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, 1998
[ ] Transition Report under Section 13 or 15(d) of the Exchange Act
FOR THE TRANSITION PERIOD FROM___________ TO___________
COMMISSION FILE NUMBER 0-21946
HI-RISE RECYCLING SYSTEMS, INC.
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(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.)
8505 NW 74TH STREET, MIAMI, FLORIDA 33166
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(Address of Principal Executive Offices)
(305) 597-0243
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(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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 13, 1998 was 9,054,879.
Transitional small business disclosure format:
YES [X] NO [ ]
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INDEX
PART I FINANCIAL INFORMATION PAGE
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Item 1. Consolidated Financial Statements 3
Consolidated Balance Sheets as of December 31, 1997 and 3
June 30, 1998
Consolidated Statements of Operations for the three and six months 4
ended June 30, 1997 and 1998
Consolidated Statement of Changes in Shareholders' Equity 5
for the six months ended June 30, 1998
Consolidated Statements of Cash Flows for the three and six months
ended June 30, 1997 and 1998 6
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 12
Item 2. Changes in Securities 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
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2
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HI-RISE RECYCLING SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND JUNE 30, 1998
ASSETS
(UNAUDITED)
DECEMBER 31, 1997 JUNE 30, 1998
----------------- -------------
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Current assets:
Cash and cash equivalents $ 1,134,131 $ 2,000,658
Restricted cash 3,022,035 --
Investments -- 157,101
Accounts receivable, net of allowance for doubtful accounts of
$147,299 and $199,316 in 1997 and 1998, respectively 3,071,380 6,494,994
Inventory 2,002,163 3,574,991
Other assets 613,006 464,091
------------ ------------
Total current assets 9,842,715 12,691,835
Property and equipment, net 1,172,692 1,576,668
Note receivable from related party 33,223 34,225
Net investment in sales type leases 4,888,526 5,370,102
Deferred acquisition costs 240,674 --
Goodwill 3,007,020 12,087,957
------------ ------------
Total assets $ 19,184,850 $ 31,760,787
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 943,212 $ 2,596,948
Income taxes payable 11,000 --
Note payable to officer -- 500,000
Revolving lines of credit 3,707,185 6,953,861
Current portion of long-term debt 690,000 540,000
Unearned service agreement revenue 2,824 8,446
------------ ------------
Total current liabilities 5,354,221 10,599,255
Long-term debt 3,195,020 2,820,000
------------ ------------
Total liabilities 8,549,241 13,419,255
------------ ------------
Shareholders' equity:
Preferred stock, $.01 par value per share; 1,000,000
shares authorized; 200 shares issued and outstanding
at December 31, 1997 and June 30, 1998, liquidation
preference of $2,000,000 2 2
Common stock, $.01 par value; 20,000,000 shares authorized,
6,468,532 and 9,054,879 shares issued and outstanding
at December 31, 1997 and June 30, 1998, respectively 64,685 90,549
Additional paid-in capital 16,508,980 22,979,743
Accumulated deficit (5,938,058) (4,728,762)
Total shareholders' equity 10,635,609 18,341,532
------------ ------------
Total liabilities and shareholders' equity $ 19,184,850 $ 31,760,787
============ ============
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The accompanying notes are an integral part of these financial statements
3
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HI-RISE RECYCLING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1998
(UNAUDITED)
THREE MONTHS THREE SIX SIX
MONTHS MONTHS MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 1997 JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1998
------------- ------------- ------------- --------------
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Total Revenues: $ 2,737,811 $ 7,312,856 $ 4,661,851 $ 10,888,128
------------ ------------ ------------ ------------
Cost and Operating Expenses:
Cost of equipment sold 1,558,851 4,738,288 2,806,018 6,910,693
Selling and marketing 580,306 400,875 955,349 800,316
General and administrative 521,714 1,138,987 998,134 1,799,571
Product development 14,888 49,820 46,842 52,984
------------ ------------ ------------ ------------
Total operating costs and
expenses 2,675,759 6,327,970 4,806,343 9,563,564
============ ============ ============ ============
Operating Income (loss) 62,052 984,886 (144,492) 1,324,564
Other income (expense):
Interest income............. 112,044 105,874 203,132 281,463
Interest expense............ (162,675) (263,016) (229,941) (396,731)
============ ============ ============ ============
Net income (loss)............. 11,421 827,744 (171,301) 1,209,296
============ ============ ============ ============
Basic income (loss) per share.. $ 0.00 $ 0.09 $ (0.03) $ 0.13
Weighted average common shares
outstanding used for basic
calculation................. 5,585,833 9,054,879 6,318,522 9,047,940
Diluted Income (loss)
per share................... $ 0.00 $ 0.07 $ (0.03) $ 0.10
============ ============ ============ ============
Weighted average common shares
outstanding used in
diluted calculation......... 6,292,456 12,734,783 6,318,522 12,729,431
</TABLE>
The accompanying notes are an integral part of these financial statements
4
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HI-RISE RECYCLING SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 3O, 1998
SHARES OF ADDITIONAL TOTAL
COMMON PREFERRED COMMON PAID-IN ACCUMULATED SHAREHOLDERS'
STOCK STOCK STOCK CAPITAL DEFICIT EQUITY
----------- ----------- ----------- ------------ ------------ --------------
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Balance at December 31, 1997 6,468,532 $ 2 $ 64,685 $16,508,980 $(5,938,058) $10,635,609
Issuance of common stock (unaudited) 2,586,347 -- 25,864 6,470,763 -- 6,496,627
Net income (unaudited) -- -- -- -- 1,209,296 1,209,296
----------- ----------- ----------- ----------- ----------- -----------
Balance at June 30, 1998 9,054,879 $ 2 $ 90,549 $22,979,743 $(4,728,762) $18,341,532
=========== =========== =========== =========== =========== ===========
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The accompanying notes are an integral part of these financial statements
5
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HI-RISE RECYCLING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998
(UNAUDITED)
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1997 JUNE 30, 1998
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Operating Activities:
Net income (loss) $ (171,301) $ 1,209,296
Adjustments to reconcile net income (loss)
to net cash (used in) provided by
operating activities:
Depreciation and amortization 140,615 354,430
Changes in assets and liabilities, net
of acquisitions:
Accounts receivable (871,013) (977,329)
Inventory (156,618) (80,627)
Other assets (141,209) 175,924
Net investment in sales type leases (725,042) (481,577)
Accounts payable and accrued liabilities 447,038 798,764
Unearned service agreement revenue (3,535) 5,622
----------- -----------
Net cash (used in) provided by operating activities (1,481,065) 1,004,503
----------- -----------
Investing Activities:
Purchase of business net of cash acquired (1,013,917) (4,057,400)
Maturity of investments 597,973 --
Purchase of property and equipment (22,125) (74,941)
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Net cash used in investing activities (438,069) (4,132,341)
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Financing Activities:
Restricted cash -- 3,022,035
Loan from Officer -- 500,000
Payments under credit line (815,316) (5,457,740)
Draws from line of credit 1,337,945 6,065,070
Issuance of preferred stock 930,145 --
Payment of long-term debt (112,777) (135,000)
----------- -----------
Net cash provided by financing activities 1,339,997 3,994,365
----------- -----------
Net (decrease) increase in cash and cash equivalents (579,137) 866,527
Cash and cash equivalents, beginning of period 1,711,752 1,134,131
----------- -----------
Cash and cash equivalents, end of period $ 1,132,615 $ 2,000,658
----------- -----------
Purchase of business, net of cash acquired
Working capital, other than cash $(1,280,921) $(3,957,087)
Property, plant and equipment (573,618) (213,976)
Cost in excess of net assets acquired, net (1,109,378) (9,357,212)
Revolving line of credit 750,000 3,000,000
Current portion of long-term debt 180,000 --
Long-term debt 720,000 --
Common stock issued 300,000 6,470,875
----------- -----------
Net cash used to acquire business $(1,013,917) $(4,057,400)
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</TABLE>
The accompanying notes are an integral part of these financial statements
6
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1998
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, 1997 of Hi-Rise Recycling Systems, Inc.
(the "Company"), as filed with the Securities and Exchange Commission. The
December 31, 1997 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 management, 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, 1998 are not
necessarily indicative of the results to be expected for the full year.
3. 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.
4. Net investment in sales type leases consists of the following at June 30,
1998:
Minimum Lease Payments $ 6,507,276
Unearned Income (1,523,100)
Estimated Residual Value on Leased Equipment 385,926
-----------
Total $ 5,370,102
-----------
5. On February 20, 1998, HS Acquisition Corp., a newly-formed wholly-owned
subsidiary of the Company ("HS Acquisition Corp."), merged with and into Hesco
Sales, Inc., a Florida corporation ("Hesco") owned by Evelio Acosta ("Acosta"),
with Hesco as the surviving corporation (the "Hesco Merger"). As a result of the
Hesco Merger, Hesco became a wholly-owned subsidiary of the Company. The
consideration for the Hesco Merger paid by the Company was $8,300,000 in cash
(including $2,236,281 in repayment of shareholder loans). As discussed in Note
6, the consideration for the Hesco Merger was partially funded by the net
proceeds of a private placement. Approximately $500,000 of the Hesco Merger
consideration was funded from the proceeds of a $500,000 five-year term loan
from Donald Engel, Chairman of the Board of Directors and Chief Executive
Officer of the Company. The remaining portion of the Hesco Merger consideration
was funded through the proceeds of a line of credit and a term loan from Ocean
Bank, N.A. Ocean Bank"). On February 20, 1998, AM Acquisition Corp., a
newly-formed wholly-owned subsidiary of the Company, merged with and into
Atlantic Maintenance of Miami, Inc., a Florida corporation ("Atlantic
Maintenance") owned by Acosta, with Atlantic Maintenance as the surviving
corporation (the "Atlantic Maintenance Merger"). As a result of the Atlantic
Maintenance Merger, Atlantic Maintenance became a wholly-owned subsidiary of the
Company. The consideration for the Atlantic Maintenance Merger consisted of
1,276,094 shares of the Company's common stock. The Company also entered into a
seven year agreement with an affiliate of Acosta to lease Hesco's primary
manufacturing facility. Hesco is engaged primarily in manufacturing, marketing
and selling solid waste handling equipment products.
The acquisitions made by the Company has been accounted for using the purchase
method of accounting. Accordingly, the results of operations of the acquired
companies are included in the Company's consolidated results of operations from
the respective dates of acquisition.
The consideration for the Company's acquisition for Hesco and Atlantic
Maintenance has been allocated to the assets and liabilities acquired based upon
their respective fair values. The components of the purchase price allocation,
including fees and expenses are as follows:
Working capital, other than cash $ (3,957,087)
Property, plant and equipment (213,976)
Goodwill (9,357,212)
Revolving line of credit 3,000,000
Common stock issued 6,470,875
-------------
Net cash used to acquire businesses $ (4,057,400)
-------------
The following information presents the unaudited pro forma condensed results of
operations for the period January 1, 1997 through June 30, 1997 as if the
Company's acquisition of Hesco and Atlantic Maintenance had occurred on January
1, 1997. The pro forma results are presented for informational purposes only and
are not necessarily indicative of the future results of operation of the Company
or the results of operation of the Company had the acquisitions occurred on
January 1, 1997.
PRO FORMA
RESULTS OF
OPERATIONS
----------
Net revenues $9,756,723
Net income $ 244,914
Earnings per common share-basic $ .03
Earnings per common share-diluted $ .02
6. On February 20, 1998, the Company sold an aggregate of 1,299,098 shares of
its Common Stock for $2.70 per share in a private placement to accredited
investors (the "1998 Private Placement") in which it received aggregate gross
proceeds of approximately $3,507,560. After payment of fees, expenses and
commissions, the net proceeds to the Company from the 1998 Private Placement
were approximately $3,100,000. The 1998 Private Placement was consummated in
order to partially fund the cash portion of the Hesco Merger.
7
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 1997 AND 1998
(UNAUDITED) (CONTINUED)
7. The Company is currently in the process of evaluating its computer software
and databases to determine whether or not modifications will be required to
prevent problems related to the Year 2000. These problems could cause
malfunctions in certain software and databases with respect to dates on or after
January 1, 2000, unless corrected. At this time, the Company has not yet
determined the cost of evaluating its computer software or databases or of
making any modifications required to correct any Year 2000 problems. The Year
2000 issue may also effect the systems and applications of the Company's
customers or suppliers. The Company has initiated formal communications with a
number of its significant suppliers to determine the extent to which the
Company's interface systems are vulnerable to those third parties' failure to
remediate their own Year 2000 issues. The Company will continue similar
communication with major customers, and the balance of its major suppliers
during 1998 to receive appropriate warranties and assurances that those parties
are, or will be, Year 2000 compliant. Although the Company currently does not
anticipate any material impact on its operations as a result of Year 2000 issues
of its customers or suppliers, at this stage of its review, no assurance can be
given that the failure by one or more of its major suppliers or customers to
become Year 2000 compliant will not have a material adverse impact on its
operations.
8. Earnings per share have been computed in accordance with Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" by dividing net
income (loss) by the weighted average number of common shares (basic earnings
per share) and by the weighted average number of common shares plus dilutive
common share equivalents outstanding (diluted earnings per share).
9. Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gain and losses) in a full set of general-purpose financial
statements. SFAS No. 130 requires that an enterprise classify items of other
comprehensive income by their nature in a financial statement and display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of the balance
sheet. SFAS No. 130 did not have a material impact on the financial statements
of the Company.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 establishes
standards for public business enterprises to report information about operating
segments in annual financial statements and requires those enterprises to report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes the standards for related
disclosures about products and services, geographic areas, and major customers.
SFAS No. 131 requires a public business enterprise report financial and
descriptive information about its reportable operating segments. The financial
information is required to be reported on the basis that it is used internally
for evaluating segment performance and deciding how to allocate resources to
segments. Operating segments are components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. SFAS No. 131 is effective for financial statements for
periods beginning after December 15, 1997. Management is currently evaluating
the requirements of SFAS No. 131 to determine whether additional disclosure is
required.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
Hi-Rise Recycling Systems, Inc., a Florida corporation (the "Company"), is
primarily engaged in manufacturing, distributing, marketing and selling
recycling and solid waste handling equipment. Until February 1997, the Company
was primarily engaged in distributing, marketing and selling the Hi-Rise System,
a proprietary automated system designed to collect source-separated recyclables
and other solid waste in multi-story residential buildings. In February 1997,
the Company expanded its product lines to include sheet metal fabrication
products, consisting primarily of rubbish and laundry chutes. During the three
and six-months period ended June 30, 1998, sales of sheet metal fabrication
products accounted for approximately 16% and 23%, respectively, of the Company's
revenues. As described below, in February 1998, the Company acquired Hesco Sales
Inc., a Florida corporation ("Hesco"), a company engaged in the business of
manufacturing, marketing and selling solid waste handling equipment products.
Hesco's product lines include waste containers and trash compaction systems.
During the three and six months ended June 30, 1998, Hesco's product lines
accounted for approximately 62% and 55%, respectively, of the Company's
revenues. The Company anticipates that in the future Hesco's product lines will
be the Company's single largest source of revenue. In addition, the Company
expects that its other principal sources of revenue will be sales of rubbish and
linen chutes, trash compaction systems and the Hi-Rise System and sales-types
leases of the Hi-Rise System.
During the six month period ended June 30, 1998, substantially all of the
Company's operating revenues were derived from Hesco, Wilkinson Company, Inc.and
IDC Systems, Inc., which the Company acquired in February 1995, from sales type
leases of the Hi-Rise System and from direct sales of the Hi-Rise System to
multi-story residential building owners.
On February 3, 1997, the Company acquired (the "Wilkinson Acquisition")
substantially all of the assets other than real property (the "Wilkinson
Assets") and assumed certain of the liabilities, which are not material to the
Company, of Wilkinson Company, Inc., an Ohio corporation (the "Wilkinson
Seller"). The Company consummated the Wilkinson Acquisition 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. The aggregate
purchase price paid for the Wilkinson Assets was $2,486,827 in cash, subject to
adjustment under certain circumstances, and 76,272 shares of Common Stock,
valued at $300,000. The Wilkinson Seller was engaged in the sale, manufacture,
distribution and installation of sheet metal fabrication products, consisting
primarily of laundry and rubbish chutes, as well as corner guards, kick and push
plates, handrails and bumper rail systems. The Company, through its subsidiary,
Wilkinson Company, Inc. ("Wilkinson"), is continuing the business previously
conducted by the Wilkinson Seller. In connection with the Wilkinson Acquisition,
Wilkinson entered into a lease with the Wilkinson Seller for its facility in
Stow, Ohio. The Company has consolidated the manufacturing and engineering of
certain of the Company's products at Wilkinson's facility in Ohio, which the
Company believes will enable it to realize cost efficiencies.
On February 20, 1998, HS Acquisition Corp., a newly-formed wholly-owned
subsidiary of the Company, merged with and into Hesco, with Hesco as the
surviving corporation (the "Hesco Merger"). As a result of the Hesco Merger,
Hesco became a wholly-owned subsidiary of the Company. The consideration for the
Hesco Merger paid by the Company was $8,300,000 in cash (including $2,236,281 in
repayment of shareholder loans. The consideration for the Hesco Merger was
partially funded by the net proceeds of the 1998 Private Placement (as defined
below). Approximately $500,000 of the Hesco Merger consideration was funded from
the proceeds of a $500,000 five-year term loan from Donald Engel, Chairman of
the Board of Directors and Chief Executive Officer of the Company. The remaining
portion of the Hesco Merger consideration was funded through the proceeds of a
line of credit and a term loan from Ocean Bank N.A. ("Ocean Bank"). On February
20, 1998, AM Acquisition Corp., a newly-formed wholly-owned subsidiary of the
Company, merged with and into Atlantic Maintenance of Miami, Inc., a Florida
corporation ("Atlantic Maintenance"), with Atlantic Maintenance as the surviving
corporation (the "Atlantic Maintenance Merger"). As a result of the Atlantic
Maintenance Merger, Atlantic Maintenance became a wholly-owned subsidiary of the
Company. The consideration for the Atlantic Maintenance Merger consisted of
1,276,094 shares of Common Stock. The Company also entered into a seven year
agreement with an affiliate of Acosta to lease Hesco's primary manufacturing
facility. Goodwill which resulted from the business combinations described above
is being amortized over twenty years.
On February 20, 1998, the Company sold an aggregate of 1,299,098 shares of its
Common Stock for $2.70 per share in a private placement (the "1998 Private
Placement") to accredited investors in which it received aggregate gross
proceeds of approximately $3,507,560. After payment of fees, expenses and
commissions, the net proceeds to the Company from the 1998 Private Placement
were approximately $3,100,000. The 1998 Private Placement was consummated in
order to partially fund the cash portion of the Hesco Merger.
9
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RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997.
Total revenue during the three months ended June 30, 1998 was $7,028,547, an
increase of $4,240,736 compared to total revenue of $2,787,811 during the prior
comparable three-month period. One of the primary sources of the increase is the
inclusion of Hesco in this quarter in the amount of $4,321,907. In addition,
revenue from equipment sales, consisting of sales of Hi-Rise Systems and trash
compaction systems, increased by $108,153 to $1,156,112 during the three months
ended June 30, 1998, from $1,047,959 during the prior comparable three-month
period. Revenues from trash chute sales increased by $55,709 to $1,341,359
during the three months ended June 30, 1998, from $1,285,650 during the prior
comparable three-month period. Revenue from service and parts increased by
$56,341 to $351,465 during the three months ended June 30, 1998, compared to
$295,124 during the prior comparable three-month period. This is primarily a
result of the inclusion of service and parts for Hesco of $55,212.
During the three months ended June 30, 1998, the Company had interest income of
$105,874, a decrease of $6,170 compared to $112,044 during the prior comparable
three-month period.
Total operating expenses during the three months ended June 30, 1998 were
$6,049,304, an increase of $3,373,545 compared to total operating expenses of
$2,675,759 during the prior comparable three-month period. A primary reason for
the increase was the inclusion in the three months ended June 30, 1998 of
additional cost of sales for Hesco of $3,151,450. Cost of equipment sold
increased by $2,850,771 from $1,608,851 during the three months ended June 30,
1997 to $4,459,622 during the three months ended June 30, 1998. As a percentage
of revenue cost of equipment sold increased to 63% during the three months ended
June 30, 1998 from 58% during the prior comparable three-month period. The
primary reason for the increase is the inclusion of Hesco's cost of sales which
is approximately 70% of its revenue, Hesco's accounting for 54% of the Company's
overall revenue. Selling and marketing expenses during the three months ended
June 30, 1998 were $400,875, a decrease of $179,431 compared to selling and
marketing expenses of $580,306 during the prior comparable three-month period.
Selling and marketing expenses for the three months ended June 30, 1998 include
approximately $200,422 of additional expenses for Hesco for the three month
period. A primary reason for the decrease is cost saving enacted the later half
of 1997 flowing into the first half of this year. Also with the Hesco merger
clerical sales staff was allocated to administrative expense as they are now
considered to be administrative personnel. General and administrative expenses
during the three months ended June 30, 1998 were $1,138,987, an increase of
$617,273 compared to general and administrative expenses of $521,784 during the
prior comparable three-month period. General and administrative expenses for the
three months ended June 30, 1998 include approximately $453,777 of such expenses
for Hesco. The other increase is the previous mentioned sales staff moved to
administrative. Interest expense increased by $100,341 to $263,016 as compared
to the prior comparable three-month period, as a result of increased borrowings
under the Company's lines of credit to finance the Hesco Merger.
As a result, the Company realized net income of $822,101 during the three months
ended June 30, 1998, compared to net income of $11,421 during the three months
ended June 30, 1997.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997.
Total revenue during the six months ended June 30, 1998 was $10,832,816, an
increase of $6,170,965 compared to total revenue of $4,661,851 during the prior
comparable six-month period. One of the primary sources of the increase is the
inclusion of four months of sales of Hesco in this quarter in the amount of
$6,191,981. Revenue from equipment sales, consisting of sales of Hi-Rise Systems
and trash compaction systems, decreased by $296,015 to $1,323,839 during the six
months ended June 30, 1998, from $1,619,854 during the prior comparable
six-month period. Revenues from trash chute sales increased by $666,581 to
$2,506,235 during the six months ended June 30, 1998, from $1,839,654 during the
prior comparable six-month period. This is primarily a result of the inclusion
of a full six months of Wilkinson sales in 1998 compared to only five months in
1997, as well as increased Wilkinson sales during the six months ended June 30,
1998. Revenue from service and parts increased by $127,540 to $485,820 during
the six months ended June 30, 1998, compared to $358,280 during the prior
comparable six-month period. This is primarily a result of the inclusion of
service and parts for Hesco of $140,424.
During the six months ended June 30, 1998, the Company had interest income of
$281,831, an increase of $78,699 compared to $203,132 during the prior
comparable six-month period. The increase in interest income is primarily
attributable to increased interest realized from investments and additional
leases in 1998 as compared to 1997.
Total operating expenses during the six months ended June 30, 1998 were
$9,508,252, an increase of $4,701,409 compared to total operating expenses of
$4,806,343 during the prior comparable six-month period. A primary reason for
the increase was the inclusion in the six months ended June 30, 1998 of
additional cost of sales for Wilkinson of $1,854,613 and for Hesco of
$4,109,511. Cost of equipment sold increased by $4,049,363 from $2,806,018
during the six months ended June 30, 1997 to $6,855,381 during the six
10
<PAGE>
months ended June 30, 1998. As a percentage of revenue, cost of equipment sold
increased to 63% during the six months ended June 30, 1998 from 60% during the
prior comparable six-month period. Selling and marketing expenses during the six
months ended June 30, 1998 were $800,316, a decrease of $155,033 compared to
selling and marketing expenses of $955,349 during the prior comparable six-month
period. Selling and marketing expenses for the six months ended June 30, 1998
include approximately $221,422 of additional expenses for Hesco for four months
of 1998. General and administrative expenses during the six months ended June
30, 1998 were $1,799,571, an increase of $801,437 compared to general and
administrative expenses of $948,134 during the prior comparable six-month
period. General and administrative expenses for the six months ended June 30,
1998 include approximately $550,000 of such expenses for Hesco. Interest expense
increased by $166,790 to $396,731 as compared to the prior comparable six-month
period, as a result of increased borrowings under the Company's lines of credit
to finance the Hesco Merger.
As a result, the Company realized net income of $1,209,296 during the six months
ended June 30, 1998, compared to a net loss of $171,301 during the six months
ended June 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company had working capital of $2,092,580 and cash and
cash equivalents aggregating $2,000,658 compared to working capital of
$4,488,494 and cash and cash equivalents of $1,134,131 at December 31, 1997.
The Company's primary sources of working capital are the net proceeds of
approximately $1.8 million from the sale of Series B Preferred Stock in June and
July 1997 and its lines of credit with Ocean Bank in the aggregate amount of
$7.0 million including a $3.0 million line of credit for its lease financing
arrangements. At June 30, 1998 an aggregate of $6,953,861 was outstanding under
these lines of credit.
The Company has a line of credit with Ocean Bank under which 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 1.0% and is payable on demand. The line was increased
from $2.0 million to $3.0 million on or about September 30, 1997. As of June 30,
1998, the outstanding balance under this line of credit was $2,992,189.
The Company has entered into a lease financing arrangement with Western Finance
and Lease, Inc., formerly known as First Sierra, Inc. ("Western Finance"),
pursuant to which Western Finance has agreed to purchase, from time to time,
eligible leases of Hi-Rise Systems from the Company for a purchase price equal
to the discounted present value of the leases purchased. In the event that a
lessee defaults under a lease purchased by Western Finance, Western Finance has
the right to require the Company to repurchase 25% of the lease obligations. At
June 30, 1998, the Company's contingent repurchase obligations under this
arrangement equaled $142,174.
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. In February 1998, the line of
credit was increased to $1,000,000. 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, 1998, the outstanding balance
under this line of credit was $999,432. The line of credit is due in February
1999. The term loan is payable in monthly installments of principal and interest
through February 2002.
In order to fund part of the cash portion of the Hesco Merger, in February 1998,
the Company obtained a $3,000,000 line of credit and a $3,000,000 term loan from
Ocean Bank. The term loan was obtained on December 31, 1997. The line of credit
and the term loan are secured by Hesco's accounts receivable, inventory and
fixed assets and bear interest at a rate per annum equal to Citibank's prime
rate plus 1%. The line of credit is due in February 1999. At June 30, 1998, the
outstanding balance under this line of credit was $3,000,000. The term loan is
payable in 100 monthly installments of principal and interest through April
2006. Approximately $500,000 of the cash portion of the purchase price for the
Hesco Merger was funded from the proceeds of a $500,000 five-year term loan, at
an annual interest rate of 10%, from Donald Engel, the Chairman of the Board of
Directors and the Chief Executive Officer of the Company. The remaining portion
of the purchase price was funded from the proceeds of the 1998 Private
Placement.
Net cash provided in operating activities was $1,004,503 during the six-month
period ended June 30, 1998, compared to net cash used in operating activities of
$1,481,065 during the six-month period ended June 30, 1997. The change was
primarily attributable to the change from a net loss to net income. In addition,
accounts receivable increased by $977,329 and accounts payable and accrued
liabilities decreased by $798,764. The increase in accounts receivable is the
result of increased sales by Wilkinson and Hesco during the six months ended
June 30, 1998. Hesco shipped a large order totaling $1.0 million to a major
customer. In addition, Wilkinson had its largest sales in the last month of the
period. Accounts payable increased as a result the heavy volume in June for
expenses to be allocated for the current quarter. Net cash provided by financing
activities was $3,994,365 during the six months ended June 30, 1998. This is
mainly the result of proceeds received from the 1998 Private Placement and draws
under the lines of credit in order to provide working capital and to fund the
cash portion of the purchase price for the Hesco Merger. These funds were
received in 1997 but not used until the Hesco Merger was
11
<PAGE>
consummated. Net cash used in investing activities was $4,132,341 during the six
months ended June 30, 1998 relating to the acquisition of Hesco.
The Company currently has no outstanding material commitments for capital
expenditures. The Company's primary requirements for capital will be the cost of
equipment 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. In the event that the Company's plans change, its assumptions change
or prove to be inaccurate or its existing capital and cash flow otherwise prove
to be insufficient (due to unanticipated expenses, delays, problems,
difficulties or otherwise), the Company could be required to seek additional
financing or may be required to curtail its expansion or other activities. In
the event that the Company requires additional financing, the Company may seek
to raise capital through the sale of its debt or equity securities, including at
prices which represent significant discounts from the market price of the Common
Stock. The Company anticipates that cash flow from operations borrowings under
its existing lines of credit and the remaining proceeds from the sale of the
Series B Convertible Preferred Stock will be sufficient to enable the Company to
meet its anticipated cash requirements for the next 12 months, except that the
Company may be required to seek additional financing for acquisitions.
CAUTIONARY STATEMENT RELATING TO FORWARD-LOOKING STATEMENTS
The foregoing Management's Discussion and Analysis or Plan of Operation 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 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, 1998.
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, 1998; 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
12
<PAGE>
and broker non-votes with respect to such nominee, are set forth
below:
NAME FOR AGAINST ABSTAIN NON-VOTES
- --------------- --------- ------- ------- ---------
Don Engel 7,183,475 189,060 -0- -0-
Warren Adelson 7,183,475 189,060 -0- -0-
Ira Merritt 7,183,475 189,060 -0- -0-
Joel Pashcow 7,183,475 189,060 -0- -0-
(ii) A proposal to approve the adoption of the Company's 1998 Executive
Incentive Compensation Plan and the reservation of 1,000,000 shares of
common stock for issuance pursuant to the 1998 Executive Incentive
Compensation Plan. 6,951,123 shares were voted in favor of such
proposal, 242,112 shares against and 179,300 abstained. In addition,
there were 1,098,888 broker non-votes with respect to such proposal.
D. Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
(A) EXHIBITS:
EXHIBITS DESCRIPTION
-------- -----------
11 Statement Re: Computation of Per Share Earnings
27 Financial Data Schedule
(B) REPORT ON FORM 8-K:
The Company filed a Current Report on Form 8-K on March 9, 1998 in
connection with the Hesco Merger and the Atlantic Maintenance Merger,
which included the audited combined financial statements of Hesco
Sales, Inc. and Subsidiaries and Atlantic Maintenance of Miami, Inc.
Pro Forma financial statements relating to the Hesco Merger and the
Atlantic Maintenance Merger were contained in the Form 10-KSB for the
fiscal year ended December 31, 1997 filed by the Company on March 31,
1998.
13
<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 13, 1998 By: /s/ DONALD ENGEL
-----------------
Donald Engel, Chairman of the Board and
Chief Executive Officer (principal executive
officer)
Date: August 13, 1998 /s/ BRADLEY HACKER
------------------
Bradley Hacker, Chief Financial Officer
(Principal Financial and Accounting
Officer)
14
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
11 Statement Re: Computation of Per Share Earnings
27 Financial Data Schedule
<TABLE>
<CAPTION>
EXHIBIT 11
HI-RISE RECYCLING SYSTEMS, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
FOR THE THREE AND SIX MONTHS ENDED
JUNE 30, 1997 AND 1998
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 1997 JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income (loss) $ 11,421 $ 822,101 $ (171,301) $ 1,209,296
Weighted average shares outstanding 5,585,833 9,054,879 6,318,522 9,047,940
Basic Income (loss) per share $ 0.00 $ 0.09 $ (0.03) $ 0.13
Diluted Calculation:
Net income (loss) $ 11,421 $ 822,101 $ (171,301) $ 1,209,296
Diluted effect of common stock
equivalents 696,623 3,679,644 -- 3,681,491
Diluted weighted average shares
outstanding and common
stock equivalants 6,282,456 12,734,523 6,318,522 12,729,431
Diluted income (loss) per share $ 0.00 $ 0.06 $ (0.03) $ 0.10
</TABLE>
The effect of 1,310,111 shares of potential common stock were anti-dilutive for
the six months ended June 30, 1997.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,000,658
<SECURITIES> 157,101
<RECEIVABLES> 6,494,994
<ALLOWANCES> (199,316)
<INVENTORY> 3,574,991
<CURRENT-ASSETS> 12,691,835
<PP&E> 3,401,471
<DEPRECIATION> 1,824,803
<TOTAL-ASSETS> 31,760,787
<CURRENT-LIABILITIES> 10,599,255
<BONDS> 0
0
2
<COMMON> 90,549
<OTHER-SE> 18,341,532
<TOTAL-LIABILITY-AND-EQUITY> 31,760,787
<SALES> 10,888,128
<TOTAL-REVENUES> 10,888,128
<CGS> 6,910,693
<TOTAL-COSTS> 9,563,564
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 396,738
<INCOME-PRETAX> 1,209,296
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,209,296
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,209,296
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0.10
</TABLE>
