<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------------
FORM 8-KA
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
November 22, 1996
KTI, INC.
(Exact name of Registrant as specified in Charter)
New Jersey 33-85234 22-2665282
(State or other juris- (Commission (IRS Employer
diction of incorporation) File Number) Identification
Number)
7000 Boulevard East, Guttenberg, New Jersey 07093
(Address of principal executive office) (Zip Code)
Registrant's telephone number including area code- (201) 854-7777
Not Applicable
(Former name and former address, as changed since last report)
<PAGE> 2
ITEM 5. OTHER EVENTS
On November 22, 1996 a wholly owned subsidiary of KTI, Inc. (the "Company" or
the "Registrant"), executed an agreement with Continental Casualty Company and
two of Continental Casualty Company's subsidiaries (collectively "CCC") and
purchased certain investments of CCC in Timber Energy Investment, Inc., a
Delaware corporation ("Timber Energy"), including debt having a par amount of
approximately $11.8 million, preferred stock having a liquidation value of
approximately $50 million and a 49% common stock ownership for $1,850,000 in
cash. The assets of Timber Energy have a market value of $15.4 million and are
subject to other debt of $13.4 million which is senior to approximately $7
million of the debt purchased by the Company. The Company has also acquired the
remaining 51% of common stock for $172,000. Timber Energy's subsidiaries own a
14 megawatt power plant in Telogia, Florida which sells electric power to
Florida Power Company under a long term contract, a 400,000 ton per year wood
chipmill in Cairo, Georgia, with a long term take or pay contract with Stone
Container to process a minimum of 250,000 tons of wood chips per year and a 15
million pound per year plastic recycling plant in Tuscaloosa, Alabama. Timber
Energy has annual revenue of $8 million. As a condition of sale, the Company
must obtain a release for CCC of that company's reimbursement obligation to a
bank which supports $13.4 million of tax exempt debt. The Company must obtain
such release not later than August 22, 1997. If the Company is unable to obtain
such release, the purchase may be canceled by CCC. Upon cancellation, CCC must
return the $1,850,000 purchase price to the Company, less $250,000 as liquidated
damages. The Company intends to operate Timber Energy and its subsidiaries as
subsidiaries of the Company.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of the business acquired.
The audited financial statements of Timber Energy Investment, Inc. for the year
ended September 30, 1996 together with the independent auditors report thereon
are included on pages F-1 through F-18 hereof.
(b) Pro forma Financial information.
The following pro forma condensed combined financial statements are based on the
historical financial statements of the Company at September 30, 1996. The pro
forma condensed combined balance sheet assumes that the Company purchased Timber
Energy prior to the end of the stated period. The pro forma condensed combined
statement of operations assumes that the Company purchased Timber Energy at the
beginning of the stated period.
The pro forma condensed combined statements of operations are not necessarily
indicative of operating results which would have been achieved had this
transaction been completed at the beginning of the respective periods and should
not be construed as representative of future operations.
<PAGE> 3
(c) Exhibits.
Exhibit Number Description
1 Securities Purchase Agreement by and among KTI
Plastic Recycling, Inc., Continental Casualty
Company, CNA Realty Corp., CLE, Inc. and Timber
Energy Investment, Inc. dated as of November 22,
1996. The schedules to this Exhibit do not contain
information which is material to an investment
decision and which is not otherwise disclosed in the
Securities Purchase Agreement. The schedules include
a Pledge and Security Agreement, descriptions of the
Securities purchased, descriptions of the other
outstanding debt of Timber Energy, a list of leases
in which Timber Energy is a lessee, descriptions of
Timber Energy's Welfare Benefit Plans and a
description of a car being sold by Timber Energy to a
third party. The Company hereby agrees to furnish a
copy of any omitted schedule to the Commission upon
request. (Filed as an exhibit to registrant's current
report on Form 8-K dated November 22, 1996.)
<PAGE> 4
KTI, INC.
PROJECTED CONDENSED COMBINED BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
TIMBER PRO FORMA PRO FORMA
KTI, INC. ENERGY ADJUSTMENTS KTI, INC.
----------------------------------------------------- ---------------
<S> <C> <C> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 2,168,609 $ 1,028,514 $ 5,000,000 (1) $ 6,175,123
(2,022,000)(3)
Restricted funds - current portion 7,653,612 1,370,403 9,024,015
Accounts receivable 2,678,724 713,765 3,392,489
Notes receivable--officers/shareholders and
affiliates - current 220,855 220,855
Other receivables - current portion 338,364 338,364
Other current assets 719,504 594,213 1,313,717
--------------------------------------------------------------------
Total current assets 13,779,668 3,706,895 2,978,000 20,464,563
Restricted funds 133,016 133,016
Management fees receivable--affiliates 2,672,519 2,672,519
Notes receivable - officers/shareholders and affiliates 99,930 99,930
Other receivables 275,609 275,609
Investment in PERC 3,698,820 3,698,820
Deferred costs 183,663 183,663
Goodwill and other intangibles
0 0
Other assets 1,714,823 40,813 1,755,636
Property, equipment and leasehold improvements 80,226,770 12,767,520 315,182 (4) 93,309,472
--------------------------------------------------------------------
$102,784,818 $16,515,228 $ 3,293,182 $122,593,228
====================================================================
Liabilities and stockholders' equity
Current Liabilities
Accounts payable $ 2,587,781 $ 286,414 $ 2,874,195
Accrued expenses 1,961,264 2,940,434 (2,699,810) (5) 2,201,888
Current portion of long-term debt 6,518,380 1,741,254 (871,254) (6) 7,388,380
Income taxes payable
- -
Other current liabilities 125,517 11,372 136,889
--------------------------------------------------------------------
Total current liabilities 11,192,942 4,979,474 (3,571,064) 12,601,352
Other liabilities 598,941 598,941
Long-term debt, less current portion 17,063,667 21,663,913 (8,263,913) (7) 35,463,667
5,000,000 (2)
Minority interest - Maine Energy 11,052,363 11,052,363
Deferred gain 42,187,500 42,187,500
Commitments and contingencies
Stockholders' equity
Preferred stock; 10,000,000 shares authorized,
no shares issued or outstanding
Common stock, no par value (stated value $.01 per share);
authorized 13,333,333; issued and outstanding 5,795,021 57,951 50,177,820 (50,177,820) (8) 57,951
Additional paid-in capital 34,369,646 34,369,646
- -
Accumulated (deficit) (13,738,192) (60,305,979) 60,305,979 (9) (13,738,192)
--------------------------------------------------------------------
Total stockholders' equity 20,689,405 (10,128,159) 10,128,159 20,689,405
--------------------------------------------------------------------
$102,784,818 $16,515,228 $ 3,293,182 $122,593,228
====================================================================
</TABLE>
<PAGE> 5
KTI, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
TIMBER PRO FORMA PRO FORMA
KTI, INC. ENERGY ADJUSTMENTS KTI, INC.
<S> <C> <C> <C> <C>
Revenues:
Electric power revenues $ 17,213,875 $ 4,196,356 -- $ 21,410,231
Sale of capacity, net 32,057,359 -- -- 32,057,359
Waste processing revenues 6,225,475 -- -- 6,225,475
Other waste handling revenues 3,636,292 2,069,030 -- 5,705,322
------------ ----------- ----------- ------------
Total revenues 59,133,001 6,265,386 -- 65,398,387
------------
Costs and expenses:
Electric power and waste processing operating costs 20,660,503 5,471,799 (1,041,520)(a) 25,090,782
Selling, general and administrative 1,487,135 846,202 (173,550)(e) 2,159,787
Interest - net 3,868,878 1,095,295 (705,933)(b) 4,445,740
-- 300,000 (c) --
-- (112,500)(d) --
------------ ----------- ----------- ------------
Total costs and expenses 26,016,516 7,413,296 (1,733,503) 31,696,309
Equity in net income of PERC 292,027 -- -- 292,027
------------ ----------- ----------- ------------
Income from continuing operations
before minority interest and extraordinary item 33,408,512 (1,147,910) 1,733,503 33,994,105
Minority interest 17,889,970 -- -- 17,889,970
------------ ----------- ----------- ------------
Income from continuing operations
before extraordinary item 15,518,542 (1,147,910) 1,733,503 16,104,135
Discontinued operations (254,009) -- -- (254,009)
------------ ----------- ----------- ------------
Income before extraordinary item 15,264,533 (1,147,910) 1,733,503 15,850,126
Extraordinary item - loss on early
extinguishment of debt, net of minority interest (2,396,731) -- -- (2,396,731)
------------ ----------- ----------- ------------
Net income $ 12,867,802 $(1,147,910) $ 1,733,503 $ 13,453,395
============ =========== =========== ============
Pro forma earnings (loss) per common share and common
share equivalent:
Extraordinary item ($ 0.39) -- -- ($ 0.39)
Net income $ 2.11 -- -- $ 2.21
============ ============
Pro forma weighted average number of common shares and
common share equivalents outstanding 6,097,517 -- -- 6,097,517
============ ============
</TABLE>
<PAGE> 6
KTI, INC.
SEPTEMBER 30, 1996
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (UNAUDITED)
1. DESCRIPTION OF TRANSACTION
On November 22, 1996 a wholly owned subsidiary of KTI, Inc. (the "Company" or
the "Registrant"), executed an agreement with Continental Casualty Company and
two of Continental Casualty Company's subsidiaries (collectively "CCC") and
purchased certain investments of CCC in Timber Energy Investment, Inc., a
Delaware corporation ("Timber Energy"), including debt having a par amount of
approximately $11.8 million, preferred stock having a liquidation value of
approximately $50 million and a 49% common stock ownership. The assets of Timber
Energy have a market value of $15.4 million and are subject to other debt of
$13.4 million which is senior to approximately $7 million of the debt purchased
by the Company. The purchase price for the investments purchased from CCC is
$1,850,000 in cash. The Company has also acquired the remaining 51% of common
stock for $172,000.
2. PRO FORMA ADJUSTMENTS
BALANCE SHEET
(1) Proceeds from the sale of 8% Convertible Debt from Wexford KTI LLC, of
which a portion of such proceeds were used to purchase Timber Energy.
(2) Record the 8% Convertible Debt from Wexford KTI LLC.
(3) Cash portion of purchase price to CCC and other unrelated shareholders.
(4) Step-up of certain assets at Timber Energy.
(5) Elimination of accrued interest relating to the notes payable purchased
by the Company from CCC.
(6) Elimination of current portion of notes payable at Timber Energy which
were purchased by the Company from CCC.
(7) Elimination of long term portion of notes payable at Timber Energy
which were purchased by the Company from CCC.
(8) Elimination of Timber Energy's common and preferred stock.
(9) Elimination of Timber Energy's accumulated deficit.
STATEMENT OF OPERATIONS
(a) Reduction in depreciation of assets to reflect the current estimated
useful life of Timber Energy's assets.
(b) Adjustment to interest expense to reflect the notes payable which were
purchased by the Company.
(c) Adjustment to interest expense to reflect the 8% Convertible Debt to
Wexford KTI LLC.
(d) Adjustment to interest expense to reflect interest income from the
remaining proceeds of the 8% Convertible Debt to Wexford KTI LLC.
(e) Adjustment to selling, genenal & administrative expenses which will be
absorbed by the Company.
<PAGE> 7
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 hereunto duly authorized.
KTI, Inc.
-------------------
(Registrant)
Dated: January 30, 1997 By: /s/ Martin J. Sergi
-------------------
Name: Martin J. Sergi
Title: President
<PAGE> 8
Timber Energy Investment, Inc.
Consolidated Financial Statements
and Other Financial Information
Years ended September 30, 1996 and 1995
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors........................................ 1
Audited Consolidated Financial Statements
Consolidated Balance Sheets .......................................... 3
Consolidated Statements of Operations and Accumulated Deficit......... 4
Consolidated Statements of Cash Flows................................. 5
Notes to Consolidated Financial Statements............................ 6
Other Financial Information
Schedule of Operations by Division ...................................16
</TABLE>
F-1
<PAGE> 9
Report of Independent Auditors
The Board of Directors and Shareholders
Timber Energy Investment, Inc.
We have audited the consolidated balance sheets of Timber Energy Investment,
Inc. and subsidiaries as of September 30, 1996 and 1995, and the related
consolidated statements of operations and accumulated deficit, and cash flows
for the years then ended. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Timber Energy
Investment, Inc. and subsidiaries as of September 30, 1996 and 1995, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As more fully described in
Note 2, the Company has suffered recurring losses from operations and has an
accumulated deficit of $60,305,979 and a shareholders' deficit of $10,128,159 as
of September 30, 1996. Those conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 2. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
<PAGE> 10
Page Two
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The Schedule of Operations by Division is
presented for the purposes of additional analysis and is not a required part of
the basic financial statements. Such information has been subjected to the
auditing procedures applied to our audits of the basic financial statements and,
in our opinion, is fairly stated in all material respects in relation to the
basic financial statements taken as a whole.
Thomas Howell Ferguson P.A.
December 19, 1996
F-3
<PAGE> 11
Timber Energy Investment, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
SEPTEMBER 30
1996 1995
----------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 1,028,514 $ 538,440
Accounts receivable, trade 713,765 1,041,535
Inventory 459,013 290,164
Prepaid expenses 135,200 121,233
Funds held by the trustee (Note 8) 1,370,403 978,675
------------ ------------
Total current assets 3,706,895 2,970,047
Property, plant and equipment, net (Note 4) 12,767,520 14,453,792
Other non-current assets 40,813 93,019
------------ ------------
Total assets $ 16,515,228 $ 17,516,858
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Notes payable and current portion of
long-term debt (Note 5) $ 1,741,254 $ 1,577,764
Accounts payable 286,414 231,771
Accrued interest 572,971 192,959
Other accrued expenses 202,624 177,733
Deferred revenues 11,372 60,834
------------ ------------
Total current liabilities 2,814,635 2,241,061
Accrued interest (Note 10) 2,164,839 1,963,037
Long-term debt (Note 5) 21,663,913 21,863,311
Minority interest (Note 1) -- --
Shareholders' deficit:
Common stock, no par value - 150,000 shares
authorized, issued and outstanding 2,750 2,750
Preferred Class A 29,270,726 29,270,726
Preferred Class B 20,904,344 20,904,344
Accumulated deficit (60,305,979) (58,728,371)
------------ ------------
Total shareholders' deficit (10,128,159) (8,550,551)
------------ ------------
Total liabilities and shareholders' deficit $ 16,515,228 $ 17,516,858
============ ============
</TABLE>
See accompanying notes
F-4
<PAGE> 12
Timber Energy Investment, Inc.
Consolidated Statements of Operations and Accumulated Deficit
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1996 1995
----------------------------
<S> <C> <C>
Revenues $ 8,184,889 $ 6,968,202
Operating costs and expenses:
Fuel cost 722,728 776,559
Production costs 4,421,267 2,812,425
Depreciation expense 1,996,128 1,723,482
------------ ------------
7,140,123 5,312,466
------------ ------------
Gross profit 1,044,766 1,655,736
General and administrative 1,207,306 817,613
------------ ------------
Operating (loss) profit (162,540) 838,123
Other income (expense):
Other income 69,415 62,284
Interest expense (1,484,483) (1,189,471)
Minority interest (Note 1) -- --
Write down of idle facilities (Note 4) -- (100,000)
------------ ------------
(1,415,068) (1,227,187)
------------ ------------
Net loss (1,577,608) (389,064)
Accumulated deficit at beginning of year (58,728,371) (58,339,307)
------------ ------------
Accumulated deficit at end of year $(60,305,979) $(58,728,371)
------------ ------------
</TABLE>
See accompanying notes.
F-5
<PAGE> 13
Timber Energy Investment, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1996 1995
-----------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(1,577,608) $ (389,064)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 2,003,332 1,724,586
Loss on sale of fixed assets 36,620 --
Write down of idle facility -- 100,000
Changes in operating assets and liabilities:
Accounts receivable 327,770 (549,889)
Inventory (168,849) (39,267)
Prepaid expenses (13,967) (5,255)
Funds held by the trustee (391,728) (73,490)
Other non-current assets 45,002 (93,019)
Accounts payable and accrued expenses 661,348 483,642
Deferred revenues (49,462) (55,487)
----------- -----------
Net cash provided by operating activities 872,458 1,102,757
INVESTING ACTIVITIES
Proceeds from sale of property, plant and equipment 29,041 130,000
Purchases of property, plant and equipment (375,517) (3,684,503)
Construction-in-process -- 37,348
----------- -----------
Net cash used in investing activities (346,476) (3,517,155)
FINANCING ACTIVITIES
Proceeds from long-term borrowings 1,100,000 3,838,825
Principal payments on long-term debt and notes payable (1,135,908) (1,167,532)
----------- -----------
Net cash (used in) provided by financing activities (35,908) 2,671,293
----------- -----------
Net increase in cash 490,074 256,895
Cash at beginning of year 538,440 281,545
----------- -----------
Cash at end of year $ 1,028,514 $ 538,440
----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the years
ended September 30 for:
Interest $ 897,162 $ 896,076
</TABLE>
See accompanying notes.
F-6
<PAGE> 14
Timber Energy Investment, Inc.
Notes to Consolidated Financial Statements
September 30, 1996 and 1995
1. SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Timber Energy Resources, Inc. (TER) was incorporated on July 18, 1984 to
construct, own and operate a biomass waste-fuel power plant for the production
of electricity from wood and wood products. Substantially all sales are to
Florida Power Corporation, an unaffiliated entity.
In December 1989, TER began operating a chip mill in South Georgia that converts
wood logs to chip products. Substantially all revenues generated from this
operation are from Stone Container, Inc., an unaffiliated entity.
On June 28, 1992, Timber Energy Investment, Inc. (the Company) was formed and
remained dormant until 1995. In 1994, shareholders of 95,000 shares of TER
common stock exchanged their shares for 133,800 shares of the Company's common
stock. Subsequently, the Company issued 16,200 shares of common stock. Timber
Energy Investment, Inc. was created primarily to be a holding company. This
ownership change of TER and the formation of the Company is considered a change
in legal organization and not a business combination. The exchange of TER shares
for shares of the Company's common stock is accounted for at historical cost in
a manner similar to that in a pooling of interests. The minority interest is
presented at no value because of the accumulated deficit of TER.
In July 1994, the Company formed a wholly owned subsidiary, Timber Energy
Trucking, Inc., (TET) to conduct a contract hauling operation for Timber Energy
Resources, Inc. The Company discontinued these operations in July 1995.
In June 1995, Timber Energy Plastics Recycling, Inc. (TEPRI), a wholly-owned
subsidiary of the Company, purchased certain assets and discharged certain
obligations of Seri, Inc., a debtor-in-possession. Previously, on May 24, 1995,
the United States Bankruptcy Court approved the sale of assets free and clear to
Continental Casualty Company or its designee. Continental Casualty Company, an
affiliated entity of a shareholder of the Company, designated TEPRI as the
purchaser. TEPRI recycles plastic waste into products that are sold to
manufacturers of plastic products. Prior to this acquisition, Timber Energy
Chipping, Inc., which amended its name to Timber Energy Plastics Recycling, Inc.
in May 1995, was a dormant entity that had no assets nor liabilities.
F-7
<PAGE> 15
Timber Energy Investment, Inc.
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company, its
wholly-owned subsidiaries, Timber Energy Plastics Recycling, Inc. and its
majority owned subsidiary, Timber Energy Resources, Inc.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of depreciable assets,
which range from 3 to 32 years. Additions, betterments and replacements are
capitalized, whereas costs of maintenance and repairs are charged to expense as
incurred.
INCOME TAXES
The Company has adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS No. 109). The liability method is used in
accounting for income taxes under SFAS No. 109. 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.
Deferred income taxes are provided principally for temporary differences in
reporting start-up costs and depreciation expense for financial statements and
for tax purposes.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
CASH
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash.
F-8
<PAGE> 16
Timber Energy Investment, Inc.
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.
2. GOING CONCERN
The financial statements have been prepared on a going concern basis, which
contemplates continuity of operations and realization of assets and liquidation
of liabilities in the ordinary course of business. The Company incurred a net
loss of $1,577,608 and $389,064 in 1996 and 1995, respectively and has an
accumulated deficit of $60,305,979 at September 30, 1996.
In June 1995, Timber Energy Plastics Recycling, Inc. purchased certain assets to
recycle plastic waste into products that are sold to manufacturers of plastic
products (Note 1). Since commencement of operations, TEPRI has operated at a
deficit and has borrowed from a shareholder to meet current obligations. The
Company's management anticipates that renovation of the TEPRI facility to be
complete and the facility fully operational at September 30,1996. Management
anticipates that TEPRI will operate at a profit, due to the renovations and
affiliation with related entities of KTI Plastics Recycling, Inc. (Note 3).
Realization of the carrying value of assets and satisfaction of liabilities is
dependent upon the Company's ability to generate adequate revenues and sustain
profitable operations.
3. SUBSEQUENT EVENT
CNA Realty Corp. (CNA), a 49% shareholder of the Company's outstanding common
shares at September 30, 1996, sold its interest in the Company to KTI Plastics
Recycling, Inc. on November 22, 1996 for $1,850,000. CNA's interest consist of
73,500 shares of common stock, 29,271 shares of Preferred Class A, 20,904 shares
of Preferred Class B and debt instruments described in Note 5.
F-9
<PAGE> 17
Timber Energy Investment, Inc.
Notes to Consolidated Financial Statements (continued)
3. SUBSEQUENT EVENT (CONTINUED)
KTI has offered to purchase the remaining 76,500 shares of common stock of the
Company for $0.25 per share ($19,125). As of December 19, 1996, management has
represented that commitments have been made by numerous shareholders to sell
their stock under these arrangements. As discussed in Note 7, these subsequent
period transactions have resulted in an "ownership change" as defined in Section
382 of the Internal Revenue Code.
4. PROPERTY, PLANT AND EQUIPMENT
The following is a summary of property, plant and equipment:
<TABLE>
<CAPTION>
SEPTEMBER 30
1996 1995
-----------------------------
<S> <C> <C>
Buildings $ 730,621 $ 730,621
Leasehold improvements 96,982 37,326
Land improvements 640,440 636,380
Land 149,493 149,493
Chipping and other equipment 769,318 815,242
PPF plant and equipment 881,519 881,519
14-megawatt power plant 15,469,842 15,508,944
Fuel handling system 792,786 792,786
Transmission lines 649,920 649,920
Transportation equipment 157,047 160,781
Furniture and fixtures 109,412 89,599
Chip mill-Cairo 2,751,095 2,751,095
Plastic recycling production equipment 2,250,279 2,021,111
----------- -----------
25,448,754 25,224,817
Less allowance for depreciation 12,681,234 10,771,025
----------- -----------
$12,767,520 $14,453,792
=========== ===========
</TABLE>
Depreciation expense for the year ended September 30, 1996 and 1995 was
$1,996,128 and $1,723,482 respectively. In 1995, the Telogia Chip Mill, an idle
facility, was written off.
F-10
<PAGE> 18
Timber Energy Investment, Inc.
Notes to Consolidated Financial Statements (continued)
5. NOTES PAYABLE AND LONG-TERM DEBT
On April 20, 1994, TER completed a restructuring of certain debt obligations.
TER issued $15,685,000 of demand bonds and used the proceeds to retire the 1985
bond issue. In addition, TER issued non-voting, non-cumulative preferred class A
shares to a shareholder (Note 3) in full settlement of interest payable
($29,270,726) on the 1985 bonds. TER also issued non-voting, non-cumulative
preferred class B shares to a shareholder (Note 3) in full settlement of notes
payable ($7,633,430) and accrued interest (13,270,914). Both classes of
preferred stock pay a 5% dividend from available cash flows after certain
operating and debt priority payments are made. The bond indenture and
intercompany agreements place various restrictions on TER's use of funds and
require certain shareholder approval for issuance of any additional debt by TER.
The following is a summary of notes payable and long-term debt:
<TABLE>
<CAPTION>
SEPTEMBER 30
1996 1995
----------------------------
<S> <C> <C>
Note payable to a shareholder (Note 3); interest at prime plus 1%; secured by a
14-megawatt power plant and generated revenues. See Note 10 for discussion of
payment terms $ 2,300,000 $ 2,300,000
Note payable to a shareholder (Note 3); due November 1998; monthly payments of
$38,597 including interest at 12% per annum; secured by real property and
improvements (Cairo chip mill) with a book value of
$1,491,671 at September 30, 1996 1,141,252 1,296,468
Construction loan payable to a shareholder (Note 3); due November 1998; monthly
payments of $14,000 including interest at 12% per annum; secured by real
property with a book value of $517,390 at September 30, 1996 422,778 483,534
Bonds payable due from October 1995 to January 2003; principal and interest
payable annually; variable interest rate determined monthly and based on market
conditions (3.9% at September 30, 1996) not to exceed 12% per annum; secured by
a line of credit from a bank, which is
guaranteed by a shareholder (Note 3), and generated 14,270,000 15,025,000
revenues.
</TABLE>
F-11
<PAGE> 19
Timber Energy Investment, Inc.
Notes to Consolidated Financial Statements (continued)
5. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
<TABLE>
<S> <C> <C>
Unsecured notes payable to a shareholder (Note 3); due
October 20, 1998 including interest at 9.5% per annum 475,291 475,291
Note payable to a shareholder (Note 3); due May 15,
2004; monthly payments of $18,980 including interest at
12% per annum; secured by an electrostatic precipitator
with a book value of $1,115,598 at September 30, 1996 1,190,323 1,214,427
Note payable to a shareholder (Note 3); due May 31, 2005;
monthly payments beginning June 1, 1996 of $34,297 including
interest at 10% per annum; secured by generated revenues
and real and personal property with a book value
of $2,025,031 at September 30, 1996 3,550,000 2,450,000
Various notes payable with monthly payments of
principal and interest, secured by property with a book
value approximating the notes payable balance. The
interest rate on the notes payable vary from 7% to 18% 55,523 196,355
----------- -----------
23,405,167 23,441,075
Less current portion 1,741,254 1,577,764
----------- -----------
$21,663,913 $21,863,311
=========== ===========
</TABLE>
After the payment of its ordinary operating expenses, the priority of debt
service payments as specified in the trust indenture for the 1994 bond issue is
as follows:
1) Insurance and taxes
2) Bond administrative expenses
3) Interest on bonds payable
F-12
<PAGE> 20
Timber Energy Investment, Inc.
Notes to Consolidated Financial Statements (continued)
5. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
4) Monthly pro-rata amount of next principal payment on bonds
payable
Scheduled Due Date Amount
------------------ ------------
October 1, 1996 $ 870,000
October 1, 1997 $ 1,000,000
October 1, 1998 $ 1,150,000
October 1, 1999 $ 1,315,000
October 1, 2000 $ 1,510,000
October 1, 2001 $ 1,740,000
October 1, 2002 $ 1,995,000
October 1, 2003 $ 2,290,000
5) Interest on construction loans payable of $422,778 and
$1,190,323 at September 30, 1996
6) Interest on the unsecured notes payable of $475,291 at
September 30, 1996
7) Principal payment of construction loans payable of $422,778
and $1,190,323 at September 30, 1996
8) Principal payment of unsecured notes payable of $475,291 at
September 30, 1996
9) Optional bond redemptions as follows:
<TABLE>
<CAPTION>
Scheduled Due Date Amount
------------------ -------------
<S> <C>
October 1, 1996 $ 430,185
October 1, 1997 $ 921,881
October 1, 1998 $ 580,932
</TABLE>
Scheduled principal payments under notes payable and long-term debt agreements
at September 30, 1996 are as follows:
<TABLE>
<CAPTION>
Year ending
September 30
<S> <C>
1996 $ 1,741,254
1997 1,923,380
1998 2,168,881
1999 2,279,202
2000 2,052,947
Thereafter 13,239,503
-------------
$ 23,405,167
</TABLE>
F-13
<PAGE> 21
Timber Energy Investment, Inc.
Notes to Consolidated Financial Statements (continued)
6. LEASES
The Company leases land, right-of-way, and equipment under operating leases.
Rental expense for the year ended September 30, 1996 and 1995 was $109,328 and
$42,576, respectively. The future minimum rental commitments as of September 30,
1996 are as follows:
<TABLE>
<CAPTION>
Year ending
September 30
<S> <C>
1997 $ 92,897
1998 $ 90,693
1999 $ 86,684
2000 $ 86,844
</TABLE>
7. INCOME TAXES
At September 30, 1996 and 1995, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $25,580,000 and $24,160,000,
respectively. The net operating loss carryforwards expire in years 2005 through
2011. Cumulative taxable temporary differences were $5,800,000 at September 30,
1996 and 1995. The Company has recorded a deferred tax asset for the expected
benefit of the net operating loss carryforwards, and investment tax credits net
of the deferred liability related to the cumulative taxable temporary
differences. In accordance with SFAS No. 109, management has evaluated the
recoverability of the deferred tax asset and has recorded a valuation allowance
to offset the deferred tax asset. The tax benefit of those items will be
realized when offset against future taxable income.
Significant components of the Company's deferred tax asset as of September 30,
1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
-----------------------------
<S> <C> <C>
Tax effects of:
Net operating loss carryforwards $ 9,625,000 $ 9,092,000
Taxable temporary differences:
Depreciation (2,227,000) (2,227,000)
Other 41,000 44,000
Investment tax credits 288,000 288,000
----------- -----------
Deferred tax asset 7,727,000 7,197,000
Valuation allowance 7,727,000 (7,197,000)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
</TABLE>
F-14
<PAGE> 22
Timber Energy Investment, Inc.
Notes to Consolidated Financial Statements (continued)
7. INCOME TAXES (CONTINUED)
Under Section 382 of the Internal Revenue Code, as amended by the Tax Reform Act
of 1986, a corporation's ability to carry forward its net operating loss and
built-in losses following an "ownership change" is limited on an annual basis to
an amount equal to the product of the fair market value of the corporation's
outstanding stock immediately before the ownership change and the long-term
tax-exempt interest rate, subject to certain adjustments for built-in gains of
the corporation. The risk of change in a company's stock ownership is always
present and may result from transactions that are beyond the control of the
Company. As of September 30, 1996, no such ownership changes have occurred.
As discussed in Note 3, CNA sold its 49% interest in the Company on November 22,
1996. The Company determined it has undergone an "ownership change" due to the
stock sales occurring in the subsequent period. The future effect of the
"ownership change" on the utilization of the net operating losses has not been
determined.
8. FUNDS HELD BY TRUSTEE
Funds held by the trustee represent the proceeds from fuel sales which can only
be used to repay the bonds and related interest cost. The restricted funds are
invested by the trustee in specified investments. The following is a description
of the funds held by the trustee:
<TABLE>
<CAPTION>
SEPTEMBER 30
1996 1995
----------------------------
<S> <C> <C>
Funds restricted for the debt service $ 968,800 $775,239
Other restricted funds 401,603 203,436
---------- --------
Total funds held by the trustee $1,370,403 $978,675
========== ========
</TABLE>
9. RELATED PARTY TRANSACTIONS
CNA, a 49% shareholder of the Company and owner of Preferred Class A and B
shares at September 30, 1996 is due approximately $9,080,000 under various
long-term debt agreements and is guarantor for payment of a line of credit
securing the bonds payable at September 30, 1996 (Note 3). During the year ended
September 30, 1996, the Company recognized $944,369 in interest expense owed to
CNA related to this long-term debt and made interest payments of $353,767. CNA
also owns the rights to a royalty contract purchased in 1988 from the original
holder of a $2,300,000 note payable (Note 10).
F-15
<PAGE> 23
Timber Energy Investment, Inc.
Notes to Consolidated Financial Statements (continued)
10. COMMITMENTS
Under a contract to construct the 14-megawatt power plant, the Company is
committed to make quarterly payments to a shareholder (Note 3) in the amount of
50% of net project cash flow not to exceed 25% of the estimated annual project
cash flow, until the deferred sum of $2,300,000 is paid, including interest
accrued quarterly at a rate of prime plus 1 %. In addition, once the deferred
portion plus interest is paid, quarterly payments of 25% of net project cash
flow will be paid for a period of five years. Net project cash flow is defined
under the contract as projected gross income less debt service, operations,
maintenance and fuel expenses.
The $2,300,000 note payable and related accrued interest payable of $2,164,839
and $1,963,037 is recorded in the financial statements at September 30, 1996 and
1995, respectively. The liability, if any, related to the commitment to pay 25%
of net projected cash flow, is not recorded at September 30, 1996 or 1995. Such
amounts will be recorded as royalty expense in the period in which the net
projected cash flow is generated.
11. PENSION PLAN
On July 31, 1990, TER adopted a deferred compensation plan 401(K) that covers
substantially all of its employees. It is the Company's policy to fund its
qualified pension plan in amounts equal to the pension cost incurred each year.
The total pension expense for 1996 and 1995 was $27,672 and $25,219,
respectively. At September 30, 1996 and 1995, there was no unpaid pension
expense.
Effective October 1, 1996, the 401(K) Plan was amended to include all employees
of the Company and the name of the plan was changed to Timber Energy Investment,
Inc. 401(K) Plan.
F-16
<PAGE> 24
OTHER FINANCIAL INFORMATION
F-17
<PAGE> 25
Timber Energy Investment, Inc.
Schedule of Operations by Division
Year ended September 30, 1996
<TABLE>
<CAPTION>
POWER CHIP PLASTIC ELIMINATING
PLANT MILL RECYCLING ENTRIES TOTAL
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues $ 5,606,985 $ 1,451,837 $ 1,438,644 $ (312,577) $ 8,184,889
Operating costs and expenses:
Fuel cost 1,035,305 -- -- (312,577) 722,728
Production costs 1,860,002 765,392 1,795,873 -- 4,421,267
Depreciation expense 1,414,769 250,074 331,285 -- 1,996,128
----------- ----------- ----------- ----------- -----------
4,310,076 1,015,466 2,127,158 (312,577) 7,140,123
----------- ----------- ----------- ----------- -----------
Gross profit (loss) 1,296,909 436,371 (688,514) -- 1,044,766
General and administrative 483,655 58,525 665,126 -- 1,207,306
----------- ----------- ----------- ----------- -----------
Operating profit (loss) 813,254 377,846 (1,353,640) -- (162,540)
Other income (expense):
Other income 9,564 787 59,064 -- 69,415
Interest expense (981,326) (150,799) (352,358) -- (1,484,483)
Minority interest -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Net(loss)income $ (158,508) $ 227,834 $(1,646,934) $ -- $(1,577,608)
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Year ended September 30, 1995
CHIP POWER CHIP PLASTIC ELIMINATING
HAULING PLANT MILL RECYCLING ENTRIES TOTAL
----------- ----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 241,167 $ 5,312,059 $ 1,902,411 $ 119,105 $ (606,540) $ 6,968,202
Operating costs and expenses:
Fuel cost -- 1,165,911 -- -- (389,352) 776,559
Production costs 224,741 1,862,944 783,443 149,210 (207,913) 2,812,425
Depreciation expense 13,500 1,417,948 244,430 47,604 -- 1,723,482
----------- ----------- ----------- --------- ----------- -----------
238,241 4,446,803 1,027,873 196,814 (597,265) 5,312,466
----------- ----------- ----------- --------- ----------- -----------
Gross profit (loss) 2,926 865,256 874,538 (77,709) (9,275) 1,655,736
General and administrative 10,243 553,487 113,830 127,222 12,831 817,613
----------- ----------- ----------- --------- ----------- -----------
Operating profit(loss) (7,317) 311,769 760,708 (204,931) (22,106) 838,123
Other income (expense):
Other income 55,994 5,781 509 -- -- 62,284
Interest expense (8,273) (959,714) (184,102) (37,382) -- (1,189,471)
Minority interest -- -- -- -- -- --
Write down of idle facilities -- (100,000) -- -- -- (100,000)
----------- ----------- ----------- --------- ----------- -----------
Net(loss)income $ 40,404 $ (742,164) $ 577,115 $(242,313) $ (22,106) $ (389,064)
=========== =========== =========== ========= =========== ===========
</TABLE>
F-18
<PAGE> 26
Page Two
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The Schedule of Operations by Division is
presented for the purposes of additional analysis and is not a required part of
the basic financial statements. Such information has been subjected to the
auditing procedures applied to our audits of the basic financial statements and,
in our opinion, is fairly stated in all material respects in relation to the
basic financial statements taken as a whole.
Thomas Howell Ferguson P.A.
January 30, 1997
F-3
<PAGE> 27
Accountant's Consent
The Board of Directors
Timber Energy Investment, Inc.
We consent to the inclusion of our report dated December 19, 1996, with respect
to the balance sheets of Timber Energy Investment, Inc. as of September 30, 1996
and 1995, and the related statements of operations, accumulated deficit, and
cash flows for the years then ended, which report appears in the Form 8-KA of
KTI, Inc. dated November 22, 1996.
Thomas Howell Ferguson P.A.
Tallahassee, Florida
February 3, 1997
