Date: July 24, 1996

Location: Fort Lee

Title: Prins Recycling Files Chapter 11

Author: Diana G. Lasseter

Subject: Often, companies have to take risks if they want to grow. For one recycler, however, the rewards were short-lived.

What a difference a year can make. Last June headlines were heralding Fred Prins as the Prince of Recycling. His company, Fort

Lee-based Prins Recycling, which operates processing facilities for recyclables in Illinois, Maryland, Massachusetts, New Jersey and Pennsylvania, had enjoyed a stratospheric rise since it first began trading on the Nasdaq small-cap market in May 1993. The company reported 1994 earnings of $2.1 million excluding the effect of a $6.7 million non-cash charge, reversing a year-earlier loss of $1.1 million. Sales skyrocketed 156% to $20.2 million from $7.9 million. Its stock traded around $16 a share. Individual Investor magazine named Prins Recycling one of its Magic 25 stocks in January 1995.

By July 15, 1996, however, the magic was gone. Prins Recycling filed for Chapter 11 bankruptcy. It was the final step in a downward spiral that began in late 1995, when the company began hemorrhaging cash. In February the company made a $13 million private placement to raise capital. That same month, Jonathan Moreland, a writer for Individual Investor, recommended that investors sell their Prins stock, which-by then trading on the Nasdaq National market-had fallen to $5.63 a share. Wrote Moreland: “Prins could be in for a cash crunch, with just $1.3 million in cash as of September.” Results for 1995 held little encouragement. The company had a net loss of $3.2 million, compared with the earnings of $2.1 million that it had trumpeted a year earlier. Prins Recycling disclosed that it was in need of additional capital. The company continued to operate at a loss and had been unable to secure financing.

By June, Prins Recycling had hired Goldman Sachs to help it “explore strategic alternatives to enhance shareholder value.” It was putting itself up for sale. Today Prins admits: “We are losing money every day.”

Investors are left asking, “What happened?” Industry insiders, however, are asking each other, “What was Fred Prins thinking?” John Zozzaro, president of the New Jersey Paper Recycling Association and of Zozzaro Bros., a recycler in Clifton, has kept a thick file of news detailing Prins Recycling”s course from boom to bust. “Many of us were watching Prins as a direction to take our own businesses,” Zozzaro explains. “A year ago I said, ”Boy that Fred, did he call this industry right.” But he lost on the next spin of the wheel. It”s difficult to maintain a liberal philosophy in an industry that has been so close to the vest for so long.”

Paper prices are at the root of Prins Recycling”s troubles. Toward the end of 1994 and in the beginning of 1995, the market skyrocketed as prices for second-hand paper rose threefold over the previous year. Says John Mulligan, source department manager for Zozzaro Bros.: “1995 was an unprecedented year for scrap paper.” Prins, which receives post-consumer waste, largely newspaper, from towns at its material-recovery facilities, sorts and bundles it and then sells it to paper mills and metal smelters, had positioned itself for such a rise by securing large municipal contracts.

But then disaster struck. After prices peaked at nearly $150 a ton in June 1995, they began an unexpected, steady drop that even the most savvy of economists had not predicted. Along with it, Prins Recycling”s business and image plummeted. Says Moreland: “The dramatic rise in stock at Prins was all resting on paper prices. Fred had the brass ring out there. But Prins did not build paper tonnage enough to lock in an incremental profit, and he was at the whim of the commodity market. The drop in prices destroyed the company.” Today scrap paper prices have dipped to the point where no payment is given for newspapers or magazines. Consequently, recyclers can”t even pay to get rid of these materials, much less profit from them.

Many regard Prins Recycling”s collapse as a sad tale. Still others say Fred Prins, who has been in the forefront of the U.S. paper recycling industry for 30 years, wanted too much too fast. Very seldom has the spotlight shone so brightly on a materials recycler. The industry is dominated by small, privately owned firms. Prins Recycling, which was started in 1990, is said to be the only publicly traded company to exclusively process recyclables. That and Prins”s aggressive approach with such a young company launched Prins Recycling in recent years into the headlines of such industry watchers as Waste News, a Crain publication that reports on solid-waste management. Says a source: “Prins is not the only company that has been hurt. It is just very visible.”

Feeding Prins Recycling”s high profile has been its aggressive strategy in pursuing municipal contracts. After going public in November 1992, Prins Recycling struggled through 1993 with a poor balance sheet. A cash shortage forced the company to raise half a million dollars in working capital from existing shareholders in early 1994. Prins believed, however, that paper prices, which had been down due to excessive supply and low demand created by mandatory recycling laws, were on the rise.

In May 1994, Prins Recycling announced a positive cash flow and earnings for its first quarter. A whirlwind of growth followed. In June, the company was awarded the contract for processing and marketing all of the curbside recyclables generated by the city of Boston. The firm also signed a deal to supply a Maine de-inking plant with 33,000 tons of reclaimed paper per year. That September, Prins Recycling bought its second material recovery facility-the first of which was in Boston-in Pittsburgh. In January 1995, it acquired Recycling Systems, a Newark-based paper recycling company.

That August, Prins Recycling negotiated a contract with Pittsburgh that required the company to pay the city a flat $42.50 a ton for the material it processed. According to industry sources, many of the Prins Recycling contracts involved fixed prices and were for as long as five years. Competitors were disconcerted by those terms. “Recycling is a very mercurial industry,” explains Zozzaro. “I”ve been in the business for 26 years, and I still can”t predict it beyond six months. When we saw Prins negotiating fixed-price, long-term contracts, a lot of us feared that the slingshot would backfire.”

The backfire happened when paper prices plummeted. Unable to process all the incoming material, Prins Recycling was caught dumping Pittsburgh”s household recyclables in the Alden landfill in Washington County, Pa. last month. As a result, the city later ended its contract with the company. According to Pittsburgh officials, Prins Recycling had not paid the $42.50 built into its contract since last year.

What made Fred Prins so confident? Says he: “I had a binding contract with an end-user of the material, then I set a contract with a generator. That way I would have a predictable profit stream.” Sources say a major problem with that strategy is that the mills-the end-users-dictate the market. “When the paper prices dropped, many of the mills said that they could not live up to their contracts with us,” admits Prins. “The mills knew we wouldn”t sue them because we needed them.” Likewise, Prins could not satisfy, or take the time to renegotiate, its contracts with municipalities.

A reorganization plan under Chapter 11 is ready to go, and it may put the company back in the black. Prins Recycling has reached an agreement with Midlantic Bank NA to provide debtor-in-possession financing. Says Prins: “We have to make money on every pound of material that goes over our scale.” The company will charge “what the market dictates” for material coming into its processing facilities. Prins would only add, “I want to take the commodity risk out of Prins Recycling.”

The recycling industry will be talking about Fred Prins and the flash of light created by Prins Recycling for years. Many insiders echo Zozzaro”s sentiments. Says he: “Fred is a very knowledgeable and nice guy. You”ve got to give him credit for trying.” Those same people have also learned a valuable lesson from watching the rise and fall of one of their own. Adds Zozzaro: “Experience teaches conservatism.”