<PAGE> 1
FORM 10-Q. - QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10Q
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1997
------------------
Commission File No. 0-25490
KTI, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
New Jersey 22-2665282
- ------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
7000 Boulevard East
Guttenberg, New Jersey 07093
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip code)
(201) 854-7777
- --------------------------------------------------
(Registrants telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No|_|
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date:
Common Stock, No Par Value 8,362,788 Shares as of October 31, 1997
<PAGE> 2
TABLE OF CONTENTS
Item Number and Caption Page Number
- ----------------------- -----------
PART I
Item 1. Financial Statements 2
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
PART II
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8K 17
1
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
KTI, Inc.
Consolidated Balance Sheet
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------------------------------
Assets (Unaudited)
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 15,866,847 $ 5,227,381
Restricted funds - current portion 15,397,651 5,163,965
Accounts receivable, net of allowances of
$308,305 and $291,938 19,274,847 4,080,503
Management fees receivable - current portion 566,634
Consumables and spare parts 5,669,746 2,100,311
Notes receivable--officers/shareholders and affiliates - current 441,151 57,629
Other receivables - current portion 552,474 398,320
Other current assets 1,631,759 480,034
-----------------------------
Total current assets 58,834,475 18,074,777
Restricted funds 4,828,519 2,903,761
Management fees receivable--affiliates 2,175,203
Notes receivable - officers/shareholders and affiliates 212,835
Other receivables 711,783
Investment in PERC 3,792,429
Deferred costs, net of accumulated amortization
of $607,624 and $208,096. 4,354,847 1,930,118
Goodwill and other intangibles, net of accumulated amortization
of $673,815 and $297,941 12,192,534 2,179,466
Other assets 1,374,135 238,893
Property, equipment and leasehold improvements, net of
accumulated depreciation of $15,775,852 and $12,671,949 152,232,501 90,855,366
-----------------------------
Total assets $ 233,817,011 $ 123,074,631
=============================
Liabilities and stockholders' equity
Current Liabilities
Accounts payable $ 7,820,304 $ 2,371,430
Accrued expenses 2,143,435 1,829,959
Short-term debt and Current portion of long-term debt 12,258,403 4,123,840
Other current liabilities 1,739,718 665,585
-----------------------------
Total current liabilities 23,961,860 8,990,814
Other liabilities 2,513,741 1,308,199
Long-term debt, less current portion 75,361,922 34,949,148
Minority interest 26,795,520 10,871,852
Deferred income 37,500,000 41,250,000
Stockholders' equity
Preferred stock, 10,000,000 shares authorized;
Series A - $8 par value, zero coupon 487,500
convertible shares issued and outstanding; 3,707,744
Series B - $25 par value, 8.75% coupon 856,000
convertible shares issued and outstanding 19,984,240
Common stock, no par value (stated value $.01 per share);
authorized 20,000,000; issued and outstanding
8,270,890 in 1997 and 6,836,766 in 1996 82,709 68,368
Additional paid-in capital 52,318,330 38,575,892
Accumulated (deficit) (8,409,055) (12,939,642)
-----------------------------
Total stockholders' equity 67,683,968 25,704,618
-----------------------------
Total liabilities and stockholders' equity $ 233,817,011 $ 123,074,631
=============================
</TABLE>
See accompanying notes.
2
<PAGE> 4
KTI, Inc.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-------------------------- ---------------------------
1997 1996 1997 1996
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Electric power revenues $ 10,177,496 $ 4,893,234 $ 30,389,250 $ 16,067,982
Gain on sale of capacity 33,203,252
Waste processing revenues 7,318,906 2,217,617 19,513,711 6,225,475
Other materials handling revenues 9,351,249 1,625,313 16,096,812 3,636,292
------------ ----------- ------------ ------------
Total revenues 26,847,651 8,736,164 65,999,773 59,133,001
------------ ----------- ------------ ------------
Costs and expenses:
Electric power and waste processing operating costs 20,527,935 6,045,670 50,180,577 20,660,503
Selling, general and administrative 520,265 307,420 2,375,680 1,487,135
Interest - net 977,080 611,709 3,699,876 3,868,878
------------ ----------- ------------ ------------
Total costs and expenses 22,025,280 6,964,799 56,256,133 26,016,516
Equity in net income of PERC 159,233 292,027
------------ ----------- ------------ ------------
Income from continuing operations
before minority interest and extraordinary item 4,822,371 1,930,598 9,743,640 33,408,512
Pre-acquisition earnings minority interest (1,543,834) (3,983,766)
Minority interest in subsidiaries (883,024) (637,753) (1,229,287) (17,889,970)
------------ ----------- ------------ ------------
Income from continuing operations
before extraordinary item 2,395,513 1,292,845 4,530,587 15,518,542
Discontinued operations
Income (loss) from operations of computer services (35,843) (254,009)
------------ ----------- ------------ ------------
Income before extraordinary item 2,395,513 1,257,002 4,530,587 15,264,533
Extraordinary item - loss on early
extinguishment of debt, net of minority interest -- (2,396,731)
------------ ----------- ------------ ------------
Net income $ 2,395,513 $ 1,257,002 $ 4,530,587 $ 12,867,802
============ =========== ============ ============
Earnings (loss) per common share and
common share equivalent
Primary:
Income from continuing operations $ 0.27 $ 0.21 $ 0.59 $ 2.42
Income (loss) from discontinued operations (0.01) (0.04)
------------ ----------- ------------ ------------
Income before extraordinary item 0.27 0.20 0.59 2.38
Extraordinary item -- (0.37)
------------ ----------- ------------ ------------
Net income $ 0.27 $ 0.20 $ 0.59 $ 2.01
============ =========== ============ ============
Weighted average number of common shares and
common share equivalents outstanding 8,186,115 6,416,481 7,726,900 6,402,393
============ =========== ============ ============
Fully diluted:
Income from continuing operations $ 0.27 $ 0.21 $ 0.59 $ 2.42
Income (loss) from discontinued operations (0.01) (0.04)
------------ ----------- ------------ -------------
Income before extraordinary item 0.27 0.20 0.59 2.38
Extraordinary item -- (0.37)
------------ ----------- ------------ ------------
Net income $ 0.27 $ 0.20 $ 0.59 $ 2.01
============ =========== ============ ============
Weighted average number of common shares and
common share equivalents outstanding 9,116,550 6,416,481 8,040,449 6,402,393
============ =========== ============ ============
</TABLE>
See accompanying notes.
3
<PAGE> 5
KTI, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine months ended September 30,
1997 1996
------------ ------------
(Unaudited)
<S> <C> <C>
Operating activities
Net income $ 4,530,587 $ 12,867,802
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and Amortization 3,246,093 4,744,697
Minority interest 1,229,287 17,889,970
Interest accrued and capitalized on debt 2,528,822 486,247
Equity in net income of PERC, net of distributions (104,182)
Deferred revenue (2,974,598) 41,250,000
Extraordinary item, net of minority interest 2,396,731
(Gain) loss on sale of assets (6,824) 71,971
Changes in operating assets and liabilities
(decreasing) cash:
Accounts receivable (2,710,534) 5,710,257
Consumables and spare parts 64,947 (193,255)
Management fees receivable 260,755
Other receivables 648,477 230,151
Other assets 224,079 (1,257,411)
Accounts payable (799,024) 75,672
Accrued expenses (1,162,413) (899,281)
Other liabilities (235,927) (250,747)
------------ ------------
Net cash provided by operating activities 4,582,972 83,279,377
Investing activities
Additions to property, plant and equipment (2,335,666) (4,798,188)
Proceeds from sale of assets 7,500 351,300
Proceeds from sale of TEPRI 30,000
Proceeds from sale of discontinued operation 4,960,000
Decrease (increase) in restricted cash and cash equivalents (2,106,924) 5,758,003
Acquisition of businesses, net of cash acquired (9,155,211)
Purchase of additional partnership interest in Maine Energy (1,239,867)
Notes receivable-officers/shareholders and affiliates (170,687) (122)
------------ ------------
Net cash provided by (used in) investing activities (13,730,988) 5,031,306
</TABLE>
-Continued-
4
<PAGE> 6
KTI, Inc.
Consolidated Statements of Cash Flows--(continued)
<TABLE>
<S> <C> <C>
Financing activities
Deferred financing costs (1,702,150) (1,186,131)
Proceeds from issuance of debt 2,862,235 4,654,752
Proceeds from sale of common stock 1,177,055 441,036
Proceeds from sale of preferred stock 23,691,984
Principal payments on debt (6,241,672) (96,506,289)
------------ ------------
Net cash provided by (used in) financing activities 19,787,482 (92,596,632)
------------ ------------
Increase (decrease) in cash and cash equivalents 10,639,466 (4,285,949)
Cash and cash equivalents at beginning of period 5,227,381 6,454,558
------------ ------------
Cash and cash equivalents at end of period $ 15,866,847 $ 2,168,609
============ ============
Supplemental disclosure of cash flow information
Interest paid $ 1,081,847 $ 5,793,527
============ ============
Non-cash investing and financing activities
Conversion of convertible subordinated notes
to equity, including accrued interest $ 5,007,639 $ 500,000
Elimination of management fees receivable from
affiliate upon purchase of additional interest 2,741,837
Common stock issued in connection with
acquisition of business 7,472,055
</TABLE>
See accompanying notes.
5
<PAGE> 7
KTI, Inc.
Consolidated Statement of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Additional
Common Stock Preferred Stock Paid In Accumulated
Shares Amount Shares Amount Capital Deficit Total
--------- ------------ --------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 3,376,617 $ 33,766 -- $ -- $21,330,071 $(25,274,500) $ (3,910,663)
Net loss (1,331,494) (1,331,494)
Issuance of common stock
from exercise of options 73,980 740 256,077 256,817
Issuance of common stock in
connection with business
combination 1,801,044 18,010 8,983,708 9,001,718
Issuance of common stock 695,332 6,954 2,857,235 2,864,189
--------------------------------------------------------------------------------------------------
Balance at December 31, 1995 5,946,973 59,470 -- -- 33,427,091 (26,605,994) 6,880,567
Net income 13,666,352 13,666,352
Issuance of common stock
from exercise of options 55,346 553 280,107 280,660
Issuance of common stock
from exercise of warrants 41,183 412 225,114 225,526
Issuance of common stock
upon conversion of debt 725,015 7,250 4,044,697 4,051,947
Issuance of stock purchase
warrants 143,738 143,738
Issuance of common stock in
connection with business
combination 68,249 683 455,145 455,828
--------------------------------------------------------------------------------------------------
Balance at December 31, 1996 6,836,766 68,368 -- -- 38,575,892 (12,939,642) 25,704,618
Net income 4,530,587 4,530,587
Issuance of preferred stock
and warrants 1,343,500 23,691,984 100,000 23,791,984
Issuance of common stock
upon conversion of debt 618,609 6,186 5,001,453 5,007,639
Issuance of common stock
in connection with acquisition
of businesses 625,013 6,250 7,465,805 7,472,055
Issuance of common stock
from exercise of options 3,868 39 23,152 23,191
Issuance of common stock
from exercise of warrants 186,634 1,866 1,152,028 1,153,894
--------------------------------------------------------------------------------------------------
Balance at September 30, 1997 8,270,890 $ 82,709 1,343,500 $23,691,984 $52,318,330 $ (8,409,055) $ 67,683,968
==================================================================================================
</TABLE>
6
<PAGE> 8
KTI, Inc.
Notes to Consolidated Financial Statements
September 30, 1997
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. 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. Operating results for the three months or nine months ended
September 30, 1997 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1997. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 1996.
Certain 1996 financial information contained herein has been reclassified to
conform with the 1997 presentation.
2. Earnings (Loss) Per Share
Earnings (loss) per share have been computed based on the weighted
average number of shares outstanding as well as the dilutive effect of
outstanding options and warrants during the periods presented.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share," which is required to be adopted for the
Company's year ending December 31, 1997. At that time, the Company will be
required to change the method currently used to compute earnings per share and
to restate all prior periods. Under the new requirements for calculating primary
earnings per share, the dilutive effect of stock options and warrants will be
excluded. The impact upon adoption is expected to result in an increase in
primary earnings per share to $.29 and to $.60 for the quarter and for the nine
months ended September 30, 1997 and to $.21 and to $2.04 for the quarter and
for the nine months ended September 30, 1996. The impact of Statement 128 on the
calculation of fully diluted earnings per share for all periods presented is not
expected to be material.
3. Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its majority-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation. As described in
Note 5, the Company acquired certain limited partnership interests in Penobscot
Energy aggregating 49.5% during September, 1997. Prior to this transaction the
Company was a 7% owner and a co-general partner of Penobscot Energy. As a result
of the Company's aggregate ownership interest, Penobscot Energy's financial
statements have been included in the Company's consolidated financial statements
at September 30, 1997. In accordance with Account Research Bulletin No. 51, the
consolidated statement of operations includes Penobscot Energy's operations for
the nine months ended September 30, 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 Penobscot Energy attributable to
the partnership interests through the date of acquisition.
The ownership interests of minority owners in the equity and earnings
of the Company's less than 100 percent-owned consolidated subsidiaries is
recorded as minority interest.
7
<PAGE> 9
4. Debt
<TABLE>
<CAPTION>
The Company's debt consists of the following:
September 30 December 31,
-----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Long-term Debt and Short-term Debt:
8% convertible subordinated note payable $ -- $ 5,000,000
Term note payable to bank at bank prime rate 417,641 1,657,448
10% note payable to Energy National, Inc. 1,048,049 1,353,479
$6,000,000 bank line of credit at bank prime rate plus .75% 7,089 589,904
$8,000,000 bank line of credit at prime rate plus 2.25% 4,000,000
$300,000 bank line of credit at bank prime rate plus 1.5% 220,000
$500,000 bank line of credit at bank prime rate plus .75% 100,000
9.94% Secured term notes Payable 482,633 780,357
Notes payable to limited partners of Maine Energy 490,063
8.63% secured term note payable 350,395 400,000
9.9% secured term notes payable to GE Capital 35,380 190,368
10.13% secured term notes payable 105,187 179,997
Notes payable to shareholders 310,000
Note payable to former shareholder 81,819 127,137
8.57% secured term notes payable 1,453,054
12.5% secured term note payable 496,287
Other 37,008 108,250
----------- -----------
8,924,542 11,097,003
Resource Recovery Revenue Bonds payable by Timber Energy Resources 13,736,161 13,400,000
Resource Recovery Revenue Bonds payable by Penobscot Energy Recovery Co. 49,100,000
12% Subordinated Notes Payable to Maine Energy Limited Partners 15,859,622 14,575,985
----------- -----------
87,620,365 39,072,988
Less current portion of Long-term and Short-term Debt 12,258,403 4,123,840
----------- -----------
$75,361,922 $34,949,148
=========== ===========
</TABLE>
In June, 1997, the prior $13,400,000 of outstanding Resource Recovery
Revenue Bonds for Timber Energy together with accrued interest were retired from
the proceeds of $13,736,161 of Series 1997A and 1997B Resource Recovery Revenue
Bonds.
In August, 1997 the Company amended its revolving line of credit with
Key Bank of New York, increasing the amount of the line from $1 million to $6
million and extending its maturity to April 30, 1998. The line of credit may be
used for general working capital purposes, issuance of letters of credit and
bridge financing for acquisitions. Bridge financing may not exceed six months or
exceed $1.5 million without (a) approved replacement financing in place or (b)
prior approval from Key Bank of New York. Loan proceeds may not be used for
permanent capital investments in subsidiaries or related parties. The line of
credit has an unused facility fee of .125%. The interest rate on borrowed funds
is the base rate of Key Bank of New York plus .75% per annum. The line of credit
is secured by the assets of the Company and its subsidiaries, other than assets
of subsidiaries pledged under project financing. As a result of this transaction
KTI closed the $300,000 line of credit with Key Bank of Maine.
In August, 1997 the Company acquired K-C Industries, Inc. ("K-C"). K-C
has a revolving line of credit with U.S. Bank in the amount of $8,000,000. The
line of credit may be used for general working capital purposes. The interest
rate on borrowed funds, which total $4,000,000 at September 30, 1997 is the
bank's prime rate plus 2.25%
In connection with the acquisition of the additional interest in PERC,
the Company has included additional debt of $49,100,000 in its consolidated
balance sheet. This debt represents balances payable on the Town of Orrington
Resource Recovery Bonds, issued on behalf of PERC, in the original amount of
8
<PAGE> 10
$81,000,000 in 1986. The bonds are variable rate obligations, as determined
weekly by the remarketing agents, and based on rates for certain tax exempt
obligations. The bonds are subject to mandatory installments of varying amounts
through November 2003.
In September, 1997, Wexford KTI LLC converted all of its $5 million
principal amount 8% Convertible Subordinated Promissory Note, dated October 23,
1996, and accrued interest of $7,639 into 618,609 shares of the Company's common
stock.
5. Stockholders' Equity
In June, 1997, the Company consummated the private placement of 487,500
shares of its Series A Convertible Preferred Stock (the "Series A Preferred')
for gross proceeds of $3,900,000. The Series A Preferred is convertible into
shares of the Company's common stock, no par value (the "Common Stock"), at a
price of $8.00 per share, subject to adjustment, and may be redeemed at $16.00
per share, subject to adjustment. Purchasers of the shares of Series A Preferred
also received, in the aggregate, warrants to purchase 243,750 shares of Common
Stock at $9.00 per share and warrants to purchase 32,500 shares of Common Stock
at $10.00 per share.
In August, 1997, the Company consummated the private placement of
856,000 shares of its 8.75% Series B Convertible Preferred Stock (the "Series B
Preferred") for gross proceeds of $21,400,000. The Series B Preferred is
convertible into shares of the Company's common stock, no par value, at a price
of $11.75 per share. Also, in connection with the Series B shares, the Company
issued warrants to purchase 95,750 shares of the Company's common stock at
$11.75 per share.
6. Other Events
In August, 1997, KTI Recycling, Inc., a wholly-owned subsidiary of KTI,
Inc., purchased the stock of I. Zaitlin & Sons, Inc., ("I. Zaitlin") and Data
Destruction Services, Inc., ("DDS"), and two parcels of real estate, including
buildings, used by I. Zaitlin and owned by the shareholders of I. Zaitlin for
200,000 shares of KTI, Inc. common stock and $669,500 in cash. The Company
purchased I. Zaitlin, DDS and the real estate subject to certain outstanding
debt of approximately $2,300,000.
In August, 1997 the Company sold Timber Energy Plastics Recycling, Inc.
("TEPRI"), to the management of TEPRI for $30,000 in cash and a $250,000 9%
promissory note due on November 10, 1997. In the first six months of 1997 TEPRI
had revenue of $1,575,000 and losses of $392,000. TEPRI was acquired by the
Company as part of the acquisition of Timber Energy Investments, Inc., which
also owned and operated a wood waste burning power plant in Telogia, Florida and
a wood chip mill in Cairo, Georgia, both of which continue to be active KTI
assets.
In September, 1997 the Company purchased the stock of K-C Industries,
Inc., ("K-C") for 425,013 shares of KTI, Inc. common stock, cash in the amount
of approximately $2.1 million, and the assumption of approximately $4.3 million
in debt.
In September, 1997 the Company purchased a 49.5% limited partnership
interest in Penobscot Energy Recovery Company, Limited Partnership, a Maine
limited partnership ("PERC") from The Prudential Insurance Company of America
("Prudential") for approximately $11.7 million in cash. In addition the Company
assumed certain obligations of Prudential by the payment of cash in the amount
of $200,000 to Prudential and the issuance of Letters of Credit to Morgan
Guaranty Trust Company of New York ("Morgan Guaranty") for approximately $3.9
million, replacing obligations of Prudential to Morgan Guaranty. At the same
time, the Company purchased an option for $300,000 to buy the remaining 15.2%
interest of Prudential in PERC for a price of $2.1 million. The option to
purchase this remaining limited partnership interest terminates on October 31,
1998.
9
<PAGE> 11
7. Contingencies
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.
10
<PAGE> 12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Revenues
Electric power revenues increased by $5,284,000 or 108% for the quarter
ended September 30, 1997 and by $14,321,000 or 89.1% for the nine months ended
September 30, 1997. The majority of the net increase is attributable to electric
power revenues of PERC of $4,975,000 for the quarter and $13,915,000 for the
nine months ended September 30 1997. An additional 49.5% interest in PERC was
acquired in September, 1997, and, as a result, PERC's revenues for the quarter
and the nine months ended September 30, 1997 are consolidated in the Company's
financial statements. PERC was previously accounted for on the equity method of
accounting. Revenues at Maine Energy were $53,000 higher for the quarter ended
September 30, 1997 than the same period last year as a result of slightly higher
electrical generation at that facility; but were $4,162,000 lower for the nine
months ended September 30, 1997 than the same period last year. This decrease is
attributable both to lower generation (1.8% for the nine months) and to a lower
rate paid under the Power Purchase Agreement ("PPA") during the same period.
Maine Energy Recovery Company restructured its Power Purchase Agreement ("PPA")
on May 3, 1996, which resulted in a contract rate reduction from 16.3(cents) per
kilowatt to 7.18(cents) per kilowatt effective that date. The Maine Energy
electric rate effective January 1, 1997 increased to 7.35(cents) per kilowatt.
The revenue increase in electric power revenues is further attributable to
Timber Energy revenues of $1,483,000 and $4,005,000 for the quarter and nine
months ended September 30, 1997. Timber Energy was acquired after the third
quarter of 1996. These net increases were partly offset by decreased
amortization of the deferred revenue associated with the PPA restructuring of
$1,227,000 for the three months ended September 30, 1997 and an increase of
$563,000 for the nine months ended September 30, 1997.
Revenues from the gain on sale of capacity for the nine months ended
September 30, 1996 were a result of the restructuring of the Maine Energy PPA on
May 3, 1996.
Revenues from waste processing increased $5,101,000 or 230% for the
three months ended and by $13,288,000 or 213% for the nine months ended
September 30, 1997 as compared to the same periods in 1996. The increase
resulted primarily from revenues of PERC of $4,352,000 and $9,685,000 for the
three months and nine months ended September 30, 1997. The increase is also
attributable to $335,000 and $1,183,000 of revenues from processing fees at
Timber Energy for the quarter and nine months ended September 30, 1997. Timber
Energy was acquired after the third quarter of 1996. Maine Energy revenues from
waste processing increased $414,000 and $306,000 for the quarter and nine months
ended September 30, 1997. The increase is principally from a 2,400 and 5,700
increase in tons of waste processed and an increase in average tipping fees of
$1.28 and $.71 per ton for the quarter and nine months ended September 30, 1997.
These increases in average tipping fee occurred after taking into account a
reduction in the charter and host communities tipping fees as required by
contractual agreement, in view of having retired the $64,500,000 in bonds at
Maine Energy. Also, for the nine months, TEPRI had $1,575,000 of revenues. TEPRI
was purchased after the third quarter of 1996 as part of the Timber Energy
acquisition and was sold in July, 1997. Special waste revenues remained flat for
the quarter and increased by $539,000 for the nine months ended September 30,
1997.
Other materials handling revenues increased $7,726,000 or 475% for the
quarter and $12,461,000 or 344% for the nine months ended September 30, 1997 as
compared to the same period for 1996. The increase for the quarter and nine
months ended September 30, 1997 as compared to the same period in 1996 is
principally due to the acquisitions of K-C Industries ($3,777,000) and I.
Zaitlin ($2,086,000) in the third quarter; and from an increase in revenues at
KTI Bio Fuels of $525,000 and at American Ash Recycling of Tennessee ("AART") of
$401,000 for the nine months ended September 30, 1997 as a result of increased
tonnage and additional trucking
11
<PAGE> 13
and wood marketing activities; and from revenues generated by Manner Resins of
$1,863,000 and $5,672,000 for the quarter and nine months ended September 30,
1997. Manner Resins was acquired after the third quarter of 1996.
Costs and Expenses
Electric power and waste handling operating costs increased by
$14,482,000 or 240% for the quarter and $29,520,000 or 142.9% for the nine
months ended September 30, 1997 as compared to the same period in 1996. The
increase for the quarter is largely attributable to the operating costs of the
newly acquired entities of Timber Energy, Manner Resins, K-C Industries and I.
Zaitlin; which had operating expenses of $3,540,000, $4,513,000, $3,743,000 and
$2,004,000, respectively, for the nine months ended September 30, 1997.
Additional costs associated with Penobscot Energy were $16,100,000 for the nine
months ended September 30, 1997. TEPRI also incurred $1,967,000 of operating
costs before it was sold. These increases were offset by decreases at Maine
Energy, where operating costs were decreased by approximately $2,347,000 for the
nine months ended September 30, 1997 as a result of changes in useful lives
of plant and equipment; write-offs of deferred financing costs as a result of
the retirement of the $64,500,000 in bonds; and other cost reduction practices.
Selling, general and administrative expenses increased by $212,845 or
69.2% for the quarter ended September 30, 1997 and by $889,000 or 59.8% for the
nine months ended September 30, 1997 as compared to the same periods in 1996.
The increases are primarily attributable to increases in administrative costs of
the recent acquisitions of PERC, K-C and I. Zaitlin, offset by reductions in
corporate staff which occurred during the second quarter of 1996.
Interest and Other Items
Interest expense increased $365,000 or 59.7% for the quarter and
decreased by $169,000 or 4.3% for the nine months ended September 30, 1997. The
changes are attributable to interest costs associated with debts assumed on
newly acquired companies, principally PERC and Timber Energy, of $669,000 and
$2,615,000 for the quarter and nine months ended, which are offset by the
retirement of $94,000,000 of Maine Energy debt on May 3, 1996 and other debt
reductions during the first nine months of 1997.
Minority interest of $883,024 and $1,229,287 for the quarter and for
the nine months ended September 30, 1997, principally resulted from the
elimination of 25.85% and 25% of Maine Energy's and AART's income, respectively.
For the quarter and the nine months ended September 30, 1997 93% of PERC's
income through the date of acquisition has been accounted for as preacquisition
minority interest. The increase in minority interest of $245,000 for the three
months ended September 30, 1997 results from increases of Maine Energy and AART
net income for the period and post acquisition minority interest at PERC. The
decrease in minority interest of $16,661,000 for the nine months ended September
30, 1997 principally resulted from the minority interest on the higher 1996
income at Maine Energy as a result of the gain on sale of capacity on
May 3, 1996.
Extraordinary item of $2,247,000 for the nine months ended September
30, 1996 resulted from the early retirement of the $64,500,000 Biddeford Bonds
at Maine Energy, net of minority interest.
Liquidity and Capital Resources
The Company has financed its operations and capital
expenditures primarily through cash flow from its subsidiaries which are not
contractually restricted from making distributions, collateralized equipment
financing, unsecured subordinated debt, drawings under its lines of credit and
proceeds from the sale of the Company's preferred and common stock. Receipt of
cash flow from PERC is currently restricted by covenants under loan agreements,
distribution restrictions under partnership agreements with its equity
investors, and put-or-pay agreements with municipalities. Cash flow from Timber
Energy is also restricted by covenants under loan agreements. Maine Energy's
cash flow is required to retire the remaining outstanding balance of $15,859,622
of subordinated notes payable as of September 30, 1997 before partners cash
distributions can begin; however, the Company is not obligated to pay any
minimum amounts on such
12
<PAGE> 14
subordinated debt. Accordingly, the following discussion is organized to present
liquidity and capital resources of the Company separate from Maine Energy, PERC
and Timber Energy and liquidity and capital resources of each of Maine Energy,
PERC and Timber Energy independently.
The Company
On June 4, 1997, the Company consummated the private placement of
487,500 shares of its Series A Convertible Preferred Stock (the "Series A
Preferred') for gross proceeds of $3,900,000. The Series A Preferred is
convertible into shares of the Company's common stock, no par value (the "Common
Stock"), at a price of $8.00 per share, subject to adjustment, and may be
redeemed by the Company at $16.00 per share, subject to adjustment. Purchasers
of the shares of Series A Preferred also received, in the aggregate, warrants to
purchase 243,750 shares of Common Stock at $9.00 per share and warrants to
purchase 32,500 shares of Common Stock at $10.00 per share. On August 15, 1997,
the Company consummated the private placement of 856,000 shares of its 8.75%
Series B Convertible Preferred Stock (the "Series B Preferred") for gross
proceeds of $21,400,000. The Series B Preferred is convertible into shares of
Common Stock at a price of $11.75 per share. Also, in connection with the Series
B shares, the Company issued warrants to purchase 95,750 shares of the Company's
common stock at $11.75 per share.
The Company and its subsidiaries, other than Maine Energy, PERC and
Timber Energy, at September 30, 1997 had indebtedness maturing in the next year
of $5,912,000 including $4,297,000 resulting from the recent acquisitions of I.
Zaitlin and K-C Industries. During the first nine months of 1997, the Company,
other than Maine Energy, PERC, Timber Energy, and the recently acquired I.
Zaitlin and K-C incurred additional debt of approximately $2,862,000, primarily
as a result of drawings under its lines of credit, and retired approximately
$5,713,000 of debt. Also the $5,000,000 note, including accrued interest, with
Wexford KTI LLC was converted into 618,609 shares of the Company's common stock,
further reducing debt.
As of September 30, 1997, the Company had cash and cash equivalents of
$6,500,000 without regard to Maine Energy, PERC and Timber Energy and
approximately $1,400,000 available in lines of credit from banks for operating
purposes. On August 15, 1997 the bank increased the Company's line of credit to
$6,000,000. On October 31, 1997 the Company's line of credit was further
increased to $11,000,000. Letters of credit issued against this line of credit
associated with the acquisition of additional PERC limited partnership interest
amounted to approximately $4,500,000. Management of the Company believes that
cash flow from its subsidiaries and affiliates and unused lines of credit will
meet its current needs for liquidity. Moreover, management believes that the
Company has the ability to access additional borrowing facilities if needed,
although no assurance can be given that such borrowing can be arranged under
terms and conditions acceptable to the Company.
Maine Energy
During the last four years Maine Energy has financed its operations and
capital expenditures from cash flows from operations.
As of September 30, 1997, in addition to Maine Energy's operating cash
of $3,022,000, Maine Energy, as required under the terms of the credit agreement
with its letter of credit, has on account an additional $8,321,000 of reserves
to be used for capital improvements, debt service, operating shortfalls and
working capital requirements.
Management of the Company believes Maine Energy has adequate cash
resources available to fund its future operations and anticipated capital
expenditures. Capital expenditures for Maine Energy for the year ending December
31, 1997 are expected to be approximately $2,581,000, which has principally been
set aside in the above mentioned reserves accounts.
13
<PAGE> 15
PERC
During the last five years PERC has financed its operations and capital
expenditures primarily by cash flow from operations.
At September 30, 1997, PERC had outstanding tax-exempt, variable rate
revenue bonds backed by bank letters of credit in the aggregate amounts of
$49,100,000. The variable interest rate on the Orrington Bonds at September 30,
1997 was 3.60%. The bonds are payable pursuant to a schedule through May 2003.
During the first nine months of 1997 PERC made principal payments to bondholders
of $4,400,000.
As of September 30, 1997, in addition to PERC's operating cash of
$5,374,500, PERC, as required under the terms of the credit agreement with its
letter of credit banks and the trust indenture governing the Orrington Bonds,
had on account an additional $9,413,000 of cash reserves to be used for capital
improvements, debt service, operating shortfalls and working capital
requirements.
Company management believes PERC has adequate cash resources available
and expects additional cash from operations to fund its current project
operations, debt obligations and currently anticipated capital expenditures.
PERC plans capital expenditures for the year ending December 31, 1997 of
approximately $782,000.
Timber Energy
Timber Energy has financed its operations and capital expenditures
primarily from cash flow from operations since it was acquired on November 22,
1996. Cash provided by operations during the nine months ended September 30,
1997 was approximately $1,750,000. Timber Energy, during the second quarter,
completed a month long shutdown and retrofit to complete an extensive overhaul
of its boiler and turbine generator. Costs associated with the shutdown and
retrofit, which were all of Timber's anticipated capital expenditures for 1997,
totaled approximately $1,200,000. All of these costs were paid out of cash flow
from operations and cash reserves held specifically for this retrofit.
The Company was required to obtain the release of CNA's reimbursement
obligation to Bank of Montreal as part of the Company's purchase agreement with
CNA when Timber Energy was acquired on November 22, 1996. On June 4, 1997, the
outstanding bonds, together with accrued interest and associated closing costs
including an additional debt service reserve of $1,340,000 were paid or retired
from the proceeds of $13,736,000 of Series 1997A and 1997B bonds and from cash
totaling $993,000 provided by the Company.
As of September 30, 1997, Timber Energy has outstanding tax exempt
bonds, together with accrued interest, in the aggregate amount of $14,028,526.
The bonds are payable pursuant to a mandatory redemption schedule through
December 1, 2002.
As of September 30, 1997, in addition to Timber Energy's operating cash
of $932,700, Timber Energy, as required by the terms of the refinancing, had an
additional $2,014,000 of cash reserves to be used for debt service.
Company management believes Timber Energy has adequate cash resources
available and expects additional cash from operations to fund its current
operations and debt obligations. No significant additional capital expenditures
are anticipated for 1997.
14
<PAGE> 16
Forward Looking Statements
All statements contained herein which are not historical facts
including but not limited to statements regarding the Company's plans for future
cash flow and its uses are based on current expectations. These statements are
forward-looking in nature and involve a number of risks and uncertainties.
Actual results may differ materially. Among the factors that could cause actual
results to vary materially are the availability of sufficient capital to finance
the Company's business plan and other capital needs on terms satisfactory to the
Company. The Company wishes to caution readers not to place undue reliance on
any such forward looking statements, which statements are made pursuant to the
Private Litigation Reform Act of 1995 and as such speak only as of the date
made.
15
<PAGE> 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Anthony Buonaguro, a former officer of the Company, has instituted
arbitration proceedings in New York, New York against the Company for alleged
breaches of an employment agreement between Mr. Buonaguro and the Company more
than five years prior to the filing of the arbitration proceedings. The amount
of damages requested is approximately $220,000. The Company believes that it has
meritorious defenses against this claim and is defending the matter.
A fatality of an employee of PERC's operator, ESOCO, occurred when he
was working under a conveyor belt in the plant. His widow instituted a lawsuit
against various parties. Her lawyer joined the Company to the suit as an
additional defendant on the basis that the Company is an owner of PERC. PERC's
insurance carrier defended this lawsuit. The legal proceedings have been settled
at no cost to the Company.
The Company and its subsidiary, K-C International, Ltd. ("K-C") have
been sued by Capitol Recycling of Connecticut in the Superior Court for the
Judicial District of Hartford. The suit alleges disputes under two contracts,
tortuous interference and violations of the Connecticut Unfair Trade Practices
Act and also alleges a breach of alleged oral agreements. As both contracts
require arbitration, K-C has filed a demand for arbitration. The Company and K-C
believe that they have meritorious defenses against these claims and will defend
the matter.
The Company is a defendant in certain other law suits alleging various
claims incurred in the ordinary course of business, none of which, either
individually or in the aggregate, the Company believes will have a material
adverse effect on the Company.
Management of the Company does not believe that the outcome of the
foregoing matters, individually or in the aggregate, will have a materially
adverse effect on the Company's financial condition, cash flows or results of
operations.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
16
<PAGE> 18
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
Four reports on Form 8-K were filed in and during the third
quarter of 1997 through the date of this filing. No financial statements were
included with such Forms 8-K. The following is a list of the Forms 8-K filed and
the dates thereof.
(i) A Form 8-K dated August 12, 1997 reporting that the Company amended
its revolving line of credit with KeyBank of New York and reporting the sale of
Timber Energy Plastic Recycling, Inc.
(ii) A Form 8-K dated August 15, 1997 reporting the issuance of 8.75%
Series B Convertible Exchangeable Preferred Stock and the appointment of
American Stock Transfer and Trust Company as transfer agent for the Series B
Convertible Exchangeable Preferred Stock.
(iii) A Form 8-K dated September 16, 1997 to report the execution of an
agreement of reorganization and merger among the Company, K-C Industries, Inc.
and KES, Inc.
(iv) A Form 8-K dated September 30, 1997 to report the purchase of
49.5% of the limited partnership interest in Penobscot Energy Recovery Company
from the Prudential Insurance Company of America and to report that Wexford KTI
LLC converted all of its Convertible Subordinated Promissory Note.
17
<PAGE> 19
Signatures
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 thereunto duly authorized.
KTI, Inc.
-------------------------------
(Registrant)
By: /s/ Ross Pirasteh
-------------------------------
Name: Ross Pirasteh
Title: Chairman of the Board
By: /s/ Martin J. Sergi
-------------------------------
Name: Martin J. Sergi
Title: President and Chief
Financial Officer
(Principal Accounting Officer)
Date: November 4, 1997
18
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<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
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