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 June 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 Small Business Issuer as Specified in Its Charter)
FLORIDA 65-0222933
-----------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
8505 NW 74TH STREET, MIAMI, FLORIDA 33166
-----------------------------------------
(Address of Principal Executive Offices)
(305) 597-0243
--------------
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
The number of shares outstanding of the Issuer's Common Stock, $.01 Par Value,
as of August 8, 2000 was 15,845,039.
Transitional small business disclosure format:
YES [ ] NO [X]
<PAGE>
INDEX
PART I FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 2000 and
December 31, 1999 3
Consolidated Statements of Operations
for the three and six months ended
June 30, 2000 and 1999 4
Consolidated Statement of Changes in
Shareholders' Equity for the six months ended
June 30, 2000 5
Consolidated Statements of Cash Flows
for the six months ended
June 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 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
EXHIBIT INDEX 15
2
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HI-RISE RECYCLING SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2000 AND DECEMBER 31, 1999
IN THOUSANDS, EXCEPT SHARE DATA
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 576 $ 194
Investments -- 170
Accounts receivable, net of allowance
for doubtful accounts of $275 and
$293 in 2000 and 1999, respectively 19,843 14,620
Inventories 13,750 10,519
Deferred tax asset 189 189
Other assets, net 1,962 1,955
--------- ---------
Total current assets 36,320 27,647
Property and equipment, net 5,928 5,779
Net investment in sales type leases 8,490 10,108
Prepaid financing costs 2,300 2,340
Deferred acquisition costs 57 380
Deferred tax asset 326 326
Other assets 831 451
Goodwill, net 47,583 47,683
--------- ---------
Total assets $ 101,835 $ 94,714
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities 8,353 $ 5,671
Cash overdrafts 1,712 739
Income taxes payable 110 461
Current portion of long-term debt $ 22,173 $ 17,975
--------- ---------
Total current liabilities 32,348 24,846
Long-term debt 31,459 33,401
--------- ---------
Total liabilities $ 63,807 $ 58,247
--------- ---------
Shareholders' equity:
Preferred stock, $.01 par value per share;
1,000,000 shares authorized; 100 and 200 shares issued and
outstanding at June 30, 2000 and December 31, 1999,
liquidation preference of $1,000 -- --
Common stock, $.01 par value per share;
50,000,000 shares authorized,
15,837,132 and 13,757,472 shares issued and
outstanding at June 30, 2000,
and December 31, 1999, respectively 158 137
Additional paid-in capital 39,675 37,482
Accumulated deficit (1,805) (1,152)
--------- ---------
Total shareholders' equity 38,028 36,467
--------- ---------
Total liabilities and shareholders' equity $ 101,835 $ 94,714
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
3
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HI-RISE RECYCLING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
IN THOUSANDS, EXCEPT PER SHARE DATA
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Total revenues: $ 18,342 $ 16,850 $ 34,187 $ 29,117
---------- ----------- ------------ -----------
Costs and Expenses:
Costs of equipment and parts sold 12,907 11,762 24,361 20,119
Selling and marketing 1,131 601 2,045 1,196
General and administrative 2,864 2,224 6,086 4,223
---------- ----------- ------------ -----------
Total operating costs and expenses 16,902 14,587 32,492 25,538
---------- ----------- ------------ -----------
Operating income 1,440 2,263 1,695 3,579
Other income (expense):
Interest income 139 398 344 763
Interest expense (1,543) (1,129) (2,990) (1,820)
---------- ----------- ------------ -----------
Income (loss) before income taxes 36 1,532 (951) 2,522
Benefit (provision) for income taxes (15) (400) 360 (414)
---------- ----------- ------------ -----------
Net income (loss) 21 1,132 (591) 2,108
---------- ----------- ------------ -----------
Net income (loss) per
common share
Basic 0.00 0.09 (0.04) 0.17
Diluted 0.00 0.08 (0.04) 0.14
Weighted average common shares
Outstanding
Basic 15,280,153 13,016,752 14,859,647 12,528,952
Diluted 16,467,209 14,918,217 14,859,647 14,676,649
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
4
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HI-RISE RECYCLING SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2000
IN THOUSANDS, EXCEPT SHARE DATA
(UNAUDITED)
<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 1,530,010 16 2,136 2,152
Conversion of preferred stock
Into common stock 549,650 5 (5)
Dividend requirement on preferred
stock 62 (62) ---
Net loss (591) (591)
---------- ---- ---- ------- -------- -----
Balance at June 30, 2000 15,837,132 -- $158 $39,675 $(1,805) $38,028
========== ==== ==== ======= ======== =======
</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 SIX MONTHS ENDED JUNE 30, 2000 AND 1999
IN THOUSANDS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
2000 1999
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income $ (591) $ 2,108
Adjustments to reconcile net (loss) income
to net cash used in operating activities:
Depreciation and amortization 1,319 1,078
Costs in connection with uncompleted acquisition 323 --
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable (5,223) (4,508)
Inventories (3,231) (904)
Other assets (387) 627
Net investments in sales type leases 1,618 (1,404)
Accounts payable and accrued liabilities 2,682 94
Deferred financing costs 160 --
Income tax payable (351) --
-------- --------
Net cash used in operating activities (3,681) (2,909)
INVESTING ACTIVITIES:
Purchase of businesses net of cash acquired -- (469)
Sales and redemptions of investments 170 --
Purchase of property and equipment (720) (247)
-------- --------
Net cash used in investing activities (550) (716)
-------- --------
FINANCING ACTIVITIES:
Draws from line of credit 6,663 3,975
Payment of long-term debt (3,023) --
Cash overdrafts 973 --
-------- --------
Net cash provided by financing activities 4,613 3,975
-------- --------
Net increase in cash and cash equivalents 382 350
Cash and cash equivalents, beginning of period 194 325
-------- --------
Cash and cash equivalents, end of period $ 576 $ 675
-------- --------
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 -- (11,636)
Long term debt -- 11,583
Issuance of common stock -- 2,950
-------- --------
Net cash used to acquire businesses $ -- $ (469)
======== ========
</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 for the year ended December 31, 1999 of Hi-Rise Recycling Systems, Inc.
(the "Company"), as filed with the Securities and Exchange Commission. The
December 31, 1999 consolidated 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 which are
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 six months ended June 30, 2000 are
not necessarily indicative of the results to be expected for the full year.
2. INVENTORIES
Inventories as of June 30, 2000 consisted of the following (amounts in
thousands):
Raw materials $ 8,389
Work in process 839
Finished goods 4,522
-------
$13,750
=======
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>
SIX MONTHS ENDED
JUNE 30, 2000
----------------
Revenues $ 8,650 $25,537 $ 34,187
Income (loss) before income taxes $ (224) $ (727) $ (951)
Total assets $31,103 $70,732 $101,835
SIX MONTHS ENDED
JUNE 30, 1999
----------------
Revenues $ 5,304 $23,813 $ 29,117
Income (loss) before income taxes $ 297 $ 2,225 $ 2,522
Total assets $53,997 $22,218 $ 76,215
</TABLE>
4. PER SHARE DATA
Basic net income (loss) per 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 preferred stock and the resulting
elimination of the stated dividend requirements, which are payable in common
stock upon conversion of the preferred stock.
Potentially dilutive shares as of June 30, 2000 were excluded from the fully
diluted loss per share calculation for the six months ended June 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
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<PAGE>
share was the same. Potentially dilutive shares which were not included in the
diluted loss per share calculation for the six months ended June 30, 2000
include 6,739,130 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 preferred stock and the resulting
elimination of the stated dividend requirements.
5. SHAREHOLDERS' EQUITY
In 1997, the Company sold 200 shares of newly created Series B non-voting
convertible preferred stock, par value of $.01 per share, 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 converted included 105,206 shares
issued as dividends.
In connection with the 1998 acquisition of Bes-Pac, Inc. ("Bes-Pac") and Acme
Chute Co. ("Acme"), the Company entered into contractual arrangements whereby
shares of the Company's common stock and cash may have to be issued to the
former owners of Bes-Pac and Acme upon attainment of specified financial
criteria over the twelve month period following the closings as set forth in
the acquisition agreements. During 1999, all necessary financial criteria was
achieved and the Company was required to pay an additional $1,333,334 and
$100,000 to the former owners of Bes-Pac and Acme, respectively, which was
settled through the issuance of 727,521 shares of commo stock during the first
quarter of 2000 and was recorded as additional purchase price for the related
acquisitions.
At December 31, 1999, the Company had a $1,219,000 promissory note payable to a
related party, bearing interest at prime rate plus 1/4%, and payable in
quarterly principal installments of $68,000. During February 2000, the note
payable was converted to 609,500 shares of common stock upon shareholder
approval.
During May 2000, the Company paid employee bonuses through the issuance of
192,989 shares of its common stock valued at approximately $196,000.
6. INCREASE IN 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")
administrative agent, and other participating lenders (the "Credit Facility") to
increase the availability under the Credit Facility from $61 million to $63
million. The increase in the available lines of credit under the Credit Facility
will be 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.
7. SUBSEQUENT EVENTS
In connection with the increase of the Credit Facility, 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 ranks: (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 holder of the Series C Preferred Stock is 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 will accrue from the date of
issuance or thereafter, from the most recent date on which dividends are
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 are required to be redeemed by
the Company no later than October 31, 2001.
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.
8
<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 first year in which the
Company was profitable.
The Company is primarily engaged in manufacturing, distributing, marketing and
selling solid waste handling equipment. Until February 1997, the Company was
primarily engaged in distributing, marketing and selling the Hi-Rise System, a
proprietary automated system designed to collect source-separated recyclables
and other solid waste in multi-story residential buildings. 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 sources 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, the Hi-Rise System and sales-type leases
of the Hi-Rise System.
The Company's results of operations for the three and six months ended June 30,
1999 include the results of Hesco, Bes-Pac and Acme Chute Company ("Acme
Chute"), each of which was acquired in 1998, for the full three and six months
and the results of operations of DeVivo from February 1999. The Company's
results of operations for the three and six months ended June 30, 2000 also
include the results of operations of DeVivo, Kohlman and American Gooseneck for
the full three and six months periods. Accordingly, the Company's results of
operations for the three and six months ended June 30, 1999 and 2000 are not
comparable in certain material respects.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999.
Total revenue during the three months ended June 30, 2000 was $18,342,000, an
increase of $1,492,000 compared to total revenue of $16,850,000 during the prior
comparable three-month period of 1999. This increase is primarily attributable
to the inclusion of AG Products revenue in this quarter in the amount of
$2,091,000. The impact of including AG Products revenues was in part offset by a
general decline in revenue throughout the Solid Waste Division operations of
approximately $500,000 due to a corresponding decline in orders from the
Company's major customers, Allied Waste, Waste Management and Republic
Industries who delayed capital expenditures for the quarter.
During the three months ended June 30, 2000, the Company had interest income of
$139,000 a decrease of $259,000 compared to $398,000, during the comparable
three-month period of 1999. The decrease in interest income is attributable to
the sale of certain lease receivables to Western Finance at the end of 1999 and
June 2000. Proceeds of the sales were used to reduce the balance of the
Company's lease revolving line of credit as more fully discussed in the
following discussion of LIQUIDITY AND CAPITAL RESOURCES.
Total operating expenses during the three months ended June 30, 2000 were
$16,902,000, an increase of $2,315,000 compared to total operating expenses of
$14,587,000 during the comparable three-month period of 1999. This increase is
primarily attributable to the inclusion in the three months ended June 30, 2000
of additional operating cost for AG Products of $1,746,000 and $318,000 for
Kohlman. Cost of equipment sold increased by $1,145,000 from $11,762,000 during
the three months ended June 30, 1999 to $12,907,000 during the three months
ended June 30, 2000. As a percentage of revenue, cost of equipment sold remained
unchanged at 70% during the three months ended June 30, 2000 from 70% and the
prior comparable three-month period.
9
<PAGE>
Selling and marketing expenses during the three months ended June 30, 2000 were
$1,131,000, an increase of $530,000 compared to selling and marketing expenses
of $601,000 during the prior three-month period. Selling and marketing expenses
for the three months ended June 30, 2000 include approximately $128,000 of
expenses for AG Products and Kohlman, $150,000 in salaries from the expansion of
the sales and marketing staff at Solid Waste Division, and $160,000 of
advertising expenses attributable to the introduction of a new product line for
roll off hoists.
General and administrative expenses during the three months ended June 30, 2000
were $2,864,000 an increase of $645,000 compared to $2,224,000 during the
comparable three-month period of 1999. General and administrative expenses for
the three months ended June 30, 2000 include approximately $176,000 of such
expenses for AG PRODUCTS and Kohlman and the insurance costs of approximately
$100,000 as a result of an adjustment to workers compensation expense.
Interest expense increased by $414,000 to $1,543,000 as compared to the prior
comparable three-month period, as a result of increased borrowings under the
Company's working capital lines of credit as well as the draw on the acquisition
facility for the AG Products acquisition.
As a result, the Company realized net income of $21,000 during the three months
ended June 30, 2000, compared to net income of $1,132,000 during the three
months ended June 30, 1999.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999.
Total revenue during the six months ended June 30, 2000 was $34,187,000, an
increase of $5,070,000 compared to total revenue of $29,117,000 during the
comparable six-month period of 1999. This increase is primarily attributable to
inclusion of AG Products revenues in the amount of $4,496,000 and revenue from
equipment sales of $847,000 due to sales from Kohlman.
During the six months ended June 30, 2000, the Company had interest income of
$344,000 a decrease of $419,000 compared to $763,000 during the comparable
six-month period of 1999. The decrease in interest income is primarily
attributable to the sale of certain lease receivables to Western Finance at the
end of 1999 and June 2000. Proceeds of the sale were used to reduce the balance
of the Company's lease revolving line of credit as more fully discussed in the
following discussion of LIQUIDITY AND CAPITAL RESOURCES.
Total operating expenses during the six months ended June 30, 2000 were
$32,492,000, an increase of $6,954,000 compared to total operating expenses of
$25,538,000 during the comparable six-month period of 1999. This increase is
primarily attributable to the inclusion in the six months ended June 30, 2000 of
additional cost of sales for AG Products of $3,339,000 and Kohlman of $529,000.
Cost of equipment sold increased by $4,242,000 from $20,119,000 during the six
months ended June 30, 1999 to $24,361,000 during the six months ended June 30,
2000. As a percentage of revenue, cost of equipment sold increased to 71% during
the six months ended June 30, 2000 from 69% during the prior comparable
six-month period. The primary reason for the increase is the inclusion of the
waste equipment cost of sales, which approximates 75% of revenue. Solid waste
cost of sales is approximately 70% of revenues.
Selling and marketing expenses during the six months ended June 30, 2000 were
$2,045,000, an increase of $849,000 compared to selling and marketing expenses
of $1,196,000 during the comparable six-month period of 1999. Selling and
marketing expenses for the six months ended June 30, 2000 include approximately
$245,000 of additional expenses for AG Products and Kohlman and an increase of
$250,000 in salaries from the expansion of the sales and marketing staff at
Solid Waste Division. There was also $170,000 of advertising expenses in the
introduction of a new product line for roll off hoists.
General and administrative expenses during the six months ended June 30, 2000
were $6,086,000 an increase of $1,863,000 compared to $4,223,000 for the
comparable six-month period of 1999. General and administrative expenses for the
six months ended June 30, 2000 include approximately $450,000 of such expenses
for AG Products and Kohlman, insurance costs increased by $100,000 as a
result of an adjustment to workers compensation expense and $600,000 of expenses
related to an acquisition and financing not consummated by the company.
Interest expense increased by $1,170,000 to $2,990,000 as compared to the prior
comparable six-month period, as a result of increased borrowings under the
Company's working capital lines of credit as well as the draw on the acquisition
facility for the AG Products acquisition.
As a result, the Company realized net loss of $591,000 during the six months
ended June 30, 2000, compared to net income of $2,108,000 during the six months
ended June 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, the Company had working capital of $3,972,000 and cash and
cash equivalents of $576,000 compared to working capital of $2,801,000
and cash and cash equivalents of $194,000 at December 31, 1999.
On June 30, 2000 the Company entered into a second amendment to the Company's
credit agreement with GE Capital as administrative agent, and the other lenders,
10
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to increase the facility to $63 million. The increase in the available lines of
credit under the Credit Facility will be 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 the DeVivo and a $20 million
acquisition line used to acquire Devivo and AG Products.
Accounts receivable and inventory of the Company and its subsidiaries
collateralize one revolving line of credit in the amount of up to $19 million.
The borrowing base is calculated by taking 80% of the value of eligible
receivables and 50% of the value of eligible inventory. Approximately
$16,993,000 was outstanding under this line of credit as of June 30, 2000 and
approximately $1,500,000 was available for borrowing. The other revolving line
of credit in the amount of up to $9 million is collateralized by leases entered
into by the Company for Hi-Rise systems and other products manufactured by the
Company and its subsidiaries. The borrowing base is calculated by taking 90% of
the value of eligible leases issued by the Company for its equipment.
Approximately $6,950,000 was outstanding under this line of credit as of June
30, 2000. Both lines of credit bear interest at a rate per annum equal to the
prime rate as announced by THE WALL STREET JOURNAL plus 0.5% and are due in
October 2003. The term loan funded at closing is for $9 million and bears
interest at a fixed rate of 11% for five years. Interest only on the term loan
is payable quarterly for four and one half years with principal payable for two
quarters in the amount of $1.5 million and a $6 million dollar payment due at
October 30, 2003. The $6 million dollar term loan has a six-month period of
interest only and principal payments to be paid on a quarterly basis until
October 30, 2003. The acquisition facility also has a six-month interest only
period and quarterly principal payments due five years from the funding of the
loan. Both the $6 million term loan and the acquisition facility bear interest
at a rate of prime, as announced by THE WALL STREET JOURNAL, plus 0.5%. As part
of the credit facility provided by GECC and other lenders, the Company issued
warrants to the lenders to purchase an aggregate of 1,476,259 shares of the
Company's Common Stock.
In December 1999 and June 2000, the Company entered into a lease financing
arrangement with Western Finance and Lease, 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. During 1999, the Company sold the
anticipated cash flow relating to twenty-two (22) Hi-Rise System leases to
Western Finance for an aggregate of $1,706,566. During June 2000, the Company
sold the anticipated cash flow relating to twenty (20) Hi-Rise System leases to
Western Finance for an aggregate of $1,594,551.
During the six months ended June 30, 2000, net cash used by operating activities
was $3,681,000, compared to net cash used in operating activities of $2,909,000
during the six months ended June 30, 1999. Accounts receivable increased by
$5,223,000 as a result the delay of payments received from the Company's major
customers Allied Waste, Waste Management and Republic Waste. These companies
have extended their payments terms from approximately 45 days to 55 days. The
month of June 2000 was also the highest revenue month of the year to date and
resulted in a large increase in accounts receivable balance at the end of the
quarter. In addition, inventory increased by $3,231,000 primarily as a result of
purchases of inventory for equipment and material to support the Company's $10
million backlog. Net investment in sales type leases decreased by $1,618,000 as
a result of 20 leases sold from the lease portfolio.
Net cash used in investing activities was $550,000 during the six months ended
June 30, 2000. This is primarily the result of cash used for capital
expenditures. Net cash provided by financing activities was $4,613,000 during
the six months ended June 30, 2000. This increase was primarily the result of
proceeds on draws from the GECC credit facility.
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, efforts to establish a nationwide distribution network and
general and administrative expenses associated with the Company's business plan.
The Company anticipates, based on currently proposed plans and assumptions
relating to operations (including the anticipated costs associated with, and
timetable for, its proposed expansion), that cash flows from operations and
funds available under the Company's existing credit facilities will be
sufficient to
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satisfy the Company's contemplated cash requirements for at least 12 months. In
the event that the Company's plans change, its assumptions change or prove to
be inaccurate or if 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 equity securities, including at prices which may
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 of Financial Conditions 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 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 1. LEGAL PROCEEDINGS
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.
ITEM 2. CHANGES IN SECURITIES
In connection with the increase of the Credit Facility, 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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
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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:
(i) The election of four members to the Company's
Board of Directors. The name of each nominee for
election and the number of shares voted for and
against such nominee, as well as the number of
abstentions and broker non-votes with respect to
such nominee, are set forth below:
NAME FOR AGAINST ABSTAIN NON-VOTES
---- --- ------- ------- ---------
Don Engel 9,745,250 87,450 -0- -0-
Ira Merritt 9,695,779 136,921 -0- -0-
Joel Pashcow 9,693,779 136,921 -0- -0-
Leonard Toberoff 9,698,779 133,921 -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:
None
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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: August 11, 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
15
