<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 8-K/A
Amendment No. 1
to Current Report
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): December 14, 1999
-----------------
CASELLA WASTE SYSTEMS, INC.
---------------------------
(Exact name of Registrant as specified in its Charter)
Delaware 0-23211 03-0338873
-------- ------- ----------
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
25 Greens Hill Lane, Rutland, Vermont 05701
- ---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (802) 775-0325
--------------
Not Applicable
-------------------------------------
(Former Name or Former Address, if Changed
Since Last Report)
<PAGE>
The undersigned Registrant hereby amends Item 7 of its Current Report on
Form 8-K dated December 22, 1999 to read in its entirety as follows:
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
On December 14, 1999, the Registrant completed the acquisition of KTI,
Inc., a New Jersey corporation ("KTI"). The acquisition was consummated pursuant
to an Agreement and Plan of Merger, dated as of January 12, 1999, as amended
(the "Merger Agreement"), providing for the merger of Rutland Acquisition Sub,
Inc., a New Jersey corporation and a wholly-owned subsidiary of the Registrant,
with and into KTI (the "Merger"), with KTI surviving the merger as a
wholly-owned subsidiary of the Registrant. Upon consummation of the Merger,
8,599,899 shares of the Registrant's Class A common stock, $.01 par value per
share, became issuable pursuant to an exchange ratio which provided that each
outstanding share of KTI common stock, no par value per share, and each KTI
option, warrant and convertible note exercisable for or convertible into KTI
common stock, would be exchanged for .51 shares of the Registrant's Class A
common stock. The Merger is expected to be accounted for under the purchase
method of accounting, and was structured to qualify as a tax-free reorganization
under the Internal Revenue Code of 1986, as amended.
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED:
KTI, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
-------------------- -----------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 9,711 $ 9,426
Restricted funds 19,813 19,088
Accounts receivable, net of allowances of $1,860 and $1,313 37,812 29,272
Consumables and spare parts 5,005 4,483
Inventory 8,381 4,866
Notes receivable - officers/shareholders and affiliates 187 1,858
Other receivables 1,940 4,158
Deferred taxes 3,414 4,832
Other current assets 4,028 3,370
------------- -------------
Total current assets 90,291 81,353
Restricted funds 4,185 4,350
Notes receivable - officers/shareholders and affiliates 8,288 1,534
Other receivables 1,784 3,025
Other assets 6,087 6,167
Deferred taxes 4,804 1,407
Deferred costs, net of accumulated amortization of $2,001 and $1,610 5,284 5,268
Goodwill and other intangibles, net of accumulated amortization of $8,242
and $4,354 125,731 119,712
Property, equipment and leasehold improvements, net of
accumulated depreciation and amortization of $38,248 and $27,724 210,300 213,669
------------- -------------
Total assets $456,754 $436,485
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 23,003 $ 14,940
Accrued expenses 15,081 9,313
Debt, current portion 159,716 9,775
Other current liabilities 912 4,499
------------- -------------
Total current liabilities 198,712 38,527
Other liabilities 1,728 4,227
Debt, less current portion 64,054 202,153
Minority interest 15,354 12,437
Deferred revenue 55,820 61,396
Customer advance 12,263 12,788
Convertible subordinated notes 6,770 6,770
Commitments and contingencies
Stockholders' equity:
Preferred stock; 10,000,000 shares authorized; none outstanding
Common stock, no par value (stated value $.01 per share); authorized 40,000,000
in 1999 and 1998, issued and outstanding: 14,023,838 in 1999,
13,266,204 in 1998 140 133
Additional paid-in capital 127,874 115,026
Accumulated deficit (25,961) (16,972)
------------- -------------
Total stockholders' equity 102,053 98,187
------------- -------------
Total liabilities and stockholders' equity $456,754 $436,485
============= =============
</TABLE>
SEE ACCOMPANYING NOTES.
2
<PAGE>
KTI, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------
1999 1998
------------- --------------
<S> <C> <C>
Revenues $199,023 $117,653
Cost of operations 168,731 99,623
----------- ------------
Gross Profit 30,292 18,030
Selling, general and administrative 17,530 5,745
Restructuring charge 4,299
Asset impairment charge 3,000
----------- ------------
Income from operations 5,463 12,285
Interest expense, net 13,575 5,790
Loss (gain) on sale of business 77
Equity loss in subsidiaries 463
Other charges 131
Other income, net (658)
----------- ------------
Income (loss) before minority interest, provision
(benefit) for income taxes, extraordinary item and
cumulative effect of change in accounting principle (8,125) 6,495
Minority interest 1,875 2,508
----------- ------------
Income (loss) before provision (benefit) for income
taxes, extraordinary item and cumulative effect of change
in accounting principle (10,000) 3,987
Provision (benefit) for income taxes (1,069) (1,558)
----------- ------------
Income (loss) before extraordinary item and cumulative
effect of change in accounting principle (8,931) 5,545
Extraordinary item (495)
----------- ------------
Income (loss) before cumulative effect of change in
accounting principle (8,931) 5,050
Cumulative effect of change in accounting principle (58)
----------- ------------
Net income (loss) (8,989) 5,050
Accretion and accrued and paid dividends on preferred stock 1,134
----------- ------------
Net income (loss) available to common shareholders $(8,989) $3,916
=========== ============
Earnings per common share:
Basic:
Income (loss) before extraordinary item and cumulative
effect of change in accounting principle $(0.64) $0.45
Extraordinary item (0.05)
Cumulative effect of change in accounting principle (0.01)
----------- ------------
Net income (loss) $(0.65) $0.40
=========== ============
Weighted average number of shares used in computation 13,851,716 9,813,101
=========== ============
Diluted:
Income (loss) before extraordinary item and cumulative
effect of change in accounting principle $(0.64) $0.42
Extraordinary item (0.05)
Cumulative effect of change in accounting principle (0.01)
----------- ------------
Net income (loss) $(0.65) $0.37
=========== ============
Weighted average number of shares used in computation 13,851,716 10,688,513
=========== ============
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
<TABLE>
<CAPTION>
KTI, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
SERIES A SERIES B
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
---------------------------- ---------------------------- ------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------------ -------------- ------------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 447,500 $ 3,732 856,000 $ 21,400 8,912,630 $ 89
Net income
Accretion of preferred stock 42
Issuance of common stock and common stock
purchase warrants for:
Exercise of options 235,682 2
Exercise of warrants 411,894 4
Non-employee director's compensation
Conversion of preferred stock:
Series A (447,500) (3,774) 447,500 4
Series B (856,000) (21,400) 25,531 1
Conversion of debt 1,283,399 13
Employee savings plan contribution 4,215
Business combinations 1,945,353 20
Tax benefit realized from stock option
transactions
Dividends paid on Series B Preferred Stock
Additional costs related to preferred
stock issuances
------------ -------------- ------------- ------------- ------------- ---------
Balance at December 31, 1998 13,266,204 133
Net loss
Issuance of common stock for:
Exercise of options 20,552
Exercise of warrants 19,482
Business combinations 717,600 7
------------ -------------- ------------- ------------- ------------- ---------
Balance at September 30, 1999 (unaudited) 14,023,838 $ 140
============ ============== ============= ============= ============= =========
</TABLE>
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN ACCUMULATED
CAPITAL DEFICIT TOTAL
------------- ------------- -------------
<S> <C> <C> <C>
Balance at December 31, 1997 $ 52,762 $ (18,267) $ 59,716
Net income 2,699 2,699
Accretion of preferred stock (42)
Issuance of common stock and common stock
purchase warrants for:
Exercise of options 1,894 1,896
Exercise of warrants 1,648 1,652
Non-employee director's compensation 205 205
Conversion of preferred stock:
Series A 3,770
Series B 300 (21,099)
Conversion of debt 15,686 15,699
Employee savings plan contribution 41 41
Business combinations 38,122 38,142
Tax benefit realized from stock option 738 738
transactions
Dividends paid on Series B Preferred Stock (1,404) (1,404)
Additional costs related to preferred (98) (98)
stock issuances
------------- ------------- -------------
Balance at December 31, 1998 115,026 (16,972) 98,187
Net loss (8,989) (8,989)
Issuance of common stock for:
Exercise of options 161 161
Exercise of warrants 193 193
Business combinations 12,494 12,501
------------- ------------- -------------
Balance at September 30, 1999 (unaudited) $ 127,874 $ (25,961) $102,053
============= ============= =============
</TABLE>
SEE ACCOMPANYING NOTES
4
<PAGE>
KTI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------
1999 1998
------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $(8,989) $ 5,050
Adjustments to reconcile net income to net cash
provided by operating activities:
Asset impairment charge 3,000
Extraordinary item 495
Cumulative effect of change in accounting principle 58
Depreciation and amortization 16,117 8,937
Minority interest, net of distributions 2,917 (195)
Loss on sale of businesses, net 145
Equity loss in subsidiaries 463
Deferred revenue and customer advance (6,101) (5,812)
Deferred income taxes (2,190) (4,671)
Provision for losses on accounts receivable 634 579
Interest accrued and capitalized on debt 413 872
Other non-cash charges 394 (30)
Changes in operating assets and liabilities:
Accounts receivable (8,733) (886)
Consumables, spare parts and inventory (1,848) (1,316)
Other receivables 796 (4,220)
Other assets (1,925) 3,832
Accounts payable and accrued expenses 11,564 439
Other liabilities (2,596) 2,814
-------------- --------------
Net cash provided by operating activities 4,119 5,888
INVESTING ACTIVITIES
Additions to property, equipment and leasehold improvements (6,995) (5,088)
Proceeds from sale of assets 86 33
Net change in restricted funds (560) (2,714)
Proceeds from sale of businesses 4,283 1,985
Purchase of businesses, net of cash acquired (151) (62,154)
Notes receivable--officers/shareholders and affiliates (4,653) (380)
-------------- --------------
Net cash used in investing activities (7,990) (68,318)
FINANCING ACTIVITIES
Deferred financing costs (3,936)
Proceeds from issuance of debt 44,995
Net borrowings on lines of credit 10,532 114,373
Proceeds from other borrowings 1,000
Proceeds from amendment of power purchase agreement, net of transaction costs 5,900
Proceeds from sale of common stock 354 3,235
Dividends paid (1,092)
Principal payments on debt (7,730) (104,048)
-------------- --------------
Net cash provided by financing activities 4,156 59,427
-------------- --------------
Increase (decrease) in cash and cash equivalents 285 (3,003)
Cash and cash equivalents at beginning of period 9,426 11,181
-------------- --------------
Cash and cash equivalents at end of period $9,711 $8,178
============== ==============
</TABLE>
-Continued-
5
<PAGE>
KTI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------
1999 1998
-------------------- -------------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 15,239 $ 4,803
Taxes paid 1,665
NON CASH INVESTING AND FINANCING ACTIVITIES
Capital lease obligation entered into for lease of equipment 241 -
Purchase of businesses and additional partnership interest, net of cash
acquired:
Working capital, net of cash acquired (1,611) (3,040)
Property, equipment and leasehold improvements (8,621) (51,950)
Purchase price in excess of net assets acquired (7,843) (91,034)
Other assets (4,752)
Non-current liabilities 5,423 52,985
Common stock issued 12,501 35,637
</TABLE>
SEE ACCOMPANYING NOTES
6
<PAGE>
KTI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
SEPTEMBER 30, 1999
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of KTI,
Inc. (the "Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information. Accordingly, they do
not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting only of normal recurring
accruals) considered necessary for a fair presentation have been included.
The municipal solid waste ("MSW") market in Maine, which provides material to
the waste-to-energy segment, is seasonal, with one-third more MSW generated
in the summer months than is generated during the rest of the year. The
Residential and Commercial Recycling segments experience increased volumes of
newspaper in November and December due to increased newspaper advertising and
retail activity during the holiday season. Additionally, the Residential
Recycling segment operates facilities in Florida which experience increased
volumes of recyclable materials during the winter months followed by
decreases in the summer months in connection with seasonal changes in
population. Operating results for the nine month periods ended September 30,
1999 and 1998 are not necessarily indicative of the results that may be
expected for the full year. For further information, refer to the
consolidated financial statements and notes thereto included in the Company's
annual report on Form 10-K for the year ended December 31, 1998. Certain 1998
financial information contained herein has been reclassified to conform with
the 1999 presentation.
2. RESTATEMENT
The Company's balance sheet as of September 30, 1999, the statements
of operations, stockholders' equity and cash flows, for the nine months ended
September 30, 1999, have been restated to reflect certain adjusting entries
relating to restructurings, valuation allowances and other accruals. As a
result of these adjustments, net loss increased approximately $4.4 million
and loss per share increased $0.32 per share.
7
<PAGE>
KTI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
SEPTEMBER 30, 1999
3. MERGER AND ACQUISITIONS
On September 23, 1999, the Company entered into an Amended Agreement
and Plan of Merger (the "Merger Agreement") with Casella Waste Systems, Inc.,
("Casella") a publicly-owned company engaged in the waste services industry. The
merger will be completed through the exchange of all of the shares of the
Company's common stock for shares of Casella's Class A common stock based on an
exchange ratio specified in the Merger Agreement. In addition, all of the
Company's outstanding and unexercised stock options and stock purchase warrants
will be converted into similar rights to acquire Casella's Class A common stock
under the same terms and conditions and the same exchange ratio. Subsequent to
the completion of the merger, the current Casella stockholders will own a
majority of the combined company. Under the terms of the Merger Agreement,
Casella is required to file a registration statement with the Securities and
Exchange Commission to register the shares of its Class A common stock to be
issued in the merger. The merger is subject to, among other things, approval of
the Company's and Casella's stockholders. No assurance can be given that the
conditions of the merger will be satisfied or that the merger will be
consummated.
In connection with the merger, Casella has agreed to reimburse the
Company for its investment banking fees and other merger related costs and as of
September 30, 1999 approximately $1,514 of such costs have been deferred.
On March 31, 1999, May 19, 1999, and September 30, 1999 pursuant to the
Second Amended, Restated and Extended Waste Disposal Agreement among Penobscot
Energy Recovery Company, Limited Partnership ("PERC") and the municipalities
named therein, the municipalities made capital contributions to PERC, which were
recorded as additional minority interest, totaling $730, $240 and $1,300
respectively, in exchange for 1.31%, 0.43% and 2.33%, respectively, of limited
partnership interest in PERC.
8
<PAGE>
On January 27, 1999 the Company completed its acquisition of AFA Group,
Inc. and subsidiaries ("AFA"), an integrated wood waste processing and hauling
business located in Newark, New Jersey. Payment of the aggregate purchase price,
including all direct costs, of $9,682 consisted of (i) 460,000 shares of the
Company's common stock valued at $20.70 per share (based on the closing price of
the common stock on the date of announcement) and (ii) $150 in cash. In July
1999, the Company paid AFA an additional 104,038 shares of the Company's common
stock as a purchase price adjustment based on the final net worth, as defined,
of AFA as of the acquisition date. These shares were valued at $13.58 per share.
This acquisition was accounted for as a purchase, and accordingly, the assets
and liabilities have been recorded at their estimated fair value at the date of
acquisition. The excess of the purchase price over the fair value of the
acquired net assets of $7,776 has been recorded as goodwill and is being
amortized on a straight-line basis over 30 years. The Company's financial
statements include the results of operations of AFA since the date of
acquisition.
4. SALE OF BUSINESSES
In June 1999, the Company completed the sale of its Commercial
Recycling facility located in Franklin Park, Illinois. The proceeds from this
sale were approximately $1,757 and the Company recorded a loss of approximately
$644.
In September 1999, the Company completed the sale of substantially all
of the assets of the Waste-to-Energy segment's hauling operation located in
Maine to Casella. The proceeds from this sale were approximately $2,526 and the
Company recorded a gain of approximately $567.
5. EXERCISE OF BHE WARRANTS
In August 1999, the Company exercised its rights under a Warrant
Purchase Agreement (the "Warrant Agreement") to purchase 178,214 common shares
of BHE. Under the terms of the Warrant Agreement, BHE elected to pay cash in
lieu of issuing shares. The Waste-to-Energy segment received approximately
$1,699 in cash and recorded a gain of approximately $757 which is classified as
other income.
6. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1999 1998
-------------- --------------
<S> <C> <C>
Numerator:
Net income (loss) $(8,989) $ 5,050
Preferred stock dividends 1,092
Accretion of preferred stock 42
------------ ------------
Numerator for basic earnings per share-net income (loss)
available to common stockholders (8,989) 3,916
Effective of dilutive securities:
------------ ------------
Numerator for diluted earnings per share-net income (loss)
available to common stockholders after assumed
conversions $(8,989) $3,916
============ ============
Denominator:
Denominator for basic earnings per share-weighted
average shares 13,851,716 9,813,101
Effect of dilutive securities:
Employee stock options (1) 501,310
Warrants (1) 374,102
Convertible preferred stock (2)
Convertible subordinated notes (3)
------------ ------------
Dilutive potential common shares 875,412
------------ ------------
Denominator for diluted earnings per share-adjusted
weighted-average shares and assumed conversions 13,851,716 10,688,513
============ ============
Net Income (loss) per share-Basic $(0.65) $0.40
============ ============
Net income (loss) per share-Diluted $(0.65) $0.37
============ ============
</TABLE>
9
<PAGE>
(1) The employee stock options and warrants outstanding during the nine months
ended September 30, 1999 are anti-dilutive.
(2) The convertible preferred stock is anti-dilutive in 1999 and the nine
months ended September 30, 1998.
(3) The convertible subordinated notes
payable are anti-dilutive.
7. CONTINGENCIES
The Company is a defendant in a consolidated purported class action,
which alleges violations of certain sections of the federal securities laws. The
Company believes the allegations are without merit and intends to defend the
litigation vigorously.
Two lawsuits have been filed against a subsidiary of the Company
alleging fraud and tortious interference. The actions are based on two contracts
between the plaintiff and the subsidiary, which contracts require all disputes
to be resolved by arbitration. The Company settled these lawsuits in October
1999 and paid $350 in final settlement of these claims, which was accrued at
September 30, 1999.
The majority shareholder of a company acquired by a subsidiary of the
Company instigated arbitration proceedings against the Company and two of its
subsidiaries, alleging the subsidiaries acted to frustrate the "earn-out"
provisions of the acquisition agreement and thereby precluding him from
receiving, or alternatively, reducing the sum to which he was entitled to
receive. He also alleges his employment agreement was wrongfully terminated. The
claim for arbitration alleges direct charges in excess of $5,000 and requests
punitive damages, treble damages and attorneys fees. The Company and its
subsidiaries have responded to the demand, denying liability and filed a
counterclaim for $1,000 for misrepresentations. The Company believes it has
meritorious defenses to the claims.
The Company is a defendant in certain lawsuits alleging various claims
incurred in the ordinary course of business. Management of the Company does not
believe that the outcome of these matters, individually or in the aggregate,
will have a material effect on the Company's financial condition, cash flows or
results of operations.
11
<PAGE>
8. IMPAIRMENT OF COMMERCIAL RECYCLING LONG-LIVED ASSETS
As a result of the loss on the sale of the Franklin Park Facility (see
Note 4) and the continued poor operating performance of the Commercial Recycling
segment, the Company initiated an impairment review of the long-lived assets,
including goodwill, in the Commercial Recycling segment in the second quarter. A
revised operating plan for each of the remaining facilities in the Commercial
Recycling segment was developed. While revenues are stable, the Commercial
Recycling segment continues to operate at levels of profitability, which are
significantly below the levels anticipated when the acquisitions were completed.
In addition, with the continued consolidation of the solid waste industry and
the continued focus on the disposal aspects of this industry, the possibility of
selling these facilities for amounts approximating their carrying value is
remote.
In the second quarter of 1999, the Company determined that the
estimated future undiscounted cash flows for the KTI Recycling of New Jersey
("Newark Plant") facility were below the carrying value of the related equipment
and leasehold improvements. The Company adjusted the carrying value of the
related equipment and leasehold improvements of the Newark Plant by
approximately $3,000 to their estimated fair value of approximately $1,142. The
fair value of the long-lived assets was based on the expected cash flows
discounted at a rate commensurate with the risk involved.
9. PLANT CONSOLIDATION, RESTRUCTURING AND OTHER UNUSUAL ITEMS
In April 1999, FCR, Inc. ("FCR"), a subsidiary of the Company, signed a
new agreement with a municipality to operate a material recovery facility in
Charlotte, North Carolina. As part of this agreement, the Company committed to
relocate the cellulose insulation plant located in Ronda, North Carolina to the
material recovery facility in Charlotte. This secures the supply of raw material
for the cellulose insulation plant and provides additional cost savings from the
integration of recycling and the manufacturing of cellulose insulation into one
facility. As a result, the Company developed an exit plan for the closing of the
plant in Ronda, North Carolina and began the construction of the new cellulose
insulation plant during the second quarter. In the second quarter of 1999, the
Finished Products segment recorded a restructuring charge of approximately
$1,205, which consisted primarily of the write-down of equipment and leasehold
improvements and an accrual for the remaining payments under the noncancelable
lease of the Ronda facility. Payments against this reserve are expected to begin
in the fourth quarter of 1999.
During 1999, the Company reached agreement with an employee to
restructure the amounts paid under an employment contract. The Finished Products
segment recorded a restructuring charge of approximately $320 relating to
amounts due under the revised contract. Payments against this reserve are
expected to begin during the fourth quarter of 1999.
In June 1999, the Company initiated a plan to close the Residential
Recycling segment's material recovery facility located in Howes Cave, New York
and process the materials from this facility at another Residential Recycling
segment facility. In the second quarter of 1999, the Company recorded a
restructuring charge of $644, which consisted primarily of the remaining
payments under noncancelable leases of the building and equipment. The Company
made payments totaling $110 against this reserve during 1999.
In September, 1999, the Company initiated a plan to relocate
brokerages' corporate offices from Portland, Oregon to Passaic, New Jersey.
In the third quarter of 1999, the Company recorded a restructuring charge of
$450, which consisted primarily of existing lease obligations, severance and
related taxes.
Included in restructuring charges is $432 of deferred acquisition costs
related to acquisitions that were terminated during the second quarter.
In April 1998, a subsidiary of the Company, FCR, entered into an
amended agreement to operate a material recovery facility in Stratford,
Connecticut. This agreement requires FCR to add additional processing equipment
to this facility within a certain period of time as defined in the amended
agreement or pay the municipality $100 per year over the next five years. In
April 1999, FCR determined that this processing equipment was not cost effective
due to other alternative methods of processing and, thus, will not install the
equipment. As a result, in the second quarter of 1999, the Residential Recycling
segment recorded the penalty included in the agreement of $500 for the payments
to be made to the municipality. No payments were made during the third quarter
of 1999 and the entire amount is accrued and classified as other liabilities as
of September 30, 1999.
During 1999, other charges of $131 represents an accrual for penalties
assessed by the Florida Department of Environmental Protection related to the
temperature of the discharge water at the Waste-to-Energy segment's Telogia
Facility.
In the first quarter of 1999, the Company recorded a $748 restructuring
charge. The restructuring initiatives primarily involve the Company's Commercial
Recycling segment and represent primarily severance and other costs related to
employee reductions. In connection with the restructuring, the Company
terminated ten employees. The restructuring
12
<PAGE>
charges relate to integration of the brokerage operation acquired as part of the
New Jersey Fibers acquisition and elimination of costs as a result of
streamlining the operations of acquisitions completed in 1998. The Company made
payments totaling $442 against this reserve during 1999.
10. INCOME TAXES
The income tax benefit was approximately $1,069 and $1,558 for the
nine months ended September 30, 1999 and 1998, respectively. During 1999, the
effective tax rate utilized by the Company of 10.7% represents the estimated
annual effective rate based on the total estimated pretax loss of the Company
for the year ending December 31, 1999. The income tax benefit in 1998 was due
to the reduction of the valuation allowance for deferred tax assets of $3,160.
11. REVOLVING LINE OF CREDIT AGREEMENT
On May 12, 1999, the Company's Revolving Line of Credit Agreement with
a bank (the "Credit Agreement") was amended (the "Amended Agreement") modifying
certain financial covenants and requiring bank approval for all acquisitions.
The Amended Agreement requires that the Company and certain subsidiaries, as
defined, maintain certain specified financial covenants, including, a minimum
interest coverage ratio, a maximum funded debt to EBITDA ratio, a minimum fixed
charge coverage ratio, and a maximum debt to capitalization ratio, each as
defined in the Amended Agreement. The Company recorded a charge of $835 in
connection with the amendment. This charge was recorded in interest expense
during the second quarter.
As of September 30, 1999, the Company was in default of the financial
covenants of its line of credit. The Company's lender has waived the violation
of the financial covenants through January 1, 2000. As a result, the outstanding
amount under the line of credit has been classified as a current liability. Upon
the consummation of the merger, this line of credit will be replaced by the
credit facility of the merged company. However, no assurances can be given that
the conditions of the merger will be satisfied or that the merger will be
consummated.
The Company will continue to select interest rates on the outstanding
borrowings based on the bank's prime rate or LIBOR rates, however, the interest
rates range from the bank's prime rate to the bank's prime rate plus 1.50% or
LIBOR plus 1.88% to LIBOR plus 3.25% depending on the attainment of a financial
covenant, as defined, in the Amended Agreement.
As of September 30, 1999, one of the Company's subsidiaries was in
violation of one of the financial covenants of its revolving line of credit.
Borrowings under this line of credit are classified as a current liability at
September 30, 1999. This violation was cured in October 1999.
13
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
KTI, Inc.
We have audited the accompanying consolidated balance sheets of KTI, Inc. as of
December 31, 1998 and 1997, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of KTI, Inc. at
December 31, 1998 and 1997, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31, 1998
in conformity with generally accepted accounting principles.
As discussed in Note 2, the previously issued financial statements for each of
the three years in the period ended December 31, 1998 have been restated to
reflect the deferral of revenue related to certain proceeds received in
connection with the restructuring of a power purchase agreement and the sale of
electric generating capacity with two utilities.
ERNST & YOUNG LLP
Hackensack, New Jersey
March 30, 1999, except for the
second paragraph of Note 9, as to
which the date is August 27, 1999,
Note 2 as to which the date is
August 30, 1999 and the first
paragraph of Note 21 as to which
the date is September 23, 1999
14
<PAGE>
KTI, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents.......................................................... $ 9,426 $ 11,181
Restricted funds................................................................... 19,088 13,103
Accounts receivable, net of allowances of $1,313 and $294.......................... 29,272 22,126
Consumables and spare parts........................................................ 4,483 4,041
Inventory.......................................................................... 4,866 1,219
Notes receivable--officers/shareholders and affiliates............................. 1,858 29
Other receivables.................................................................. 4,158 461
Deferred taxes..................................................................... 4,832 2,751
Other current assets............................................................... 3,370 793
------------- -------------
Total current assets............................................................. 81,353 55,704
Restricted funds..................................................................... 4,350 6,527
Notes receivable--officers/shareholders and affiliates............................... 1,534 81
Other receivables.................................................................... 3,025 271
Other assets......................................................................... 6,167 1,768
Deferred taxes....................................................................... 1,407
Deferred costs, net of accumulated amortization of $1,610 and $676................... 5,268 2,911
Goodwill and other intangibles, net of accumulated amortization of $4,354 and
$1,422............................................................................. 119,712 19,535
Deferred project development costs................................................... 937
Property, equipment and leasehold improvements, net of accumulated depreciation of
$27,724 and $18,369................................................................ 213,669 164,753
------------- -------------
Total assets..................................................................... $ 436,485 $ 252,487
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable................................................................... $ 14,940 $ 8,779
Accrued expenses................................................................... 9,313 3,990
Debt, current portion.............................................................. 9,775 19,794
Other current liabilities.......................................................... 4,499 1,184
------------- -------------
Total current liabilities........................................................ 38,527 33,747
Other liabilities.................................................................... 4,227 1,918
Debt, less current portion........................................................... 202,153 74,473
Minority interest.................................................................... 12,437 14,077
Deferred revenue..................................................................... 61,396 68,556
Customer advance..................................................................... 12,788
Convertible subordinated notes....................................................... 6,770
Commitments and contingencies
Stockholders' equity
Preferred stock; 10,000,000 shares authorized;
Series A; non-voting; par value $8 per share; 447,500 shares authorized, issued and
outstanding in 1997.............................................................. 3,732
Series B; voting; par value $25 per share; 8.75%, 880,000 shares authorized;
856,000 shares issued and outstanding in 1997.................................... 21,400
Common stock; no par value (stated value $.01 per share);
authorized 40,000,000 in 1998 and 20,000,000 in 1997, issued and outstanding
13,266,204 and 8,912,630 shares in 1998 and 1997, respectively................... 133 89
Additional paid-in capital........................................................... 115,026 52,762
Accumulated deficit.................................................................. (16,972) (18,267)
------------- -------------
Total stockholders' equity........................................................... 98,187 59,716
------------- -------------
Total liabilities and stockholders' equity....................................... $ 436,485 $ 252,487
------------- -------------
------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
15
<PAGE>
KTI , INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
<S> <C> <C> <C>
1998 1997 1996
------------- ------------ ------------
Revenues.............................................................. $ 179,007 $ 98,587 $ 35,717
Cost of operations.................................................... 156,664 75,864 26,048
------------- ------------ ------------
Gross Profit........................................................ 22,343 22,723 9,669
Selling, general and administrative................................... 7,947 3,196 2,534
------------- ------------ ------------
Income from operations.............................................. 14,396 19,527 7,135
Interest expense, net................................................. (10,667) (5,086) (4,464)
Other income, net..................................................... 390 37
------------- ------------ ------------
Income from continuing operations before minority interest, benefit
for income taxes and extraordinary item............................. 3,729 14,831 2,708
Minority interest..................................................... 3,702 2,522 1,185
Pre-acquisition earnings.............................................. 4,722
------------- ------------ ------------
Income from continuing operations before benefit for income taxes
and extraordinary item.............................................. 27 7,587 1,523
Benefit for income taxes.............................................. (3,023) (2,586)
------------- ------------ ------------
Income from continuing operations before extraordinary item......... 3,050 10,173 1,523
Discontinued operations
Loss from discontinued operations (including a loss on disposal of
$549 and provision for income taxes of $200)........................ 714
------------- ------------ ------------
Income before extraordinary item.................................... 3,050 10,173 809
Extraordinary item--Loss on early extinguishment of debt, net of
minority interest and in 1998, taxes................................ 351 2,248
------------- ------------ ------------
Net income (loss)................................................... 2,699 10,173 (1,439)
Accretion and accrued and paid dividends on preferred stock........... (1,133) (1,408)
------------- ------------ ------------
Net income (loss) available to common shareholders.................. $ 1,566 $ 8,765 $ (1,439)
------------- ------------ ------------
------------- ------------ ------------
Net income (loss) per common share:
Basic:
Income from continuing operations before
extraordinary item.................................................. $ 0.18 $ 1.18 $ 0.25
Loss from discontinued operations................................... (0.12)
------------- ------------ ------------
Income before extraordinary item.................................... 0.18 1.18 0.13
Extraordinary item.................................................. (0.03) (0.37)
------------- ------------ ------------
Net income (loss)................................................... $ 0.15 $ 1.18 $ (0.24)
------------- ------------ ------------
------------- ------------ ------------
Weighted average number of shares used in computation............... 10,548,570 7,403,681 6,090,956
------------- ------------ ------------
------------- ------------ ------------
Diluted:
Income from continuing operations before
extraordinary item.................................................. $ 0.17 $ 1.08 $ 0.24
Loss from discontinued operations................................... (0.11)
------------- ------------ ------------
Income before extraordinary item.................................... 0.17 1.08 0.13
Extraordinary item.................................................. (0.03) (0.36)
------------- ------------ ------------
Net income (loss)................................................... $ 0.14 $ 1.08 $ (0.23)
------------- ------------ ------------
------------- ------------ ------------
Weighted average number of shares used in computation............... 11,398,151 8,426,190 6,255,088
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES.
16
<PAGE>
KTI, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SERIES A SERIES B COMMON
PREFERRED STOCK PREFERRED STOCK STOCK
---------------------- -------------------- ---------
SHARES AMOUNT SHARES AMOUNT SHARES
--------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995........................................ 5,946,973
Net loss..........................................................
Issuance of common stock for:
Exercise of options............................................. 55,346
Exercise of warrants............................................ 41,183
Conversion of debt.............................................. 725,015
Business combinations........................................... 68,249
Issuance of stock purchase warrants...............................
--------- ----------- --------- --------- ---------
Balance at December 31, 1996........................................ 6,836,766
Net income........................................................
Issuance of preferred stock and common stock purchase warrants.... 487,500 $ 3,376
Accretion of preferred stock...................................... 700
Issuance of preferred stock and common stock purchase warrants.... 856,000 $ 21,400
Issuance of common stock and common stock purchase warrants for:
Exercise of options............................................. 85,353
Exercise of warrants............................................ 692,771
Conversion of debt.............................................. 618,609
Conversion of preferred stock................................... (40,000) (344) 40,000
Employee savings plan contribution.............................. 4,117
Business combinations........................................... 635,014
Dividends paid on Series B Preferred Stock........................
--------- ----------- --------- --------- ---------
Balance at December 31, 1997........................................ 447,500 3,732 856,000 21,400 8,912,630
Net income........................................................
Accretion of preferred stock...................................... 42
Issuance of common stock and common stock purchase warrants for:
Exercise of options............................................. 235,682
Exercise of warrants............................................ 411,894
Non-employee director's compensation............................
Conversion of preferred stock:
Series A...................................................... (447,500) (3,774) 447,500
Series B...................................................... (856,000) (21,400) 25,531
Conversion of debt.............................................. 1,283,399
Employee savings plan contribution.............................. 4,215
Business combinations........................................... 1,945,353
Tax benefit realized from stock option transactions...............
Dividends paid on Series B Preferred Stock........................
Additional costs related to preferred stock issuance..............
--------- ----------- --------- --------- ---------
Balance at December 31, 1998........................................ 13,266,204
--------- ----------- --------- --------- ---------
--------- ----------- --------- --------- ---------
<CAPTION>
ADDITIONAL ACCUMULATED
AMOUNT PAID-IN DEFICIT TOTAL
----------- ----------- ------------ ---------
<S> <C> <C> <C> <C>
Balance at December 31, 1995........................................ $ 59 $ 33,427 $ (26,606) $ 6,880
Net loss.......................................................... (1,439) (1,439)
Issuance of common stock for:
Exercise of options............................................. 1 280 281
Exercise of warrants............................................ 225 225
Conversion of debt.............................................. 7 4,045 4,052
Business combinations........................................... 1 455 456
Issuance of stock purchase warrants............................... 144 144
----- ----------- ------------ ---------
Balance at December 31, 1996........................................ 68 38,576 (28,045) 10,599
Net income........................................................ 10,173 10,173
Issuance of preferred stock and common stock purchase warrants.... 422 3,798
Accretion of preferred stock...................................... (700)
Issuance of preferred stock and common stock purchase warrants.... (1,416) 19,984
Issuance of common stock and common stock purchase warrants for:
Exercise of options............................................. 1 502 503
Exercise of warrants............................................ 7 3,611 3,618
Conversion of debt.............................................. 6 4,901 4,907
Conversion of preferred stock................................... 1 343
Employee savings plan contribution.............................. 35 35
Business combinations........................................... 6 6,488 6,494
Dividends paid on Series B Preferred Stock........................ (395) (395)
----- ----------- ------------ ---------
Balance at December 31, 1997........................................ 89 52,762 $ (18,267) 59,716
Net income........................................................ 2,699 2,699
Accretion of preferred stock...................................... (42)
Issuance of common stock and common stock purchase warrants for:
Exercise of options............................................. 2 1,894 1,896
Exercise of warrants............................................ 4 1,648 1,652
Non-employee director's compensation............................ 205 205
Conversion of preferred stock:
Series A...................................................... 4 3,770
Series B...................................................... 1 300 (21,099)
Conversion of debt.............................................. 13 15,686 15,699
Employee savings plan contribution.............................. 41 41
Business combinations........................................... 20 38,122 38,142
Tax benefit realized from stock option transactions............... 738 738
Dividends paid on Series B Preferred Stock........................ (1,404) (1,404)
Additional costs related to preferred stock issuance.............. (98) (98)
----- ----------- ------------ ---------
Balance at December 31, 1998........................................ $ 133 $ 115,026 $ (16,972) $ 98,187
----- ----------- ------------ ---------
----- ----------- ------------ ---------
</TABLE>
SEE ACCOMPANYING NOTES.
17
<PAGE>
KTI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
<S> <C> <C> <C>
1998 1997 1996
---------- ---------- ----------
<CAPTION>
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)............................................................. $ 2,699 $ 10,173 $ (1,439)
Adjustments to reconcile net income to net cash provided by
operating activities:
Loss on disposal of discontinued operations............................... 550
Extraordinary loss........................................................ 351 2,248
Depreciation and amortization............................................. 13,749 6,786 6,694
Minority interest, net of distributions................................... 1,114 2,522 1,185
Deferred revenue and customer advance..................................... (7,807) (7,281) (4,854)
Deferred income taxes..................................................... (3,913) (2,751)
Provision for losses on accounts receivable............................... 1,289 193
Interest accrued and capitalized on debt.................................. 1,109 906 1,451
Write-off of deferred project development costs........................... 937
Non-cash directors' compensation.......................................... 205
Premium for conversion of convertible debt to common stock................ 1,370
Other non-cash charges.................................................... 187 (83) 262
Equity in net income of subsidiaries, net of distributions................ (198)
Loss on sale of debt securities........................................... 296
Changes in operating assets and liabilities:
Accounts receivable..................................................... 1,866 (2,458) 4,703
Consumables, spare parts and inventory.................................. (1,104) 71 (842)
Other receivables....................................................... 1,206 244 (258)
Other assets............................................................ (1,172) (503) (1,410)
Accounts payable and accrued expenses................................... (9,038) 1,285 (3,283)
Other liabilities....................................................... (1,867) 218 (187)
Proceeds from sale of electric generating capacity, net of transaction
costs................................................................... 80,691
---------- ---------- ----------
Net cash provided by operating activities..................................... 1,181 9,322 85,609
INVESTING ACTIVITIES
Additions to property, equipment and leasehold improvements................... (8,581) (5,072) (3,412)
Proceeds from sale of assets.................................................. 460 203 469
Proceeds from sale of discontinued operation.................................. 5,005
Deferred project development costs............................................ (45) (910)
Net change in restricted funds:
Cash equivalents.......................................................... (3,251) (2,149) (3)
Debt securities available-for-sale........................................ 5,579
Purchase of additional partnership interests.................................. (2,410) (14,532) (792)
Cash acquired in purchase of additional partnership interests................. 5,375
Purchase of businesses, net of cash acquired.................................. (55,499) (17,548) (2,958)
Investment in unconsolidated affiliate........................................ (865)
Notes receivable--officers/shareholders and affiliates........................ (1,400) 340 (9)
Proceeds from sale of business................................................ 1,985
---------- ---------- ----------
Net cash provided by (used in) investing activities........................... (69,561) (33,428) 2,969
</TABLE>
18
<PAGE>
KTI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Deferred financing costs...................................................... (3,901) (1,265) (1,188)
Net borrowings on lines of credit............................................. 133,573 30,107 8,786
Proceeds from issuance of debt................................................ 44,995
Additional preferred stock issuance costs..................................... (98) 4,121 506
Proceeds from customer advance, net........................................... 5,900
Proceeds from sale of common stock............................................ 3,548
Proceeds from sale of preferred stock......................................... 23,782
Dividends paid................................................................ (1,404) (395)
Principal payments on debt.................................................... (115,988) (26,290) (97,909)
---------- ---------- ----------
Net cash provided by (used in) financing activities........................... 66,625 30,060 (89,805)
---------- ---------- ----------
Increase (decrease) in cash and cash equivalents.............................. (1,755) 5,954 (1,227)
Cash and cash equivalents at beginning of year................................ 11,181 5,227 6,454
---------- ---------- ----------
Cash and cash equivalents at end of year...................................... $ 9,426 $ 11,181 $ 5,227
---------- ---------- ----------
---------- ---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid................................................................. $ 8,864 $ 2,792 $ 6,145
Taxes paid.................................................................... 150 75
NON CASH INVESTING AND FINANCING ACTIVITIES
Capital lease obligations entered into for lease of equipment................. 1,725 347
Purchase of businesses and additional partnership interest, net of cash
acquired:
Working capital surplus (deficit), net of cash acquired................... (1,772) 6,293 1,311
Property, equipment and leasehold improvements............................ 48,277 67,660 8,012
Purchase price in excess of net assets acquired........................... 102,866 14,235 3,256
Other assets.............................................................. 4,466 667 591
Non-current liabilities................................................... 57,786 55,659 8,964
Common stock and common stock purchase warrants issued.................... 38,142 6,494 456
</TABLE>
SEE ACCOMPANYING NOTES
19
<PAGE>
KTI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. ORGANIZATION
KTI, Inc. ("KTI") and subsidiaries (collectively, the "Company"), is an
integrated waste handling business providing wood, paper, corrugated, metals,
plastic and glass processing and recycling, municipal solid waste processing and
disposal capabilities, specialty waste disposal services, recycling of ash
combustion residue, the generation of electricity and steam and the manufacture
of finished products utilizing recyclable materials. The Company also markets
recyclable metals, plastic, paper and corrugated processed at its facilities and
by third parties. The Company operates 53 facilities in 21 states and Canada in
four operating segments: Waste-to-Energy Processing, Finished Products,
Commercial Recycling and Residential Recycling.
There are significant restrictions on the ability of certain of the
Company's subsidiaries to distribute assets to the Company. These restrictions
result from the terms of certain indebtedness and provisions of other agreements
with third parties. These subsidiaries include the Company's majority-owned
consolidated subsidiaries, Maine Energy Recovery Company ("Maine Energy") and
Penobscot Energy Recovery Company ("PERC") and the Company's wholly-owned
subsidiary Timber Energy Resources, Inc. ("TERI"). At December 31, 1998, the net
assets of these subsidiaries was $51,551.
Maine Energy, PERC and TERI are subject to the provisions of various
federal, state, local and provincial energy laws and regulations, including the
Public Utility Regulatory Policy Act of 1978, as amended. In addition, federal,
state and local environmental laws establish standards governing certain aspects
of the Company's operations. The Company believes it has all permits, licenses
and approvals necessary to operate.
2. RESTATEMENT
The Company's balance sheets as of December 31, 1998 and 1997 and the
related statements of operations, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1998 have been restated. The
restatement is a result of the Securities and Exchange Commission's review of
the Company's proxy materials related to the prospective merger with Casella
Waste Systems (See note 21). The restatement relates to revenue recognized as a
result of the restructuring of a power purchase agreement and the sale of
electric generating capacity by two of the Company's majority-owned subsidiaries
with its customers, BHE and CMP, which were completed in 1998 and 1996,
respectively (See notes 4 and 5). At the time of these transactions, the Company
had recognized revenues representing a portion of the cash received in 1996 and
the total consideration received in 1998. After discussions with the staff of
the Securities and Exchange Commission, the Company agreed to defer these
amounts and recognize them over the term of the respective power purchase and
capacity purchase agreements to comply with generally accepted accounting
principles. In addition, performance credits previously reported as expense have
been reclassified as a reduction of
20
<PAGE>
KTI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
2. RESTATEMENT (CONTINUED)
revenues. The impact of the restatement on the Company's consolidated financial
results as originally reported is summarized as follows:
<TABLE>
<CAPTION>
AS REPORTED RESTATED
-------------------------------- --------------------------------
1998 1997 1996 1998 1997 1996
---------- --------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues..................................... $ 192,977 $ 96,157 $ 68,508 $ 179,007 $ 98,587 $ 35,717
Income before extraordinary item............. 7,069 8,092 15,914 3,050 10,173 809
Net income (loss)............................ 6,718 8,092 13,666 2,699 10,173 (1,439)
Net income (loss) available to common
shareholders............................... 5,585 6,684 13,666 1,566 8,765 (1,439)
Net income (loss) per share:
Basic...................................... 0.53 0.90 2.25 0.15 1.18 (0.24)
Diluted.................................... 0.49 0.83 2.05 0.14 1.08 (0.24)
</TABLE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of KTI and its
wholly-owned and majority-owned subsidiaries. All significant intercompany
accounts and transactions are eliminated in consolidation. As described in Note
6, during 1997 the Company acquired in two transactions certain limited
partnership interests in PERC aggregating 64.29%. Prior to these transactions,
the Company was a 7.00% owner and the managing general partner of PERC. As a
result of the Company's aggregate ownership interest, PERC's financial
statements have been included in the Company's consolidated statement of income
for the year ended December 31, 1997. The consolidated statement of income
includes PERC's operations for the year ended December 31, 1997 as though the
acquisition had occurred at the beginning of the year and includes adjustments
to eliminate minority interest and the pre-acquisition earnings of PERC
attributable to the partnership interests acquired as of the respective dates.
Prior to 1997, the Company's investment in PERC was accounted for under the
equity method based on the Company's significant influence over its financial
and operating policies.
The ownership interest of minority owners in the equity and earnings of the
Company's less than 100 percent-owned consolidated subsidiaries is recorded as
minority interest.
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of 90 days or less when purchased to be cash equivalents.
RESTRICTED FUNDS
Restricted funds consist of cash and cash equivalents held in trust, all of
which are available, under certain circumstances, for current operating
expenses, debt service, capital improvements and repairs and maintenance in
accordance with certain contractual obligations and cash deposited in a bank in
connection with certain of the Company's debt and standby letter of credit
obligations. Restricted funds available for current operating and debt service
purposes are classified as current assets.
21
<PAGE>
KTI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SIGNIFICANT CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK
Within the Waste-to-Energy segment, Maine Energy, PERC and TERI each sell
electricity to the local electric utility in their respective geographic
locations (Central Maine Power Company, ("CMP"), Bangor Hydro Electric Company
("BHE") and Florida Power Company ("FPC"), respectively). Electric power revenue
from such utilities during 1998 totaled approximately $19,326, $14,676 and
$5,593, respectively, and $18,780, $17,492 and $5,126, respectively, in 1997 and
$21,441 in 1996 for CMP. Accounts receivable from CMP, BHE and FPC were $1,393,
$3,166 and $472, respectively, at December 31, 1998 and $2,163, $3,212 and $454,
respectively, at December 31, 1997. In addition, Maine Energy and PERC earn
substantial portions of their waste handling revenues from municipalities in
their respective geographic regions in the state of Maine. TERI also earns a
significant portion of its revenue from a large national paper manufacturer.
Such revenues are earned under the terms of long-term agreements. American Ash
Recycling of Tennessee, Ltd. ("AART") earns a substantial portion of its
revenues as the result of a contract with the City of Nashville, Tennessee.
Although less than 10% of consolidated revenue, a significant portion of
sales of recyclables in the Commercial segment is to international (including
Pacific Rim countries, South America and Europe) and domestic paper
manufacturers. The Company performs periodic credit evaluations of these
customers. Although the Company's exposure to credit risk associated with
non-payment by paper manufacturers is affected by conditions within the paper
industry and the general economic condition of countries within the Pacific Rim,
South America and Europe, a significant portion of outstanding receivables are
supported through letters of credit either issued, confirmed or discounted by
banks located in the United States. No single paper manufacturer or customer
exceeded 5% of the Company's total accounts receivable at December 31, 1998.
Although less than 10% of consolidated revenue, a significant portion of
sales in the Residential Recycling segment is to two customers. The facilities
within the Residential Recycling segment operate under long-term contracts with
the local municipalities or contract waste haulers. This segment earns a portion
of its revenues from these municipalities and waste haulers within the
geographic region surrounding the respective facilities. In addition, the
Residential Recycling segment enters into long-term contracts to sell recyclable
materials at prices based on market price with a contractual floor. These
contracts have terms from one to ten years and expire through 2008. No
individual municipality or customer under long-term commodity contracts exceeded
5% of the Company's total accounts receivable at December 31, 1998.
Although less than 10% of consolidated revenue, a significant portion of
sales in the Finished Products segment is to one customer. This customer is
under a contract to purchase a specified quantity of product at rates that
approximate market value through August, 2000. In addition, a significant
portion of this segment's sales are to manufacturers of manufactured homes and
insulation contractors throughout the United States and thus the revenues are
impacted by sales of new homes, which are cyclical in nature. No individual
customer of this segment exceeded 5% of the Company's total accounts receivable
at December 31, 1998.
Other financial instruments which subject the Company to concentrations of
credit risk are cash and cash equivalents including restricted funds. The
Company restricts its cash investments to financial institutions with high
credit standings and securities backed by the United States Government.
22
<PAGE>
KTI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories, consisting of secondary fibers, recyclables ready for sale and
certain finished products, include costs paid to third parties for purchased
materials and are stated at the lower of cost (first-in, first-out) or market.
Inventories consisted of finished goods of approximately $4,065 and $1,219 at
December 31, 1998 and 1997 respectively, and raw material of approximately $801
at December 31, 1998.
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements are stated at cost, less
accumulated depreciation and amortization. All costs incurred for additions and
improvements, including interest during construction, are capitalized. The
Company capitalized net interest costs of $285, $20 and $110, in 1998, 1997 and
1996, respectively. Depreciation of property and equipment is provided using the
straight-line method over the estimated useful lives ranging principally from
three to twenty-five years. Assets under capital leases are amortized using the
straight-line method over the estimated useful lives ranging from five to ten
years. Amortization of assets under capital leases is included in depreciation
expense. Leasehold improvements are amortized on a straight-line basis over the
shorter of the term of the lease or the estimated useful life of the
improvement.
GOODWILL
Goodwill represents costs in excess of net assets of businesses acquired in
purchase transactions. Goodwill is being amortized on a straight-line basis over
periods up to thirty years.
DEFERRED FINANCING COSTS
Costs incurred in connection with debt and letter of credit financings are
deferred and are being amortized over the life of the related debt or letter of
credit issues using the interest method. The unamortized portion of such costs
related to the previously outstanding PERC bonds in 1998 and the Maine Energy
bonds in 1996 were included in the determination of the extraordinary loss.
DEFERRED PROJECT DEVELOPMENT COSTS
The Company defers certain external costs incurred in the development of new
projects including design and costs related to obtaining required permits.
Amortization of these costs begins when the project becomes operational. If
management concludes that the related project will not be completed, the
deferred costs are expensed immediately.
REVENUE RECOGNITION
Revenues from the sale of electricity to local utilities are recorded at the
contract rate specified in each entity's power purchase agreement ("PPA") as it
is delivered. Revenue includes the portion of the deferred gain on the sale of
electric generating capacity at Maine Energy (see Note 5) which is being
amortized on a straight-line basis over the term of the capacity agreement
(eleven years). Revenue also
23
<PAGE>
KTI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
includes the amortization of the customer advance at PERC (see note 4) which is
being amortized on a straight-line basis over the term of the Power Purchase
Agreement (nineteen years).
Revenues from waste processing consist principally of fees charged to
customers for waste disposal. Substantially all waste processing revenues are
earned from customers located in a geographic region proximate to the respective
facility. Revenue is generally recorded upon acceptance and in certain cases is
based on rates specified in long-term contracts. Certain of these rates are
subject to adjustment based on the levels of certain costs and expenses, as
defined, of Maine Energy and PERC. The Company periodically reviews the
long-term contracts and any anticipated losses are charged to operations in the
period the losses are first determinable. The Company's evaluation is based on
estimated revenues and direct costs related to the respective contracts.
Revenues from the sale of recycled materials ($72,130, and $17,004 in 1998
and 1997, respectively) and finished products are recognized upon shipment.
Rebates to certain municipalities based on sales of recyclable materials are
recorded upon the sale of such recyclables to third parties and are included in
cost of operations. Revenues for processing of recyclable materials are
recognized upon delivery of recycled materials to the Company and totaled $7,791
and $690 in 1998 and 1997, respectively.
Management fees from affiliates for 1996, related to providing general
partner services to PERC, were recognized in accordance with the partnership
agreement and were included in waste processing revenues. Such amounts have been
eliminated in consolidation for 1998 and 1997. Service and other revenues in
connection with transportation and waste management are recognized upon
completion of the services.
INCOME TAXES
Deferred income taxes are determined using the liability method. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
BUSINESS COMBINATIONS
The Company has accounted for all business combinations under the purchase
method of accounting. Under this method, the purchase price is allocated to the
assets and liabilities of the acquired enterprise as of the acquisition date (to
the extent of the Company's ownership interest) based on their estimated
respective fair values and are subject to revision for a period not to exceed
one year from the date of acquisition. The results of operations of the acquired
enterprise are included in the Company's consolidated financial statements for
the period subsequent to the acquisition.
24
<PAGE>
KTI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET INCOME AVAILABLE FOR COMMON SHAREHOLDERS
Net income available for common shareholders represents net income adjusted
for:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Accretion of preferred stock to redemption value........................... $ 42 $ 700
Preferred stock dividends.................................................. 1,091 395
Dividends earned but not paid or accrued................................... 313
--------- ---------
$ 1,133 $ 1,408
--------- ---------
--------- ---------
</TABLE>
EVALUATION OF LONG-LIVED ASSETS
The Company assesses long-lived assets for impairment, including goodwill
associated with assets acquired in a business combination when events or
circumstances exist that indicate the carrying amount of those assets may not be
recoverable. The Company performs an evaluation comparing the estimated future
undiscounted cash flows associated with the asset to the asset's carrying amount
to determine if a write-down to market value or discounted cash flow value is
required. No such events or circumstances existed at December 31, 1998.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
RECENT ACCOUNTING DEVELOPMENTS
Recent accounting pronouncements which are not required to be adopted at
December 31, 1998, include the following Statement of Financial Accounting
Standards ("SFAS") and the American Institute of Certified Public Accountants
Statements of Position ("SOP"):
SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES,
which will be required to be adopted by the Company as of January 1, 2001,
establishes standards for derivative instruments, including those embedded in
other contracts and for hedging activities. The new standard requires the
Company to recognize all derivatives as either assets or liabilities and measure
those instruments at fair value. Management believes that the adoption of SFAS
No. 133 will not have a material impact on the Company's financial statements.
SOP 98-1, ACCOUNTING FOR COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED
FOR INTERNAL USE is required to be adopted by the Company as of January 1, 2000.
The Company's current policy falls within the guidelines of SOP 98-1. Also, SOP
98-5, REPORTING ON THE COSTS OF START-UP ACTIVITIES is required to be adopted by
the Company as of January 1, 1999. Management believes that the adoption of SOP
98-5 will not have a material impact on the Company's financial statements.
25
<PAGE>
KTI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year presentation.
4. AMENDMENT OF PERC'S POWER PURCHASE AGREEMENT AND WASTE DISPOSAL AGREEMENTS
On June 26, 1998, PERC completed an amendment of its PPA with BHE. At
closing, PERC received $6,000 in cash and BHE agreed to make 16 quarterly
payments of $250 commencing October 1, 1998 (the "BHE Note"). For financial
statement purposes, the BHE Note has been discounted using an effective interest
rate of 5.45%. The $6,000 cash payment and the present value of the BHE Note
($3,572) are being accounted for as a customer advance. Imputed interest on the
BHE Note is being amortized over its term and is included in interest income. In
addition, BHE issued the Company warrants to purchase 712,857 shares of BHE
common stock at an exercise price of $7.00 per share, exercisable 25% annually
with an expiration date of June 26, 2008. The estimated aggregate fair value of
these warrants at the date of issuance was approximately $3,814 ($5.35 per
share) which was also recorded as a customer advance. The customer advance, net
of transaction costs, is being amortized over the life of the PPA with BHE (19
years). As of December 31, 1998 the remaining customer advance in connection
with this transaction was approximately $12,788.
In connection with the amendment, PERC's waste disposal agreements with
certain municipalities (the "Amending Charter Municipalities") were amended to
extend the term of such agreements to 2018. In addition, PERC granted the
Amending Charter Municipalities the right to purchase up to a 50% limited
partnership interest in PERC for an aggregate purchase price of $31,000. Such
purchases may only be made to the extent of their respective share of
distributable cash from PERC, as defined, and one-half of the quarterly payments
to be made under the BHE Note. Any such amounts paid by the Amending Charter
Municipalities must be used to prepay PERC's outstanding bonds payable. The
Amending Charter Municipalities were also granted the right to purchase the
remaining partnership interests in 2018 at the then fair market value, as
defined.
The waste disposal agreements were further amended to provide that the
Amending Charter Municipalities, BHE, and partners in PERC would each receive
one-third of PERC's cash flows, as defined. Prior to this amendment, the
municipalities received one-half PERC's distributable cash, as defined. Based on
PERC's cash flow, as defined, distributable cash of approximately $4,616 and
$1,101 was payable for 1998 and 1997, respectively. Of these amounts,
approximately $413 and $1,101 remained unpaid as of December 31, 1998 and 1997,
respectively, and was included in accrued expenses.
Under the PPA, PERC is required to deliver at least 105,000,000 kWh to BHE
in any Calendar year. In the event PERC fails to deliver this output, PERC is
obligated to pay $4 for each 1,000,000 kWh by which such deliveries fall below
105,000,000 kWh.
5. SALE OF ELECTRIC GENERATION CAPACITY AND RESTRUCTURE OF POWER PURCHASE
AGREEMENT
On May 3, 1996, Maine Energy completed a restructuring of its PPA with CMP
and the sale of the rights to its electrical generating capacity to CL Power
Sales One, L.L.C. ("CL One"). At closing, Maine Energy received a payment from
CL One of $85,000 ("Capacity Payment") and the PPA was amended to reflect a
reduction in CMP's purchase price for electric power. In addition, the term of
the
26
<PAGE>
KTI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
5. SALE OF ELECTRIC GENERATION CAPACITY AND RESTRUCTURE OF POWER PURCHASE
AGREEMENT (CONTINUED)
PPA was extended from 2007 to 2012. The Company also received reimbursement of
certain transaction costs, including interest on the Capacity Payment from
November 6, 1995 to closing and certain other payments. The Company recorded the
payment from CL One, net of transaction costs, of approximately $80,691 as
deferred revenue in 1996. This amount is being recognized on a straight-line
basis as revenue over the life of the capacity agreement with CL One (eleven
years). As of December 31, 1998 and 1997 the remaining deferred revenue was
$61,276 and $68,556, respectively.
Under the terms of the agreements, Maine Energy will be liable to CMP for
liquidated damages of $3,750 for any calendar year through the year 2006 and on
a pro rata basis for the period from January 1, to May 31, 2007 in which it does
not deliver at least 100,000,000 kilowatt hours ("kWh"). Also, if during the
same period, Maine Energy fails to deliver at least 15,000,000 kWh in any
calendar year through the year 2006 and on a pro rata basis for the period from
January 1, to May 31, 2007 it will be liable to CMP for liquidated damages of
$3,750 times the number of years remaining in the term of the agreement. Both
the 100,000,000 kWh and the 15,000,000 kWh levels are adjusted in the case of a
force majeure event, as defined. Maine Energy produced approximately 166,000,000
and 168,000,000 kWh of electricity in each of 1998 and 1997, respectively. In
order to secure CMP's right to liquidated damages, Maine Energy has obtained an
irrevocable letter of credit in the initial amount of $45,000 which will be
reduced by $3,750 for each completed year in which no event requiring the
payment of liquidated damages occurs. Under the terms of the letter of credit
agreement, Maine Energy is required to maintain certain restricted funds. The
letter of credit is collateralized by liens on substantially all of Maine
Energy's assets.
Maine Energy used the proceeds from the sale of its capacity to repay the
then outstanding Maine Energy Resource Recovery Bonds and to retire the related
bank letter of credit. This prepayment resulted in the recognition of an
extraordinary loss of $2,248 (net of minority interest of $2,213) in 1996.
6. ACQUISITIONS
1998 ACQUISITIONS
The Company acquired ten companies and an additional partnership interest in
one company during 1998. Payment of the aggregate purchase price for these
acquisitions consisted of (i) 1,945,353 shares of the Company's common stock at
a weighted-average value of $19.06 per share (based on the closing prices of the
common stock on the date of announcement of each acquisition); (ii) $57,909 in
cash (net of cash acquired of $6,198); (iii) a promissory note in the principal
amount of $1,086; and (iv) warrants to purchase 130,000 shares of common stock
valued at approximately $1,060 as of the date of acquisition. These acquisitions
were accounted for as purchases, and accordingly, the assets and liabilities of
the acquired entities have been recorded at their estimated fair value at the
dates of acquisition. The excess of the purchase price over the fair value of
the acquired net assets aggregating $102,866 has been recorded as goodwill and
is being amortized on a straight line basis over 30 years. The more significant
1998 acquisitions are described below.
In August 1998, the Company acquired FCR, Inc. ("FCR") a diversified
recycling company that provides residential and commercial recycling, processing
and marketing services and primarily manufactures cellulose insulation and
plastics using recycled materials. FCR owns or operates eighteen
27
<PAGE>
KTI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
6. ACQUISITIONS (CONTINUED)
material recovery facilities, six cellulose insulation manufacturing facilities
and three plastic processing facilities in twelve states. Payment of the
purchase price, including all direct costs, of $63,581 consisted of (i)
1,714,285 shares of the Company's common stock valued at $18.96 per share (based
on the closing price of the common stock on the date of announcement) and (ii)
$31,074 in cash. An additional payment of up to $30,000 may have been required
based on the earnings of FCR for the period July 1, 1998 through December 31,
1998 (the "Earnout"). Based on FCR's earnings during the period, no payments are
due under the Earnout. The cost of the acquisition exceeded the fair value of
the acquired net assets by approximately $70,032.
In August 1998, the Company acquired certain assets and assumed certain
liabilities of Atlantic Coast Fibers, Inc. ("Atlantic Coast") and Gaccione Bros.
& Co., Inc. and PGC Corporation (collectively, "Gaccione"). Atlantic Coast
operates a high-grade paper processing facility. Payment of the purchase price,
including all direct costs, for Atlantic Coast of $9,655 consisted of (i)
123,532 shares of the Company's common stock valued at $20.29 per share (based
on the closing price of the common stock on the date of the announcement), (ii)
$6,995 in cash and (iii) warrants to purchase 20,000 shares of common stock
valued at approximately $153 as of the date of acquisition. Gaccione operated a
high-grade paper processing facility. Payment of the purchase price, including
all direct costs, for Gaccione of $6,975 consisted of (i) $5,889 in cash and
(ii) a 7% promissory note in the principal amount of $1,086. In September 1998,
the Company agreed to a payment of an additional purchase price for Atlantic
Coast and Gaccione consisting of 150,000 shares of common stock. The Company
recorded this additional purchase price as a liability and an addition to
goodwill. Subsequent to year-end, the Board of Directors approved the payment of
the additional purchase price and the common stock was issued. The cost of these
acquisitions exceeded the fair value of the acquired net assets by approximately
$18,104.
In June 1998, the Company acquired Multitrade Group, Inc. ("Multitrade").
Multitrade operates three waste-to-energy facilities utilizing biomass and coal
to produce steam for sale to major industrial users under long-term contracts.
Payment of the purchase price, including all direct costs, for Multitrade was
$12,347 in cash. The cost of the acquisition exceeded the fair value of the
acquired net assets by approximately $4,537.
In December 1998, the Company acquired an additional 9.6% limited
partnership interest in Maine Energy from one of the existing limited partners.
The cost of the acquisition was $2,410. The transaction has been accounted for
under the purchase method of accounting and the cost of the purchase price has
been allocated to the assets and liabilities of Maine Energy (to the extent of
the Company's additional ownership interest) based on their estimated fair
values as of the date of acquisition and resulted in an increase in the carrying
value of property and equipment of approximately $1,670.
1997 ACQUISITIONS
On September 30, 1997 and November 12, 1997, the Company purchased certain
limited partnership interests in PERC aggregating 64.29% from one of the
existing limited partners. The aggregate cost of the acquisitions was $14,500.
The purchase price has been allocated to the assets and liabilities of PERC (to
the extent of the Company's additional ownership interest) based on their
estimated fair values as of the date of acquisition and resulted in a reduction
in the carrying value of
28
<PAGE>
KTI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
6. ACQUISITIONS (CONTINUED)
property and equipment of approximately $8,038. Prior to the acquisition of the
additional 64.29% limited partnership interest, the Company accounted for its 7%
ownership under the equity method. The excess of the Company's actual capital
contributions over its original 7% ownership interest in the partnership's total
contributed capital is being amortized over the term of the partnership's energy
sales contract. This amount is included in goodwill.
In November, 1997, the Company acquired certain assets and assumed certain
liabilities of Prins Recycling Corp. and its subsidiaries ("Prins") pursuant to
an order of the Bankruptcy Court for the District of New Jersey. Prins was
engaged in the operation of three material recycling facilities located in or
proximate to Newark, New Jersey, Chicago, Illinois and Charlestown,
Massachusetts. The aggregate purchase price including all direct costs was
approximately $15,100 and included warrants to purchase 92,250 shares of the
Company's common stock at exercise prices ranging from $8.10 to $9.25 per share.
The warrants are exercisable at any time and expire on various dates between
December 31, 1999 and April 30, 2002. During 1998 and 1997, 40,000 and 17,325 of
these warrants were exercised. At December 31, 1998, 34,925 of these warrants
remain outstanding. In connection with the transaction, the Company assumed
certain administrative claims against Prins. The cost of the acquisition
exceeded the fair value of the acquired net assets by approximately $6,374 which
has been recorded as goodwill and is being amortized on a straight line basis
over 15 years. During 1998, the Company finalized its allocation of the purchase
price which resulted in certain changes in estimated liabilities as of the
acquisition date, including certain additional administrative claims against
Prins and fair values assigned to property, equipment and leasehold
improvements. Such adjustments resulted in an increase in goodwill of
approximately $1,865.
On September 19, 1997, the Company acquired all of the outstanding common
stock of K-C Industries, Inc. ("K-C"). K-C is engaged in the marketing of paper
and secondary fibers. The aggregate purchase price, including all direct costs,
was approximately $6,739 and included 425,014 shares of the Company's common
stock. The cost of the acquisition exceeded the fair value of the acquired net
assets by approximately $5,035 which has been recorded as goodwill and is being
amortized on a straight line basis over 15 years.
In August, 1997, the Company acquired all of the outstanding common stock of
I. Zaitlin and Sons, Inc. ("Zaitlin"), a company engaged in the recycling
business in Maine, and Data Destruction Services, Inc., a company engaged in the
destruction of confidential records. The aggregate purchase including all direct
costs was approximately $2,245 and included 200,000 shares of the Company's
common stock. The cost of the acquisition exceeded the fair value of the
acquired net assets by approximately $2,498 which has been recorded as goodwill
and is being amortized on a straight line basis over 10 years. During 1998, the
Company finalized its allocation of the purchase price which resulted in certain
changes in estimated liabilities as of the acquisition date. Such adjustments
resulted in an increase in goodwill of approximately $105 during 1998.
In June, 1997, the Company acquired the entire general partnership interest
in AARNE from the existing general partner. The aggregate cost of the
acquisition was $560 which exceeded the carrying value of the minority interest
by approximately $328 which was recorded as goodwill and is being amortized on a
straight line basis over 15 years. Subsequent to the acquisition, the Company
owns 100% of AARNE.
29
<PAGE>
KTI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
6. ACQUISITIONS (CONTINUED)
1996 ACQUISITIONS
On May 3, 1996, the Company purchased additional limited partnership
interests in Maine Energy aggregating 23.77% from certain other existing limited
partners. The aggregate cost of the acquisitions was approximately $485.
Subsequent to this acquisition, the Company's ownership in Maine Energy
aggregated 74.15%. Prior to September 16, 1994 (the date at which the Company
acquired its initial limited partnership interests and became majority owner in
Maine Energy), the Company accounted for its 10% ownership interest under the
equity method. The difference between the Company's actual capital contributions
and its ownership interest in the partnership's total contributed capital is
being amortized over the term of the partnership's energy sales contract. This
amount is included in goodwill.
During the fourth quarter of 1996, the Company acquired all of the
outstanding common stock of Timber Energy Investments, Inc. ("TEII"). TEII,
through its subsidiaries, is engaged in the generation of electricity and the
processing of wood and plastic materials. The purchase price, including all
direct costs, was approximately $2,142. The cost of the acquisition exceeded the
fair value of TEII's net assets by approximately $2,035 which has been recorded
as goodwill and is being amortized on a straight line basis over 10 years.
During 1997, the Company finalized its allocation of the purchase price which
resulted in certain changes in the fair values assigned to property, equipment
and leasehold improvements and the reduction of certain assumed liabilities.
Such adjustments resulted in an increase of goodwill of approximately $229.
On March 31, 1996, the Company acquired a 60% limited partnership interest
in American Ash Recycling Co. of Tennessee, a limited partnership, ("AART").
AART is engaged in the processing of ash residue from a waste-to-energy facility
located in Nashville, Tennessee. The purchase price for the limited partnership
interest was $2,100. The cost of the acquisition exceeded the fair value of
AART's net assets by approximately $800 which has been recorded as goodwill and
is being amortized on a straight line basis over 10 years.
On November 25, 1996, the Company acquired all of the outstanding common
stock of Manner Resins, Inc. ("Manner") a company engaged in the purchase and
sale of recyclable plastic materials. The purchase price was approximately $456
and was entirely financed through the issuance of 65,000 shares of the Company's
common stock. The cost of the acquisition exceeded the fair value of Manner's
net assets by approximately $421 which has been recorded as goodwill and is
being amortized on a straight line basis over 5 years.
The following unaudited pro forma summary presents selected operating data
as if the significant 1998 and 1997 acquisitions described above had occurred as
of January 1, 1997, and does not purport
30
<PAGE>
KTI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
6. ACQUISITIONS (CONTINUED)
to be indicative of the results that would have occurred had the transactions
been completed as of those dates or of results which may occur in the future.
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Net revenues.............................................................................. $ 239,541 $ 240,354
Income (loss) from continuing operations before extraordinary item........................ (686) 4,603
Net income (loss)......................................................................... (1,037) 4,603
Net income (loss) available for common shareholders....................................... (2,170) 2,031
Net income (loss) per share-basic......................................................... (0.18) 0.21
Net income (loss) per share-diluted....................................................... (0.18) 0.21
</TABLE>
7. DISPOSAL OF COMPUTER SERVICES SEGMENT
During 1996, the Company disposed of its computer services segment which was
comprised entirely of its wholly-owned subsidiary Convergent Solutions, Inc.
("CSI"). The sale was completed in two separate transactions. On July 26, 1996
certain assets and liabilities of CSI were sold to Ciber, Inc. for $5,000. Also,
on July 29, 1996, all of the outstanding common stock of CSI was sold to certain
members of its management for $5. In addition, the Company had notes receivable
from the buyers aggregating $445 at December 31, 1996. The notes receivable were
repaid during 1997. The results of operations of CSI for 1996 have been
classified as discontinued operations in the accompanying financial statements.
CSI's revenues for 1996 were $5,785.
8. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements consist of the following at:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
<S> <C> <C>
1998 1997
---------- ----------
Land...................................................................................... $ 3,018 $ 2,171
Buildings and site improvements........................................................... 43,772 40,942
Machinery and equipment................................................................... 184,589 137,184
Automobiles and trucks.................................................................... 3,694
Furniture and fixtures.................................................................... 2,300 2,075
Leasehold improvements.................................................................... 2,917 750
Construction-in-progress.................................................................. 1,103
---------- ----------
241,393 183,122
Less accumulated depreciation............................................................. (27,724) (18,369)
---------- ----------
$ 213,669 $ 164,753
---------- ----------
---------- ----------
</TABLE>
Beginning October 1, 1996 Maine Energy revised the estimated average useful
lives used to compute depreciation for substantially all of its plant and
equipment. These revisions were made to more properly reflect the remaining
useful lives of the assets. The change had the effect of increasing income
before extraordinary item and net income by approximately $482 ($.08 per share,
basic and $.07 diluted per share) for 1996.
31
<PAGE>
KTI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
9. DEBT
The Company's debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
<S> <C> <C> <C>
1998 1997
---------- ---------
(A) Revolving credit agreement............................................................ $ 138,628
(A) Revolving and term loan payable....................................................... $ 12,411
(B) Capital lease obligations............................................................. 5,466 357
(C) Revolving credit facility............................................................. 4,000 4,000
(D) Promissory note payable............................................................... 1,086
(E) Bonds Payable......................................................................... 760
(F) Secured term notes payable............................................................ 555 692
(G) Term loan payable..................................................................... 460 489
(H) Secured note payable to bank.......................................................... 50 1,555
(I) Term note payable to bank............................................................. 304
Other................................................................................. 1,210
PERC Bonds Payable.................................................................... 44,995 47,900
Revenue Bonds Payable by TERI......................................................... 11,635 13,400
Convertible Subordinated Notes........................................................ 6,770
Subordinated Notes Payable to Maine Energy Limited Partners........................... 4,293 11,949
---------- ---------
218,698 94,267
Less current portion.................................................................. 9,775 19,794
---------- ---------
$ 208,923 $ 74,473
---------- ---------
---------- ---------
</TABLE>
- ------------------------
(A) During July 1998, the Company entered into a Revolving Line of Credit
Agreement with a bank (the "Credit Agreement") which provides for
borrowings of up to $150,000. The Credit Agreement expires in April 2001.
The Company may select interest rates on the outstanding borrowings based
on the bank's prime rate or LIBOR rates. The interest rates range from
the bank's prime rate to the bank's prime rate plus 0.75% or LIBOR rates
plus 1.75% to LIBOR rates plus 2.50% depending on the attainment of
certain financial covenants, as defined in the Credit Agreement. All
borrowings under the Credit Agreement at December 31, 1998 were at LIBOR
plus 2.50% (8.05% at December 31, 1998). The Credit Agreement also
provides standby letters of credit which reduce the total borrowings
available to the Company. At December 31, 1998, approximately $2,275 in
standby letters of credit were outstanding and the Company had
approximately $9,097 in available borrowings under the Credit Agreement.
All borrowings under the Credit Agreement are secured by substantially
all of the Company's assets which have not been pledged for other
borrowings or certain standby letters of credit. Among other things, the
Credit Agreement restricts the Company's ability to incur additional
indebtedness and requires it to maintain certain financial ratios. At
December 31, 1998, the Company was in default of a debt covenant and
received a waiver from the bank for this default. Certain borrowings
under this Credit Agreement were utilized to repay the revolving and
term loan payable discussed below.
32
<PAGE>
KTI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
9. DEBT (CONTINUED)
On May 12, 1999, the Company executed an amendment to the Credit
Agreement (the "Amended Agreement") modifying certain financial covenants
and requiring bank approval for all acquisitions. The Amended Agreement
requires that the Company and certain subsidiaries, as defined, maintain
certain specified financial covenants, including, a minimum interest
coverage ratio, a maximum funded debt to EBITDA ratio, a minimum fixed
charge coverage ratio, and a maximum debt to capitalization ratio, each
as defined in the Amended Agreement. The Company's ability to
satisfy these covenants is dependent on its ability to substantially
achieve its operating plan. As of June 30, 1999, the Company was in
default of certain of these covenants and received a waiver from the
bank for this default through January 1, 2000. The Company will
continue to select interest rates on the outstanding borrowings based on
the banks prime rate or LIBOR rates, however, the interest rates range
from the bank's prime rate to the bank's prime rate plus 1.50% or LIBOR
plus 1.88% to LIBOR plus 3.25% depending on the attainment of a financial
covenant, as defined, in the Amended Agreement.
During 1997, the Company had entered into an Amended and Restated
Revolving and Term Loan and Security Agreement with the same bank which
provided an $11,000 revolving credit facility and $7,500 term loan. At
December 31, 1997, $5,000 and $7,411 were outstanding under the revolving
credit facility and term loan, respectively. The revolving line of credit
interest was at the bank's prime rate plus 0.75% (8.75% at December 31,
1997) payable monthly. The term loan bore interest at the bank's prime
rate plus 1.25% (9.25% at December 31, 1997), and was due in monthly
installments of $89 plus interest. These obligations were repaid in July
1998.
(B) The Company leases certain machinery and equipment under capital leases
expiring at various times through 2008. These capital lease obligations
have a weighted average interest rate of 9.46% at December 31, 1998 and
monthly principal and interest payments totaling $129. These obligations
are secured by machinery and equipment with a net carrying value of
$6,702 at December 31, 1998.
(C) A subsidiary of the Company has a $8,000 revolving line of credit
(including $1,000 available for letters of credit) with a bank (the
"Revolving Credit Agreement") which expires in May 2000. Borrowings under
the Revolving Credit Agreement are based on eligible collateral which
includes specified percentages of certain cash, accounts receivable and
inventory, as defined. Interest on borrowings is at LIBOR rate plus 2.25%
(weighted average rate of 7.78% and 9.50% at December 31, 1998 and 1997,
respectively). Among other things, the Revolving Credit Agreement
restricts the subsidiary's ability to incur additional indebtedness and
requires it to maintain certain financial ratios, as defined.
(D) Promissory note payable to sellers in a business transaction with
interest at 7% and principal due in February 2001.
(E) A subsidiary of the Company financed the construction of a facility by
issuing bonds with a maturity date of November 1, 1999. Interest is
payable monthly at a variable rate, as defined in the bond agreement
(3.2% at December 31, 1998). The bonds contain certain restrictive
covenants for the subsidiary including maintenance of certain financial
ratios and minimum net worth requirements. The bonds are secured by the
facility and the related equipment with
33
<PAGE>
KTI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
9. DEBT (CONTINUED)
an aggregate net carrying value of $2,138 at December 31, 1998. These
bonds were paid in full subsequent to December 31, 1998.
(F) The notes payable to various commercial lenders bear interest at rates
between 7.90% and 12.5%, with a weighted average interest rate of 8.17%
at December 31, 1998, with monthly payments of principal totaling $18.
The notes mature at various dates through 2002. The notes are secured by
equipment with an aggregate net carrying value of $2,201 at December 31,
1998.
(G) A subsidiary has a term loan payable to a private lender. The principal
payments are $7 per month plus interest at 12.5% through May 2007.
(H) During 1997, a subsidiary of the Company entered into a working capital
and term financing agreement (the "Financing Agreement") with a bank. The
balance outstanding at December 31, 1998, is under a $500 working capital
loan which carries interest at the bank's prime rate plus 0.75% (8.50% at
December 31, 1998), is secured by substantially all of the assets of the
subsidiary and expires in April 1999. At December 31, 1997 the Financing
Agreement included a term loan with an outstanding principal balance of
$780, with interest at the bank's prime rate plus 1.25% (9.75%) and was
secured by equipment with a carrying value of approximately $1,300; a 5
year mortgage loan with an outstanding principal balance of $670, with
interest at the bank's prime rate plus 1.25% (9.75%) and was secured by
certain real estate with a carrying value of approximately $715; and $105
outstanding under the working capital loan. The term loan and mortgage
loan were repaid in full during 1998.
(I) On April 1, 1997, the Company and a bank entered into a Second Amended
and Restated Term Note for $607. The bank agreed to forgive $150 of the
outstanding balance under the previous Amended and Restated Term Note.
This amount is included in other income in 1997. The Second Amended and
Restated Term Note was due in monthly installments of $38 plus interest
at the bank's prime rate (8.5% at December 31, 1997). The obligation was
repaid in full during 1998.
PERC BONDS PAYABLE
On June 26, 1998, the Finance Authority of Maine ("FAME") issued $44,995 par
amount Finance Authority of Maine Electric Rate Stabilization Revenue Refunding
Bonds, Series 1998 A and Series B (Penobscot Energy Recovery Company, LP) (the
"1998 Bonds"). The proceeds of the 1998 Bonds were used to repay all of the
outstanding balance due on PERC's existing Floating Rate Demand Resource
Recovery Revenue Bonds (the "1986 Bonds"), which were called for redemption
during July 1998. The redemption resulted in the recognition of an extraordinary
loss of $351 (net of minority interest of $249 and tax of $267) which included
the unamortized portion of the deferred financing costs associated with the
original issuance. The 1998 Bonds are fixed rate bonds with yields ranging from
3.75% to 5.20% with a weighted-average yield of approximately 5.06%.
The 1998 Bonds are subject to mandatory redemption in annual installments of
varying amounts through July 1, 2018. Beginning July 1, 2008, the 1998 Bonds are
subject to redemption at the option of PERC at a redemption price equal to 102%,
through June 30, 2009, 101% for the period July 1, 2009 to June 30, 2010 and
100% thereafter of the principal amount outstanding plus accrued interest.
34
<PAGE>
KTI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
9. DEBT (CONTINUED)
In conjunction with the refinancing, PERC entered into a loan agreement with
FAME, which contains various provisions including the maintenance of certain
restricted funds and certain restrictive covenants relating to the 1998 Bonds.
The covenants restrict PERC's ability to incur additional indebtedness and
restrict the ability of the general partners to sell, assign or transfer their
general partner interests. The bonds are collateralized by liens on
substantially all of PERC's assets
In connection with the refinancing, the Company issued a $3,000 limited
guaranty of PERC's payment obligation under the Loan Agreement, in the favor of
FAME and the 1998 Bond Trustee. In addition, BHE also issued a guaranty to FAME
and the 1998 Bond Trustee in the amount equal to the annual payments for
principal and interest on the 1998 Bonds. Demands on the above guaranties are to
be on a pro-rata basis. If either party shall default under such demand, the
other guarantor is liable for the entire demand, up to the limit on such
guarantor's guaranty. In addition, the 1998 Bonds are insured by Financial
Security Assurance, Inc.
At December 31, 1997, two series of the 1986 Bonds totaling $47,900 were
outstanding. The interest rates on the Revenue bonds were based on rates for
certain tax-exempt obligation, as determined weekly by the remarketing agent for
the bonds with a weighted-average interest rate of 4.32% at December 31, 1997.
TERI REVENUE BONDS PAYABLE
During June 1997, TERI issued two series of 1997 Industrial Development
Revenue Bonds: Series A in the amount of $13,400 and Series B in the amount of
$308. The Series B bonds carried interest at 10% and were paid in full in
December 1997. The Series A bonds bear interest at 7.0%. The Series A bonds have
an annual sinking fund payment due each December, ($2,030 due December 1, 1999),
with final payment of $4,620 due December 2002. The bond agreements require,
among other things, maintenance of various insurance coverages and restrict the
borrowers ability to incur additional indebtedness. The bonds are collateralized
by liens on TERI's electric generating facility located in Telogia, Florida. The
proceeds from these bonds were utilized to repay certain then outstanding
indebtedness.
CONVERTIBLE SUBORDINATED NOTES
During August 1998, the Company issued $21,099 of Convertible Subordinated
Notes (the "Convertible Notes") in exchange for substantially all the
outstanding shares of the Series B Preferred Stock. This exchange was made in
accordance with the original terms of the Series B Preferred Stock. The
Convertible Notes carry interest at 8.75% and are due in August 2004. In
accordance with the terms of the Convertible Notes established concurrently with
the issuance of the Series B Preferred Stock, the holders of Convertible Notes
have the option to convert the principal amount of the Convertible Notes into
shares of the Company's Common Stock at $11.75 per share. During November 1998,
$14,329 of the then outstanding Convertible Notes were converted to common
shares (see Note 11).
SUBORDINATED NOTES PAYABLE TO MAINE ENERGY LIMITED PARTNERS
These notes, as amended, bear interest at 12%. Payments of principal and
interest are made solely at the discretion of Maine Energy's general partner.
However, all principal and interest must be repaid
35
<PAGE>
KTI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
9. DEBT (CONTINUED)
prior to any partner distributions. To the extent interest is not paid, accrued
interest is capitalized. As a holder of a portion of the Subordinated Notes
Payable, the Company is entitled to receive a proportionate share of such
payments. At December 31, 1998 and 1997, Maine Energy had $12,880 and $14,307,
respectively, outstanding under the notes of which the Company held $8,587 and
$2,358, respectively.
Excluding any amounts which may be paid on the subordinated notes payable to
the Maine Energy Limited Partners, aggregate maturities as of December 31, 1998
of the Company's debt are as follows:
<TABLE>
<S> <C>
1999.............................................. $ 9,775
2000.............................................. 5,960
2001.............................................. 143,731
2002.............................................. 6,742
2003.............................................. 2,065
Thereafter........................................ 46,132
</TABLE>
10. PREFERRED STOCK
SERIES A PREFERRED STOCK
In June 1997 the Company sold 487,500 shares of Series A Preferred Stock
(the "Original Series A Preferred") for gross proceeds of $3,900 and net
proceeds of $3,798, and issued 243,750 common stock purchase warrants with an
exercise price of $9.00 per share, subject to adjustment, (the "$9.00 Warrants")
and 32,500 common stock purchase warrants with an exercise price of $10.00 per
share, subject to adjustment (the "$10.00 Warrants"). Both the $9.00 Warrants
and the $10.00 Warrants are exercisable at any time until June 4, 2003. The
$9.00 Warrants and the $10.00 Warrants had an aggregate fair value of $524 at
the date of issuance which has been accounted for as additional paid-in capital.
During 1998, 234,500 of the $9.00 Warrants and 31,267 of the $10.00 Warrants
were exercised. At December 31, 1998, 9,250 of the $9.00 Warrants and 1,233 of
the $10.00 Warrants remained outstanding.
In October 1997, 40,000 shares of the Original Series A Preferred were
converted into 40,000 shares of common stock. In December 1997, the remaining
outstanding shares of Original Series A Preferred were converted into newly
issued Series C Preferred Stock. The Series C Preferred Stock was subsequently
renamed Series A Preferred ("Series A Preferred"). During the first quarter of
1998, all of the remaining 447,500 shares of the Series A Preferred were
converted into 447,500 shares of common stock.
The Company accreted the carrying value of the Series A Preferred by $42 and
$228 in 1998 and 1997, respectively, representing periodic accretion to the
mandatory redemption value of $12.00 per share and $472 in 1997 which represents
the difference between the initial allocated value of the Series A Preferred and
the initial conversion rate.
36
<PAGE>
KTI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
10. PREFERRED STOCK (CONTINUED)
SERIES B PREFERRED STOCK
In August 1997, the Company sold 856,000 shares of Series B Convertible
Preferred Stock (the "Series B Preferred") for gross proceeds of $21,400 and net
proceeds to the Company of $19,984. Dividends at an annual rate of 8.75% were
cumulative and were payable quarterly.
Except under certain circumstances, principally resulting from the
non-payment of dividends or a change of control of the Company, as defined, the
Series B Preferred were non-voting. The Series B Preferred placed certain
restrictions on the Company's ability to issue securities in parity with, or
senior to, the Series B Preferred. These restrictions principally involved the
Company satisfying certain financial ratios, as defined.
In June 1998, the Company exercised its option to exchange all of the
outstanding shares of the Series B Preferred for the Company's Convertible
Subordinated Notes due August 2004. During August 1998, 843,960 shares of Series
B Preferred were exchanged for Convertible Subordinated Notes pursuant to their
original terms at a conversion price of $25.00 per share totaling $21,099. The
remaining 12,040 shares were converted at the holder's option into 25,531 shares
of common stock at a conversion price of $11.75 per share and $1 in exchange for
fractional shares.
11. STOCKHOLDERS' EQUITY
In November 1998, $14,329 of the Convertible Subordinated Notes were
exchanged for 1,219,489 shares of common stock at $11.75 per share. The
conversion included a premium equal to 3.0% of the face value of the
Subordinated Convertible Notes and nine months forward interest at 8.75%, paid
to the Convertible Subordinated noteholders in the form of 63,910 shares of
common stock valued at $21.44 per share. The premium, aggregating $1,370, was
recorded as interest expense.
During 1998, the Company issued warrants to purchase 40,000 shares of its
common stock at prices ranging from $15.31 to $22.25 per share to certain
members of the Board of Directors. These warrants expire ten years from the date
of issue with 7,500 of the warrants exercisable immediately and the remaining
warrants exercisable beginning one year from the date of issue. These warrants
had an aggregate fair value of $205 at the date of issuance which was recorded
as compensation expense during 1998. All such warrants remain outstanding at
December 31, 1998.
The Company issued warrants to purchase 130,000 shares of the Company's
common stock at prices ranging from $19.75 to $21.88 per share in connection
with certain business acquisitions during 1998. These warrants have a ten year
life, and vest ratably over a 60-month period, beginning one month after the
date of issue. All such warrants remain outstanding at December 31,1998.
During 1997, the Company issued warrants to purchase 149,750 shares of its
common stock at prices ranging from $5.71 to $10.00 as consideration for
services rendered in connection with certain equity issuances. These warrants
are exercisable at any time and expire at various dates ranging from April 30,
2001 to August 15, 2002. During 1998, warrants to purchase 30,592 shares of the
Company's common stock were exercised and warrants to purchase 119,158 shares of
the Company's common stock remain outstanding at December 31, 1998.
37
<PAGE>
KTI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
11. STOCKHOLDERS' EQUITY (CONTINUED)
In February 1997, the Company issued 10,500 shares of its common stock and
warrants to purchase an additional 2,100 shares at a price of $8.10 in
connection with the purchase of certain minority interests in a subsidiary.
These warrants were exercised during 1998.
In connection with certain debt obligations issued during 1996, the Company
issued warrants to purchase 420,572 shares of common stock at $5.71 per share.
The aggregate original issue discount representing the fair value of the
warrants was $144. These warrants are exercisable at any time and expire at
various dates from March 31, 2001 to June 30, 2001. During 1998 and 1997,
warrants to purchase 39,900 and 259,015, respectively, shares of common stock
were exercised and at December 31, 1998, warrants to purchase 121,657 shares
remain outstanding.
During 1996, the Company issued warrants to purchase 210,000 shares of its
common stock at a price of $7.10 per share as consideration for consulting
services. During 1998 and 1997, warrants to purchase 50,000 and 160,000 shares
of common stock, respectively, were exercised.
In September of 1996, the Company issued warrants to purchase 26,250 shares
of common stock to an officer of the Company, at an exercise price of $8.08.
These warrants vested 100% one year from the date of issue and have a 10-year
life. All such warrants remain outstanding at December 31, 1998.
In addition, warrants issued prior to 1996 to purchase 87,499 shares of
common stock at $5.71 per share were exercised during 1998.
As of December 31, 1998, the Company has reserved shares of common stock for
issuance as follows:
<TABLE>
<CAPTION>
NUMBER
OF SHARES
----------
<S> <C>
Conversion of Convertible Subordinated Notes Payable............................. 588,774
Exercise of common stock purchase warrants....................................... 482,473
Exercise of common stock options................................................. 2,177,068
Employee savings plan............................................................ 191,668
----------
3,439,983
----------
----------
</TABLE>
Certain of the Company's outstanding warrants contain provisions which allow
for the conversion of such warrants into a lesser number of shares without the
payment of cash into the Company (so-called "cashless exercise" provisions).
Accordingly, there can be no assurance that, even if all such warrants are
exercised, the Company will receive all the aggregate gross proceeds.
12. STOCK OPTION PLANS
The Company has four stock option plans; the 1986 Stock Option Plan of KTI
(the "1986 Plan"), the KTI 1994 Long-Term Incentive Award Plan and the DataFocus
Long-Term Incentive Plan (collectively, the "1994 Incentive Plans") and the KTI
Directors Stock Option Plan (the "Directors Plan"). All plans are administered
by the Compensation Committee of the Board of Directors.
The Company has elected to follow Accounting Principles Board Opinion No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25") and related
Interpretations in accounting for its employee stock
38
<PAGE>
KTI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
12. STOCK OPTION PLANS (CONTINUED)
options because, as discussed below, the alternative fair value accounting
provided for under SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, ("SFAS
No. 123") requires use of option valuation models that were not developed for
use in valuing employee stock options. Under APB 25, because the exercise price
of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
Elements of the various plans include the following:
THE 1986 PLAN. A maximum of 66,190 shares are subject to the 1986 Plan.
Options were granted at prices not less than the fair market value at the date
of grant. All options granted had 10 year terms and vested immediately. No new
options can be granted under this plan.
THE 1994 INCENTIVE PLANS. A maximum of 1,383,333 shares are subject to grant
under the 1994 Incentive Plans. Options may be granted at prices not less than
the fair market value at the date of grant. All grants prior to January 1, 1998
primarily vest at 20% per year beginning one year from the date of grant. Grants
subsequent to January 1, 1998 vest ratably over a 60-month period beginning one
month from the date of grant. Vested options may be exercised at any time until
their expiration which may be up to ten years from the date of grant. Unvested
options are forfeited upon termination of employment.
THE DIRECTORS PLAN. A maximum of 200,000 shares are subject to the Directors
Plan. Under the Directors Plan, non-employee Directors are automatically granted
non-statutory options on August 1 of each year. The number of shares granted is
equal to the lesser of (i) 7,500 shares or (ii) a number of shares having a
maximum market value of $68. Options granted may not be exercised within one
year of grant and have 10 year terms.
In addition to the Plans described above, the Company's Board of Directors
from time to time has granted key employees non-plan options. During 1998 and
1997, the Board of Directors made non-plan option grants. These non-plan options
have a ten-year term, and were granted at the then current fair market value.
The 1997 grants vested on the date of grant. The 1998 grants had vesting
schedules ranging from immediate vesting to ratably over a 60-month period
beginning one month from the date of grant.
39
<PAGE>
KTI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
12. STOCK OPTION PLANS (CONTINUED)
Option activities under the plans and for the non-plan options are detailed
in the following table:
<TABLE>
<CAPTION>
WEIGHTED
1994 AVERAGE
INCENTIVE DIRECTOR EXERCISE
1986 PLAN PLANS PLAN NON-PLAN PRICE PER SHARE
---------- ----------- ------------ ---------- ---------------
<S> <C> <C> <C> <C> <C>
Outstanding at January 1, 1996............. 15,263 542,566 16,800 52,500 $ 6.28
Granted.................................. 225,475 31,500 7.23
Exercised................................ (55,346) 5.38
Forfeited................................ (238,355) 6.15
---------- ----------- ------------ ---------- ------
Outstanding at January 1, 1997............. 15,263 474,340 48,300 52,500 6.82
Granted.................................. 169,500 37,500 175,000 10.03
Exercised................................ (85,353) 5.89
Forfeited................................ (46,356) 7.75
---------- ----------- ------------ ---------- ------
Outstanding at January 1, 1998............. 15,263 512,131 85,800 227,500 8.33
Granted.................................. 884,250 30,000 495,000 16.86
Exercised................................ (15,263) (80,720) (21,324) (118,375) 8.00
Forfeited................................ (129,815) (149,000) 15.54
---------- ----------- ------------ ---------- ------
Outstanding at December 31, 1998........... 1,185,846 94,476 455,125 $ 14.11
---------- ----------- ------------ ---------- ------
---------- ----------- ------------ ---------- ------
Exercisable at December 31, 1998........... 254,383 64,476 218,636 $ 12.11
---------- ----------- ------------ ---------- ------
---------- ----------- ------------ ---------- ------
</TABLE>
The weighted-average fair value of options granted was $8.60, $4.95 and
$5.12 for 1998, 1997 and 1996, respectively.
At December 31, 1998, for each of the following classes of options as
determined by range of exercise price, information regarding weighted-average
exercise prices and weighted-average remaining contractual lives of each class
is as follows:
<TABLE>
<CAPTION>
WEIGHTED-
WEIGHTED- AVERAGE
AVERAGE WEIGHTED-AVERAGE EXERCISE PRICE
EXERCISE PRICE REMAINING NUMBER OF OF
NUMBER OF OF CONTRACTUAL LIFE OF OPTIONS OPTIONS
OPTIONS OUTSTANDING OUTSTANDING OPTIONS CURRENTLY CURRENTLY
OPTION CLASS OUTSTANDING OPTIONS (YEARS) EXERCISABLE EXERCISABLE
- -------------------------------- ----------- --------------- --------------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Price of $4.70 to $7.05......... 207,094 $ 6.51 6.70 111,121 $ 6.39
Price of $7.051 to $9.40........ 319,400 $ 8.64 8.00 157,524 $ 8.63
Price of $9.401 to $11.75....... 21,620 $ 10.18 8.50 8,737 $ 10.18
Price of $14.01 to $18.80....... 934,833 $ 16.09 9.10 243,955 $ 16.52
Price of $18.801 to $23.50...... 252,500 $ 20.27 9.60 16,158 $ 19.76
----------- -----------
Total........................... 1,735,447 $ 14.11 8.70 537,495 $ 12.11
</TABLE>
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had been
accounting for its employee stock options under the fair value method of that
statement. The fair value of these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following assumptions for
1998, 1997 and 1996, respectively: weighted average risk-free interest rates of
5.5%, 5.9% and 6.5%; no dividends;
40
<PAGE>
KTI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
12. STOCK OPTION PLANS (CONTINUED)
volatility factors of the expected market price of the Company's common stock of
.517, .494 and .642; and weighted- average expected life of 5 years, 5 years and
8 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options granted subsequent to 1994 is amortized to expense over the options'
vesting period. The Company's pro forma information follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Pro forma net income (loss) available for common shareholders....................... $ (602) $ 7,973 $ (1,803)
Pro forma basic earnings (loss) per share........................................... $ (0.06) $ 1.08 $ (0.30)
Pro forma diluted earnings (loss) per share......................................... $ (0.06) $ 0.99 $ (0.30)
</TABLE>
The pro forma disclosures presented above reflect compensation expense only
for options granted subsequent to 1994. These amounts may not necessarily be
indicative of the pro forma effect of SFAS No. 123 for future periods in which
options may be granted.
41
<PAGE>
KTI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
13. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------ ------------
<S> <C> <C> <C>
NUMERATOR:
Income from continuing operations................................... $ 3,050 $ 10,173 $ 1,523
Preferred stock dividends........................................... (1,091) (708)
Accretion of preferred stock........................................ (42) (700)
------------- ------------ ------------
Numerator for basic earnings per share-income from continuing
operations available to common stockholders....................... 1,917 8,765 1,523
Effective of dilutive securities:
Convertible subordinated notes payable (1)........................ 345
------------- ------------ ------------
Numerator for diluted earnings per share-income from continuing
operations available to common stockholders after assumed
conversions....................................................... $ 1,917 $ 9,110 $ 1,523
------------- ------------ ------------
------------- ------------ ------------
DENOMINATOR:
Denominator for basic earnings per share-weighted average shares.... 10,548,570 7,403,681 6,090,956
Effect of dilutive securities:
Employee stock options............................................ 517,426 203,883 55,043
Warrants.......................................................... 332,155 342,382 109,089
Convertible subordinated notes payable (1).......................... 476,244
------------- ------------ ------------
Dilutive potential common shares.................................... 849,581 1,022,509 164,132
------------- ------------ ------------
Denominator for diluted earnings per share-adjusted weighted-average
shares and assumed conversions.................................... 11,398,151 8,426,190 6,255,088
------------- ------------ ------------
------------- ------------ ------------
Income from continuing operations per share-Basic..................... $ 0.18 $ 1.18 $ 0.25
------------- ------------ ------------
------------- ------------ ------------
Income from continuing operations per share-Diluted................... $ 0.17 $ 1.08 $ 0.24
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
- ------------------------
(1) Preferred shares outstanding during 1998 and the convertible subordinated
notes payable in 1998 and 1996 are anti-dilutive and the preferred shares
were anti-dilutive in 1997.
For additional disclosures regarding dilutive securities see Notes 9 through
12.
42
<PAGE>
KTI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
14. INCOME TAXES
At December 31, 1998 the Company has net operating loss carryforwards of
approximately $52,500 for income tax purposes that expire in years 2002 through
2018 and general business credit carryforwards of approximately $530 which
expire in years 1999 through 2006. All of these carryforwards are subject to
limitation as described below. In addition, the Company has $906 of minimum tax
credit carryovers available that are not subject to limitation.
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1998 1997 1996
--------- ------------ ---------
<S> <C> <C> <C>
Deferred tax assets
Current:
Alternative minimum tax credit carryforwards.............. $ 906 $ 815
General business credit carryforwards..................... 204
Net operating loss carryforwards.......................... 2,191 1,930
Reserve on notes and accounts receivable.................. 525 65 $ 37
State taxes, net.......................................... 7 14 14
Other liabilities......................................... 999 22 47
--------- ------------ ---------
Total current deferred tax assets....................... 4,832 2,846 98
Valuation allowance for current deferred tax assets....... (95) (98)
--------- ------------ ---------
Net current deferred tax assets........................... 4,832 2,751
--------- ------------ ---------
Non-current:
Deferred revenues......................................... 20,510 17,074 18,887
Basis difference in partnership interest.................. 14,127 14,555 118
State taxes, net.......................................... 2,182 2,507 3,294
General business credit carryforwards..................... 326 530 530
Alternative minimum tax credit carryforwards.............. 687
Deferred development fees................................. 104 110 117
Net operating loss carryforwards.......................... 16,194 13,098 16,655
--------- ------------ ---------
Total non-current deferred tax assets................... 53,443 47,874 40,288
Valuation allowance for non-current deferred tax assets... (12,708) (15,645) (23,467)
--------- ------------ ---------
Net non-current deferred tax assets....................... 40,735 32,229 16,821
Non-current deferred tax liabilities:
Goodwill amortization on asset purchases.................. (107)
Deferred development expenses............................. (61)
Depreciation.............................................. (39,160) (32,229) (16,821)
--------- ------------ ---------
Net non-current deferred taxes............................ $ 1,407 $ $
--------- ------------ ---------
--------- ------------ ---------
</TABLE>
43
<PAGE>
KTI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
14. INCOME TAXES (CONTINUED)
Significant components of the provision (benefit) for income taxes on
continuing operations before extraordinary item are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal..................................................... $ 746 $ 65
State....................................................... 144 100
--------- --------- ---------
Total current................................................. 890 165
Deferred:
Federal..................................................... (882) 3,095 $ (3,602)
State....................................................... 1 362 (44)
Valuation allowance......................................... (3,032) (6,208) 3,646
--------- --------- ---------
Total deferred................................................ (3,913) (2,751)
--------- --------- ---------
$ (3,023) $ (2,586) $
--------- --------- ---------
--------- --------- ---------
</TABLE>
The components of the provision (benefit) from deferred income taxes on
continuing operations before extraordinary item for 1998, 1997, and 1996 are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
--------- --------- ----------
<S> <C> <C> <C>
Deferred revenues............................................ $ (3,436) $ 1,813 $ (18,887)
Net operating loss carryforwards............................. 1,648 1,627 (635)
General business and minimum tax credit carryforwards........ (91) (128) 320
Basis difference in partnership interests.................... 1,103 388 17,875
State taxes, net............................................. 635 510 (1,401)
Deferred development fees.................................... (2) 7 3
Goodwill amortization on asset acquisitions.................. 107
Depreciation................................................. (636) (757) (1,110)
Change in reserve on receivables............................. (368) (28) 13
Accrued and other expenses................................... 159 25 176
Change in valuation allowance................................ (3,032) (6,208) 3,646
--------- --------- ----------
Provision (benefit) for deferred income taxes................ $ (3,913) $ (2,751) $
--------- --------- ----------
--------- --------- ----------
</TABLE>
44
<PAGE>
KTI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
14. INCOME TAXES (CONTINUED)
The reconciliation of income tax computed at the federal statutory tax rates
to benefit for income taxes on continuing operations before extraordinary item
is:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Tax at US statutory rates..................................... $ 9 $ 2,655 $ (254)
State income taxes, net of federal tax benefit................ 145 455 (44)
Amortization of goodwill...................................... 812 250 42
Change in valuation allowance................................. (3,032) (6,208) 3,646
Other......................................................... (957) 262 (3,390)
--------- --------- ---------
$ (3,023) $ (2,586) $
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Tax Reform Act of 1986 enacted a complex set of rules limiting the
potential utilization of net operating loss and tax credit carryforwards in
periods following a corporate "ownership change". In general, for federal income
tax purposes, an ownership change is deemed to occur if the percentage of stock
of a loss corporation owned (actually, constructively and, in some cases,
deemed) by one or more "5% shareholders" has increased by more than 50
percentage points over the lowest percentage of such stock owned during a
three-year testing period. During 1994, such a change in ownership occurred. As
a result of the change, the Company's ability to utilize certain of its net
operating loss carryforwards and general business credits will be limited to
approximately $1,200 of taxable income, or approximately $375 of equivalent
credit per year. This limitation may be increased if the Company recognizes a
gain on the disposition of an asset which had a fair market value greater than
its tax basis on the date of the ownership change.
The Company recorded net operating loss carryforwards of $25,580, $12,525
and $525 related to the acquisition of TEII, FCR and Total Waste Management,
Inc., respectively, which are also subject to a corporate "ownership change". As
a result of the change, the Company's ability to utilize the net operating loss
carryforwards are limited to approximately $989, $3,219 and $71 per year,
respectively.
15. COMMITMENTS
The Company has entered into various facility and equipment operating
leases. The facility lease agreements generally require the Company to pay
certain expenses including maintenance costs and a percentage of real estate
taxes. The leases expire at various times ranging through 2007. Rental expense
for all operating leases including facilities, amounted to approximately $3,747,
$1,192 and $145 for the years ended December 31, 1998, 1997 and 1996,
respectively. Included in the Company's operating leases are leases of certain
administrative offices from companies whose principals include certain officers
and shareholders of the Company. Rent expense under these leases was $708, $96
and $110 for the years ended December 31, 1998, 1997 and 1996, respectively. In
addition, the Company leases certain other office and operating facilities from
individuals who are shareholders and employees. As of
45
<PAGE>
KTI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
15. COMMITMENTS (CONTINUED)
December 31, 1998, future minimum rental commitments on non-cancelable operating
leases, are as follows:
<TABLE>
<CAPTION>
THIRD-PARTY RELATED-PARTY
LEASES LEASES
----------- -------------
<S> <C> <C>
1999.............................................................. $ 3,920 $ 815
2000.............................................................. 3,252 815
2001.............................................................. 2,685 785
2002.............................................................. 2,127 675
2003.............................................................. 1,565 480
Thereafter........................................................ 3,826 1,280
</TABLE>
The Company has entered into employment agreements with certain of its key
employees which provide for fixed compensation and bonuses based on operating
results, as defined. These agreements generally continue until terminated by the
employee or the Company and, under certain circumstances, provide for salary
continuation for a specified period. At December 31, 1998 the Company's maximum
aggregate liability under the agreements if all the employees were terminated by
the Company is $13,129.
In connection with their operations, Maine Energy, TERI and PERC have
entered into certain contractual agreements with respect to the supply and
acceptance of municipal solid waste and the sale of electric power.
In 2007, certain of Maine Energy's municipal customers have the right to
obtain a 20% interest in Maine Energy's cash flows, as defined in certain
agreements, to be applied against the municipalities' future waste disposal
costs.
FCR Plastics, Inc. ("Plastics"), a subsidiary of FCR, has committed to fund
a maximum of $700 towards the construction of certain machinery and equipment on
behalf of a customer. The equipment will be located within Plastics facility and
the customer will repay the total cost of the equipment up to Plastics maximum
contribution of $700. Repayment of the notes will commence as soon as
installation of the equipment is complete.
On December 31, the Company acquired a 35% interest in the Oakhurst Company,
Inc. ("Oakhurst") for approximately $900. Oakhurst is a public holding company
which owns two businesses which are distributors in the automotive aftermarket.
As part of this transaction, the Company assigned its interest in a joint
venture with Grace Brothers, Ltd. and SC Fundamental Investments L.P., the
majority bond holders of the Ford Heights, Illinois Waste Tire to Energy
Project, to own and operate this facility. Due to amendments to the Illinois
Retail Rate Act, which repealed certain incentives to the facility, it was
closed during startup testing and the owner sought protection under federal
bankruptcy laws. On December 28, the bankruptcy court in Delaware approved the
amended Plan of Reorganization which provided for the Company and the
bondholders each to own 50% of the reorganized entity which was renamed New
Heights Recovery & Power, LLC ("New Heights"). The bondholders converted $80.0
million in bonds and other claims into equity and KTI committed to investing up
to $17.0 million in equity for working capital, retrofitting and upgrading of
the facility. This commitment to New Heights was transferred to Oakhurst and the
Company has agreed to provide financing to Oakhurst. During 1998, the Company
advanced $1,500 to Oakhurst. This amount is included in notes
receivable-officers/shareholders and affiliates at December 31, 1998.
46
<PAGE>
KTI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
15. COMMITMENTS (CONTINUED)
During 1997, FCR acquired a company whereby the former shareholder of the
Company may receive up to $2,000 of additional consideration. The amount of the
additional consideration will be based on the earnings of the Company for the 12
months ended April 30, 1998 and 1999, as defined in the purchase agreement. Any
additional consideration will be recorded as an addition to goodwill. Of the
potential additional consideration $924 was advanced at closing and is recorded
as a note receivable from the former shareholder. Upon reaching the earnings
targets discussed above, this amount will be reclassified to goodwill.
16. EMPLOYEE BENEFIT PLAN
The Company has established defined contribution employee savings and
investment retirement plans under Section 401(k) of the Internal Revenue Code
which cover substantially all employees after satisfying certain eligibility
requirements. The Company contributes on behalf of each participating employee
an amount as defined in the plans. The Company's contribution was approximately
$596, $290 and $164 for the years ended December 31, 1998, 1997 and 1996,
respectively. Included in the 1998, 1997 and 1996 Company contributions were
4,215, 4,117 and 4,322 shares, respectively, of the Company's common stock. The
4,322 shares contributed for 1996 were purchased by the Company from third
parties. The aggregate fair value of the stock was $41, $35 and $32,
respectively.
17. RELATED PARTY TRANSACTIONS
The Company receives an annual management fee (adjusted annually for changes
in the Consumer Price Index) as co-general partner of PERC. During the year
ended December 31, 1996, the Company earned management fees of approximately
$418. All such amounts are eliminated in consolidation in 1998 and 1997.
During 1998, the Company advanced $1,500 to New Heights with an interest
rate at 14%. The advance is due in 2001 and is recorded as a note receivable-
affiliate at December 31, 1998.
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments have been determined by
the Company using available market information and appropriate valuation
methodologies. However, considerable judgment is required in interpreting market
data to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts the Company could
realize in a current market exchange. The carrying amount and estimated fair
values of financial instruments at December 31, 1998 and 1997 are summarized as
follows:
The following methods and assumptions were used to estimate the fair value
of financial instruments:
CASH, RESTRICTED CASH AND ACCOUNTS RECEIVABLE--the carrying amounts reported
in the balance sheet for cash, cash equivalents, restricted funds including debt
securities, and accounts receivable approximate their fair value.
NOTES AND OTHER RECEIVABLES--the fair value is estimated using discounted
cash flow analyses, using appropriate interest rates.
47
<PAGE>
KTI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
18. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
RESOURCE RECOVERY REVENUE BONDS PAYABLE--the fair value of bonds payable is
estimated using discounted cash flow analyses, using appropriate interest rates.
OTHER DEBT--the fair value is estimated based on discounting the estimated
future cash flows using the Company's incremental borrowing rate for similar
debt instruments.
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
---------------------- ----------------------
<S> <C> <C> <C> <C>
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
--------- ----------- --------- -----------
ASSETS
Cash and cash equivalents....................... $ 9,426 $ 9,426 $ 11,181 $ 11,181
Restricted cash................................. 23,438 23,438 19,630 19,630
Accounts receivable, net........................ 29,272 29,272 22,126 22,126
Notes receivable, officers/shareholders
and affiliates................................ 3,392 3,642 110 90
Other receivables............................... 7,183 6,785 732 618
Stock purchase warrant included in
other assets.................................. 3,814 6,459
LIABILITIES
Resources Recovery
Revenue Bonds Payable......................... 56,630 56,630 61,300 61,300
Other debt...................................... 162,068 162,484 32,967 27,625
</TABLE>
19. SEGMENT REPORTING
Information as to the operations of the Company in different business
segments is set forth below based on the nature of the services and products
offered. The Company evaluates performance and allocates resources based on
profit or loss from operations before interest and income taxes. The accounting
policies of the business segments are the same as those described in the summary
of significant accounting policies. Intersegment sales are accounted for at fair
value as if the sales were to third parties.
During 1998, the Company operated in the business units as indicated below.
<TABLE>
<CAPTION>
COMMERCIAL FINISHED RESIDENTIAL
WASTE-TO-ENERGY RECYCLING PRODUCTS RECYCLING
--------------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Revenues
Unaffiliated customers................ $ 76,680 $ 68,139 $ 22,346 $ 11,782
Intersegment revenues................. 273 5,307 427 770
Segment Profit (Loss)................... 17,606 (412) 826 1,349
Depreciation and Amortization........... 8,628 2,303 1,095 1,082
Identifiable Assets..................... 231,767 56,557 54,850 65,662
Capital Expenditures.................... 4,812 1,904 1,786 42
</TABLE>
48
<PAGE>
KTI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
19. SEGMENT REPORTING (CONTINUED)
During 1997, the Company operated in the business units indicated below.
<TABLE>
<CAPTION>
COMMERCIAL FINISHED
WASTE-TO-ENERGY RECYCLING PRODUCTS
--------------- ----------- -----------
<S> <C> <C> <C>
Revenues
Unaffiliated customers............................. $ 74,232 $ 17,694 $ 6,523
Intersegment revenues.............................. 2,766 1,342 636
Segment Profit....................................... 19,837 490 129
Depreciation and Amortization........................ 8,782 340 90
Identifiable Assets.................................. 207,866 36,791 1,575
Capital Expenditures................................. 4,496 198 63
</TABLE>
During 1996, the Company only operated in the waste-to-energy business unit.
This segment reporting detailed above reconciles to consolidated revenues
and income from continuing operations before provision (benefit) for income
taxes and extraordinary item as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------
<S> <C> <C>
1998 1997
---------- ---------
REVENUES
Total unaffiliated customers revenue for reportable segments........... $ 178,947 $ 98,449
Holding companies revenues............................................. 60 138
Intersegment revenues for reportable segments.......................... 6,777 4,744
Elimination of intersegment revenues................................... (6,777) (4,744)
---------- ---------
Total consolidated revenues............................................ $ 179,007 $ 98,587
---------- ---------
PROFIT AND LOSS
Total segment profit................................................... $ 19,369 $ 20,456
Holding companies segment loss......................................... (4,973) (929)
---------- ---------
Total segment profit................................................... 14,396 19,527
---------- ---------
Unallocated amounts:
Interest expense, net................................................ 10,667 5,086
Other income......................................................... (390)
Minority interest.................................................... 3,702 2,522
Pre-acquisition earnings............................................. 4,722
---------- ---------
Income from continuing operations before benefit for income taxes and
extraordinary item................................................. $ 27 $ 7,587
---------- ---------
---------- ---------
</TABLE>
49
<PAGE>
KTI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
19. SEGMENT REPORTING (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
<S> <C> <C>
1998 1997
---------- ----------
ASSETS
Total identifiable assets for reportable segments..................... $ 408,836 $ 246,232
Holding companies assets.............................................. 27,649 6,255
---------- ----------
Total consolidated assets............................................. $ 436,485 $ 252,487
---------- ----------
---------- ----------
</TABLE>
20. CONTINGENCIES
The Company is a defendant in a consolidated purported class action, which
alleges violations of certain sections of the federal securities laws. The
Company believes the allegations are without merit and intends to defend the
litigation vigorously.
Two lawsuits have been filed against a subsidiary of the Company and certain
of its officers, alleging fraud and tortious interference. The actions are based
on two contracts between the plaintiff and the subsidiary, which contracts
require all disputes to be resolved by arbitration. Arbitration proceedings have
commenced. The Company believes it has meritorious defenses to the allegations.
The former majority shareholder of a company acquired by a subsidiary of the
Company instigated arbitration proceedings against the Company and two of its
subsidiaries, alleging the subsidiaries acted to frustrate the "earn-out"
provisions of the acquisition agreement and thereby precluding him from
receiving, or alternatively, reducing the sum to which he was entitled to
receive. He also alleges his employment agreement was wrongfully terminated. The
claim for arbitration alleges direct charges in excess of $5,000 and requests
punitive damages, treble damages and attorneys fees. The Company and its
subsidiaries have responded to the demand, denying liability and filed a
counterclaim for $1,000 for misrepresentations. The Company believes it has
meritorious defenses to the claims.
The Company is involved in certain litigation arising from the normal course
of its business. In the opinion of management, the outcome of these matters
individually and in the aggregate will not have a material effect on the
Company's financial position, cash flows or results of operations.
21. SUBSEQUENT EVENTS
On September 23, 1999, the Company entered into an amended Agreement and
Plan of Merger (the "Merger Agreement") with Casella Waste Systems, Inc.,
("Casella") a publicly-owned company engaged in the waste services industry.
This Merger Agreement was an amendment to the original agreement dated
January 12, 1999. The merger will be completed through the exchange of all of
shares of the Company's common stock for shares of Casella's Class A common
stock based on an exchange ratio specified in the Merger Agreement. In
addition, all of the Company's outstanding and unexercised stock options and
stock purchase warrants will be converted into similar rights to acquire
Casella's Class A common stock under the same terms and conditions and the
same exchange ratio. Subsequent to the completion of the merger the current
Casella stockholders will own a majority of the combined company. Under the
terms of the Merger Agreement, Casella is required to file a registration
statement with the Securities and Exchange Commission to register the shares
of its Class A common stock to be issued in the Merger. The merger is subject
to, among other things, approval of the
50
<PAGE>
KTI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
21. SUBSEQUENT EVENTS (CONTINUED)
Company's and Casella's stockholders. No assurances can be given that the
remaining conditions of the Merger will be satisfied and that the merger will
be consummated. In connection with the merger, Casella has agreed to
reimburse the Company for its investment banking fees and other merger
related costs and as of December 31, 1998 approximately $1,160 of such
costs have been deferred.
During January 1999, the Company completed the acquisition of AFA Group,
Inc. and subsidiaries, an integrated wood waste processing and hauling business.
The purchase price was approximately $9.0 million.
During March 1999, the Company signed a definitive agreement to acquire a
company which operates a material recovery facility. The acquisition is expected
to close on June 30, 1999 upon the resolution of a contingency, as outlined in
the purchase agreement. The purchase price is expected to be approximately
$5,600 of which $250 was paid at the signing of the definitive agreement.
51
<PAGE>
KTI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
22. QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
1998
--------------------------------------------
<S> <C> <C> <C> <C>
FIRST SECOND THIRD FOURTH
--------- ---------- --------- ----------
Revenues............................................................ $ 37,876 $ 34,790 $ 44,987 $ 61,354
Gross Profit........................................................ 7,163 1,810 9,056 4,314
Income (loss) from continuing operations before
extraordinary item................................................ 2,038 (1,008) 4,804 (2,784)
Net income (loss)................................................... $ 2,038 $ (1,503) $ 4,804 $ (2,640)
Earnings per share:
Basic:
Income (loss) from continuing operations before
extraordinary item................................................ $ 0.17 $ (0.16) $ 0.44 (0.21)
Net income (loss)................................................... $ 0.17 $ (0.21) $ 0.44 $ (0.20)
Diluted:
Income (loss) from continuing operations before
extraordinary item................................................ $ 0.16 $ (0.16) $ 0.36 $ (0.21)
Net income (loss)................................................... $ 0.16 $ (0.21) $ 0.36 $ (0.20)
</TABLE>
<TABLE>
<CAPTION>
1997
------------------------------------------
<S> <C> <C> <C> <C>
FIRST SECOND THIRD FOURTH
--------- --------- --------- ---------
Revenues.............................................................. $ 19,313 $ 20,137 $ 28,020 $ 31,117
Gross Profit.......................................................... 5,461 4,817 7,411 5,034
Income from continuing operations before
extraordinary item................................................ 1,879 386 3,131 4,777
Net income.......................................................... $ 1,879 $ 386 $ 3,131 $ 4,777
Earnings per share:
Basic:
Income from continuing operations before
extraordinary item................................................ $ 0.27 $ (0.02) $ 0.39 $ 0.46
Net income.......................................................... $ 0.27 $ (0.02) $ 0.39 $ 0.46
Diluted:
Income from continuing operations before
extraordinary item................................................ $ 0.25 $ (0.02) $ 0.34 $ 0.40
Net income.......................................................... $ 0.25 $ (0.02) $ 0.34 $ 0.40
</TABLE>
52
<PAGE>
(b) PRO FORMA FINANCIAL INFORMATION:
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
The following unaudited pro forma combined financial statements give effect
to the merger under the purchase method of accounting. These pro forma
statements are presented for illustrative purposes only. The pro forma
adjustments are based upon available information and certain assumptions that
management believes are reasonable. The pro forma combined financial statements
do not purport to represent what the results of operations or financial position
of Casella would actually have been if the merger had in fact occurred on such
dates, nor do they purport to project the results of operations or financial
position of Casella for any future period or as of any date. Additionally, no
pro forma adjustments have been made to reflect potential effects of (a) the
efficiencies that may be obtained by combining the operations of Casella and KTI
or (b) the costs of restructuring, integrating or consolidating the operations
of Casella and KTI, except as disclosed in Note 4(g). Under the purchase method
of accounting, tangible and identifiable intangible assets acquired and
liabilities assumed are recorded at their estimated fair values. The excess of
the purchase price, including estimated fees and expenses related to the merger,
over the fair value of net tangible assets acquired has preliminarily been
allocated to goodwill, and is being amortized over an estimated blended life of
30 years. The estimated fair values and useful lives of assets acquired and
liabilities assumed are based on a preliminary valuation and are subject to
final valuation adjustments.
Casella's and KTI's fiscal years end on different dates. Accordingly, to
combine Casella's and KTI's financial information:
- The unaudited pro forma combined condensed balance sheet information as
of October 31, 1999 was prepared by combining the balance sheet at
October 31, 1999 for Casella, with certain adjustments, with the balance
sheet at September 30, 1999 for KTI, giving effect to the merger as
though it had been completed on October 31, 1999; and
- The unaudited pro forma combined condensed statements of operations for
the six months ended October 31, 1999 was prepared by combining Casella's
statement of operations for the six months ended October 31, 1999, with
certain adjustments, with KTI's statement of operations for the six
months ended September 30, 1999, giving effect to the merger as if it had
occurred on May 1, 1998.
- The unaudited pro forma combined condensed statement of operations for
the year ended April 30, 1999 was prepared by combining Casella's
statements of operations for the year ended April 30, 1999, with
certain adjustments, with KTI's statements of operations for the twelve
months ended March 31, 1999, as adjusted for an acquisition and the
sale of substantially all assets of a business, giving effect to the
merger as if it had occurred on May 1, 1998.
The unaudited pro forma financial information should be read in conjunction
with the respective audited historical financial statements, the unaudited
interim financial statements and the notes thereto of Casella and KTI which we
included in this proxy statement/prospectus.
53
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
OCTOBER 31, 1999
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
CASELLA KTI PRO FORMA PRO FORMA
OCTOBER 31, 1999 SEPTEMBER 30, 1999 ADJUSTMENTS BALANCES
---------------- ------------------ ----------- ---------
<S> <C> <C> <C> <C>
Cash and cash equivalents........................ $ 4,833 $ 9,711 $ -- $ 14,544
Restricted funds................................. 897 19,813 -- 20,710
Accounts receivable and other.................... 31,849 39,939 -- 71,788
Other current assets............................. 4,477 20,828 -- 25,305
-------- -------- --------- --------
Total current assets............................. 42,056 90,291 -- 132,347
Property, plant, and equipment, net.............. 155,787 210,300 -- 366,087
Intangible assets, net........................... 113,971 125,731 (125,731)(4) 231,301
117,330 (4)
Other assets..................................... 13,557 30,432 (6,700)(3) 16,911
(959)(4)
(19,419)(4)
-------- -------- --------- --------
127,528 156,163 (35,479) 248,212
-------- -------- --------- --------
Total assets..................................... $325,371 $456,754 $ (35,479) $746,646
======== ======== ========= ========
Current maturities of long-term obligations...... $ 3,007 $159,716 (150,000)(4) $ 12,723
Accounts payable................................. 17,874 23,003 18,300 (3) 59,177
Other current liabilities........................ 12,536 15,993 4,500 (4) 33,029
-------- -------- --------- --------
Total current liabilities........................ 33,417 198,712 (127,200) 104,929
Long-term obligations, less current maturities... 117,795 70,824 150,000 (4) 338,619
Minority interest................................ -- 15,354 -- 15,354
Deferred revenue................................. -- 68,083 (68,083)(4) --
Other long term liabilities...................... 17,594 1,728 -- 19,322
-------- -------- --------- --------
135,389 155,989 81,917 373,295
Stockholders' equity:
Casella Class A common stock:
Authorized--100,000,000 shares, $.01 par
value
Issued and Outstanding--15,055,775 shares
historical and 22,207,932 shares pro forma 151 -- 72 223
KTI common stock
Authorized--40,000,000 shares, no par value
(stated value $.01 per share)
Issued and Outstanding--14,023,838 shares
historical and 0 shares pro forma -- 140 (140) --
Casella Class B common stock.....................
Authorized--1,000,000 shares, $.01 par value
10 votes per share. Issued and Outstanding--
988,200 shares historical and pro forma.... 10 -- -- 10
Additional paid-in capital....................... 155,404 127,874 (16,089) 267,189
Accumulated deficit.............................. 1,000 (25,961) 25,961 1,000
-------- -------- --------- --------
Total stockholders' equity 156,565 102,053 9,804 268,422
-------- -------- --------- --------
Total liabilities and stockholders' equity....... $325,371 $456,754 $ (35,479) $746,646
======== ======== ========= ========
</TABLE>
54
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED OCTOBER 31, 1999
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
KTI
CASELLA ADJUSTED
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
OCTOBER 31, 1999 SEPTEMBER 30, 1999 ADJUSTMENTS BALANCES
---------------- ------------------ ----------- ----------
<S> <C> <C> <C> <C>
Revenues............................................... $111,156 $ 132,603 $(3,374)(2) $236,393
(3,992)(5)
Cost of operations..................................... 62,036 101,890 (3,374)(2) 160,552
General and administrative............................. 15,162 13,871 -- 29,033
Merger-related costs................................... 1,490 -- -- 1,490
Restructuring charge................................... -- 3,551 -- 3,551
Depreciation and amortization.......................... 15,667 11,062 (140)(4) 26,589
Loss on impairment of long-lived assets................ -- 3,000 -- 3,000
------- -------- ------- --------
94,355 133,374 (3,514) 224,215
------- -------- ------- --------
Operating income (loss)................................ 16,801 (771) (3,852) 12,178
Gain/(loss) on sale of business........................ -- 367 -- 367
Equity loss in subsidiary -- (383) -- (383)
Other expense, net..................................... (2,709) (9,228) -- (11,937)
------- -------- ------- --------
Income (loss) before minority interest and provision
(benefit) for income taxes........................... 14,092 (10,015) (3,852) 225
Minority interest...................................... -- 1,189 (664) 525
------- -------- ------- --------
Income (loss) before provision (benefit) for income
taxes................................................ 14,092 (11,204) (3,188) (300)
Provision (benefit) for income taxes................... 6,178 (1,921) (1,331) 2,926
------- -------- ------- --------
Net income (loss)...................................... $ 7,914 $ (9,283) $(1,857) $ (3,226)
======= ======== ======= ========
Income (loss) before extraordinary item and cumulative
effect of change in accounting principle per common
share:
Basic.............................................. $ 0.49 $ (0.67) $ (0.14)
======= ======== ========
Diluted............................................ $ 0.48 $ (0.67) $ (0.14)
======= ======== ========
Weighted average common shares outstanding:
Basic.............................................. 16,008 13,816 23,160
Diluted............................................ 16,545 13,816 23,160
</TABLE>
55
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED APRIL 30, 1999
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
KTI
CASELLA ADJUSTED
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
APRIL 30, 1999 MARCH 31, 1999 ADJUSTMENTS BALANCES
-------------- -------------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues............................................. $184,246 $ 231,881 $(5,981)(2) $402,160
(7,986)(5)
Cost of operations................................... 110,008 182,182 (5,981)(2) 286,209
General and administrative........................... 27,043 14,242 -- 41,285
Merger-related costs................................. 1,951 -- -- 1,951
Restructuring charge................................. -- 748 -- 748
Depreciation and amortization........................ 25,899 18,973 (280)(4) 44,592
-------- --------- ------- --------
164,901 216,145 (6,261) 374,785
-------- --------- ------- --------
Operating income..................................... 19,345 15,736 (7,706) 27,375
Other expense, net................................... 5,221 15,521 -- 20,742
-------- --------- ------- --------
Income (loss) before minority interest, provision
(benefit) for income taxes, extraordinary item and
cumulative effect of change in accounting
principle.......................................... 14,124 215 (7,706) 6,633
Minority interest.................................... -- 3,256 (2,026) 1,230
-------- --------- ------- --------
Income (loss) before provision (benefit) for income
taxes, extraordinary item and cumulative effect of
change in accounting principle..................... 14,124 (3,041) (5,680) 5,403
Provision (benefit) for income taxes................. 7,509 (3,723) (2,384) 1,402
-------- --------- ------- --------
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle.......................................... $ 6,615 $ 682 $(3,296) $ 4,001
======== ========= ======= ========
Income (loss) before extraordinary item and
cumulative effect of change in accounting principle
per common share:
Basic............................................ $ 0.44 $ 0.06 $ 0.19
======== ========= ========
Diluted.......................................... $ 0.41 $ 0.05 $ 0.18
======== ========= ========
Weighted average common shares outstanding:
Basic............................................ 15,145 12,330 21,433
Diluted.......................................... 16,019 13,176 22,739
</TABLE>
56
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
NOTE 1. PRO FORMA INCOME (LOSS) PER COMMON SHARE
The pro forma combined income (loss) per share calculations are based on the
combined basic and diluted weighted average number of shares outstanding of
Casella and KTI utilizing an exchange ratio of 0.51 shares of Casella Common
Stock for each share of KTI Common Stock.
NOTE 2. INTERCOMPANY TRANSACTIONS
All material intercompany transactions between Casella and KTI have been
eliminated from all periods presented.
NOTE 3. MERGER COSTS
Casella and KTI estimate that they will incur direct merger costs of
approximately $25.0 million associated with the merger, consisting of
transaction fees for investment bankers, severance, attorneys, accountants, and
other related charges as follows:
<TABLE>
<CAPTION>
AMOUNT IN
MILLIONS
---------
<S> <C>
Investment banking fees..................................... $13.9
Severance charges........................................... 7.0
Professional fees (legal, accounting, printing)............. 4.1
-----
Total estimated direct costs.............................. $25.0
Less: amounts incurred and reflected in historical balance
sheets.................................................. (6.7)
-----
Additional direct costs to be incurred.................. 18.3
=====
</TABLE>
NOTE 4. PURCHASE PRICE ALLOCATION
The fair value of the consideration to acquire KTI's common stock will be
allocated to the assets and liabilities of KTI based on their estimated fair
value. A preliminary allocation is presented below in which the fair value of
the identifiable net assets are assumed to equal the net book value of such
assets, as adjusted, more fully described in (d) below. The excess of
consideration over the fair value of the identifiable net assets has been
preliminarily allocated to goodwill as follows (in thousands, except share and
per share data):
<TABLE>
<S> <C>
Number of Casella shares to be issued....................... 7,152
Price per share (a)....................................... $ 15.64
---------
Total stock consideration................................... $ 111,857
Merger costs (b)............................................ 25,000
---------
Total purchase price........................................ 136,857
Estimated fair value of KTI tangible net assets (c)......... 19,527
---------
Excess of purchase price over fair value of tangible net
assets (primarily goodwill)................................ $ 117,330
=========
</TABLE>
(a) The estimated consideration and purchase price allocation used for pro forma
purposes are based on a value of $15.64 per share of Casella common stock
(average of closing market price from two business days prior to the
announcement to two days after the announcement).
57
<PAGE>
NOTE 4. PURCHASE PRICE ALLOCATION (CONTINUED)
(b) Merger costs primarily include investment banking fees, severance and other
professional fees (see note 3 above).
<TABLE>
<S> <C> <C>
(c) Reconciliation of KTI identifiable net assets to tangible
net assets as of September 30, 1999:
Net Book Value of KTI identifiable net assets............... $102,053
Less: Intangible assets..................................... (125,731)
Less: Deferred financing fees (d)........................... (959)
Plus: Deferred revenue (f).................................. 68,083
Less: Net deferred tax asset related to deferred revenue.... (19,419)
Less: Incremental liabilities related to planned asset
divestitures (g)............................................ (4,500)
--------
Estimated fair value of KTI tangible net assets............. $ 19,527
========
</TABLE>
(d) Casella and KTI expect to enter into a new line of credit agreement
immediately following the consummation of the merger. Therefore, deferred
financing fees of $1.5 million on KTI's September 30, 1999 balance sheet
have been given no value in the combined unaudited pro forma balance sheet.
When the new line of credit has been obtained, current liabilities of $150
million will convert to long term obligations.
(e) A pro forma adjustment has been made for the six months ended October 31,
1999 and the twelve months ended April 30, 1999 to reflect the amortization
of acquired intangibles using an estimated blended life of 30 years.
(f) KTI had deferred revenue related to certain contracts that is not considered
an assumed liability to the combined company.
(g) A pro forma adjustment has been made as of September 30, 1999 to reflect
estimated incremental liabilities related to planned divestitures of KTI
assets and other matters following the merger. The incremental liabilities
can be summarized as follows:
-- $3.5 million estimate related to facility abandonment charges,
including residual waste material clean-up and disposal costs, lease
termination fees and miscellaneous other charges. Of these charges,
$1.5 million relates to residual waste material clean-up and disposal
costs that will be incurred by certain KTI businesses which are not
expected to be sold.
-- $1.0 million estimate related to employee severance and separation
costs, and employment contract early termination costs.
No pro forma adjustments have been made to the statement of operations to
reflect the impact of these proposed asset divestitures because the
estimated impact is immaterial. In addition, the foregoing pro forma
adjustments relate only to certain planned divestitures expected to occur
shortly following the merger and do not include adjustments associated with
divestitures of the remainder of the 10 to 15 percent of KTI assets planned
to be divested. No pro forma adjustments have been made with respect to such
additional planned divestitures because plans relating to those divestitures
are preliminary at this time.
NOTE 5. REVENUE
A pro forma adjustment has been made for the three months ended July 31,
1999 and the twelve months ended April 30, 1999 to eliminate previously
recognized revenue relative to the deferred revenue discussed in Note 4 (f).
58
<PAGE>
KTI UNAUDITED ADJUSTED HISTORICAL STATEMENT OF OPERATIONS
The KTI unaudited adjusted historical statement of operations for the twelve
months ended March 31, 1999 and the six months ended September 30, 1999 include
the effect of KTI's acquisition of FCR on August 28, 1998 and KTI's sale of
substantially all the assets of KTI Recycling of Illinois, Inc. on June 1, 1999,
as if the acquisition and sale had occurred on April 1, 1998. This acquisition
was accounted for under the purchase method of accounting and accordingly, the
results of operations since the acquisition date is included in the historical
financial statements of KTI.
The KTI unaudited adjusted historical statement of operations is not
necessarily indicative of the results of operations which would have been
reported if the acquisition and sale had occurred on April 1, 1998, nor is it
necessarily indicative of the future operating results of the combined company.
Furthermore, the adjusted historical statement of operations does not give
effect to all cost savings or incremental costs that may occur as a result of
the integration and consolidation of the completed acquisition. In the opinion
of management, all adjustments necessary to present fairly such adjusted
historical statement of operations have been made.
The KTI unaudited adjusted historical statement of operations should be read
in conjunction with the historical consolidated financial statements of KTI
which we have included elsewhere in this proxy statement/prospectus.
59
<PAGE>
KTI UNAUDITED ADJUSTED HISTORICAL STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED MARCH 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
COMPLETED
SALE
COMPLETED ACQUISITION -------------
--------------------------------------- KTI RECYCLING
FCR FCR TOTAL OF
KTI FCR ACQUISITION(1) ADJUSTMENTS ACQUISITION ILLINOIS
-------- -------- -------------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues.............................. $207,259 $25,682 $1,258 $ -- $26,940 $(2,318)
Cost of operations.................... 165,062 19,191 1,194 -- 20,385 (3,265)
Selling, general and administrative... 10,382 4,032 509 -- 4,541 --
Restructuring charge.................. 748 -- -- -- -- -- --
Depreciation and amortization......... 16,352 1,667 260 (27) (1)(2) 1,900 (94)
-------- ------- ------ ------- ------- -------
192,544 24,890 1,963 (27) 26,826 (3,359)
Operating income (loss)............... 14,715 792 (705) 27 114 1,041
Interest expense, net................. 12,942 1,553 183 34 (3) 1,770 --
-------- ------- ------ ------- ------- -------
Income (loss) before minority
interest, provision (benefit) for
income taxes, extraordinary item and
cumulative effect of change in
accounting principle................ 1,773 (761) (888) (7) (1,656) 1,041
Minority interest..................... 3,256 -- -- -- -- --
-------- ------- ------ ------- ------- -------
Income (loss) before provision
(benefit) for income taxes,
extraordinary item and cumulative
effect of change in accounting
principle........................... (1,483) (761) (888) (7) (1,656) 1,041
Provision (benefit) for income
taxes............................... (3,517) (201) 8 (13) (4) (206) --
-------- ------- ------ ------- ------- -------
Income (loss) before extraordinary
item and cumulative effect of change
in accounting principle............. $ 2,034 $ (560) $ (896) $ 6 $(1,450) $ 1,041
======== ======= ====== ======= ======= =======
Income (loss) before extraordinary
item and cumulative effect of change
in accounting principle per common
share:
Basic............................. $ 0.09
========
Diluted........................... $ 0.08
========
Weighted average common shares
outstanding:
Basic............................. 11,631
Diluted........................... 12,440
<S> <C> <C> <C>
KTI
ADJUSTED
PRO FORMA HISTORICAL
ADJUSTMENTS BALANCES
----------- ----------
Revenues.............................. $ -- $231,881
Cost of operations.................... -- 182,182
Selling, general and administrative... (681) (5) 14,242
Restructuring charge.................. -- -- 748
Depreciation and amortization......... 815 (6) 18,973
------- --------
134 216,145
Operating income (loss)............... (134) 15,736
Interest expense, net................. 809 (7) 15,521
------- --------
Income (loss) before minority
interest, provision (benefit) for
income taxes, extraordinary item and
cumulative effect of change in
accounting principle................ (943) 215
Minority interest..................... -- 3,256
------- --------
Income (loss) before provision
(benefit) for income taxes,
extraordinary item and cumulative
effect of change in accounting
principle........................... (943) (3,041)
Provision (benefit) for income
taxes............................... -- (3,723)
------- --------
Income (loss) before extraordinary
item and cumulative effect of change
in accounting principle............. $ (943) $ 682
======= ========
Income (loss) before extraordinary
item and cumulative effect of change
in accounting principle per common
share:
Basic............................. $ 0.06
========
Diluted........................... $ 0.05
========
Weighted average common shares
outstanding:
Basic............................. 12,330
13,176
Diluted...........................
</TABLE>
60
<PAGE>
KTI UNAUDITED HISTORICAL STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1999
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
COMPLETED KTI
KTI SALE ADJUSTED
HISTORICAL KTI RECYCLING PRO FORMA HISTORICAL
SEPTEMBER 30, 1999 OF ILLINOIS ADJUSTMENTS BALANCES
------------------ ------------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues.................................................. $133,128 $ 292 $ -- $132,836
Cost of operations........................................ 99,065 360 -- 98,705
General and administrative................................ 13,480 88 -- 13,392
Restructuring charge...................................... 2,971 -- -- 2,971
Depreciation and amortization............................. 11,098 36 -- 11,062
Loss on impairment of long-lived assets................... 3,000 -- -- 3,000
------- -------- ------- --------
129,614 484 -- 129,130
------- -------- ------- --------
Operating loss............................................ 3,514 (192) -- 3,706
Loss/(Gain) on sale of business........................... 145 444 -- (299)
Equity loss in subsidiary................................. 383 -- -- 383
Other expense, net........................................ 9,239 -- (35 )(4) 9,204
------- -------- ------- --------
Loss before minority interest and benefit for income
taxes................................................... (6,253) (636) 35 (5,582)
Minority interest......................................... 1,189 -- -- 1,189
------- -------- ------- --------
Loss before benefit for income taxes...................... (7,442) (636) 35 (6,771)
Benefit for income taxes.................................. (1,921) -- -- (1,921)
------- -------- ------- --------
Net loss.................................................. $ (5,521) $ (636) $ 35 $ (4,850)
======= ======== ======= ========
Income (loss) before extraordinary item and cumulative
effect of change in accounting principle:
Basic................................................... $ (0.40) $ (0.35)
======= ========
Diluted................................................. $ (0.40) $ (0.35)
======= ========
Weighted average common shares outstanding:
Basic................................................... 13,816 13,816
Diluted................................................. 13,816 13,816
</TABLE>
61
<PAGE>
KTI, INC.
NOTES TO KTI UNAUDITED ADJUSTED HISTORICAL STATEMENT OF OPERATIONS
(IN THOUSANDS)
1. DESCRIPTION OF TRANSACTIONS
On August 28, 1998, KTI, Inc. (KTI) acquired FCR, Inc. (FCR) for $30.0
million in cash, and issued 1,714,285 shares of KTI common stock.
On July 2, 1998, FCR acquired Resource Recovery Systems, Inc. (RRS).
All the acquisitions discussed above were accounted for under the purchase
method of accounting and accordingly, the results of operations since the
respective acquisition dates are included in the historical financial statements
of KTI.
On June 1, 1999, KTI sold substantially all the assets of KTI Recycling of
Illinois, Inc. (Illinois) for $1.8 million in cash.
The KTI unaudited adjusted historical statement of operations is not
necessarily indicative of the results of operations which would have been
reported if the acquisitions or the sale of Illinois had occurred on April 1,
1998, nor are they necessarily indicative of the future operating results of the
combined company. Furthermore, the adjusted historical statement of operations
do not give effect to any cost savings or incremental costs that may occur as a
result of the integration and consolidation of the completed acquisitions. In
the opinion of management, all adjustments necessary to present fairly such
adjusted historical statement of operations have been made.
The KTI unaudited adjusted historical statement of operations should be read
in conjunction with the historical consolidated financial statements of KTI,
which we included in this proxy statement/ prospectus.
2. PRO FORMA ADJUSTMENTS
(1) Reduction in depreciation expense resulting from the reduction in carrying
value of acquired assets based on purchase price allocation of $49.
Depreciation is recorded over the estimated remaining lives of property,
plant, and equipment.
(2) Reflects additional goodwill amortization expense of $22. Goodwill is
amortized over 40 years.
(3) Adjustment to interest expense on refinanced and incremental debt
outstanding, assuming an average interest rate of 8.85%.
(4) Provision (benefit) for income taxes on the pro forma adjustments at a 39.5%
tax rate before non-deductible depreciation expense and goodwill
amortization.
(5) Elimination of legal and investment banking fees incurred by FCR in
connection with KTI's acquisition of FCR.
(6) Additional goodwill amortization expense. Goodwill is amortized over 30
years.
(7) Additional interest expense on refinanced and incremental debt outstanding
assuming an average interest rate of 8.75%.
3. EARNINGS PER SHARE
The pro forma earnings per share calculations are based on the unaudited
adjusted historical basic and diluted weighted average number of shares
outstanding adjusted for the issuance of shares for the acquisition of FCR.
62
<PAGE>
(c) EXHIBITS:
2.1 Agreement and Plan of Merger dated as of January 12, 1999, as
amended by Amendments No. 1, 2 and 3 thereto, by and among the
Registrant, KTI, Inc. and Rutland Acquisition Sub, Inc.
(Incorporated herein by reference to the Registrants'
Registration Statement on Form S-4 dated November 12, 1999, as
amended (file no. 333-90913))
63
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: March 13, 2000 CASELLA WASTE SYSTEMS, INC.
By: /s/ Jerry S. Cifor
-------------------------------------
Jerry S. Cifor
Chief Financial Officer
64
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
- ------- -----------
2.1 Agreement and Plan of Merger dated as of January 12, 1999, as
amended by Amendments No. 1, 2 and 3 thereto, by and among the
Registrant, KTI, Inc. and Rutland Acquisition Sub, Inc.
(Incorporated herein by reference to the Registrants'
Registration Statement on Form S-4 dated November 12, 1999,
as amended (file no. 333-90913).)
23.1 Consent of Ernst & Young LP
65
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statements (Form
S-8 No. 333-40267, Form S-8 No. 333-43635, Form S-8 No. 333-43543, Form S-8
No. 333-43541, Form S-8 No. 333-43539, Form S-8 No. 222-43537, Form S-8 No.
333-67487, Form S-8 No. 333-92735, Form S-3 No. 333-85279, Form S-3 No.
333-88097 and Form S-3 No. 333-95841) of Casella Waste Systems, Inc. of our
report dated March 30, 1999 (except for the second paragraph of Note 9 as to
which the date is August 27, 1999, Note 2 as to which the date is August 30,
1999 and the first paragraph of Note 21, as to which the date is September
23, 1999) with respect to the consolidated financial statements of KTI Inc.
as of December 31, 1998 and 1997 and for each of the three years in the
period ended December 31, 1998 included in this Current Report on Form 8-K/A
of Casella Waste Systems, Inc. dated March 13, 2000.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Hackensack, New Jersey
March 9, 2000
