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 March 31, 1998
[ ] Transition Report under Section 13 or 15(d) of the Exchange Act
For the transition period from to
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Commission File Number 0-21946
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HI-RISE RECYCLING SYSTEMS, INC.
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(Exact Name of Small Business Issuer as Specified in Its Charter)
Florida 65-0222933
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(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)
16255 NW 54TH AVENUE, MIAMI, FLORIDA 33014
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(Former Address, if Changed Since Last Report)
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
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The number of shares outstanding of the Issuer's Common Stock, $.01 Par
Value, as of May 13, 1998 was 9,043,731.
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
March 31, 1998
Consolidated Statements of Operations for the three months 4
ended March 31, 1997 and 1998
Consolidated Statement of Changes in Shareholders' Equity 5
for the three months ended March 31, 1998
Consolidated Statements of Cash Flows for the three months ended 6
March 31, 1997 and 1998
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 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
2
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HI-RISE RECYCLING SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND MARCH 31, 1998
ASSETS
(UNAUDITED)
DECEMBER 31, 1997 MARCH 31, 1998
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<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,134,131 $ 1,262,547
Restricted cash 3,022,035 --
Investments -- 157,101
Accounts receivable, net of allowance for doubtful accounts of
$147,299 and $799,316 in 1997 and 1998, respectively 3,071,380 5,709,897
Inventory 2,002,163 3,480,055
Other assets 613,006 555,545
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Total current assets 9,842,715 11,165,145
Property and equipment, net 1,172,692 1,616,609
Note receivable from related party 33,223 34,225
Net investment in sales type leases 4,888,526 4,885,304
Deferred acquisition costs 240,674 --
Goodwill 3,007,020 11,919,947
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Total assets $19,184,850 $29,621,230
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 943,212 $ 1,429,302
Income taxes payable 11,000 --
Note payable to officer -- 500,000
Revolving lines of credit 3,707,185 6,567,761
Current portion of long-term debt 690,000 540,000
Unearned service agreement revenue 2,824 9,248
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Total current liabilities 5,354,221 9,046,311
Long-term debt 3,195,020 2,955,000
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Total liabilities 8,549,241 12,001,311
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Shareholders' equity:
Preferred stock, $.01 par value per share; 2,000,000 shares authorized; 200
shares issued and outstanding at December 31, 1997 and March 31, 1998,
liquidation preference of $2,000,000 2 2
Common stock, $.01 par value; 20,000,000 shares authorized, 6,468,539 and
9,043,731 shares issued and outstanding at December 31, 1997 and March 31, 1998,
respectively 64,685 90,437
Additional paid-in capital 16,508,980 23,079,975
Accumulated deficit (5,938,058) (5,550,495)
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Total shareholders' equity 10,635,609 17,619,919
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Total liabilities and shareholders' equity $19,184,850 $29,621,230
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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 MONTHS ENDED MARCH 31, 1997 AND 1998
(UNAUDITED)
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1997 MARCH 31, 1998
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Total revenues $1,874,040 $3,804,269
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Operating Expenses:
Cost of equipment sold, including direct costs of service/parts 1,197,167 2,395,759
Selling and marketing 375,043 399,441
General and administrative 476,420 660,584
Product development 31,954 3,164
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Total operating expenses 2,080,584 3,458,948
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Operating income (loss) (206,544) 345,321
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Other income (expense):
Interest income 91,088 175,957
Interest expense (67,266) (133,715)
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Total other income 23,822 42,242
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Net income (loss) $ (182,722) $ 387,563
========== ==========
Basic income (loss) per share $(0.03) $0.05
========== ==========
Weighted average common shares outstanding used in basic calculation 5,585,833 7,326,936
========== ==========
Diluted income (loss) per share $(0.03) $0.04
========== ==========
Weighted average common shares outstanding used in diluted calculation 5,585,833 11,072,422
========== ==========
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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 CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1998
SHARES OF ADDITIONAL TOTAL
COMMON PREFERRED COMMON PAID-IN ACCUMULATED SHAREHOLDERS'
STOCK STOCK STOCK CAPITAL DEFICIT EQUITY
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<S> <C> <C> <C> <C> <C> <C>
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) 2,575,199 25,752 6,570,995 6,596,747
Net income (unaudited) 387,563 387,563
--------- ------------ ------- ----------- ----------- -----------
Balance at March 31, 1998 9,043,731 $ 2 $90,437 $23,079,975 $(5,550,495) $17,619,919
========= ============ ======= =========== =========== ===========
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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 THREE MONTHS ENDED MARCH 31, 1997 AND 1998
(UNAUDITED)
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1997 MARCH 31, 1998
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Operating Activities:
Net income (loss) $ (182,722) $ 387,563
Adjustments to reconcile net income (loss) to net cash (used in) provided by
operating activities:
Depreciation and amortization 50,174 75,200
Changes in assets and liabilities, net of acquisitions:
Accounts receivable (722,164) (192,232)
Inventory 36,496 14,309
Other assets (22,756) 84,470
Net investment in sales type leases (232,398) 3,221
Accounts payable and accrued liabilities 378,342 (368,882)
Unearned service agreement revenue (3,534) 6,424
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Net cash (used in) provided by operating activities (698,562) 10,073
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Investing Activities:
Purchase of business net of cash acquired (986,748) (3,731,169)
Maturity of investments 597,973 --
Purchase of property and equipment (17,725) (8,853)
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Net cash used in investing activities (406,500) (3,740,022)
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Financing Activities:
Restricted cash -- 3,022,035
Loan from Officer -- 500,000
Payments under credit line (165,085) (2,167,974)
Draws from line of credit 475,000 2,639,304
Payment of long-term debt (67,777) (135,000)
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Net cash provided by financing activities 242,138 3,858,365
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Net (decrease) increase in cash and cash equivalents (862,924) 128,416
Cash and cash equivalents, beginning of period 1,711,752 1,134,131
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Cash and cash equivalents, end of quarter $ 848,828 $ 1,262,547
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Purchase of business, net of cash acquired
Working capital, other than cash $(1,280,921) $(4,097,621)
Property, plant and equipment (573,618) (73,442)
Cost in excess of net assets acquired, net (1,082,209) (9,131,101)
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 6,570,995
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Net cash used to acquire business $ (986,748) $(3,731,169)
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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 MONTHS ENDED MARCH 31, 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 months ended March 31, 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 March 31,
1998:
Minimum Lease Payments $5,707,534
Unearned Income (1,208,156)
Estimated Residual Value on Leased Equipment 385,926
----------
Total $4,885,304
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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, par value $0.01 per share (the
"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.
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 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 MARCH 31, 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. Effectuve 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 an 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 recycling and 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-month period ended March 31, 1998, sales of sheet metal
fabrication products accounted for approximately 31% 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 months ended March 31, 1998, Hesco's product lines accounted
for approximately 42% 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 three-month period ended March 31, 1998, substantially all
of the Company's operating revenues were derived from Hesco, Wilkinson and IDC
Systems, Inc., which the Company acquired in February 1995, from saletype leases
of the Hi-Rise System and from direct sales of the Hi-Rise System to multi-story
residential building owners. To date, the Company has entered into 36 shared
savings agreements, pursuant to which the Company manages a building's solid
waste disposal and receives an amount equal to the building's monthly waste
hauling bill prior to system installation (which amount is adjusted to reflect
increases in the hauling rate). Under the terms of these agreements, the Company
pays the building's current waste hauling bills and is entitled to retain
between approximately 60-100% of the monthly savings realized as a result of any
decrease in the building's waste hauling bill. The balance of any such savings
is passed on to the building.
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
9
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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. 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 private placement was consummated in order to
partially fund the cash portion of the Hesco Merger.
The Company's results of operations for the three months ended March
31, 1998 include the results of Wilkinson from January 1, 1998, while the
Company's results of operations for the three months ended March 31, 1997
include the results of Wilkinson only from February 3, 1997. The Company's
results of operations for the three months ended March 31, 1998 include the
results of Hesco and Atlantic Maintenance from February 20, 1998, while the
Company's results of operations for the three months ended March 31, 1997 do not
include the results of Hesco or Atlantic Maintenance. Had the Hesco Merger been
effective as of January 1, 1997, revenues for the three months ended March 31,
1997 would have been $4,875,327 as compared to $5,819,251 for the three months
ended March 31, 1998, net income for the three months ended March 31, 1997 would
have been $84,412 as compared to $567,015 for the three months ended March 31,
1998 and basic earnings per share for the three months ended March 31, 1997
would have been $0.01 per share as compared to $0.08 per share for the three
months ended March 31, 1998.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH
31, 1997.
Total revenue during the three months ended March 31, 1998 was
$3,804,269, an increase of $1,930,229 compared to total revenue of $1,874,040
during the prior comparable three-month period. One of the primary sources of
the increase is the inclusion of one month of sales of Hesco in this quarter in
the amount of $1,628,061. In addition, revenue from equipment sales, consisting
of sales of Hi-Rise Systems and trash compaction systems, decreased by $188,798
to $857,273 during the three months ended March 31, 1998, from $1,046,071 during
the prior comparable three-month period. Revenues from trash chute sales
increased by $630,774 to $1,193,876 during the three months ended March 31,
1998, from $563,102 during the prior comparable three-month period. This is
primarily a result of the inclusion of a full three months of Wilkinson sales in
1998 compared to only two months in 1997, as well as a result of increased
Wilkinson sales during the three months ended March 31, 1998. Revenue from
service and parts increased by $102,404 to $367,271 during the three months
ended March 31, 1998, compared to $264,867 during the prior comparable
three-month period. This is primarily a result of the inclusion of service and
parts for Hesco of $82,212.
During the three months ended March 31, 1998, the Company had interest
income of $175,957, an increase of $84,869 compared to $91,088 during the prior
comparable three-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 three months ended March 31, 1998
were $3,458,948, an increase of $1,378,364 compared to total operating expenses
of $2,080,584 during the prior comparable
10
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three-month period. A primary reason for the increase was the inclusion in the
three months ended March 31, 1998 of additional cost of sales for Wilkinson of
$311,122 and for Hesco of $1,117,654. Cost of equipment sold increased by
$1,198,592 from $1,197,167 during the three months ended March 31, 1997 to
$2,395,759 during the three months ended March 31, 1998. As a percentage of
equipment sales, trash chute sales and service and parts revenue, cost of
equipment sold decreased to 63% during the three months ended March 31, 1998
from 64% during the prior comparable three-month period. Selling and marketing
expenses during the three months ended March 31, 1998 were $399,441, an increase
of $24,398 compared to selling and marketing expenses of $375,043 during the
prior comparable three-month period. Selling and marketing expenses for the
three months ended March 31, 1998 include approximately $26,000 of additional
expenses for Hesco for one month of 1998. General and administrative expenses
during the three months ended March 31, 1998 were $660,584, an increase of
$184,164 compared to general and administrative expenses of $476,420 during the
prior comparable three-month period. General and administrative expenses for the
three months ended March 31, 1998 include approximately $211,000 of such
expenses for Hesco. Interest expense increased by $66,449 to $133,715 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 acquisition of the
Wilkinson Assets and the Hesco Merger.
As a result, the Company realized net income of $387,563 during the
three months ended March 31, 1998, compared to a net loss of $182,722 during the
three months ended March 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had working capital of $2,118,834 and
cash and cash equivalents aggregating $1,262,547 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 a $3.0 million line of credit with Ocean Bank for its lease
financing arrangements.
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 March 31, 1998, the outstanding balance under this
line of credit was $2,891,719.
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 March 31, 1998, the Company's contingent repurchase obligations
under this arrangement equaled $146,174.
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 March 31, 1998, the outstanding balance
under this line of credit was $978,844. 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 purchase price for 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.
11
<PAGE>
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. 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 used in operating activities was $698,562 during the
three-month period ended March 31, 1997, compared to net cash provided by
operating activities of $10,073 during the three-month period ended March 31,
1998. The change was primarily attributable to the change from a net loss to net
income. In addition, accounts receivable increased by $192,232 and accounts
payable decreased by $368,882. The increase in accounts receivable is the result
of increased sales by Wilkinson and Hesco during the three months ended March
31, 1998. Accounts payable decreased as a result of purchases of equipment for
systems installed in the fourth quarter of 1997 and paid in the first quarter of
1998, the revenues from which were booked in the fourth quarter of 1997. Net
cash provided by financing activities was $3,858,365 during the three months
ended March 31, 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 consummated. Net cash used in investing activities was $3,740,022 during the
three months ended March 31, 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.
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.
12
<PAGE>
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
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: May 14, 1998 By: /S/ DONALD ENGEL
-----------------
Donald Engel, Chairman of the Board and
Chief Executive Officer (principal executive
officer)
Date: May 14, 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 MONTHS ENDED MARCH 31, 1997 AND MARCH 31, 1998
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1997 MARCH 31, 1998
-------------- --------------
<S> <C> <C>
Basic Calculation:
Net income (loss) $ (182,722) $ (387,563)
========== ==========
Weighted average shares outstanding 5,585,833 7,326,936
========== ==========
Basic income (loss) per share $ (0.03) $ 0.05
========== ==========
Diluted Calculation:
Net income (loss) $ (182,722) $ (387,563)
========== ==========
Weighted average shares outstanding 5,585,833 7,326,936
Diluted effect of common stock equivalents 0 3,745,486
---------- ----------
Diluted weighted average shares outstanding
and common stock equivalents 5,585,833 11,072,422
========== ==========
Diluted income (loss) per share $ (0.03) $ 0.04
========== ==========
</TABLE>
The effect of 1,310,111 shares of potential common stock were anti-dilutive for
the three months ended March 31, 1997.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1998
<CASH> 1,262,547
<SECURITIES> 157,101
<RECEIVABLES> 6,509,213
<ALLOWANCES> (799,316)
<INVENTORY> 3,480,055
<CURRENT-ASSETS> 11,165,145
<PP&E> 3,366,412
<DEPRECIATION> 1,749,803
<TOTAL-ASSETS> 29,621,230
<CURRENT-LIABILITIES> 9,046,311
<BONDS> 0
0
2
<COMMON> 90,437
<OTHER-SE> 17,529,480
<TOTAL-LIABILITY-AND-EQUITY> 29,621,230
<SALES> 3,804,269
<TOTAL-REVENUES> 3,804,269
<CGS> 2,395,759
<TOTAL-COSTS> 3,458,948
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 133,715
<INCOME-PRETAX> 387,563
<INCOME-TAX> 0
<INCOME-CONTINUING> 387,563
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 387,563
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.04
</TABLE>
