<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 2000
[ ] 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.
-------------------------------
(Exact Name of Registrant 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
-----------------------------------------
(Address of Principal Executive Offices)
(305) 597-0243
--------------
(Registrant's Telephone Number, Including Area Code)
Check whether the registrant: (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 [ ]
As of November 7, 2000, the Registrant had an aggregate of 15,940,901 shares of
its common stock, par value $.01 per share, issued and outstanding.
<PAGE>
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Consolidated Financial Statements 3
Consolidated Balance Sheets as of September 30, 2000 and
December 31, 1999 3
Consolidated Statements of Operations for the three and
nine months ended September 30, 2000 and 1999 4
Consolidated Statement of Changes in Shareholders' Equity
for the nine months ended September 30, 2000 5
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2000 and 1999 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
EXHIBIT INDEX 20
</TABLE>
2
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HI-RISE RECYCLING SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
(UNAUDITED)
IN THOUSANDS, EXCEPT SHARE DATA
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 253 $ 194
Investments 12 170
Accounts receivable, net of allowance for doubtful accounts
of $1,239 and $293 in 2000 and 1999, respectively 17,854 14,620
Inventories 12,155 10,519
Other assets, net 1,729 2,144
------- -------
Total current assets 32,003 27,647
Property and equipment, net 5,995 5,779
Net investment in sales type leases 7,528 10,108
Prepaid financing costs 2,157 2,340
Deferred acquisition costs --- 380
Other assets 529 777
Goodwill, net 47,961 47,683
------- -------
Total assets $96,173 $94,714
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $10,508 $ 5,671
Cash overdrafts 1,026 739
Income taxes payable 461
Current portion of long-term debt 53,084 17,975
------- -------
Total current liabilities 64,618 24,846
Long-term debt 1,100 33,401
------- -------
Total liabilities 65,718 58,247
------- -------
Mandatorily redeemable preferred stock, $.01 par value per share;
50 shares authorized; 50 and 0 shares issued and outstanding at
September 30, 2000 and December 31, 1999, liquidation preference of $500 500 ---
------- -------
Shareholders' equity:
Preferred stock, $.01 par value per share;
1,000,000 shares authorized; 100 and 200 shares issued and outstanding
at September 30, 2000 and December 31, 1999, liquidation preference
of $1,000 --- ---
------- -------
Common stock, $.01 par value per share;
50,000,000 shares authorized, 15,866,285 and 13,757,472
shares issued and outstanding at September 30, 2000 and
December 31, 1999, respectively 158 137
Additional paid-in capital 39,715 37,482
Accumulated deficit (9,918) (1,152)
------- -------
Total shareholders' equity 29,955 36,467
------- -------
Total liabilities and shareholders' equity $96,173 $94,714
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
3
<PAGE>
HI-RISE RECYCLING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999 SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------- ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Total revenues $ 17,019 $ 15,471 $ 51,206 $ 44,586
----------- ----------- ----------- -----------
Costs and Expenses:
Costs of equipment and parts sold 16,528 10,880 40,889 31,043
Selling and marketing 1,160 483 3,205 1,679
General and administrative 6,044 1,916 12,130 6,072
----------- ----------- ----------- -----------
Total operating costs and expenses 23,732 13,279 56,224 38,794
----------- ----------- ----------- -----------
Operating income (loss) (6,713) 2,192 (5,018) 5,792
Other income (expense):
Interest income 136 331 480 1,094
Interest expense (1,703) (819) (4,693) (2,639)
----------- ----------- ----------- -----------
Income (loss) before income taxes (8,280) 1,704 (9,231) 4,247
Benefit (provision) for income taxes 190 (704) 550 (1,138)
----------- ----------- ----------- -----------
Net income (loss) (8,090) 1,000 (8,681) 3,109
Dividends on preferred stock 85 --- 85 ---
----------- ----------- ----------- -----------
Net income (loss) applicable to common
shareholders $ (8,175) $ 1,000 $ (8,766) $ 3,109
=========== =========== =========== ===========
Net income (loss) per common share
Basic (0.52) 0.07 (0.58) 0.25
Diluted (0.52) 0.07 (0.58) 0.21
Weighted average common shares outstanding
Basic 15,858,997 13,485,252 15,192,763 12,619,274
Diluted 15,858,997 14,446,864 15,192,763 14,833,501
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
4
<PAGE>
HI-RISE RECYCLING SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
IN THOUSANDS, EXCEPT SHARE DATA
<TABLE>
<CAPTION>
SHARES OF ADDITIONAL TOTAL
COMMON PREFERRED COMMON PAID-IN ACCUMULATED SHAREHOLDERS
STOCK STOCK STOCK CAPITAL DEFICIT EQUITY
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999 13,757,472 -- $137 $37,482 $(1,152) $36,467
Issuance of common stock 1,559,163 16 2,153 2,169
5 (5) --
Conversion of preferred stock 549,650
into common stock
Dividend requirement on preferred
stock 85 (85) --
Net loss (8,681) (8,681)
---------- ------- ---- ------- ------- -------
Balance at September 30, 2000 15,866,285 -- $158 $39,715 $(9,918) $29,955
========== ======= ==== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
5
<PAGE>
HI-RISE RECYCLING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
IN THOUSANDS
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------ ------------------
<S> <C> <C>
NET CASH USED IN OPERATING ACTIVITIES $ (4,089) $ (2,717)
--------- ----------
INVESTING ACTIVITIES:
Purchase of businesses net of cash acquired (776)
Sales and redemptions of investments 158
Purchase of property and equipment (1,172) (942)
--------- ----------
Net cash used in investing activities (1,014) (1,718)
--------- ----------
FINANCING ACTIVITIES:
Draws from line of credit 8,434 4,600
Payment of long-term debt (4,059)
Issuance of mandatory redeemable preferred stock 500
Cash overdrafts 287
---------
Net cash provided by financing activities 5,162 4,600
Net increase in cash and cash equivalents 59 165
Cash and cash equivalents, beginning of period 194 324
--------- ----------
Cash and cash equivalents, end of period $ 253 $ 489
========= ==========
Purchase of businesses, net of cash acquired:
Working capital, other than cash $ (1,731)
Property and equipment (1,635)
Cost in excess of net assets acquired, net (11,943)
Long term debt 11,583
Common stock issued 2,950
----------
Net cash used to acquire businesses $ (776)
==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
6
<PAGE>
HI-RISE RECYCLING SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
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 of Hi-Rise Recycling Systems, Inc. (the "Company"), for the year ended
December 31, 1999 as filed with the Securities and Exchange Commission. The
December 31, 1999 balance sheet was derived from audited consolidated financial
statements, but does not include all disclosures required by generally accepted
accounting principles.
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all normal and recurring adjustments necessary for a fair
presentation of the Company's financial position, results of operations and cash
flows as of the dates and for the periods presented. The consolidated results
of operations for the nine months ended September 30, 2000 are not necessarily
indicative of the results to be expected for the full year.
2. INVENTORIES
Inventories as of September 30, 2000 consisted of the following (amounts in
thousands):
Raw materials $ 7,391
Work in process 1,234
Finished goods 3,530
-------
$12,155
=======
3. SEGMENTS OF THE BUSINESS
The Company operates in the United States and Canada in two primary industry
segments: (1) Architectural Specified Services which involves complete handling
of waste stream in high-rise buildings and (2) Solid Waste Equipment which
involves the construction, repair and maintenance of waste handling equipment,
trucks and transfer stations. The following is a summary of selected data for
these business segments (amounts in thousands):
<TABLE>
<CAPTION>
ARCHITECTURAL SOLID WASTE CONSOLIDATED
SPECIFIED SERVICES EQUIPMENT TOTAL
------------------ --------- -----
<S> <C> <C> <C>
AS OF AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2000
Revenues $ 10,582 $ 40,624 $ 51,206
Loss before income taxes (2,255) (6,976) (9,231)
Total assets $ 27,848 $ 68,325 $ 96,173
AS OF AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1999
Revenues $ 8,775 $ 35,811 $ 44,586
Income before income taxes 456 5,336 5,792
Total assets $ 29,627 $ 49,561 $ 79,188
</TABLE>
Total assets reflected above for the Architectural Specified Services Division
include the assets of the corporate parent company.
4. INCOME TAXES
7
<PAGE>
The benefit for income taxes primarily represents the expected amount to be
recovered for the payment of prior year's Federal income taxes. Because of the
losses incurred during the current year, the Company has recorded a valuation
allowance against substantially all deferred tax assets representing primarily
the tax benefit of net operating loss carryforwards.
5. PER SHARE DATA
Basic net income (loss) per common share is calculated by dividing net income
(loss) available to common shareholders by the weighted net average common
shares outstanding during the periods presented. Diluted net income (loss) per
share is calculated by dividing net income (loss) available to common
shareholders by the weighted average number of common shares outstanding,
increased by the assumed conversion of other potentially dilutive securities
during the period.
Shares used in the dilutive calculation include the weighted average effect of
shares assumed to be issued under options and warrants under the treasury stock
method. In addition, the calculation includes the dilutive effect of the
assumed conversion into common shares of the Company's Series B Preferred Stock
and the resulting elimination of the stated dividend requirements, which are
payable in common stock upon conversion of the Series B Preferred Stock.
Potentially dilutive shares as of September 30, 2000 were excluded from the
fully diluted loss per share calculation for the three and nine months ended
September 30, 2000 because their effect would have been anti-dilutive to the net
loss incurred by the Company. Accordingly, the amount reported for basic and
diluted net loss per share was the same. Potentially dilutive shares which were
not included in the diluted loss per share calculation for the three and nine
months ended September 30, 2000 include 6,726,880 shares of common stock assumed
to be issued under options and warrants and 444,444 shares of common stock
resulting from the assumed conversion into common stock of the Company's Series
B Preferred Stock and the resulting elimination of the stated dividend
requirements.
6. PREFERRED SHARES
In 1997, the Company sold 200 shares of newly created Series B non-voting
convertible preferred stock, par value of $.01 per share (the "Series B
Preferred Stock"), and warrants to purchase an aggregate of 888,887 shares of
common stock at $2.25 per share, in a private placement for an aggregate
purchase price of $2,000,000. During June 2000, 100 of the Series B non-voting
convertible preferred stock were converted, pursuant to its original terms, into
549,650 shares of common stock at a per share conversion price of $2.25. Common
shares issued upon conversion included 105,206 shares issued as dividends.
On July 5, 2000, the Company sold 50 shares of newly created 13% Series C
Preferred Stock, $0.01 par value per share (the "Series C Preferred Stock"), to
Don Engel, the Company's Chief Executive Officer, for an aggregate purchase
price of $500,000. The Series C Preferred Stock shall rank: (i) prior to all of
the Company's common stock; (ii) prior to any class or series of capital stock
of the Company hereafter created specifically ranking by its terms junior to any
Series C Preferred Stock of whatever subdivision, and (iii) junior to the
Company's Series B Preferred Stock, in each case as to distributions of assets
upon liquidation, dissolution or winding up of the Company, whether voluntary or
involuntary.
The holders of the Series C Preferred Stock shall be entitled to receive
cumulative cash dividends, payable quarterly in arrears, at the rate per share
of 13% per annum. Dividends on the Series C Preferred Stock shall accrue from
the date of issuance or thereafter, from the most recent date on which dividends
were payable, and shall be payable quarterly each year. The Series C Preferred
Stock may be redeemed, in whole or in part, at the option of the Company at any
time prior to October 31, 2001 at $10,000 per share, plus accrued and unpaid
dividends, if any, to the date of redemption. Any and all outstanding shares of
Series C Preferred Stock shall be redeemed by the Company no later than October
31, 2001.
8
<PAGE>
7. CREDIT FACILITY
On June 30, 2000, the Company entered into a second amendment to the Company's
credit agreement with General Electric Capital Corporation ("GECC") as
administrative agent, and other participating lenders (the "Credit Facility") to
increase the availability under the Credit Facility from $61 million to $63
million. On October 19, 2000, the Company entered into a third amendment to the
Credit Facility to allow for overline advances in the aggregate amount of
$500,000 notwithstanding the existence of the pending defaults. The increase in
the available lines of credit under the Credit Facility has been used for
working capital requirements.
The Credit Facility is collateralized by all of the Company's existing and after
acquired tangible and intangible assets and any future insurance proceeds. In
addition the Company and all its subsidiaries cross-guaranteed the financing.
The Credit Facility contains, among other things, the maintenance of certain
financial covenants and limitations on and/or prohibition of mergers and
acquisitions and various commercial and equity transactions.
The Credit Facility requires the Company to maintain certain covenants and
borrowing base eligibility requirements. The Company is currently in default
under its Credit Facility under both its borrowing base eligibility and other
financial covenants.
On October 16, 2000, the Company engaged Grisanti, Galef, and Goldress, Inc
(GGG), a corporate performance consulting firm with experience in providing
interim leadership to under-performing companies, to perform an assessment of
the Company's operations, recent manufacturing and management directives and
make recommendations for the Company's operating strategies. Based upon the
recommendations of GGG, the Board of Directors determined to further retain GGG.
GGG, represented by Dr. James Ashton a GGG partner, will assume responsibility
for the operational management of the Company. Donald Engel, Chairman of the
Board and Chief Executive Officer (CEO) has requested that the Board of
Directors delegate his CEO responsibilities to Dr. Ashton.
The Company is continuing its discussions with GECC and the other lenders to
restructure its existing Credit Facility and secure additional working capital.
There are no assurances that the Credit Facility will be restructured
successfully or that additional working capital will be provided. If the
Company is not able to amend, modify or restructure the Credit Facility, GECC
and the other lenders could declare all amounts outstanding, together with
accrued interest, to be immediately due and payable. As the Company does not
currently have existing liquidity to repay these amounts, GECC and the other
lenders could proceed against the collateral, which would have a material
adverse effect on the Company's business and financial condition. Since the
Company is in default, all amounts due under the Credit Facility are presented
as current liabilities in the accompanying balance sheet as of September 30,
2000.
8. LEGAL MATTERS
As a result of operations conducted in the ordinary course of business, from
time to time the Company may be, and currently is, subject to product liability
and/or warranty claims and litigation. The Company believes, though no absolute
assurance can be given to that effect, that the current levels of coverage
provided by the Company's product liability insurance policy are adequate and
that any such claims will not have a material adverse effect on the Company's
financial condition or results of operations.
On or about July 31, 2000, the Commissioner of Environmental Protection for the
State of Connecticut (the "Plaintiff") brought an action in Superior Court,
Judicial District of Hartford, State of Connecticut, against DeVivo Industries,
Inc. ("DeVivo"), a wholly-owned subsidiary of the Company, alleging that DeVivo
violated several provisions of Connecticut law by its failure to obtain permits
relating to its construction, installation and operation in 1986 and 1994 of
paint spray booths used in its manufacturing processes. The Plaintiff is seeking
civil penalties not to exceed $25,000 per day for each day of violation on or
after October 1, 1990 and civil penalties not to exceed $1,000 per day for each
day of violation prior to October 1, 1990.
The Company believes that it is entitled to be indemnified for substantially all
liability for this action by the former shareholders of DeVivo pursuant to the
terms and conditions of the Stock Purchase Agreement dated as of February 23,
1999, by and among the Company, DII Acquisition Corp., DeVivo, Ecological
Technologies and the shareholders of DeVivo. However, there can be no assurance
that those shareholders will satisfy their indemnification obligations.
The Company believes that this action will not have a material adverse effect on
its financial condition or results of operations, however, the Company cannot
currently predict the outcome of this matter.
9
<PAGE>
9. RECLASSIFICATIONS
Certain prior period amounts in the consolidated financial statements have been
reclassified to conform with the current period presentation.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Hi-Rise Recycling Systems, Inc. (the "Company") was incorporated in May 1990 and
was engaged principally in product development until January 1991, when it
installed the first Hi-Rise System, on a shared savings basis. The Company only
began to generate significant revenues in 1998.
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 and commercial
buildings. Subsequent to such time, the Company has made a number of
acquisitions of businesses in its solid waste equipment and architectural
specified services segments. In 1999, the Company acquired DeVivo Industries,
Inc. ("DeVivo"), Kohlman Engineering Corp. ("Kohlman") and American Gooseneck,
Inc. ("American Gooseneck" or "AG Products"). DeVivo and American Gooseneck are
engaged in the business of manufacturing, marketing and selling solid waste
handling equipment. Kohlman manufactures, markets, sells and services waste
compactors and trash chutes. The Company anticipates that in the future the
Hesco Sales, Inc. ("Hesco"), Bes-Pac, Inc. ("Bes-Pac"), DeVivo and American
Gooseneck 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-type leases of the Hi-Rise System.
The Company's results of operations for the three and nine months ended
September 30, 1999 include the results of Hesco, Bes-Pac and Acme Chute Company
("Acme Chute"), for the full three and nine months and the results of operations
of DeVivo from March 1999. The Company's results of operations for the three
and nine months ended September 30, 2000 also include DeVivo, Kohlman and
American Gooseneck for the full three and nine months and for the three months
ended September 30, 2000 its recently opened Mid South manufacturing facility
located in Memphis, Tennessee. Accordingly, the Company's results of operations
for the three and nine months ended September 30, 2000 and 1999 are not
comparable in certain material respects.
BUSINESS SEGMENTS
The Company operates in two segments comprised of the Architectural Specified
Services Division, which through its manufacturing facilities, manufactures the
Hi-Rise System and rubbish, linen and laundry chutes designed primarily for
multi-story residential and commercial buildings and the Solid Waste Equipment
Division; which, through its four operations and seven manufacturing
facilities, manufactures a wide line of solid waste handling equipment.
Currently, approximately 80% of the Company's revenues are derived from its
Solid Waste Equipment Division and the other 20% of its revenues are derived
from its Architectural Specified Services Division.
CURRENT BUSINESS ENVIRONMENT
Commencing in late 1999 and continuing through the current year, the Company's
business has suffered from softened demand for its products due in large part to
competition and to decreased equipment expenditures from its largest customers.
Although overall revenues of the Company have increased over the prior year and
recently backlog has increased substantially, this has primarily been
accomplished through acquisitions, expansion activity and new product
introductions, as generally individual subsidiaries principally in the Solid
Waste Equipment Division have not performed at projected or prior year levels.
The Company has also experienced increased steel costs, which comprise the
largest material component in all of its products and more recently, aggressive
competitive pricing introduced in certain of its key Solid Waste Equipment
Division markets. In addition, the recent opening of new production facilities,
expansion of existing facilities, the introduction of new product lines and the
re-designing and shifting of production among its manufacturing facilities have
all contributed to plant and labor manufacturing inefficiencies and a
significant deterioration in operating margins. This situation, coupled with
the task of integrating all of the Company's acquisitions, has led to a number
of recent management initiatives which will continue throughout the remainder of
the year.
These initiatives have included the review of the manufacturing processes and
staffing levels at all locations and the recent change in production management
in two of its four Solid Waste Equipment operations. Management is also
examining the products being manufactured by its various facilities and a review
of all of its products to determine if standardization and/or product
rationalization is warranted in light of the current business environment
described above.
11
<PAGE>
The initiatives have also entailed an extensive review of its balance sheet,
including the review of its allowance for doubtful accounts, exposures related
to slow paying or non-paying sales type lease customers, the carrying value of
its inventories in view of the manufacturing conditions discussed above and
exposure to loss related to certain distributor accounts.
This review has resulted in significant charges being recorded in the third
quarter, certain of which, management believes are non-recurring in nature. In
addition, due to the business environment described above, increased customer
leverage and delinquencies due, in many cases to increased competition, have
required the recording of additional reserves in excess of historical levels.
Also, recent changes related to inventory production processes and product lines
have had and will continue to have a negative impact on the Company's operating
margins until the changes are fully implemented and absorbed in the
manufacturing facilities, which management believes could continue until the
first quarter of 2001.
The charges that management believes are non-recurring in nature are broadly
comprised of inventory related charges of $2,000,000 incurred during the three
months ended September 30, 2000, consisting of start-up and expansion
inefficiencies of certain new and existing facilities, severance and relocation
activities related to these facilities and charges to reduce current inventory
values and to record increased reserves for slow-moving and potentially obsolete
inventory which amounts are recorded in cost of equipment and parts sold. In
addition, charges of $1,000,000 related to potential losses on three distributor
accounts which have been or are being reviewed for termination, charges related
to the re-negotiation of six sales-type lease receivable accounts, residual
adjustments and certain other lease related issues of $700,000, and increased
bad debt expenses over historical levels of $200,000, due to increased
delinquencies and an increase in accounts receivable, all of which have been
recorded in general and administrative expenses during the three months ended
September 30, 2000. The re-negotiation of the leases was agreed to by the
Company to generate cash flows out of non-performing leases and represents the
only significant re-negotiations required out of the approximately 125 leases
entered into by the Company to date.
The Company's Credit Facility with GECC and the other lenders requires the
maintenance of certain financial covenants, borrowing base eligibility and other
restrictions. The Company is currently in default under its Credit Facility
under both its borrowing base eligibility and other financial covenants. (See
LIQUIDITY AND CAPITAL RESOURCES.)
RECENT DEVELOPMENTS
On October 16, 2000, the Company engaged Grisanti, Galef, and Goldress, Inc
(GGG), a corporate performance consulting firm with experience in providing
interim leadership to under-performing companies, to perform an assessment of
the Company's operations, recent manufacturing and management directives and
make recommendations for the Company's operating strategies. Based upon the
recommendations of GGG, the Board of Directors determined to further retain GGG.
GGG, represented by Dr. James Ashton a GGG partner, will assume responsibility
for the operational management of the Company. Donald Engel, Chairman of the
Board and Chief Executive Officer (CEO) has requested that the Board of
Directors delegate his CEO responsibilities to Dr. Ashton.
Dr. Ashton has appointed Mel Johnson as Chief Operating Officer of the Waste
Equipment Division, Michael Bracken, an employee of the Company, as acting Chief
Operating Officer of the Architectural Products Division and Ron Miller as
financial management consultant to Kevin Bartczak, Chief Financial Officer of
the Company. Messrs. Johnson, Bracken, Miller and Bartczak will report to Dr.
Ashton.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
Total revenue during the three months ended September 30, 2000 was $17,019,000,
an increase of $1,548,000 compared to total revenue of $15,471,000 during the
comparable three-month period of 1999. The primary sources of the increase are
the inclusion of AG Products, Kohlman, and Mid-South revenue and the ramp-up of
Recycletech in the three-month period ended September 30, 2000 in the aggregate
amount of $3,775,000. These increases were offset, in part, offset by a
decline in revenue throughout the rest of the solid waste division of $1,125,000
and in the architectural division of $1,100,000.
Costs of equipment and parts sold increased by $5,648,000 from $10,880,000
during the three months ended September 30, 1999 to $16,528,000 during the three
months ended September 30, 2000. This increase is attributable to the inclusion
of AG Products,
12
<PAGE>
Kohlman and Mid-South and the ramp-up of Recycletech aggregating $3,575,000,
which amount includes along with the rest of the facilities additional reserves
for slow-moving and potentially obsolete inventories discussed above. This
increase is also due to general plant inefficiencies, increased steel prices,
labor and overhead absorption adjustments due to less than anticipated third
quarter sales and projected sales levels for the remainder of the year and to a
lesser extent, product mix. These charges were determined and recorded during
the three months ended September 30, 2000, which are impacted by estimates
required in costing the Company's manufactured product during interim periods.
Selling and marketing expenses during the three months ended September 30, 2000
were $1,160,000 an increase of $677,000 compared to selling and marketing
expenses of $483,000 during the comparable three-month period of 1999. Selling
and marketing expenses for the three months ended September 30, 2000 include
$175,000 for the American Gooseneck, Kohlman and Mid-South operations which were
not in the results in 1999. In addition, selling and marketing expenses
increased $375,000 due to salaries and other marketing expenses related to
marketing of the Company's national accounts. Other increases also include
increased sales commissions of $50,000. The remaining increase is primarily due
to inflation increases along with efforts at the local level to expand its
selling and marketing activities.
General and administrative expenses during the three months ended September 30,
2000 were $6,044,000 an increase of $4,128,000 compared to general and
administrative expenses of $1,916,000 during the comparable three-month period
of 1999. General and administrative expenses for the three months ended
September 30, 2000 include the expenses discussed above associated with
potential losses for certain distributor accounts of $1,000,000, the re-
negotiation of certain lease receivable accounts, residual adjustments and
certain other lease related issues of $700,000 and increased bad debt expenses
over historical levels of $200,000. General and administrative expenses also
include $325,000 for the American Gooseneck, Kohlman and Mid-South operations
which were not in the results in 1999 and $125,000 in increased general and
administrative expenses due to the ramp-up of operations in the Company's
Canadian Recycletech subsidiary. Other increases include general salary and
inflation increases of $200,000, increased insurance costs of $150,000,
increased goodwill amortization expense of $125,000 and increased travel costs
of $150,000. In addition, the Company increased other reserves by $300,000 due
to the business conditions described above and due to overall increased sales.
The Company also wrote-off costs of $100,000 resulting from a potential
acquisition which may no longer be pursued and incurred $100,000 in connection
with a special customer incentive program for receivable collection efforts.
Interest expense increased by $884,000 to $1,703,000 from $819,000 in the prior
year comparable three-month period, as a result of increased borrowings under
the Company's credit facilities. These credit facilities have financed
substantially all of the Company's acquisitions and are used to finance its
working capital needs, which have increased significantly through increases in
inventories, accounts receivable and accounts payable.
During the three months ended September 30, 2000, the Company recognized
interest income of $136,000, a decrease of $195,000 compared to $331,000 during
the comparable three-month period of 1999. The decrease is primarily
attributable to the substantial reduction in the Company's investment in sales
type leases of Hi-Rise Systems and waste equipment and lower cash availability
in 2000 as compared to 1999. The lower investment in sales type leases results
from the sale of $3,300,000 of the leases in late 1999 and in June 2000, offset
by new leases entered into during the current year and the re-negotiations of
certain leases described above. The Company's investment in sales type leases
is expected to continue to decline as the Company sells its leases from time to
time and concentrates on selling its Hi-Rise Systems and waste equipment
outright rather than financing the equipment sales through lease arrangements.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
Total revenue during the nine months ended September 30, 2000 was $51,206,000,
an increase of $6,620,000 compared to total revenue of $44,586,000 during the
comparable nine-month period of 1999. The primary sources of the increase are
the inclusion of AG Products, Kohlman, and Mid-South revenue and the ramp-up of
Recycletech in the nine-month period ended September 30, 2000 in the aggregate
amount of $9,700,000. This increase was, in part, offset by a decline in
revenue throughout the rest of the solid waste division of $3,200,000.
Costs of equipment and parts sold increased by $9,846,000 from $31,043,000
during the nine months ended September 30, 1999 to $40,889,000 during the nine
months ended September 30, 2000. This increase is attributable to the inclusion
of AG Products, Kohlman and Mid-South and the ramp-up of Recycletech aggregating
$7,725,000, which amount includes along with the rest of the facilities
additional reserves for slow-moving and potentially obsolete inventories
discussed above. As a percentage of revenue, cost of equipment sold increased
to 80% during the nine months ended September 30, 2000 from 70% during the prior
comparable nine-
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month period and compared to an originally anticipated amount of 72%. This
increase is also due to general plant inefficiencies, increased steel prices,
labor and overhead absorption adjustments due to lower than anticipated actual
third quarter sales and projected sales levels for the remainder of the year and
to a lesser extent, product mix.
Selling and marketing expenses during the nine months ended September 30, 2000
were $3,205,000, an increase of $1,526,000 compared to selling and marketing
expenses of $1,679,000 during the comparable nine-month period of 1999. Selling
and marketing expenses for the nine months ended September 30, 2000 include
$425,000 for the American Gooseneck, Kohlman and Mid-South operations which were
not in the results in 1999. In addition, selling and marketing expenses
increased $750,000 due to salaries and other marketing expenses related to
marketing of the Company's national accounts. Other increases also include
increases of $375,000 attributable to an effort at the local level to expand its
marketing activities.
General and administrative expenses for the nine months ended September 30, 2000
were $12,130,000, an increase of $6,058,000 from the comparable nine-month
period of 1999. General and administrative expenses for the nine months ended
September 30, 2000 include the expenses discussed above associated with
potential losses for certain distributor receivables of $1,000,000, the re-
negotiation of certain lease receivable accounts, residual adjustments and
certain other lease related charges of $750,000 and increased bad debt expenses
over historical levels of $200,000. General and administrative expenses also
include $1,200,000 for the American Gooseneck, Kohlman and Mid-South operations
which were not included in the results in 1999 and for DeVivo which was not
included in the operations until March 1999 and $300,000 in increased general
and administrative expenses due to the ramp-up of operations in the Company's
Canadian Recycletech subsidiary. Other increases include general salary and
inflation increases of $300,000, increased insurance costs of $250,000,
increased goodwill amortization expense of $350,000 and increased travel costs
of $200,000. In addition, the Company increased its reserves by $375,000 due to
the business conditions described above and due to increased overall sales. The
Company also wrote-off costs of $700,000 resulting from potential acquisitions
which are no longer being pursued, and incurred $100,000 in connection with a
special incentive program for receivable collection efforts.
Interest expense increased to $4,693,000 from $2,639,000 as compared to the
comparable nine-month period of 1999, as a result of increased borrowings under
the Company's credit facilities. These credit facilities have financed
substantially all of the Company's acquisitions and are used to finance its
working capital needs which have increased significantly through increases in
inventories and accounts receivable.
During the nine months ended September 30, 2000, the Company recognized interest
income of approximately $480,000, a decrease of $614,000 compared to $1,094,000
during the comparable nine-month period of 1999. The decrease is primarily
attributable to the substantial reduction in the Company's investment in sales
type leases of Hi-Rise Systems and waste equipment and lower cash availability
in 2000 as compared to 1999. The lower investment in sales type leases results
from the sale of approximately $3,300,000 of the leases in late 1999 and in June
2000, fewer new leases entered into in 2000 and the re-negotiations of certain
leases described above. The Company's investment in sales type leases is
expected to continue to decline as the Company sells its leases from time to
time and concentrates on selling its Hi-Rise Systems and waste equipment
outright rather than financing the equipment sales through lease arrangements.
LIQUIDITY AND CAPITAL RESOURCES
On June 30, 2000, the Company entered into a second amendment to the Company's
credit agreement with GECC as administrative agent, and the other lenders from
time to time, as they become party thereto to increase the credit facility to
$63 million. On October 19, 2000, the Company entered into a third amendment
to the Credit Facility to allow for overline advances in the aggregate amount of
$500,000 notwithstanding the existence of the pending defaults. The increase in
the available lines of credit under the Credit Facility has been used for
working capital requirements.
This facility consists of two revolving lines of credit totaling $28 million, a
$9 million term loan funded at closing, a $6 million term loan which was funded
in connection with the Company's acquisition of DeVivo and a $20 million
acquisition line used to acquire DeVivo and AG Products.
The Company's Credit Facility with GECC and the other lenders requires the
maintenance of certain financial covenants, borrowing base eligibility and other
restrictions. The Company is currently in default under its Credit Facility
under both its borrowing base eligibility and other financial covenants.
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On October 16, 2000, the Company engaged Grisanti, Galef, and Goldress, Inc
(GGG), a corporate performance consulting firm with experience in providing
interim leadership to under-performing companies, to perform an assessment of
the Company's operations, recent manufacturing and management directives and
make recommendations for the Company's operating strategies. Based upon the
recommendations of GGG, the Board of Directors determined to further retain GGG.
GGG, represented by Dr. James Ashton a GGG partner, will assume responsibility
for the operational management of the Company. Donald Engel, Chairman of the
Board and Chief Executive Officer (CEO) has requested that the Board of
Directors delegate his CEO responsibilities to Dr. Ashton.
The Company is continuing its discussions with GECC and the other lenders to
restructure its existing Credit Facility and secure additional working capital.
There are no assurances that the Credit Facility will be restructured
successfully or that additional working capital will be provided. If the
Company is not able to amend, modify or restructure the Credit Facility, GECC
and the other lenders could declare all amounts outstanding, together with
accrued interest, to be immediately due and payable. As the Company does not
currently have existing liquidity to repay these amounts, GECC and the other
lenders could proceed against the collateral, which would have a material
adverse effect on the Company's business and financial condition. Since the
Company is in default, all amounts due under the Credit Facility are presented
as current liabilities in the accompanying balance sheet as of September 30,
2000.
At September 30, 2000, the Company had a working capital deficit of $32,615,000
due to amounts borrowed from its primary lenders being presented as current
obligations, and had cash and cash equivalents aggregating $253,000, compared to
working capital of $2,801,000 and cash and cash equivalents of $194,000 at
December 31, 1999.
The Company's existing financial condition will limit its ability to obtain
additional sources of financing. If the Company is unable to obtain additional
sources of financing, or to renew, replace or modify the existing Credit
Facility with facilities of like amount, or if the Company is unable to
implement other alternative strategies, then the Company will have insufficient
cash to continue to operate as the business as it is now conducted, may be
unable, in whole or in part, to fund the purchase of equipment or fund other
working capital requirements. According, in such circumstances, the Company
would have to make choices among the various demands upon its liquidity, and
among available alternatives to increase liquidity (including asset dispositions
on then available terms), and the Company's business, financial condition and
results of operations would be materially and adversely affected.
In December 1999 and June 2000, the Company had entered into a lease financing
arrangement with Western Finance and Lease, Inc., 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. During 1999 and 2000, the Company sold the
anticipated cash flow relating to Hi-Rise System leases to Western Finance for
an aggregate of $3,300,000.
During the nine months ended September 30, 2000, net cash used by operating
activities was $4,089,000, compared to net cash used by operating activities of
$2,717,000 during the nine months ended September 30, 1999. The net cash used by
operating activities was primarily the result of the net loss of $8,681,000,
decreased by non-cash expenses of $4,000,000, coupled with an increase in
accounts receivable of $4,800,000, an increase in inventories of $1,825,000, a
decrease in net investment in sales type leases of $2,580,000 and an increase in
accounts payable and accrued liabilities of $4,200,000. Accounts receivable
increased as a result of increased sales during the comparable three-month
period of 1999 in the amount of $1,548,000 and as a result of reduced
collections at certain of the Solid Waste Equipment Division companies.
Inventory increased primarily as a result of $1,000,000 related to a large
customer order and as a result of additional inventory of $600,000 due to ramp-
up for sales backlog. Accounts payable and accrued liabilities increased as a
result of the increases in accounts receivable and inventories coupled with the
lack of available cash. Additionally, net investment in sales type leases
decreased by $2,580,000 as a result of the sales of various leases to Western
Finance noted above in the amount of $1,600,000 along with the re-negotiation of
lease receivables described above.
Net cash used in investing activities was $1,014,000 during the nine months
ended September 30, 2000. This is primarily the result of cash used for the
purchase of capital equipment. Net cash provided by financing activities was
$5,162,000 during the nine months ended September 30, 2000. This increase was
primarily the result of net borrowings, net of repayments under the Company's
Credit Facility of $4,375,000 and $500,000 obtained for the issuance of
mandatorily redeemable preferred stock.
The Company currently has no outstanding material commitments for capital
expenditures.
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CAUTIONARY STATEMENT RELATING TO FORWARD-LOOKING STATEMENTS
The foregoing Management's Discussion and Analysis of Financial Condition and
Results of Operations 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; inability to
amend or replace the Credit Facility and the effect of general economic
conditions 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATES: The Company's interest rate risk results from holding variable
rate debt obligations, as an increase in interest rates results in lower
earnings and increased cash outflows. The interest rate on the Company's Credit
Facility is payable at variable rates. The effect of a 1% increase in interest
on the Company's borrowings would result in an increase in interest expense of
$235,000 for the nine months ended September 30, 2000.
STEEL PRICES: The Company is exposed to fluctuations in steel costs, which
comprise the largest material component in all of its products. Accordingly, an
increase in steel costs would result in lower earnings and increased cash
outflows.
ITEM 1. LEGAL PROCEEDINGS
As a result of operations conducted in the ordinary course of business, from
time to time the Company may be, and currently is, subject to product liability
and/or warranty claims and litigation. The Company believes, though no absolute
assurance can be given to that effect, that the current levels of coverage
provided by the Company's product liability insurance policy are adequate and
that any such claims will not have a material adverse effect on the Company's
financial condition or results of operations.
On or about July 31, 2000, the Commissioner of Environmental Protection for the
State of Connecticut (the "Plaintiff") brought an action in Superior Court,
Judicial District of Hartford, State of Connecticut, against DeVivo Industries,
Inc. ("DeVivo"), a wholly-owned subsidiary of the Company, alleging that DeVivo
violated several provisions of Connecticut law by its failure to obtain permits
relating to its construction, installation and operation in 1986 and 1994 of
paint spray booths used in its manufacturing processes. The Plaintiff is seeking
civil penalties not to exceed $25,000 per day for each day of violation on or
after October 1, 1990 and civil penalties not to exceed $1,000 per day for each
day of violation prior to October 1, 1990.
The Company believes that it is entitled to be indemnified for substantially all
liability for this action by the former shareholders of DeVivo pursuant to the
terms and conditions of the Stock Purchase Agreement dated as of February 23,
1999, by and among the Company, DII Acquisition Corp., DeVivo, Ecological
Technologies and the shareholders of DeVivo. However, there can be no assurance
that those shareholders will satisfy their indemnification obligations.
The Company believes that this action will not have a material adverse effect on
it's financial condition or results of operations, however, the Company cannot
currently predict the outcome of this matter.
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On September 29, 2000, Reliance Metalcenter, a California corporation and a
vendor of a subsidiary of the Company ("Metalcenter"), filed a lawsuit in the
United States District Court for the Southern District of Florida against the
Company, as the alleged successor-in-interest of AG Products. The complaint
filed in this action seeks damages in the amount of $364,536.05 for breach of
contract, plus interest and related items, for metal products allegedly
purchased by the Company. The Company was delayed in responding to the
complaint and a default was entered on November 6, 2000. The Company has filed
a motion to vacate the default which has not yet been decided by the Court.
On October 19, 2000, Lawson Steel Co., Inc., an Ohio corporation and a vendor of
a subsidiary of the Company ("Lawson Steel"), filed a lawsuit in the United
States District Court for the Southern District of Florida against the Company
and DeVivo. The complaint filed in this action seeks damages in the amount of
$100,765.05 for breach of contract alleging that the Company and DeVivo owe to
Lawson Steel an amount of money equal to the damages sought for steel material
purchased by DeVivo. The suit was withdrawn without prejudice.
On November 14, 2000, Lawson Steel filed a lawsuit in the Circuit Court of the
11/th/ Judicial Circuit, in and for Miami-Dade County, Florida, against the
Company and DeVivo. The complaint filed in this action seeks damages in the
amount of $58,369.87 for breach of contract alleging that the Company and DeVivo
owe to Lawson Steel an amount of money equal to the damages sought for steel
material purchased by DeVivo.
ITEM 2. CHANGES IN SECURITIES
On July 5, 2000, the Company sold 50 shares of newly created 13% Series C
Preferred Stock, $0.01 par value per share (the "Series C Preferred Stock"), to
Don Engel, the Company's Chief Executive Officer, for an aggregate purchase
price of $500,000. The Series C Preferred Stock shall rank: (i) prior to all of
the Company's common stock; (ii) prior to any class or series of capital stock
of the Company hereafter created specifically ranking by its terms junior to any
Series C Preferred Stock of whatever subdivision, and (iii) junior to the
Company's Series B Preferred Stock, in each case as to distributions of assets
upon liquidation, dissolution or winding up of the Company, whether voluntary or
involuntary.
The holders of the Series C Preferred Stock shall be entitled to receive
cumulative cash dividends, payable quarterly in arrears, at the rate per share
of 13% per annum. Dividends on the Series C Preferred Stock shall accrue from
the date of issuance or thereafter, from the most recent date on which dividends
were payable, and shall be payable quarterly each year. The Series C Preferred
Stock may be redeemed, in whole or in part, at the option of the Company at any
time prior to October 31, 2001 at $10,000 per share (the "Redemption Price"),
plus accrued and unpaid dividends, if any, to the date of redemption. Any and
all outstanding shares of Series C Preferred Stock shall be redeemed by the
Company no later than October 31, 2001 at the Redemption Price plus accrued and
unpaid dividends.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Credit Facility requires the Company to maintain certain covenants and
borrowing base eligibility requirements. The Company is currently in default
under its Credit Facility under both its borrowing base eligibility and other
financial covenants. Accordingly, all amounts aggregating $53,084,000 due under
the Credit Facility are presented as current liabilities as of September 30,
2000. (See also LIQUIDITY AND CAPITAL RESOURCES.)
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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 18, 2000.
B. The matters voted on at the meeting consisted of the following:
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:
NAME FOR AGAINST ABSTAIN NON-VOTES
---- --- ------- ------- ---------
Don Engel 8,419,296 94,450 0 0
Ira Merritt 8,369,825 143,921 0 0
Joel Pashcow 8,367,825 145,921 0 0
Leonard Toberoff 8,372,825 140,921 0 0
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
(A) EXHIBITS:
EXHIBITS DESCRIPTION
---------------------------
27 Financial Data Schedule
(B) REPORT ON FORM 8-K:
Current Report on Form 8-K, filed on July 26, 2000.
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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: November 20, 2000 BY: /S/ DONALD ENGEL
--------------------
Donald Engel, Chairman of the Board
and Chief Executive Officer
(principal executive officer)
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EXHIBIT INDEX
EXHIBIT DESCRIPTION
-----------------------------
27 Financial Data Schedule
20
