired on August 30, 1994.
In December, 1992, HNP signed a Memorandum of Understanding
7
PROLER INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
with the Port related to the lease renewal and in fiscal 1994 and 1995 provided
letters of credit totaling $9.78 million ($4.89 million each from the Company
and HNP's other owner) to secure HNP's remediation obligations under the lease.
The Port is developing an Environmental Impact Report in connection with the
lease renewal. Under the current lease, HNP would be responsible for remediating
certain environmental conditions on the property caused by HNP, the extent and
cost of which are uncertain. Currently, HNP estimates that it will incur capital
expenditures of a minimum of $4.0 million to $5.0 million in connection with
environmental control facilities at the Terminal Island location over the next
three to four years. HNP has accrued approximately $0.9 million to cover the
costs of anticipated remediation at this site.
On April 17, 1996, a Los Angeles Grand Jury subpoena was issued by the
Antitrust Division of the United States Department of Justice ("DOJ") requiring
the production of certain documents and information principally concerning the
purchase of scrap metal by HNP. HNP intends to fully cooperate with the DOJ, and
toward that end, HNP and its joint venture partners are engaged in the process
of assembling relevant information. At this time HNP is not aware of any of the
specifics underlying this investigation.
The Company is also subject to certain other litigation and claims arising
in the ordinary course of business. In the opinion of management, the
disposition of these claims and lawsuits will not have a material adverse effect
on the Company's financial position or results of operations.
NOTE 7: PER SHARE INFORMATION
Per share calculations are based on the average number of common shares
outstanding during the period. The per share calculations do not include the
common equivalent shares attributable to the assumed exercise of outstanding
stock options since the effect was not significant for the periods presented.
8
PROLER INTERNATIONAL CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
The statements contained in this report, in addition to historical
information, are forward looking statements based on the Company's current
expectations, and actual results may vary materially. The Company's business and
financial results are subject to various risks and uncertainties, including the
cyclical nature of the scrap processing business, the fact that the Company
exercises limited control over its joint operations, competitive factors such as
the availability and cost of raw scrap for inventory, fluctuations in sales
prices and demand for the products of the Company and the joint operations, the
ability to reduce excess inventories at the joint operations, the Company's
ability to correct operational and start-up problems at its Coolidge facility as
projected, the uncertainty of any future transactions resulting from the
Company's retention of investment bankers and the other risks and uncertainties
discussed herein and in the Company's Annual Report on Form 10-K. These forward
looking statements are provided as a framework for the Company's discussion of
its business and management's analysis of the Company's financial condition and
results of operations. The Company does not intend to provide updated
information other than in the context of its Quarterly Reports on Form 10-Q.
GENERAL
The Company is primarily engaged, through its subsidiaries and its joint
operations, in buying, processing, recycling and selling ferrous and other scrap
metals. While the Company sells products from its consolidated operations
primarily to domestic markets, the joint operations primarily export scrap to
foreign markets. The Company's and its joint operations' current business is
characterized by cyclical fluctuations in profitability depending upon the
availability and price of raw scrap and the demand and prices for processed
scrap by the domestic and foreign iron and steel industries and the non-ferrous
metals industries.
The Company's unincorporated joint operations are structured so that the
participants advance and withdraw funds equally, and policy decisions require
the unanimous consent of the participants. The Company makes advances to the
joint operations on a regular basis, primarily for the purchase of inventory and
for operating costs. The Company receives periodic distributions from its joint
operations, primarily from the sales proceeds of shipments. During the quarter
ended April 30, 1996, the Company's advances to joint operations exceeded
distributions by $8.6 million.
During the past four years the Company has sold its domestic scrap
operations, certain joint venture operations, real estate holdings and other
non-operating assets as part of a business plan intended to enable the Company
to complete a transition from its current participation in the highly cyclical
scrap business, primarily through its joint operations, to a recycling company
engaged in environmental services, energy supply and metals recovery with
majority control of its significant assets. With the divestitures of the
domestic scrap operations, the Company's principal scrap processing business is
conducted through its joint operations, with the Company's remaining revenues
derived from the three plants owned by Proler Recycling, Inc. ("Proler
Recycling"), a wholly-owned indirect subsidiary of the Company.
9
PROLER INTERNATIONAL CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
As reported earlier, the Company recently retained two investment firms to
assist in evaluating a broad range of strategic alternatives to deal with the
Company's short and long-term goals and capital needs. Such alternatives may
include sales, public or private offerings of debt or equity securities,
mergers, spin-offs, joint ventures and acquisitions. These actions may involve
one, two or all of the Company's businesses.
LIQUIDITY, FINANCING AND CAPITAL RESOURCES
The Company currently meets its working capital requirements from
distributions from the joint operations and borrowings under the credit facility
described below. Based on the terms of the Company's credit agreements, the
$20.0 million of bank debt outstanding as of April 30, 1996 is classified as a
current liability in the Company's Consolidated Financial Statements resulting
in negative working capital of the Company as of that date. As of April 30,
1996, the Company had negative working capital of $17.1 million, as compared to
$3.5 million of positive working capital reported as of January 31, 1996.
Between the same periods, the Company's share of combined working capital in the
joint ventures increased by $8.5 million, from $25.9 million to $34.4 million.
As noted above, the Company regularly makes advances to the joint operations
and receives periodic distributions, primarily from the sales proceeds of export
shipments. The joint operations also purchase inventory to maintain sources of
supply, even in periods of lower demand and lower sales prices. Given these
factors and the cyclical nature of the scrap markets, the Company's liquidity
can be adversely affected if lower sales, coupled with continued inventory
purchases, result in accumulation of excess inventories at the joint operations.
During the period from October, 1995 through December, 1995 and again in March,
1996 and continuing to date, the joint ventures have experienced lower prices
and demand from foreign steel mills and higher levels of inventory purchases,
resulting in the accumulation of excess inventories and increased financing
requirements. Currently, approximately 26% of these inventories are subject to
outstanding sales orders. The Company is financing its share of increased
inventory purchases primarily through increased borrowings under its bank credit
facilities. The level of debt is reduced as the proceeds of export sales are
received. Due to the volume of sales activity and inventory levels, the
Company's bank debt has fluctuated in recent months.
As of April 30, 1996, borrowings of $20.0 million were outstanding under the
revolving line of credit and $5.7 million of letters of credit were outstanding
under the letter of credit facility, including $4.89 million issued in
connection with a lease at a joint operation's Los Angeles facility. In
February, 1996, the Company paid the revolving line of credit down to $0.7
million from the $9.7 million outstanding at January 31, 1996, primarily from
distributions of sales proceeds of export shipments. Beginning in March, 1996
and continuing to date, the Company has made significant advances to the joint
operations, primarily for inventory purchases, and has funded operating losses
from the consolidated operations. As of June 12, 1996, outstanding borrowings on
the revolving line of credit totalled $26.3 million, down from a high on June
10, 1996 of $28 million, the current combined commitment level of the
facilities. The Company
10
PROLER INTERNATIONAL CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
expects that its outstanding borrowings will continue to fluctuate as current
joint venture export sales orders are completed and new sales are made and
collected.
As more fully described in Note 5 to the Consolidated Financial Statements,
the Company's credit agreements with the bank, as amended, provide for a $23
million revolving line of credit, an additional $5 million revolving line of
credit and a $6.5 million letter of credit facility. The $23 million line of
credit terminates on February 28, 1997, the $5 million line of credit terminates
on August 31, 1996 and the $6.5 million letter of credit facility terminates on
June 30, 1997. The agreements are collateralized by substantially all of the
Company's assets, including its rights to distributions from certain joint
operations. The revolving lines of credit are subject to a borrowing base of
eligible receivables and inventory, and the combined commitment levels reduce by
certain amounts at specified dates from $28 million currently to $17.5 million
on August 31, 1996, $15.0 million on September 30, 1996, $12.5 million on
December 31, 1996 and $10.0 million on January 31, 1997. Management believes
that the amounts available under its credit facilities, together with
distributions from the joint operations, should be sufficient to meet its
current working capital and short-term inventory financing requirements,
provided that inventories at the joint operations are reduced by additional
sales and/or reduced levels of inventory purchases. However, those requirements
could increase if inventory accumulations at the joint ventures continue. The
Company's ability to borrow against assets of the joint operations may be
limited by the Company's inability to grant a direct security interest in those
assets to the bank and by certain limitations on the Company's ability to pledge
its interests in the joint operations.
As reported earlier, the Company continues to develop and test industrial
waste processing and recovery technologies. In fiscal 1997, Proler Environmental
Services, Inc. ("Proler Environmental"), a wholly-owned indirect subsidiary of
the Company, expects to incur approximately $3 million in continued research and
development, marketing and feasibility study activities. Proler Environmental
also expects to incur significant capital expenditures in the commercial
application of its gasification process; however, the amount and timing of such
expenditures are uncertain. Management believes that external financing sources,
coupled with internally generated funds, will be sufficient to fund such future
capital outlays. In addition, Proler Recycling has an agreement containing an
inventory purchase commitment totalling $1.8 million as of April 30, 1996.
The Company is engaged in ongoing proceedings and communications with
regulatory authorities concerning environmental matters, and ongoing litigation
regarding non-environmental matters. An adverse outcome in these legal
proceedings, or any significant additional expenditures that may be required in
order for the Company or its joint operations to operate in accordance with
environmental laws and regulations, or to clean up sites now or formerly used by
them, could affect the Company's financial position.
The Company's consolidated balance sheet included elsewhere herein presents
the Company's share of the joint operations using the equity method of
accounting in accordance with generally accepted accounting principles. The
following table presents a proforma condensed combined balance sheet of the
11
PROLER INTERNATIONAL CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Company assuming its proportionate share of the joint operations is combined
with the Company. Management believes this presentation is informative of the
Company's financial condition since the majority of the Company's underlying
investment in its joint operations consists of net current assets.
PROFORMA CONDENSED COMBINED BALANCE SHEET
AS OF APRIL 30, 1996
PROPORTIONATE
SHARE OF
JOINT COMBINED
COMPANY OPERATIONS COMPANY
------- ------------ --------
(in thousands)
Current assets ............................. $ 7,147 $38,688 $45,835
Investments in joint operations ............ 47,641 -- --
Property and other assets, net ............. 20,146 15,053 35,199
------- ------- -------
$74,934 $53,741 $81,034
======= ======= =======
Borrowings under revolving line of credit .. $20,000 $ -- $20,000
Other current liabilities .................. 4,255 4,324 8,579
Other liabilities .......................... 3,846 1,776 5,622
Stockholders' and partners' equity ......... 46,833 47,641 46,833
------- ------- -------
$74,934 $53,741 $81,034
======= ======= =======
RESULTS OF OPERATIONS
The Company's consolidated financial statements included elsewhere
herein present the Company's share of the joint operations using the equity
method of accounting in accordance with generally accepted accounting
principles. The following table presents a proforma condensed combined statement
of operations of the Company assuming its proportionate share of the Joint
Operations is combined with the Company. Management believes this presentation
is informative of the Company's results of operations given that a significant
portion of the Company's business is conducted through the joint operations.
12
PROLER INTERNATIONAL CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
PROFORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED APRIL 30, 1996
PROPORTIONATE
SHARE OF COMBINED
COMPANY JOINT OPERATIONS COMPANY
------- ---------------- --------
(in thousands)
Net sales ................................ $ 3,609 $ 40,860 $ 44,469
Cost of sales ............................ 3,764 40,231 43,995
------- -------- --------
Gross profit (loss) ................. (155) 629 474
Earnings (loss) from joint operations .... (243) --
Selling, general and administrative
expense ............................. (1,574) (921) (2,495)
Research and development expense ......... (302) (302)
------- --------
Operating loss ....................... (2,274) (2,323)
Other income (expense), net .............. (290) 49 (241)
------- --------
Income (loss) before income taxes ........ (2,564) (2,564)
Provision for income taxes ............... 51 51
------- -------- --------
Net income (loss) ........................ $(2,615) $ (243) $ (2,615)
======= ======== ========
Consolidated net sales and cost of sales increased 2% and 13%,
respectively, during the quarter ended April 30, 1996 as compared to the prior
year's first quarter. Precipitation iron sales volume declined approximately 10%
from the prior year, however, gross margins improved approximately 16% due to
lower unit production costs resulting from the consolidation of those activities
into one location. The decline in sales volumes was due to reduced demand from
the Company's principal customers. Tin sales increased approximately 35% from
the prior quarter due to similar increases in the volume of pounds sold. The
Company also had increased sales of specialty chemicals. The increase in cost of
sales is primarily due to the start-up operations of the Company's copper
recovery unit. Total losses attributable to this unit were approximately $0.6
million for the quarter ended April 30, 1996.
The results of the joint operations decreased from earnings of $1.8
million for the three months ended April 30, 1995 to a loss of $0.2 million for
the three months ended April 30, 1996. As reported earlier, the Company
completed the sales of its joint venture interests in HPI and HPNJ in October,
1995. The Company's share of HPI and HPNJ's loss was approximately $0.2 million
for the quarter ended April 30, 1995. Excluding the results from the sold joint
venture interests, the following table highlights the more significant operating
information for the joint operations (100% basis):
13
PROLER INTERNATIONAL CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Three months
ended April 30,
-------------------------
1996 1995
-------- --------
Sales volumes (gross tons) ................... 645,000 505,000
Net sales per ton ............................ $ 136 $ 143
Cost of sales per ton ........................ 134 130
-------- --------
Gross profit per ton ......................... $ 2 $ 13
======== ========
Gross profit decreased by approximately 85% in the quarter ended April
30, 1996, compared to the quarter ended April 30, 1995 due to lower sales
volumes and prices in the nonferrous operations and reduced margins in the
ferrous operations. While the overall volume of sales increased by approximately
28%, the nonferrous sales volume was 23% lower in the fiscal 1997 quarter. The
overall average sales price per ton decreased by approximately 5% due to an 8%
decline in the nonferrous average sales price while the average ferrous sales
price declined only slightly. The average cost of sales per ton increased from
the fiscal 1996 period due to higher beginning inventory carrying costs which
contributed to the reduced margins in the ferrous operations.
General and administrative expenses in the first quarter of fiscal 1997
increased approximately 30% compared to the prior year's quarter primarily due
to higher personnel and marketing expenses attributable to the Company's
gasification project and copper recovery unit, plus higher banking charges.
Research and development expense increased approximately 19% due to
additional research activities related to the Company's gasification project.
Interest income increased during the quarter ended April 30, 1996
compared to the prior year's quarter due to income from a note receivable from a
property sale consummated in July, 1995, partially offset by lower investable
cash balances.
Interest expense increased in the first quarter of fiscal 1997 compared
to the first quarter of fiscal 1996 due to increased levels of bank borrowings.
Other, net declined in part due to an increase in real estate costs
from $168,000 in the quarter ended April 30, 1995 to $216,000 in the quarter
ended April 30, 1996.
14
PART II
OTHER INFORMATION
ITEMS 1 THROUGH 5 ARE NOT APPLICABLE.
ITEM 6(A) EXHIBITS.
27 -- Financial Data Schedule
ITEM 6(B) REPORTS ON FORM 8-K.
The Company filed a report on Form 8-K dated February 28, 1996 regarding the
Company's adoption of a holding company structure.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PROLER INTERNATIONAL CORP.
(Registrant)
Date: June 13, 1996 /s/ STEVEN F. GILLILAND
Steven F. Gilliland
President and Chief Executive Officer
(Principal Executive Officer)
Date: June 13, 1996 /s/ MICHAEL F. LOY
Michael F. Loy
Vice President - Finance and Chief
Financial Officer (Principal
Financial and Accounting Officer)
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONDENSED CONSOLIDATED BALANCE SHEET OF PROLER INTERNATIONAL CORP. AND
SUBSIDIARIES AS OF APRIL 30, 1996 AND THE RELATED CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED APRIL 30, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-END> APR-30-1996
<CASH> 959
<SECURITIES> 0
<RECEIVABLES> 2,274
<ALLOWANCES> 0
<INVENTORY> 2,854
<CURRENT-ASSETS> 7,147
<PP&E> 32,900
<DEPRECIATION> 17,104
<TOTAL-ASSETS> 74,934
<CURRENT-LIABILITIES> 24,255
<BONDS> 0
0
0
<COMMON> 5,351
<OTHER-SE> 41,482
<TOTAL-LIABILITY-AND-EQUITY> 74,934
<SALES> 3,609
<TOTAL-REVENUES> 3,609
<CGS> 3,764
<TOTAL-COSTS> 3,764
<OTHER-EXPENSES> 302
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 264
<INCOME-PRETAX> (2,564)
<INCOME-TAX> 51
<INCOME-CONTINUING> (2,615)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,615)
<EPS-PRIMARY> (.55)
<EPS-DILUTED> (.55)
</TABLE>
