U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO __________
Commission File No. 0-21946
HI-RISE RECYCLING SYSTEMS, INC.
-------------------------------
(Exact name of small business issuer as specified in its charter)
FLORIDA 65-0222933
- -------------------------------- -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16255 NW 54th Avenue
MIAMI, FLORIDA 33014
----------------
(Address of principal executive offices)
(305) 624-9222
--------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 _____
The number of shares outstanding of the Issuer's Common Stock, $.01 Par Value,
as of August 11, 1997 was 6,318,532.
Transitional small business disclosure format:
Yes___ No__X_
Page 1
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HI-RISE RECYCLING SYSTEMS, INC.
FORM 10-QSB
INDEX
PART 1. FINANCIAL INFORMATION PAGE
----
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1996 and 3
June 30, 1997
Consolidated Statements of Operations for the three and
six months ended June 30, 1996 and 1997 4
Consolidated Statement of Changes in Shareholders' Equity 5
for the six months ended June 30, 1997
Consolidated Statements of Cash Flows for the six months ended 6
June 30, 1996 and 1997
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and 9
Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
2
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<TABLE>
<CAPTION>
HI-RISE RECYCLING SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND JUNE 30, 1997
ASSETS (UNAUDITED)
DECEMBER 31, JUNE 30,
1996 1997
------------ ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,711,752 $ 1,132,615
Investments 597,973 -
Accounts receivable, net of allowance
for doubtful accounts of $14,299 and $120,559 in 1996
and 1997, respectively 765,024 2,443,554
Inventory 1,117,883 1,805,689
Other assets 329,738 470,947
----------- -----------
Total current assets 4,522,370 5,852,805
----------- -----------
Property and equipment, net 757,370 1,252,825
Note receivable from related party 33,223 33,223
Net investment in sales type leases 3,157,812 3,882,854
Deferred acquisition costs 62,281
Goodwill 1,448,237 2,539,657
----------- -----------
Total assets $ 9,981,293 $13,561,364
=========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 193,507 $ 698,329
Revolving line of credit 1,584,814 2,846,418
Current portion of long term debt 150,000 255,000
Unearned service agreement revenue 22,564 19,031
----------- -----------
Total current liabilities 1,950,885 3,818,778
----------- -----------
Long-term debt 150,000 720,000
----------- -----------
Total liabilities $ 2,100,885 $ 4,538,778
=========== ===========
Shareholders' equity:
Common stock, $.01 par value; 10,000,000 shares authorized;
6,231,119 and 6,318,532 shares issued and outstanding at
December 31, 1996 and June 30, 1997, respectively 62,311 63,185
Additional paid-in capital 13,776,320 15,088,925
Accumulated deficit (5,958,223) (6,129,524)
----------- -----------
Total shareholders' equity 7,880,408 9,022,586
----------- -----------
Total liabilities and shareholders' equity $ 9,981,293 $13,561,364
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
3
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<TABLE>
<CAPTION>
HI-RISE RECYCLING SYSTEMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1996 AND 1997
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 1996 JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1997
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Equipment sales $ 660,234 $1,202,451 $ 961,001 $ 2,248,522
Trash chute sales - 1,112,342 - 1,675,444
Shared savings contract revenue 99,195 122,616 195,528 236,842
Service/Parts revenue 157,411 350,402 287,674 501,043
------------------------------------------------------------------------------
Total revenues 916,840 2,787,811 1,444,203 4,661,851
==============================================================================
Cost and Expenses:
Cost of equipment sold, including
direct costs of service/parts 518,581 1,486,465 816,793 2,585,288
Selling and marketing 521,533 580,306 909,188 955,349
General and administrative 501,435 521,714 977,164 998,134
Product development 19,368 14,888 28,894 46,842
Shared savings contract expense 79,836 122,386 154,015 220,730
------------------------------------------------------------------------------
Total operating expenses 1,640,753 2,725,759 2,886,054 4,806,343
------------------------------------------------------------------------------
Operating income (loss) (723,913) 62,052 (1,441,851) (144,492)
------------------------------------------------------------------------------
Other income (expense):
Settlement expense (75,000) - (75,000) -
Interest income 109,569 112,044 231,056 203,132
Interest expense (31,501) (162,675) (80,008) (229,941)
------------------------------------------------------------------------------
Total other income (expense) 3,068 (50,631) 76,048 (26,809)
------------------------------------------------------------------------------
Net income (loss) $(720,845) $ 11,421 $(1,365,803) $(171,301)
==============================================================================
Net income (loss) per share $ (0.14) $ 0.00 $ (0.35) $ (0.03)
</TABLE>
The accompanying notes are an integral part of these financial statements
4
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<TABLE>
<CAPTION>
HI-RISE RECYCLING SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CHARGES IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1997
SHARES OF ADDITIONAL TOTAL
COMMON COMMON PAID-IN ACCUMULATED SHAREHOLDERS'
STOCK STOCK CAPITAL DEFICIT EQUITY
--------- ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 6,231,119 $62,311 $13,776,320 $ (5,958,223) $ 7,880,408
Issuance of common stock 87,413 874 382,460 383,334
Sales of Preffered stock-net 930,145 930,145
Net loss (171,301) (171,301)
---------- -------- ----------- ------------ -----------
Balance at June 30, 1997 6,318,532 $63,185 $15,088,925 $ (6,129,524) $ 9,022,586
========== ======== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
5
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<TABLE>
<CAPTION>
HI-RISE RECYCLING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997
(UNAUDITED)
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1996 JUNE 30, 1997
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (1,365,822) $ (171,301)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization of goodwill 80,000 140,615
Changes in assets and liabilities, net of
acquisitions:
Accounts receivable (390,838) (871,013)
Inventory (399,909) (156,618)
Other assets (29,290) (141,209)
Net investments in sales type leases (183,180) (725,042)
Accounts payable and accrued liabilities 61,328 447,038
Unearned service agreement revenue (4,608) (3,535)
Note receivable from related party (1,500) -
------------- ----------
Net cash used in operating activities (2,233,819) (1,481,065)
============= ==========
INVESTING ACTIVITIES:
Purchase of business net of cash acquired - (1,013,917)
Maturity of investments 249,086 597,973
Purchase of property and equipment (243,728) (22,125)
------------- ----------
Net cash provided (used) by investing activities 5,358 (438,069)
============= ==========
FINANCING ACTIVITIES:
Payments under credit lines (264,376) (815,316)
Draws from line of credit - 1,337,945
Payment of current portion of long-term debt (120,000)
Payment of long-term debt (80,000) (112,777)
Issuance of preferred stock 930,145
Conversion of preferred stock (6)
Common stock issued to pay note payable 84,353
Common stock purchased upon exercise of stock
options 28,335
------------- ----------
Net cash (used) provided by financing activities (351,694) 1,339,997
------------- ----------
Net (decrease) in cash and cash equivalents (2,580,155) (579,137)
Cash and cash equivalents, beginning of period 5,717,560 1,711,752
------------- ----------
Cash and cash equivalents, end of period $ 3,137,405 $1,132,615
------------- ----------
*Purchase of business, net of cash acquired
Working capital, other than cash $ - $(1,280,921)
Property, plant and equipment - (573,618)
Cost in excess of net assets acquired, net - (1,109,378)
Revolving line of credit - 750,000
Current portion of long term debt - 180,000
Long term debt - 720,000
Common stock issued - 300,000
------------- ----------
Net cash used to acquire business $ - $(1,013,917)
============= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying unaudited consolidated financial statements, which
are for interim periods, do not include all disclosures provided in the
annual consolidated financial statements. These unaudited consolidated
financial statements should be read in conjunction with the
consolidated financial statements and the footnotes thereto contained
in the Annual Report on Form 10-KSB for the year ended December 31,
1996 of Hi-Rise Recycling Systems, Inc. (the "Company"), as filed with
the Securities and Exchange Commission. The December 31, 1996 balance
sheet was derived from audited consolidated financial statements, but
does not include all disclosures required by generally accepted
accounting principles.
2. In the opinion of the Company, the accompanying unaudited
consolidated financial statements contain all adjustments (which are of
a normal recurring nature) necessary for a fair presentation of the
financial statements. The results of operations for the three and six
months ended June 30, 1997 are not necessarily indicative of the
results to be expected for the full year.
3. Per share data was computed by dividing net income or net loss as
adjusted by the preferred dividend by the weighted average number of
shares outstanding during the period.
4. For financial reporting purposes, the Company reports revenues from
sales type leases as equipment sales. Revenue from sales and sales type
equipment leases is generally recognized when equipment is installed.
5. Net investment in sales type leases consists of the following at
June 30, 1997:
Minimum Lease Payments $ 5,057,035
Unearned Income (1,389,871)
Plus: Estimated Residual Value on Lease Equipment 215,690
------------
Total $ 3,882,854
------------
6. In February 1997, the Company, through a newly formed wholly-owned
subsidiary, pursuant to an asset purchase agreement, bought
substantially all of the assets excluding real property, and assumed
certain of the liabilities of Wilkinson Company, Inc. (Wilkinson), who
is engaged in the sale, manufacture, distribution and installation of
sheet metal fabrication products. The aggregate purchase price of
approximately $2,786,000 consisted of approximately $2,486,000 in cash,
subject to adjustment under certain circumstances, and 76,272 shares of
common stock valued at $300,000. The Company also entered into a three
year agreement with Wilkinson to lease its manufacturing facility. The
Company funded the cash portion of the purchase price from proceeds
under two lines of credit and a term loan from a financial institution.
7
<PAGE>
7. During October 1996, a former employee of the Company filed a
lawsuit against the Company alleging that the Company had defrauded and
breached an employment contract with the former employee. In general,
the lawsuit alleges that the Company made written and verbal
representations to become general manger and part owner of the
Company's Midwest subsidiary. The former employee seeks compensatory
damages of $600,000 and punitive damages for an unstated amount. The
Company denies the allegations and intends to contest vigorously the
claims in the lawsuit.
8. On June 25 and July 2, 1997 the Company sold a total of 200 shares
of the Company's newly created Series B Convertible Preferred Stock,
$.01 par value (" Preferred Stock"), and warrants to purchase an
aggregate of 888,887 shares of Common Stock., in a Regulation D private
placement for an aggregate purchase price of $2,000,000. The Preferred
Stock is convertible, at the option of the holders thereof into shares
of the Company's Common Stock, at a conversion price of $2.25 per
share. The conversion price is subject to adjustment on the occurrence
of certain events such as stock dividends and recapitalizations. In
addition, if the average closing bid price (the "Trading Price") of the
Common Stock, as reported on the Nasdaq Small-Cap Market, during the
three-,month period commencing on the 270th day after the date of the
initial issuance of shares of the Preferred Stock and ending on the
360th day after such date is less than 135% of the then applicable
conversion price, the conversion price shall be reduced to such price
as shall equal the Trading Price divided by 1.35. Upon conversion the
holder is entitled to dividends at the rate of 8% per annum, accrued
from the date of issuance through the date of conversion payable in
Common Stock. The warrants are excercisable to purchase shares of the
Company's Common Stock at an exercise price of $2.25 subject to the
adjustment. The accompanying financial statements reflect only the
initial issuance on June 25, 1997 of 100 shares of Preferred Stock and
the receipt by the Company of net proceeds of $930,145 therefrom after
deduction of offering expenses.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company is engaged primarily in the business of marketing a proprietary
automated system known as the "hi-rise system" designed to collect and separate
recyclable and other solid waste in multistory buildings. As part of its
strategy to (i) expand its network of independent distributors, (ii) offer a
fully integrated waste disposal system for multi-story buildings and (iii)
commence manufacturing the components of the Company's systems, on February 3,
1997, the Company, through its newly-formed wholly-owned subsidiary now known as
Wilkinson Company, Inc. ("Wilkinson"), acquired substantially all of the assets
other than real property (the "Wilkinson Assets") and assumed certain
liabilities of Wilkinson company, Inc. (the "Wilkinson Seller"). The Wilkinson
Seller was engaged primarily in the sale, manufacture, distribution and
installation of sheet metal fabrication products. The Company, through
Wilkinson, is continuing the business of the Wilkinson Seller.The Company's
results of operations for the three and six months ended June 30, 1997 include
the results of Wilkinson from February 3, 1997, while the Company's results of
operations for the three and six months ended June 30, 1996 do not include the
results of Wilkinson for the quarter.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED
JUNE 30, 1996.
Total revenue during the three months ended June 30, 1997 was $2,787,811, an
increase of $1,870,971 compared to total revenue of $916,840 during the prior
comparable quarter. One of the primary sources of the increase is the inclusion
of three months sales for Wilkinson in this quarter in the amount of $1,207,413.
In addition, revenue from equipment sales, consisting of sales of hi-rise
systems and trash compaction systems, increased by $542,217 to $1,202,451 during
the three months ended June 30, 1997, from $660,234 during the prior comparable
quarter. Hi-rise system sales for the current quarter were $859,737, compared to
$348,123 for the previous comparable quarter. The increase was a result of the
installations during the current quarter of systems for which the Company
executed sales contracts during 1995 and 1996. In 1995 and 1996, the Company's
emphasis was on equipment sales in new construction buildings which resulted in
increased backlog. In the case of new building sales, the period of time between
the execution of a sales contract and installation of the hi-rise system
typically ranges from six to twenty months. The Company does not recognize
revenue until the installation of the system. As a result, backlog balance at
June 30, 1997 was $5,001,902. This included backlog for Wilkinson of $1,659,801.
Revenue from shared savings agreements increased by $23,421 to $122,616 during
the three months ended June 30, 1997, compared to $99,195 during the prior
comparable quarter. Pursuant to the shared savings agreements, the Company
manages the customer's solid waste disposal in order to reduce the waste hauling
bill, in return for a percentage of the savings achieved by the Company. The
9
<PAGE>
Company had 35 shared saving agreements in effect at June 30, 1997 compared to
30 at June 30, 1996. Revenue from service and parts increased by $292,991 to
$450,402 during the three months ended June 30, 1997, compared to $157,411
during the prior comparable quarter.
During the three months ended June 30, 1997, the Company had interest income of
$112,044, an increase of $2,475, compared to $109,569 during the prior
comparable period. The increase in interest income is primarily attributable to
increased interest realized from leases.
Total operating costs and expenses during the three months ended June 30, 1997
were $2,725,759, an increase of $1,085,006 compared to total operating expenses
of $1,640,753 during the prior comparable quarter. A primary reason for the
increase was the inclusion of three months cost of sales for Wilkinson in this
quarter in the amount of $912,797. The other primary reason for the increase was
the increase in sales of hi-rise systems and increased costs related to those
sales. Cost of equipment sold increased by $967,884 from $518,581 during the
three months ended June 30, 1996 to $1,486,465 during the current three months.
As a percentage of equipment sales, trash chute sales and service and parts
revenue, cost of equipment sold decreased to 56% during the three months ended
June 30, 1997 from 63% during the prior comparable period. The decrease in cost
of equipment sold as a percentage of revenue was primarily attributable to the
increase of Hi-rise system sales in this quarter compared to the previous
quarter last year. Cost of equipment sold of hi-rise systems as a percentage of
sales is higher than the cost of equipment sold of IDC compactors and trash
chute sales, as a percentage of revenue from such sales. Wilkinson's cost of
sales in the quarter was 75% as a percentage of total sales. The Company
anticipates that the cost of sales for Wilkinson will continue to be between
70%-75% and may result in an increase in overall cost of sales for the Company,
as a percentage of its total revenue. The Company intends to consolidate
manufacturing and engineering of all of the Company's product at Wilkinson's
manufacturing facility in Stow, Ohio. The Company has begun configuring the
facility to allocate space for new manufacturing. The Company believes that by
consolidating manufacturing of its products, it will be able to reduce the costs
of sales of its hi-rise and trash compaction systems. Selling and marketing
expenses during the three months ended June 30, 1997 were $580,306, a increase
of $58,773, compared to selling and marketing expenses of $521,533 during the
prior comparable period. Selling and marketing expenses for the three months
ended June 30, 1997 include approximately $30,000 of additional expenses for
Wilkinson. In addition the Company incurred additional expenses of approximately
$20,000 for support of the Wilkinson dealer network in the current quarter.
General and administrative expenses during the three months ended June 30, 1997
were $521,714, an increase of $20,279 compared to general and administrative
expenses of $501,435 during the prior comparable period. General and
administrative expenses for the three months ended June 30, 1997 include
approximately $140,000 of such expenses for Wilkinson. Interest expense
increased by $131,174 to $162,675 as compared to the prior comparable period, as
a result of increased borrowings under the Company's lines of credit to
finance the acquisition of the Wilkinson Assets.
10
<PAGE>
As a result, the Company realized net income of $11,421 during the three months
ended June 30, 1997, compared to a net loss of $720,845 during the three months
ended June 30, 1996.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED
JUNE 30, 1996.
Total revenue during the six months ended June 30, 1997 was $4,661,851, an
increase of $3,217,648 compared to total revenue of $1,444,203 during the prior
comparable quarter. One of the primary sources of the increase is the inclusion
of five months sales for Wilkinson in this period in the amount of $1,843,422.
In addition, revenue from equipment sales, consisting of sales of hi-rise
systems and trash compaction systems, increased by $1,287,521 to $2,248,522
during the six months ended June 30, 1997, from $961,001during the prior
comparable period. Hi-rise system sales for the current six months were
$1,528,499, compared to $348,123 for the previous comparable period. The
increase was a result of the installations during the current period of systems
for which the Company executed sales contracts during 1995 and 1996. In 1995 and
1996, the Company's emphasis was on equipment sales in new construction
buildings which resulted in increased backlog. In the case of new building
sales, the period of time between the execution of a sales contract and
installation of the hi-rise system typically ranges from six to twenty months.
The Company does not recognize revenue until the installation of the system. As
a result, backlog balance at June 30, 1997 was $5,001,902. This included backlog
for Wilkinson of $1,659,801. Revenue from shared savings agreements increased by
$41,314 to $236,842 during the six months ended June 30, 1997, compared to
$195,528 during the prior comparable period. Pursuant to the shared savings
agreements, the Company manages the customer's solid waste disposal in order to
reduce the waste hauling bill, in return for a percentage of the savings
achieved by the Company. The Company had 35 shared saving agreements in effect
at June 30, 1997compared to 30 at June 30, 1996. Revenue from service and parts
increased by $213,369 to $501,043 during the six months ended June 30, 1997,
compared to $287,674 during the prior comparable period. This is primarily due
to Wilkinson's revenues from parts in this period of $167,978.
During the six months ended June 30, 1997, the Company had interest income of
$203,132, a decrease of $27,924, compared to $231,056 during the prior
comparable period. The decrease in interest income is primarily attributable to
decreased interest realized from investments.
Total operating costs and expenses during the six months ended June 30, 1997
were $4,806,343 an increase of $1,920,289 compared to total operating expenses
of $2,886,054 during the prior comparable quarter. A primary reason for the
increase was the inclusion of five months cost of sales for Wilkinson in this
period in the amount of $1,385,761. The other primary reason for the increase
was the increase in sales of hi-rise
11
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systems and increased costs related to those sales. Cost of equipment sold
increased by $1,768,495 from $816,793 during the six months ended June 30, 1996
to $2,585,288 during the current six months. As a percentage of equipment sales,
trash chute sales and service and parts revenue, cost of equipment sold
decreased to 59% during the six months ended June 30, 1997 from 65% during the
prior comparable period. The decrease in cost of equipment sold as a percentage
of revenue was primarily attributable to the increase of Hi-rise system sales in
this period compared to the prior comparable period. Cost of equipment sold of
hi-rise systems as a percentage of revenues from hi-rise system sales is
typically lower than the cost of equipment sold of IDC compactors and trash
chute sales, as a percentage of revenue from such sales. Wilkinson's cost of
sales in this period was 74.4% as a percentage of total sales. The company
anticipates that cost of sales for Wilkinson will continue to be between 70%-75%
and will result in an increase in overall cost of sales for the Company, as a
percentage of its revenue. The Company intends to consolidate manufacturing and
engineering of all of the Company's product at Wilkinson's manufacturing
facility in Stow, Ohio. The Company has begun configuring the facility to
allocate space for new manufacturing. The Company believes that by consolidating
manufacturing of its products, it will be able to reduce the costs of sales of
its hi-rise and trash compaction systems. Selling and marketing expenses during
the six months ended June 30, 1997 were $955,349, a increase of $46,161,
compared to selling and marketing expenses of $909,188 during the prior
comparable period. Selling and marketing expenses for the six months ended June
30, 1997 include approximately $40,000 of additional expenses for Wilkinson for
the five months of 1997. General and administrative expenses during the six
months ended June 30, 1997 were $998,134, an increase of $20,970, compared to
general and administrative expenses of $977,164 during the prior comparable
period. General and administrative expenses for the six months ended June 30,
1997 include approximately $201,000 of such expenses for Wilkinson. Interest
expense increased by $149,933 to $229,941 as compared to the prior comparable
period, as a result of increased borrowings under the Company's lines of credit
to finance the acquisition of the Wilkinson Assets.
As a result, the Company incurred a net loss of $171,301 during the six months
ended June 30, 1997, compared to a net loss of $1,365,803 during the six months
ended June 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, the Company had working capital of $2,034,027 and cash and
cash equivalents aggregating $1,132,615 compared to working capital of
$2,571,485 and cash and cash equivalents of $1,711,752 at December 31, 1996.
The Company's primary sources of working capital are the net proceeds from the
sale of Series B Preferred Stock in June and July 1997 and a $2.0 million line
of credit with Ocean Bank for its lease financing arrangements.
12
<PAGE>
Under the Ocean Bank line of credit, the Company may borrow up to 75% of the
present value of eligible leases of the hi-rise systems entered into since
January 1994. The line of credit is collateralized by leases of the Company's
hi-rise system, bears interest at a rate per annum equal to Citibank's prime
rate plus 1% and is payable on demand. The line was increased from $1.5 million
to $2.0 million on or about September 30, 1996. As of June 30, 1997, the
outstanding balance under this line of credit was $1,998,752.
In order to fund the cash portion of the purchase price for the Wilkinson
Assets, in February 1997, the Company obtained an $850,000 line of credit and a
$900,000 five-year term loan from Ocean Bank. The line of credit and the term
loan are secured by the Wilkinson Assets and bear interest at a rate per annum
equal to Citibank's prime rate plus 1%. As of June 30, 1997, the outstanding
balance under this line of credit was $847,666. The line of credit is due in
February 1998. The term loan is payable in monthly installments of principal and
interest.
Net cash used in operating activities was $1,481,065 and $2,233,819, during the
six months ended June 30, 1997 and 1996, respectively. The decrease was
primarily attributable to a net loss of $1,194,521 less than the prior period.
In addition, accounts receivable increased by $871,013 and accounts payable
increased by $447,038. The increase in accounts receivable is the result of the
installation of two large sales of hi-rise systems at the end of the second
quarter and Wilkinson and IDC completing the quarter with the highest sales
months since Hi-rise's acquisition of the two companies. Accounts payable
increased as a result of raw material and finished goods purchases for sales in
the month of June and purchases of equipment for systems expected to be
installed in the third quarter the revenues from which will be recognized at the
time of installation. Net cash provided by financing activities was $1,339,997
during the six months ended June 30, 1997. This is mainly the result of cash
received for the private placement, draws on the lines of credit in order to
provide working capital and to fund the cash portion of the purchase price for
the Wilkinson Assets. Net cash used in investing activities was $438,069 during
the six months ended June 30, 1997 relating to the purchase of the Wilkinson
Assets.
The Company currently has no outstanding material commitments for capital
expenditures. The Company's primary requirements for capital will be the cost of
systems sold, leased and rented, strategic acquisitions, marketing and sales
costs associated with the Company's national and international expansion into
new target markets and efforts to establish a nationwide distribution network
and general and administrative expenses associated with the Company's plan for
expansion.
CAUTIONARY STATEMENT RELATING TO FORWARD-LOOKING STATEMENTS
The foregoing Management's Discussion and Analysis contains various
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, which represent the Company's expectations and beliefs concerning
future events. The Company cautions that these statements are further qualified
by important factors that could cause actual results
13
<PAGE>
to differ materially from those in the forward-looking statements, including,
without limitation, the following: decline in demand for the Company's products;
increases in costs of sales; and the effect of general economic conditions
generally and factors affecting the waste hauling and construction industries.
These statements by their nature involve substantial risks and uncertainties and
actual events or results may differ as a result of these and other factors.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A. The Annual Meeting of Shareholders (the "Meeting") of the
Company was held on July 15, 1997.
B. Not applicable because:
(i) Proxies for the Meeting were solicited pursuant to
Regulation 14 under the Securities Exchange Act of 1934.
(ii) There was no solicitation in opposition to management's
nominees as listed in the Company's proxy statement dated June
12, 1997; and
(iii) All such nominees were elected.
C. The matters voted on at the meeting consisted of the following:
(i) The election of four members to the Company's Board of
Directors. The name of each nominee for election and the
number of shares voted for and against such nominee, as well
as the number of abstentions and broker non-votes with respect
to such nominee, are set forth below:
<TABLE>
<CAPTION>
NAME FOR AGAINST ABSTAIN NON-VOTES
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Don Engel 4,717,689 41,200 -0- -0-
Warren Adelson 4,717,689 41,200 -0- -0-
Ira Merritt 4,717,689 41,200 -0- -0-
Joel Pashcow 4,717,689 41,200 -0- -0-
</TABLE>
14
<PAGE>
(ii) A proposal to amend the Company's Articles of
Incorporation to increase the number of authorized shares of
the Company's Common stock from 10,000,000 to 20,000,000
shares. 4,637,924 shares voted in favor of such proposal,
111,365 voted against and 9,600 were broker non-votes with
respect to such proposal.
D. Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
EXHIBITS DESCRIPTION
-------- -----------
11 Statement re: computation of per share
earnings
27 Financial Data Schedule
(B) REPORTS ON FORM 8-K:
(i) During the six months ended June 30, 1997, the Company
filed a Current Report on Form 8-K dated June 24, 1997 with
respect to item 5 reporting the sale of Series B Convertible
Preferred Stock by the Company to accredited investors. Filed
with the Current Report on Form 8-K, were the Form of
Subscription Agreement between the Company and the purchasers
of the Preferred Stock, including forms of Warrant,
Registration Rights Agreement and Certificate of Designation
of Preferred Stock.
15
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HI-RISE RECYCLING SYSTEMS, INC.
Date: August 12, 1997 By: /s/ DONALD ENGEL
----------------------------------
Donald Engel, Co-Chairman of the
Board and Chief Executive Officer
(Principal Executive Officer)
Date: August 12, 1997 /s/ BRADLEY HACKER
-----------------------------
Bradley Hacker, Controller
(Principal Financial and Accounting Officer)
16
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
11 Statement re: computation of per share earnings
27 Financial Data Schedule
EXHIBIT 11
HI-RISE RECYCLING SYSTEMS, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
FOR THE THREE AND SIX MONTHS ENDED
JUNE 30, 1996 AND 1997
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 1996 JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1997
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Shares outstanding: 5,982,771 6,318,532 5,982,771 6,318,532
Weighted average shares outstanding $ 3,194,889 6,300,419 3,748,465 6,318,532
Ne profit (loss) $ (720,845) $ 11,421 $ (1,365,803) (171,301)
Preferred Dividend $ (100,000) $ - $ (280,547)
Net loss per share 4 (0.14) $ 0.00 $ (0.35) $ (0.03)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,132,615
<SECURITIES> 0
<RECEIVABLES> 2,443,554
<ALLOWANCES> 147,299
<INVENTORY> 1,805,689
<CURRENT-ASSETS> 5,852,805
<PP&E> 1,618,287
<DEPRECIATION> 365,462
<TOTAL-ASSETS> 13,561,364
<CURRENT-LIABILITIES> 3,818,778
<BONDS> 0
0
0
<COMMON> 63,185
<OTHER-SE> 15,088,925
<TOTAL-LIABILITY-AND-EQUITY> 13,561,364
<SALES> 4,661,851
<TOTAL-REVENUES> 4,661,851
<CGS> 2,585,288
<TOTAL-COSTS> 2,806,018
<OTHER-EXPENSES> 2,001,825
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 229,941
<INCOME-PRETAX> (171,301)
<INCOME-TAX> 0
<INCOME-CONTINUING> (171,301)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (171,301)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> 0
</TABLE>
