<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
August 28, 1998
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 2. Acquisition or Disposition of Assets.
On August 28, 1998, FCR, Inc., a Delaware corporation ("FCR"), was merged
(the "Merger") with and into KTI Acquisition Sub, Inc., a Delaware Corporation
and a wholly owned subsidiary of the Registrant ("Merger Sub"), pursuant to an
Agreement and Plan of Merger, dated July 22, 1998 (the "Merger Agreement"), by
and among the Registrant, Merger Sub, FCR and the securityholders of FCR (the
"Holders"). Pursuant to the Merger Agreement, at the closing of the Merger, the
securities of FCR held by the Holders were converted into the right to receive
an aggregate of (i) $30.0 million in cash (the "Initial Cash Consideration"),
(ii) 1,714,285 shares of common stock, no par value (the "Common Stock"), of the
Registrant (the "Initial Stock Consideration"), and (iii) an additional payment
of up to $30.0 million (the "Earnout"), based upon the earnings from the
operations of FCR for the period from July 1, 1998 through December 31, 1998,
payable in a combination of cash and Common Stock, which Common Stock shall be
valued at the greater of the market value of the Common Stock on the date the
Earnout is determined and $23 per share; provided, that if the market value of
the Common Stock on the date the Earnout is determined is less than $18 per
share, the FCR Holders shall be entitled to an additional payment equal to the
difference between $18 and such market value (the "Makeup Payment," and together
with the Earnout, the Initial Cash Consideration and the Initial Stock
Consideration, the "Merger Consideration"). The Merger Consideration is payable
in a combination of cash and Common Stock, and the value of the Common Stock
portion of the Merger Consideration shall be equal to at least 40% of the
aggregate Merger Consideration. As a result of the Merger, FCR became a
whollyowned subsidiary of the Registrant.
FCR is a diversified recycling company that provides residential and
commercial recycling processing and marketing services and manufactures
products, in particular, cellulose insulation, using recycled materials. FCR
owns or operates eighteen material recovery facilities, six cellulose insulation
manufacturing facilities and three plastic reprocessing facilities in twelve
states.
<PAGE> 3
The Registrant utilized its $150.0 million line of credit with KeyBank
National Association to fund the $30.0 million Initial Cash Consideration.
Effective as of the closing of the Merger, Mr. Paul A. Garrett, Chief
Executive Officer of FCR, was named the Vice-Chairman of the Board of Directors
of the Registrant and was elected to the Board of Directors of the Registrant.
Mr. Brian J. Noonan, Chief Financial Officer of FCR, was named Chief Financial
Officer of the Registrant. Each of Messrs. Garrett, Noonan and Michael Kuruc,
the Chief Operating Officer of FCR, entered into three year Employment
Agreements with the Registrant, pursuant to which each one receives a base
salary of $250,000, $140,000 and $148,000, respectively. The Employment
Agreements provide for severance benefits in the event the employee is
terminated, except if the employee is terminated for cause. Also effective with
the closing of the Merger, two former directors of FCR, W. Chris Hegele and
Carlos Aguero, were elected to the Board of Directors of the Registrant.
On July 2, 1998, FCR acquired all the outstanding shares of stock of
Resource Recovery Systems, Inc. ("RRS"). RRS provides residential and commercial
recycling processing and marketing services with plants located in Berlin,
Connecticut, Howes Cave, New York, Claverack, New York, Saginaw, Michigan, Ann
Arbor, Michigan, Athens, Georgia, and Sarasota, Florida. The aggregate purchase
price for the stock of approximately $4.41 million was paid in cash. In
connection with this transaction, certain debt of RRS totaling approximately
$3.96 million was refinanced under FCR's existing credit agreement and
approximately $2.13 million of debt of RRS remained outstanding. In addition,
FCR paid a total of $500,000 in a covenant-not-to-compete to two former
shareholders of RRS. The acquisition was financed with a $10.0 million term note
with LaSalle National Bank.
Item 7. Financial Statements and Exhibits
(a) (1) Financial Statements of the business acquired.
The audited balance sheet of FCR, Inc. and its subsidiaries as of December
31, 1997 and 1996 and the related consolidated statement of operations,
stockholders' equity and cash flows for each of the years then ended are
included on pages F-1 through F-21. In addition, the interim unaudited financial
statements for the six months ended June 30, 1998 and 1997 are included on pages
F-22 through F-25.
<PAGE> 4
FCR, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997 AND 1996
TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
F-1
<PAGE> 5
[ARTHUR ANDERSEN LLP LETTERHEAD]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
FCR, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of FCR, Inc. (a
Delaware corporation) and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity 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. These 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 FCR, Inc. and
subsidiaries at December 31, 1997 and 1996, and the consolidated results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
/s/ Arthur Andersen LLP
- ---------------------------------------
Charlotte, North Carolina,
February 27, 1998 (except with
respect to the matters discussed
in Note 13, as to which the date is
September 30, 1998).
F-2
<PAGE> 6
FCR, Inc. and Subsidiaries
Consolidated Balance Sheet
December 31, 1997 and 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,777,365 $ 25,028
Accounts receivable, net 5,002,418 2,576,079
Inventory 1,768,274 179,089
Receivable from shareholder 1,294,280 0
Other assets 1,312,754 278,547
Deferred tax assets 101,000 286,000
Net assets of discontinued operations 0 1,043,472
------------ ------------
Total current assets 12,256,091 4,388,215
------------ ------------
PROPERTY, PLANT AND EQUIPMENT:
Machinery and equipment 19,118,367 9,485,933
Building and leasehold improvements 2,872,029 2,021,377
Office furniture and fixtures 535,456 281,834
Construction in progress 2,287,689 763,916
------------ ------------
24,813,541 12,553,060
Less - Accumulated depreciation (4,834,186) (3,103,076)
------------ ------------
19,979,355 9,449,984
------------ ------------
OTHER ASSETS 1,224,621 377,440
GOODWILL, net 8,120,898 0
------------ ------------
9,345,519 377,440
------------ ------------
$ 41,580,965 $ 14,215,639
============ ============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Line of credit $ 1,801,666 $ 0
Current portion of obligations under capital leases 291,982 508,561
Current portion of long-term debt 1,894,169 789,784
Note payable to shareholder 2,500,000 0
Accounts payable 4,582,891 1,910,589
Accrued liabilities 1,744,269 730,742
------------ ------------
Total current liabilities 12,814,977 3,939,676
------------ ------------
OTHER LONG-TERM OBLIGATIONS 683,720 967,093
LONG-TERM DEBT 11,431,346 3,559,140
SUBORDINATED DEBT 5,910,000 0
DEFERRED TAX LIABILITIES 1,251,000 869,000
------------ ------------
32,091,043 9,334,909
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Series A convertible preferred stock, $.01 par value; 1,500,000 shares
authorized, 1,149,842 and 1,008,000 shares issued and outstanding at
December 31, 1997 and 1996, respectively 2,230,648 5,877,631
Series B convertible preferred stock, $.01 par value; 75,000 shares
authorized, issued and outstanding 300,000 300,000
Series C convertible preferred stock, $.01 par value; 600,000 shares
authorized, 488,625 shares issued and outstanding 1,817,784 1,817,784
Common stock, $.01 par value, 3,262,500 shares authorized, 1,540,562 and
949,245 shares issued and outstanding at December 31, 1997 and 1996,
respectively 15,405 9,492
Additional paid-in capital 4,243,314 67,682
Retained earnings (deficit) 882,771 (3,191,859)
------------ ------------
Total stockholders' equity 9,489,922 4,880,730
------------ ------------
$ 41,580,965 $ 14,215,639
============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-3
<PAGE> 7
FCR, Inc. and Subsidiaries
Consolidated Statement of Operations
For the Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
NET REVENUES $ 36,654,254 $ 15,023,535
PROCESSING AND MANUFACTURING COSTS 28,484,273 12,498,895
------------ ------------
Gross margin 8,169,981 2,524,640
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 4,164,186 1,968,460
------------ ------------
Operating income 4,005,795 556,180
INTEREST AND OTHER EXPENSE (1,369,241) (455,611)
------------ ------------
Income before provision for income taxes 2,636,554 100,569
PROVISION FOR INCOME TAXES 1,099,000 22,000
------------ ------------
INCOME FROM CONTINUING OPERATIONS 1,537,554 78,569
DISCONTINUED OPERATIONS:
Loss from operations of discontinued commercial office
recycling (less applicable credit for income taxes of $272,000) 0 (762,834)
Loss on disposal of commercial office recycling including a
provision of $118,000 for operating losses during the
phaseout period 0 (133,000)
------------ ------------
Net income (loss) $ 1,537,554 $ (817,265)
============ ============
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
F-4
<PAGE> 8
FCR, Inc. and Subsidiaries
Consolidated Statement of Cash Flows
For the Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,537,554 $ (817,265)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities-
Depreciation and amortization 2,150,381 1,059,087
Accretion of common stock warrants 25,980 0
Gain (loss) on disposal of fixed assets 2,896 (25,973)
Deferred income taxes 567,000 (68,000)
Loss on disposal of discontinued operations 0 (133,000)
Loss from discontinued operations 0 (762,834)
Changes in operating assets and liabilities-
Increase in accounts receivable, net (773,163) (800,254)
Increase in inventory (641,754) (3,521)
Increase in other assets (1,301,290) (123,989)
Increase (decrease) in accounts payable (805,697) 668,702
Decrease in other liabilities (202,991) (1,128,410)
------------ ------------
Net cash provided by (used in) continuing operations 558,916 (2,135,457)
------------ ------------
Decrease in net assets of discontinued operations 1,043,472 917,763
------------ ------------
Net cash provided by (used in) operating activities 1,602,388 (1,217,694)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of businesses, net of cash acquired (9,253,480) 0
Purchases of property and equipment (4,682,468) (2,625,677)
Capital expenditures of discontinued operations 0 (12,313)
Proceeds from sale of fixed assets 4,500 48,437
------------ ------------
Net cash used in investing activities (13,931,448) (2,589,553)
------------ ------------
</TABLE>
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt $ 16,603,334 $ 3,631,937
Proceeds from issuance of subordinated debt 6,000,000 0
Net borrowings under line of credit 1,589,728 0
Principal payments under capital lease obligations (583,797) (439,792)
Principal payments under long-term debt (7,626,743) (644,654)
Principal payments of discontinued operations 0 (100,165)
Increase in receivable from shareholder (1,294,280) 0
Proceeds from exercise of stock options 0 7,500
Proceeds from exercise of common stock warrants 140,011 0
Issuance of common stock 300,644 0
Dividends paid - Series C preferred stock (47,500) (190,000)
------------ ------------
Net cash provided by financing activities 15,081,397 2,264,826
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,752,337 (1,542,421)
CASH AND CASH EQUIVALENTS, beginning of year 25,028 1,567,449
------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 2,777,365 $ 25,028
============ ============
SUPPLEMENT DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year-
Interest $ 1,160,369 $ 449,999
Taxes on income 709,157 0
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligation entered into for lease of new equipment 0 439,733
Issuance of common stock with acquisitions 2,562,503 0
Issuance of Series A preferred stock 1,063,825 0
ACQUISITIONS OF BUSINESSES, net of cash acquired:
Working capital, other than cash 1,041,578 0
Property, plant and equipment (8,136,793) 0
Costs in excess of net assets of companies acquired (8,231,547) 0
Other noncurrent assets (54,123) 0
Long-term debt 2,711,938 0
Noncurrent liabilities 852,964 0
Issuance of common stock 2,562,503 0
============ ============
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
F-5
<PAGE> 9
FCR, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
For the Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
SERIES A SERIES B SERIES C
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ----------- ------ -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995 1,008,000 $ 5,060,751 75,000 $300,000 488,625 $1,817,784
Reflect 15 for 1 stock split 0 0 0 0 0 0
Exercise of common stock options 0 0 0 0 0 0
Accretion to redemption value of preferred stock 0 816,880 0 0 0 0
Dividends paid 0 0 0 0 0 0
Net loss 0 0 0 0 0 0
--------- ----------- ------ -------- ------- ----------
BALANCE, December 31, 1996 1,008,000 5,877,631 75,000 300,000 488,625 1,817,784
Accretion to redemption value of preferred stock 0 217,269 0 0 0 0
Elimination of mandatory redemption provision of preferred
stock 0 (3,865,670) 0 0 0 0
Issuance of preferred stock 141,842 1,418 0 0 0 0
Issuance of common stock 0 0 0 0 0 0
Exercise of common stock warrants 0 0 0 0 0 0
Exercise of common stock options 0 0 0 0 0 0
Issuance and accretion to redemption value of common stock
warrants 0 0 0 0 0 0
Dividends paid 0 0 0 0 0 0
Net income 0 0 0 0 0 0
--------- ----------- ------ -------- ------- ----------
BALANCE, December 31, 1997 1,149,842 $ 2,230,648 75,000 $300,000 488,625 $1,817,784
========= =========== ====== ======== ======= ==========
<CAPTION>
ADDITIONAL RETAINED TOTAL
COMMON STOCK PAID-IN EARNINGS STOCKHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
--------- ------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995 820,245 $ 546 $ 69,128 $(1,367,714) $ 5,880,495
Reflect 15 for 1 stock split 0 7,656 (7,656) 0 0
Exercise of common stock options 129,000 1,290 6,210 0 7,500
Accretion to redemption value of preferred stock 0 0 0 (816,880) 0
Dividends paid 0 0 0 (190,000) (190,000)
Net loss 0 0 0 (817,265) (817,265)
--------- ------- ----------- ----------- -----------
BALANCE, December 31, 1996 949,245 9,492 67,682 (3,191,859) 4,880,730
Accretion to redemption value of preferred stock 0 0 0 (217,269) 0
Elimination of mandatory redemption provision of preferred
stock 0 0 0 3,865,670 0
Issuance of preferred stock 0 0 1,062,407 (1,063,825) 0
Issuance of common stock 421,207 4,212 2,858,936 0 2,863,148
Exercise of common stock warrants 140,110 1,401 138,610 0 140,011
Exercise of common stock options 30,000 300 (300) 0 0
Issuance and accretion to redemption value of common stock
warrants 0 0 115,979 0 115,979
Dividends paid 0 0 0 (47,500) (47,500)
Net income 0 0 0 1,537,554 1,537,554
--------- ------- ----------- ----------- -----------
BALANCE, December 31, 1997 1,540,562 $15,405 $ 4,243,314 $ 882,771 $ 9,489,922
========= ======= =========== =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-6
<PAGE> 10
FCR, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
1. DESCRIPTION OF THE BUSINESS AND ACCOUNTING POLICIES:
DESCRIPTION OF BUSINESS
FCR, Inc. (the Company), through its subsidiaries, is a diversified recycling
company engaged in residential recycling and the manufacturing of products using
recycled materials. The Company consists of three business segments: Recycling
Division, Insulation Division and Plastics Division.
The Recycling Division is engaged in the design and operations of facilities
which sort, process, and market recyclable materials delivered to the facilities
either by municipalities under long-term contracts as part of their overall
recycling programs or contract haulers under various commercial recycling
programs. The Recycling Division operates facilities in Connecticut, New Jersey,
Virginia, North Carolina, South Carolina, Florida and Tennessee. The Recycling
Division sells primarily recyclable material to entities who manufacture
recycled-paper or containers, constructed from newspaper, corrugated cardboard,
aluminum, plastic or glass. Recyclable materials are considered commodities and
are subject to fluctuations beyond contractual price agreements. The Recycling
Division represented 61% of the Company's 1997 consolidated net revenues.
The Insulation Division began in May 1997 with the purchase of Suncoast (Note
2). The Insulation Division produces cellulose insulation which is primarily
used in the construction of manufactured and single family residential homes.
The primary raw material for cellulose insulation is newspaper collected from
residential recycling programs. The cellulose insulation is sold to the
manufacturers of manufactured homes and insulation contractors throughout the
United States and thus the results of the Insulation Division are impacted by
the sales of new homes which is cyclical in nature. The Insulation Division
operates facilities in North Carolina, Florida, Arizona, Oregon and Ohio. Sales
of cellulose insulation represented 31% of the Company's 1997 consolidated net
revenues.
The Plastics Division began in September 1997 with the purchase of Resource
Recycling, Inc. (Note 2). The Plastics Division is a reprocessor of high density
polyethylene (HDPE) plastics collected from residential recycling programs and
industrial customers. The plastics are ground, washed and repellatized. The
recycled plastics are sold primarily to manufacturers of nursery supplies and
packaging materials for household and automotive products. The Plastics Division
operates three facilities in North Carolina. Sales of recycled plastics
represented 8% of the Company's 1997 consolidated net revenues. The majority of
the Plastics Division's raw materials are obtained from the Recycling Division.
In November 1996, the Company discontinued the operations of the commercial
office recycling line of business (Note 12).
F-7
<PAGE> 11
ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated.
REVENUE RECOGNITION
Revenue from tipping fees is recognized upon delivery of the recyclable
materials to the Company. Revenue from the sale of recyclable materials,
insulation and plastic is recognized upon shipment. The Recycling Division
shares a portion of its revenue from the sale of recyclable materials with
certain of those municipalities it serves.
COMMODITY CONTRACTS
The Company engages in long-term contracts with various customers to sell
recyclable materials at a negotiated price in relationship to market price
with a contractual floor. These contracts range in term from one to nine
years and expire at various dates through 2006.
CASH EQUIVALENTS
The Company considers unrestricted interest-bearing deposits with
financial institutions with original maturities of three months or less to
be cash equivalents.
ACCOUNTS RECEIVABLE AND CONCENTRATION OF CREDIT RISK
The Company extends credit based on an evaluation of customers' financial
condition, generally without requiring collateral. Exposure to losses on
receivables is principally dependent on each customer's financial
condition. The Company monitors its exposure for credit losses by
providing allowances for anticipated losses.
At December 31, 1997 and 1996, the Company's accounts receivable balance
represents amounts due primarily from purchasers of recyclable materials,
insulation, plastic and fees from municipalities, net of an allowance for
doubtful accounts of approximately $253,000 and $30,000 at December 31,
1997 and 1996, respectively.
F-8
<PAGE> 12
INVENTORIES
Inventories are valued at the lower of cost or market, with cost being
determined on the basis of the first-in, first-out (FIFO) method.
Inventories consist of the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Raw materials $ 568,646 $ 0
Finished goods 1,199,628 179,089
---------- ----------
$1,768,274 $ 179,089
========== ==========
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation has been
computed using the straight-line method over the estimated lives of the
various asset groups as follows: building - 10 years; machinery and
equipment - 3 to 10 years; and office furniture and fixtures - 3 to 7
years. Leasehold improvements are amortized over the lesser of the life of
the lease or the estimated useful life of the improvement.
GOODWILL
Goodwill is the excess of the cost of net assets acquired in business
combinations over their fair value. Goodwill of $8,232,000 is being
amortized on a straight-line basis over 40 years. The accumulated
amortization of intangible assets is approximately $111,000 as of December
31, 1997.
The Company continually evaluates whether events and circumstances have
occurred that indicate the remaining estimated useful life of goodwill may
warrant revision or that the remaining balance of goodwill may not be
recoverable. When factors indicate that goodwill should be evaluated for
possible impairment, the Company uses an estimate of the undiscounted net
cash flows of the related businesses over the remaining life of the
goodwill in measuring whether the goodwill is recoverable.
LOAN ACQUISITION COSTS
The Company amortizes loan acquisition costs over the term of the related
loan agreements. As of December 31, 1997 and 1996, loan acquisition costs
of $541,000 and $38,000, respectively, were included in other assets.
DEFERRED INCOME TAXES
Deferred tax assets and liabilities reflect the impact of temporary
differences between the financial reporting basis and the tax basis of
assets and liabilities. Such amounts are recorded using presently enacted
tax rates and regulations.
F-9
<PAGE> 13
LONG-TERM CONTRACT COSTS
The Company defers certain direct incremental costs to secure successful
long-term contracts with municipalities for the design and operation of
materials recovery facilities. These costs for successful efforts are
amortized over the life of the contract which range from three to ten
years. During 1997 and 1996, the Company incurred approximately $60,000
and $57,000, respectively, of direct incremental long-term contract costs
and approximately $286,000 and $288,000, respectively, are deferred at
December 31, 1997 and 1996.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities are reflected in approximate fair
value because of the short-term maturity of these financial instruments.
The carrying amount of long-term debt approximates fair value at December
31, 1997 and 1996.
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain
estimates and assumptions. These affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
RECLASSIFICATIONS
Certain balances in the accompanying prior years consolidated financial
statements have been reclassified to conform with current year
presentation.
2. ACQUISITIONS:
SUNCOAST MFG. CO.
On May 7, 1997, the Company acquired all of the outstanding shares of common
stock of Suncoast Insulation MFG. Co., N.C. and Suncoast MFG. Co., N.C.
(collectively, Suncoast). Suncoast is a manufacturer of cellulose insulation and
other related products. The acquisition has been accounted for as a purchase and
the results of the operations of Suncoast have been included in the consolidated
financial statements since the date of acquisition. The excess of the purchase
price over the fair value of the net assets acquired was approximately
$6,708,000 and has been recorded as goodwill, which will be amortized on a
straight-line basis over 40 years. The aggregate purchase price for the stock
acquired was approximately $10,013,000 which is comprised of cash and shares of
the Company's common stock.
F-10
<PAGE> 14
During the next two years, the former shareholder of Suncoast may receive up to
$2,000,000 of additional consideration. The amount of the additional
consideration will be based on the earnings of Suncoast for the 12 months ended
April 30, 1998 and 1999, as defined in the purchase agreement. Of this amount,
$924,000 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. If earned, the remaining additional
consideration will be in the form of cash, note payable to the former
shareholder, or the Company's common stock and the form of the additional
consideration is at the election of both the Company and the former shareholder.
Any additional consideration will be recorded as an addition to goodwill.
In conjunction with the purchase of Suncoast, the Company and the former
shareholder of Suncoast entered into an employment agreement through April 2004.
In addition, the former shareholder signed a noncompete agreement commencing on
the date of acquisition and continuing for five years after the former
shareholder's termination from the Company. The Company has an additional
$370,000 note receivable from this shareholder.
RESOURCE RECYCLING, INC.
On September 2, 1997, the Company acquired substantially all the assets of
Resource Recycling, Inc. (Resource). Resource is a reprocessor of post-consumer
and post-industrial plastics. The acquisition has been accounted for as a
purchase and the results of the operations of Resource have been included in the
consolidated financial statements since the date of acquisition. The aggregate
purchase price for the assets acquired was $4,100,000 which is comprised of cash
and the assumption of certain liabilities.
On March 31, 1999, the former shareholders of Resource may receive additional
consideration. The amount of the additional consideration will be based on the
earnings of Resource for the 12 months ending March 31, 1999, as defined in the
purchase agreement. If earned, the remaining additional consideration will be in
the form of stock and will be recorded as goodwill.
In conjunction with the purchase of Resource, the Company and the former
majority shareholder of Resource entered into an employment agreement through
August 2000. In addition, the former majority shareholder signed a noncompete
agreement commencing on the date of acquisition and continuing for two years
after the former majority shareholder's termination from the Company.
F-11
<PAGE> 15
USF INSULATION
On December 1, 1997, the Company acquired all of the outstanding shares of stock
of USF Insulation, Inc. and T.J. Miller Research and Technology, Inc.
(collectively, USF). USF is a manufacturer of cellulose insulation and other
related products. The acquisition has been accounted for as a purchase and the
results of the operations of USF have been included in the consolidated
financial statements since the date of acquisition. The excess of the purchase
paid price over the fair value of the net assets acquired was approximately
$1,524,000 and has been recorded as goodwill, which will be amortized on a
straight-line basis over 40 years. The aggregate purchase price for the stock
acquired was approximately $2,700,000 which is comprised of a note payable to
the former owner and shares of the Company's common stock. The note payable to
shareholder owner was paid in full on January 5, 1998, and has been included in
current liabilities as of December 31, 1997.
In conjunction with the acquisition of USF, the Company and former shareholder
of USF entered into a consulting agreement through November 1999. In addition,
the former shareholder of USF signed a noncompete agreement commencing on the
date of acquisition and continuing for five years after termination of the
consulting agreement.
The Company's consolidated results of operations will incorporate the
acquisitions discussed above commencing on the acquisition date. The unaudited
pro forma combined information below presents combined results of operations as
if the acquisitions had occurred at the beginning of each year presented, after
giving effect to certain adjustments, including the amortization of intangible
assets, increased interest expense on the acquisition debt and related income
tax effects.
The following unaudited pro forma information is not necessarily indicative of
the results of operations of the combined company had the acquisitions occurred
at the beginning of each year presented, nor is it indicative of future results.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Net revenues $48,897,000 $41,662,000
Operating income 5,382,000 3,185,000
Income from continuing operations 2,198,000 979,000
=========== ===========
</TABLE>
F-12
<PAGE> 16
3. LONG-TERM DEBT AND LINES OF CREDIT:
LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Term loan A $12,000,000 $ 0
Revolving loan B 1,000,000 0
Various equipment notes payable 325,515 412,554
Various notes payable repaid during 1997 0 3,936,370
----------- ----------
13,325,515 4,348,924
Current portion of long-term debt 1,894,169 789,784
----------- ----------
$11,431,346 $3,559,140
=========== ==========
</TABLE>
In 1997, the Company entered into two new term loan agreements with a bank.
Under the term loan A agreement, the Company borrowed $12,000,000 to refinance
its existing term debt and finance the acquisition of Suncoast, Resource and
USF. The term loan A agreement requires quarterly payments of $400,000 to
$700,000, plus interest, through December 31, 2000, with the remaining
outstanding principal due at maturity on March 31, 2001. The term loan B
commences on December 31, 1998, with the conversion of all outstanding
borrowings under the B revolving credit agreement (see discussion below). Under
the term loan B agreement, principal payments which begin on March 31, 1999,
will be based on a six-year amortization with quarterly payments of principal
and interest through December 31, 2000, with the remaining outstanding principal
due on March 31, 2001. The interest rates for both term loans are based on prime
rates that range from prime to prime plus 1.50% depending on the performance of
the Company.
Subsequent to year-end, approximately $1,000,000 of borrowings under the A
revolving line of credit that related to the purchase of new equipment was
refinanced and is classified as long-term debt in the accompanying consolidated
balance sheet and as borrowings under revolving loan B in the table above. These
borrowings will convert to the term loan B at December 31, 1998.
Maturities of long-term debt with banks are as follows:
<TABLE>
<S> <C>
1998 $ 1,894,169
1999 2,668,551
2000 3,076,898
2001 5,685,897
-----------
$13,325,515
===========
</TABLE>
F-13
<PAGE> 17
LINES OF CREDIT
In 1997, the Company entered into two new revolving line-of-credit agreements
with a bank. The A revolving line of credit (A Revolver) agreement provides the
Company loans or letters of credit of up to $5,000,000. Amounts may be borrowed
on a revolving basis and are limited to 85% of eligible receivables, as defined.
The A Revolver expires on March 31, 2001. At December 31, 1997, the Company had
approximately $1,802,000 outstanding on the A Revolver. In addition, the Company
had $535,000 in outstanding letters of credit as security for performance on
long-term contracts with municipalities which reduced the availability under the
A Revolver. Under the B revolving line-of-credit (B Revolver) agreement the
Company may borrow up to $3,000,000. Borrowings under this agreement are limited
to 80% of the cost of new equipment, as defined. On December 31, 1998, the
outstanding portion of the B revolving credit agreement converts to the term
loan B. There were no borrowings on the B Revolver at December 31, 1997. The
Company may select interest rates for both revolving line-of-credit agreements
based on prime or LIBOR rates. The interest rates range from prime to prime plus
1.25% or LIBOR plus 125 basis points to LIBOR plus 300 basis points depending on
the performance of the Company. The interest rate on the line of credit
outstanding at December 31, 1997, was 8.75%. A fee of .25% per annum is charged
on the unused portions of these revolving credit agreements.
The revolving line-of-credit agreements and the term loan agreements contain
covenants, which among other things, require the maintenance of certain
financial ratios. The credit agreements also limit the maximum amount of
indebtedness and requires lender approval for certain significant mergers and
acquisitions, dividends and asset sales, as defined in the loan agreement.
Borrowings under the revolving credit and term loan agreements are secured by
substantially all assets of the Company.
4. SUBORDINATED DEBENTURES:
Concurrent with the Suncoast acquisition discussed above, the Company completed
a private placement of $6,000,000 in subordinated debentures which were used to
finance the acquisition of Suncoast. The subordinated debentures have a maturity
date of April 1, 2001, and interest at 14.25% is paid quarterly.
The purchasers of the subordinated debentures were also issued warrants to
purchase 227,044 shares of the Company's common stock at $.01 per share. These
warrants were valued at $90,000 at May 7, 1997, and are included as a part of
additional paid-in capital as of December 31, 1997. Beginning on May 7, 2005, at
the election of the purchasers of the subordinated debentures, the Company is
required to repurchase the warrants (Put Agreement) at a price determined by a
formula that is defined in the subordinated debenture agreements. This formula
is based on the results of operations in the year ending December 31, 2004. The
Company has accreted approximately $26,000 of interest expense in relation to
the Put Agreement with a corresponding increase in additional paid-in capital.
F-14
<PAGE> 18
The subordinated debenture agreements contain covenants, which among other
things, require the maintenance of certain financial ratios similar to the
Company's senior debt agreements. These agreements also limit the maximum amount
of indebtedness and requires lender approval for certain significant mergers and
acquisitions, dividends and asset sales, as defined in the debenture agreement.
5. CAPITAL AND OPERATING LEASES:
The Company leases certain facilities under operating leases with various terms
expiring through 2003. Certain of these facilities are leased from certain
shareholders of the Company's common stock. The Company leases certain
machinery, office furniture, and equipment under operating leases expiring
through 2000.
The Company also leases certain machinery, office furniture and equipment under
capital leases expiring through 2001. In 1997 and 1996, $0 and $439,733,
respectively, of property or equipment was acquired under capital leases. The
net book value of all equipment under capital leases was approximately $838,000
at December 31, 1997.
The following is a schedule of future minimum lease payments for capital and
operating leases as of December 31, 1997:
<TABLE>
<CAPTION>
RELATED-PARTY
CAPITAL OPERATING OPERATING
YEAR ENDING DECEMBER 31 LEASES LEASES LEASES
- ---------------------------------- ----------- ----------- -------------
<S> <C> <C> <C>
1998 $ 346,187 $ 2,457,000 $ 301,000
1999 78,572 2,231,000 301,000
2000 69,365 1,926,000 301,000
2001 26,162 1,857,000 301,000
2002 0 1,393,000 251,000
Thereafter 0 4,039,000 0
----------- ----------- ----------
Total minimum lease payments 520,286 13,903,000 1,455,000
Less - Amount representing
interest 69,797 0 0
----------- ----------- ----------
$ 450,489 $13,903,000 $1,455,000
=========== =========== ==========
</TABLE>
Rental expense relating to operating leases amounted to approximately $2,172,000
and $1,905,000 for 1997 and 1996, respectively. Rental expense relating to
operating leases with shareholders of common stock was approximately $201,000
for the year ending December 31, 1997.
F-15
<PAGE> 19
6. RELATED-PARTY SALES TRANSACTIONS:
The Company has engaged in sales transactions with the Series B preferred
stockholder. During 1996, the Company had sales to this stockholder of
approximately $1,247,000. At December 31, 1996, the Company had outstanding
accounts receivable of $223,000 with this stockholder. This stockholder sold the
Series B preferred stock during 1997.
7. STOCKHOLDERS' EQUITY AND STOCK BASED COMPENSATION:
STOCKHOLDERS' EQUITY
During 1997, 376,667 shares of the Company's common stock were issued in
conjunction with the acquisitions discussed in Note 2. In addition, 44,540
shares of the Company's common stock were sold to certain key management
personnel for $6.75 per share.
Concurrent with the Suncoast acquisition discussed in Note 2, the Stockholders
of the series A, series B and series C preferred stock agreed to eliminate the
dividend provisions. The Company issued 141,842 shares of series A preferred
stock to the existing holders of series A preferred stock in satisfaction of
accrued cumulative dividends of approximately $1,064,000 at May 7, 1997.
The mandatory redemption provision for all series of preferred stock were
eliminated and the cumulative return provisions for series A and C were also
eliminated. As a result, the cumulative accretion to redemption value for the
series A preferred stock of approximately $3,866,000 ($3,649,000 at December 31,
1996) was eliminated and added back to retained earnings.
On September 30, 1996, the board of directors approved a 15-to-1 stock split.
All per share amounts in this report have been restated to reflect this stock
split.
STOCK-BASED COMPENSATION
In 1997, the Company granted non-qualified stock options to employees to
purchase 395,000 shares of common stock at prices ranging from $6.75 to $13.00.
Options representing 155,000 shares permit the holder to purchase one-third of
the number of shares of common stock subject to the option, each year beginning
on the anniversary date of grant. Options representing 240,000 shares permit the
holder to purchase one-fourth of the number of shares of common stock subject to
the option each year beginning on the anniversary date of grant. Nonvested
shares are subject to forfeiture if the employee ceases to be employed by the
Company.
F-16
<PAGE> 20
In 1996, the Company granted to a business advisor of the board of directors an
option to purchase 2,500 shares of common stock. These options have a five-year
term and may be exercised at any time during such term.
Information with respect to stock options is as follows:
<TABLE>
<CAPTION>
STOCK
OPTIONS
--------
<S> <C>
Outstanding at December 31, 1995 264,000
Granted 2,500
Exercised (129,000)
--------
Outstanding at December 31, 1996 137,500
Granted 395,000
Exercised (30,000)
--------
Outstanding at December 31, 1997 502,500
========
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
EXERCISABLE
WEIGHTED ---------------------
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER OF REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OPTIONS CONTRACTUAL EXERCISE OF EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE OPTIONS PRICE
- -------- ----------- ------------ -------- ------- ---------
<S> <C> <C> <C> <C> <C>
$ 4.33 90,000 3.0 $ 4.33 90,000 $ 4.33
$ 5.00 17,500 3.1 $ 5.00 17,500 $ 5.00
$ 6.75 145,000 4.4 $ 6.75 0 $ 6.75
$10.00 220,000 9.6 $10.00 0 $10.00
$12.50 20,000 9.8 $12.50 0 $12.50
$13.00 10,000 9.8 $13.00 0 $13.00
</TABLE>
During 1997, 30,000 options were exercised at a price of $.667 per share and
129,000 options were exercised at a price of $1 per share in 1996. Of this
amount, $141,500 of the exercise value represented notes receivable from
stockholders and was recorded as a reduction to additional paid-in capital. At
December 31, 1997, 107,500 options were exercisable.
The Company has stock purchase agreements with certain employees which restrict
the transfer of certain of the Company's common stock subject thereto. Under the
agreements, in the event a stockholder desires to sell, assign, transfer,
pledge, hypothecate or otherwise dispose of any such shares, the Company shall
have the right of first refusal to acquire the shares at a price determined in
accordance with the agreements. In the event the Company does not exercise this
right, the stockholder has the right to transfer the shares.
F-17
<PAGE> 21
8. PENSION PLAN:
The Company sponsors a 401(K) plan that provides all employees of the Company an
opportunity to accumulate funds for their retirement. The Company matches
contributions of participation employees on the basis of the percentages
specified in the plan. Company matching contributions to the plan were
approximately $16,000 and $4,000 in 1997 and 1996, respectively.
9. INCOME TAXES:
The total provision (credit) for income taxes for the years ended December 31,
1997 and 1996, consists of the following:
<TABLE>
<CAPTION>
1997 1996
----------- ---------
<S> <C> <C>
Current taxes (refundable) payable-
Federal $ 392,000 $(242,000)
State 140,000 60,000
----------- ---------
532,000 (182,000)
----------- ---------
Deferred taxes-
Federal 620,000 (70,000)
State (benefit) (53,000) 2,000
----------- ---------
567,000 (68,000)
----------- ---------
Total provision (credit) for income taxes $ 1,099,000 $(250,000)
=========== =========
</TABLE>
The components of the net deferred tax asset (liability) as of December 31, 1997
and 1996, are as follows:
<TABLE>
<CAPTION>
1997 1996
----------- ---------
<S> <C> <C>
Deferred tax assets-
State NOL carryforwards $ 143,000 $ 64,000
AMT credit carryforwards 0 168,000
Other 16,000 54,000
----------- ---------
Total deferred tax assets 159,000 286,000
Deferred tax liabilities-
Depreciation (1,201,000) (778,000)
Long-term contract costs (66,000) (91,000)
Other (42,000) 0
----------- ---------
Total deferred tax liabilities (1,309,000) (869,000)
----------- ---------
Net deferred tax liability $(1,150,000) $(583,000)
=========== =========
</TABLE>
F-18
<PAGE> 22
The classification of the net deferred tax liability as of December 31, 1997 and
1996, are as follows:
<TABLE>
<CAPTION>
1997 1996
----------- ---------
<S> <C> <C>
Current deferred tax asset $ 101,000 $ 286,000
Long-term deferred tax liability (1,251,000) (869,000)
----------- ---------
Net deferred tax liability $(1,150,000) $(583,000)
=========== =========
</TABLE>
The provision for income taxes differs from the amounts computed by applying the
federal statutory rate to income before provision for income taxes on income for
the years ended December 31, 1997 and 1996, as follows:
<TABLE>
<CAPTION>
1997 1996
----------- ---------
<S> <C> <C>
Federal provision at statutory rate $ 896,000 $(318,000)
Increase in provision resulting from-
State income taxes, net of federal tax benefit 154,000 31,000
Goodwill 45,000 0
Items not deductible for tax purposes 4,000 27,000
Other 0 10,000
----------- ---------
$ 1,099,000 $(250,000)
=========== =========
</TABLE>
10. COMMITMENTS AND CONTINGENCIES:
The Company may be subject to lawsuits, tax examinations or other claims arising
out of the normal course of business. While the ultimate result of any
unasserted claim cannot be determined, management does not expect that the
disposition of any such matters would have a material adverse effect on the
financial position or results of operations of the Company.
On October 1, 1997, the Company was engaged to procure the design of and be
responsible for the construction of a recycling facility. The Company has
subcontracted most of the construction of the facility which is estimated to be
completed during 1998. The total contract price is approximately $2,800,000.
Income from this contract is recognized using the percentage of completion
method. As of December 31, 1997, the contract is approximately 7% complete.
When current estimates indicate that a loss will result from a contract,
provision is made for the entire amount of the estimated loss. Revisions to
estimates are reflected in the period in which the events giving rise to the
revision become known.
F-19
<PAGE> 23
11. BUSINESS SEGMENTS AND MAJOR CUSTOMERS:
BUSINESS SEGMENTS
During 1997, the Company operated in three divisions as indicated below.
Corporate administrative expenses are allocated to segments based on the net
revenues for each division.
<TABLE>
<CAPTION>
RECYCLING INSULATION PLASTICS ELIMINATIONS CONSOLIDATED
----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net revenues-
Unaffiliated customers $22,258,000 $11,373,000 $3,023,000 $ 0 $36,654,000
Intersegment revenues 1,206,000 0 0 (1,206,000) 0
----------- ----------- ---------- ----------- -----------
Total net revenues 23,464,000 11,373,000 3,023,000 (1,206,000) 36,654,000
----------- ----------- ---------- ----------- -----------
Operating income 2,637,000 1,334,000 34,000 0 4,005,000
Depreciation and amortization 1,620,000 410,000 120,000 0 2,150,000
Capital expenditures 1,533,000 2,846,000 303,000 0 4,682,000
Identifiable assets 16,353,000 19,742,000 5,486,000 0 41,581,000
=========== =========== ========== =========== ===========
</TABLE>
12. DISCONTINUED OPERATIONS:
In November 1996, the Company developed a plan to discontinue the operations of
the commercial office recycling line of business as a result of the decline in
demand for high grade scrap paper during 1996 and a refocusing of the Company's
resources on its residential recycling operations. The operations of this line
of business consisted of three facilities located in Atlanta, Georgia;
Alexandria, Virginia; and Stratford, Connecticut. The operations of the
commercial office recycling line of business have been accounted for as
discontinued operations. In 1996, the Company provided for estimated losses on
disposal of the discontinued operations of approximately $118,000 which included
a provision for anticipated operating losses prior to disposal and an estimated
loss on the disposal. The actual losses incurred during the phase-out period and
the actual cost of disposal approximated the estimates established during 1996.
No additional amounts relating to discontinued operations were recorded in 1997.
13. SUBSEQUENT EVENTS:
ACQUISITION OF RESOURCE RECOVERY SYSTEMS, INC.
On July 1, 1998, FCR acquired all the outstanding shares of stock of Resource
Recovery System, Inc. (RRS). RRS provides residential and commercial recycling
processing and marketing services with plants located in Berlin, Connecticut,
Howes Cave, New York, Claverack, New York, Saginaw, Michigan, Ann Arbor,
Michigan, Athens, Georgia and Sarasota, Florida. The aggregate purchase price
for the stock of approximately $4,409,000 was paid in cash. In connection with
this transaction, certain debt of RRS totaling approximately $3,960,000 was
refinanced under FCR's existing credit agreement and approximately $2,131,000 of
debt of RRS remained outstanding. In addition, two former shareholders of RRS
signed a five year covenant-not-to-compete for $500,000. The acquisition was
financed with a $10,000,000 term note with LaSalle National Bank.
F-20
<PAGE> 24
MERGER WITH KTI, INC.
On August 28, 1998, the Company was merged (the Merger) with and into KTI
Acquisition Sub, Inc. (Merger Sub), a wholly owned subsidiary of KTI, Inc.
(KTI), pursuant to an agreement and Plan of Merger, dated July 22, 1998, (the
Merger Agreement), by and among KTI, Merger Sub, the Company and the
securityholders of the Company. Pursuant to the Merger Agreement, at the closing
of the Merger, the securities of the Company held by the securityholders of the
Company were converted into the right to receive an aggregate of (i) $30,000,000
in cash, (ii) 1,714,285 shares of no par value common stock of KTI and (iii) an
additional payment of up to $30,000,000 based upon the earnings from the
operation of the Company for the period from July 1, 1998, through December 31,
1998, payable in a combination of cash and common stock of KTI. As a result of
the Merger, the Company became a wholly owned subsidiary of KTI.
F-21
<PAGE> 25
FCR, Inc. and Subsidiaries
Consolidated Balance Sheets (unaudited)
<TABLE>
<CAPTION>
June 30, June 30,
----------- ------------
1998 1997
----------- ------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 222,583 $ 261,988
Accounts receivable, net 5,104,723 3,787,105
Other receivables 2,613,666 1,603,711
Inventory 1,820,279 885,776
Prepaid Expenses and other current assets 667,407 970,519
----------- ------------
Total current assets 10,428,658 7,509,099
Property, plant & equipment, net 22,492,068 12,334,026
Goodwill 7,977,360 7,651,448
Other assets 1,084,438 1,267,828
----------- ------------
$41,982,524 $ 28,762,401
=========== ============
Liabilities and stockholders' equity
Current liabilities
Line of Credit $ 4,300,000 $ 550,000
Current portion of long-term debt 2,297,951 1,216,855
Accounts payable 3,582,225 2,270,459
Accrued expenses 3,131,610 1,734,189
Other current liabilities 59,846 537,313
----------- ------------
Total current liabilities 13,371,632 6,308,816
Other long-term obligations 564,925 740,864
Long-term debt 11,306,406 5,946,022
Subordinated debt 5,910,000 5,910,000
Deferred taxes 1,251,000 869,000
Stockholders' equity
Series A preferred stock 2,230,648 2,230,648
Series B preferred stock 300,000 300,000
Series C preferred stock 1,817,784 1,817,784
Common Stock 16,477 14,693
Additional paid-in capital 4,403,056 4,854,899
Retained earnings (deficit) 810,596 (230,325)
----------- ------------
Total stockholder's equity 9,578,561 8,987,699
----------- ------------
$41,982,524 $ 28,762,401
=========== ============
</TABLE>
See notes to condensed consolidated financial statements.
F-22
<PAGE> 26
FCR, Inc. and Subsidiaries
Condensed Consolidated Statement of Operations (unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
1998 1997
------------ -----------
<S> <C> <C>
Net sales $ 29,431,272 $12,302,772
Processing and manufacturing costs 21,995,662 9,038,498
------------ -----------
Gross Margin 7,435,610 3,264,274
Selling, general and administrative expenses 4,303,841 1,165,649
Depreciation and amortization 1,677,221 940,637
------------ -----------
Total operating expenses 27,976,724 11,144,784
Operating income 1,454,548 1,157,988
Interest and other expenses, net 1,382,110 451,162
------------ -----------
Income before income taxes 72,438 706,826
Provision for income taxes 151,110 282,371
------------ -----------
Net income (loss) $ (78,672) $ 424,455
============ ===========
Basic net income (loss) per share $ (0.02) $ 0.14
Diluted net income (loss) per share $ (0.02) $ 0.13
Basic weighted average common shares outstanding 3,359,930 3,005,387
Diluted weighted average common shares outstanding 3,986,974 3,345,500
</TABLE>
See notes to condensed consolidated financial statements.
F-23
<PAGE> 27
FCR, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
1998 1997
----------- ------------
<S> <C> <C>
Operating Activities
Net Income (loss) $ (78,672) $ 424,455
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities -
Depreciation and amortization 1,677,221 940,637
Accretion of common stock warrants 133,813 0
Gain on disposal of fixed assets 0 2,896
Changes in operating assets and liabilities -
Increase in accounts receivable, net (102,305) (39,100)
(Increase) decrease in inventory (52,005) 40,324
Increase in other current assets (523,897) (1,922,198)
Decrease in accounts payable (1,000,666) (1,049,016)
Increase in other current liabilities 1,353,800 378,013
----------- ------------
Net cash provided by (used in) operating activities 1,407,289 (1,223,989)
Investing Activities
Purchases of property and equipment and other (3,955,355) (436,453)
Acquisitions of businesses, net of cash acquired 0 (7,077,844)
----------- ------------
Net cash used in investing activities (3,955,355) (7,514,297)
Financing Activities
Net borrowings under line of credit 1,498,334 (887,938)
Proceeds from issuance of long-term debt 2,125,000 13,000,000
Principal payments under capital lease obligations (310,892) (259,073)
Principal payments under long-term debt (846,158) (2,970,253)
Payment of shareholder note payable (2,500,000) 0
Payment of dividends 0 (47,500)
Issuance of common stock 27,000 140,010
----------- ------------
Net cash provided by (used in) financing activities (6,716) 8,975,246
Net increase (decrease) in cash and cash equivalents (2,554,782) 236,960
Cash and cash equivalents, beginning of period 2,777,365 25,028
----------- ------------
Cash and cash equivalents, end of period $ 222,583 $ 261,988
=========== ============
</TABLE>
See notes to condensed consolidated financial statements.
F-24
<PAGE> 28
FCR, Inc. and Subsidiaries
Notes to Interim Consolidated Financial Statements
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 fair presentation
have been included. Operating results for the six months ended June 30, 1998 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1998. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's financial
statements for the year ended December 31, 1997.
F-25
<PAGE> 29
(a)(2) Consent of Arthur Andersen LLP.
As independent public accountants, we hereby consent to the incorporation of
our reports included in this Form 8-K/A into KTI, Inc.'s previously filed
registration statements File No. 33-80505, No. 333-56435, No. 333-56433, No.
333-46057, No. 333-44507, No. 333-34327, No. 333-30813, No. 333-28067, No.
333-26757, No. 33-80087.
/s/ Arthur Andersen LLP
Charlotte, North Carolina,
September 30, 1998.
F-26
<PAGE> 30
(b) Unaudited Pro Forma Financial Information.
The following unaudited pro forma condensed combined financial statements
have been prepared based on the historical financial statements of the
Registrant and of FCR. FCR made acquisitions of certain entities in 1997 that
are included in the unaudited pro forma financial information as described in
note 2 below. The Registrant believes that including these entities in the
unaudited pro forma financial statements provides for a better understanding of
the Registrant's acquisition of FCR. The unaudited pro forma condensed combined
statement of operations assumes that the Registrant purchased FCR and FCR
purchased all acquired entities at January 1, 1997.
The unaudited 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 January 1, 1997 and should not be
construed as representative of future operations.
F-27
<PAGE> 31
KTI, Inc.
Pro Forma Condensed Combined Results from Operations, unaudited
Six months ended June 30, 1998
All figures in $ 000's except per share figures and share counts
<TABLE>
<CAPTION>
Completed Acquisitions
----------------------------
FCR Acquisitions
KTI, Inc. FCR, Inc. (2)
----------- -------- -------
<S> <C> <C> <C>
Revenues
Waste-to-Energy
Electric power and steam $ 25,897 $ -- $ --
Waste Processing Revenues 17,032 -- --
Recycling 35,946 29,431 4,183
----------- -------- -------
Total Revenues 78,875 29,431 4,183
Costs and Expenses
Electric power, steam and waste processing 23,904
Recycling 33,723 21,731 3,682
Selling, general, and administrative expenses 3,113 4,569 595
Depreciation and Amortization 5,065 1,677 500
Interest, net 3,060 1,382 355
----------- -------- -------
Total Costs and Expenses 68,865 29,359 5,132
----------- -------- -------
Income (loss) before minority interest, taxes, and extraordinary item 10,010 72 (949)
Minority Interest 2,989
----------- -------- -------
Income (loss) before taxes and extraordinary item 7,021 72 (949)
Income taxes (Tax benefit) 517 151
----------- -------- -------
Income (loss) before extraordinary item 6,504 (79) (949)
Loss on early extinguishment of debt, net of minority interest and taxes 495
----------- -------- -------
Net Income (loss) 6,009 (79) (949)
Accretion and paid and accrued dividends on preferred stock 977
----------- -------- -------
Net income (loss) available for common shareholders $ 5,032 $ (79) $ (949)
=========== ======== =======
Pro forma earnings per common share and common share equivalent:
Basic:
-----------
Net income $0.53
===========
Pro forma weighted average number of common shares and common
share equivalents outstanding 9,424,451
Diluted:
-----------
Net
income $0.49
===========
Pro forma weighted average number of common shares and common
share equivalents outstanding 12,275,785
<CAPTION>
Completed
Transactions
------------
FCR Pro forma KTI
Adjustments Notes Adjustments Notes
------ ----- ----------- -----
<S> <C> <C> <C> <C>
Revenues
Waste-to-Energy
Electric power and steam $ -- $ --
Waste Processing Revenues -- --
Recycling -- --
------ ----------
Total Revenues -- --
Costs and Expenses
Electric power, steam and waste processing
Recycling --
Selling, general, and administrative expenses -- (591) (M)
Depreciation and Amortization 115 (E),(F) 1,133 (J)
Interest, net (7) (G) 1,052 (K)
------ ----------
Total Costs and Expenses 108 1,594
------ ----------
Income (loss) before minority interest, taxes, and extraordinary item (108) (1,594)
Minority Interest
------ ----------
Income (loss) before taxes and extraordinary item (108) (1,594)
Income taxes (Tax benefit) 3 (I) (182) (I)
------ ----------
Income (loss) before extraordinary item (111) (1,412)
Loss on early extinguishment of debt, net of minority interest and taxes
------ ----------
Net Income (Loss) (111) (1,412)
Accretion and paid and accrued dividends on preferred stock
------ ----------
Net income (loss) available for common shareholders $ (111) $ (1,412)
====== ==========
Pro forma earnings per common share and common share equivalent:
Basic:
Net income
Pro forma weighted average number of common shares and common
share equivalents outstanding 1,714,285 (L)
Diluted:
Net income
F-28
Pro forma weighted average number of common shares and common
share equivalents outstanding (206,145) (L)
<CAPTION>
Pro forma
KTI, Inc.
-----------
<S> <C>
Revenues
Waste-to-Energy
Electric power and steam $ 25,897
Waste Processing Revenues 17,032
Recycling 69,560
-----------
Total Revenues 112,489
Costs and Expenses
Electric power, steam and waste processing 23,904
Recycling 59,136
Selling, general, and administrative expenses 7,686
Depreciation and Amortization 8,490
Interest, net 5,842
-----------
Total Costs and Expenses 105,058
-----------
Income (loss) before minority interest, taxes, and extraordinary item 7,431
Minority Interest 2,989
-----------
Income (loss) before taxes and extraordinary item 4,442
Income taxes (Tax benefit) 489
-----------
Income (loss) before extraordinary item 3,953
Loss on early extinguishment of debt, net of minority interest and taxes 495
-----------
Net Income (Loss) 3,458
Accretion and paid and accrued dividends on preferred stock 977
-----------
Net income (loss) available for common shareholders $ 2,481
===========
Pro forma earnings per common share and common share equivalent:
Basic:
-----------
Net income $ 0.22
===========
Pro forma weighted average number of common shares and common
share equivalents outstanding 11,138,736
Diluted:
-----------
Net income $ 0.21
===========
Pro forma weighted average number of common shares and common
share equivalents outstanding 12,069,640
</TABLE>
F-29
<PAGE> 32
KTI, Inc.
Pro Forma Condensed Combined Results from Operations, unaudited
Year ended December 31, 1997
All figures in $ 000's except per share figures and share counts
<TABLE>
<CAPTION>
Completed Acquisitions
--------------------------------------------
FCR Acquisitions
KTI, Inc. FCR Inc. (2) FCR Adjustments
---------- ------- -------- -------
<S> <C> <C> <C> <C>
Revenues
Waste-to-Energy
Electric power and steam $ 38,968 $ -- $ -- $ --
Waste Processing Revenues 31,545 -- -- --
Recycling 25,644 36,654 24,371 --
---------- ------- -------- -------
Total Revenues 96,157 36,654 24,371 --
Costs and Expenses
Electric power, steam and waste processing 47,654
Recycling 20,099 26,444 18,582 --
Selling, general, and administrative expenses 2,978 4,054 3,624 (1,329)
Depreciation and Amortization 8,893 2,150 1,720 450
Interest, net 5,086 1,369 1,412 78
---------- ------- -------- -------
Total Costs and Expenses 84,710 34,017 25,338 (801)
Other income 390
---------- ------- -------- -------
Income (loss) before minority interest 11,837 2,637 (967) 801
Minority Interest 1,609
Pre-acquisition earnings 4,722
---------- ------- -------- -------
Income (loss) before taxes 5,506 2,637 (967) 801
Income taxes (Tax benefit) (2,586) 1,099 227 494
---------- ------- -------- -------
Net income (loss) 8,092 1,538 (1,194) 307
Accretion and paid and accrued dividends on preferred stock (1,408)
---------- ------- -------- -------
Net income (loss) available for common shareholders $ 6,684 $ 1,538 $ (1,194) $ 307
========== ======= ======== =======
Pro forma earnings per common share and common share equivalent:
Basic:
----------
Net income $0.90
==========
Pro forma weighted average number of common shares and common share
equivalents outstanding 7,403,681
Diluted:
----------
Net income $ 0.83
==========
Pro forma weighted average number of common shares and common share
equivalents outstanding 8,426,190
<CAPTION>
Pro forma
Notes KTI Adjustments Notes KTI, Inc.
----- ---------- ----- ----------
<S> <C> <C> <C> <C>
Revenues
Waste-to-Energy
Electric power and steam $ -- $ 38,968
Waste Processing Revenues 31,545
Recycling 86,669
---------- ----------
Total Revenues -- 157,182
Costs and Expenses
Electric power, steam and waste processing 47,654
Recycling 65,125
Selling, general, and administrative expenses (H) 9,327
Depreciation and Amortization (E),(F) 2,281 (J) 15,494
Interest, net (G) 2,705 (K) 10,650
---------- ----------
Total Costs and Expenses 4,986 148,250
Other income 390
---------- ----------
Income (loss) before minority interest (4,986) 9,322
Minority Interest 1,609
Pre-acquisition earnings 4,722
---------- ----------
Income (loss) before taxes (4,986) 2,991
Income taxes (Tax benefit) (I) (1,068) (I) (1,834)
---------- ----------
Net income (loss) (3,918) 4,825
Accretion and paid and accrued dividends on preferred stock (1,408)
---------- ----------
Net income (loss) available for common shareholders $ (3,918) $ 3,417
========== ==========
Pro forma earnings per common share and common share equivalent:
Basic:
----------
Net income $ 0.37
==========
Pro forma weighted average number of common shares and common share
equivalents outstanding 1,714,285 (L) 9,117,966
Diluted:
----------
Net income $ 0.35
==========
Pro forma weighted average number of common shares and common share
equivalents outstanding 1,238,041 (L) 9,664,231
</TABLE>
F-30
<PAGE> 33
KTI, Inc.
Pro Forma Condensed Balance Sheet, unaudited
June 30, 1998
All figures in $ 000's
<TABLE>
<CAPTION>
Completed Acquisitions
----------------------------
FCR Acquisitions
and Adjustments
KTI, Inc. FCR, Inc. (A)
--------- -------- --------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 10,027 $ 223 $ 20
Restricted funds, current portion 16,367
Accounts receivable, net 21,974 5,105 888
Inventory 2,044 1,820
Spare parts 4,156
Receivable from shareholders 515 1,294
Notes and other receivables, current portion 795 1,319
Deferred tax assets 2,731 101
Other current assets 1,286 567 77
--------- -------- --------
Total current assets 59,895 10,429 985
Restricted funds, net of current portion 4,851
Notes receivable, affiliates 87
Notes and other receivables 204
Deferred project development costs 932
Deferred costs 4,690
Property, plant,and equipment, net 168,440 22,492 8,511
Goodwill, net 23,319 7,978 3,576
Other assets 2,777 1,084 61
--------- -------- --------
Total Assets $ 265,195 $ 41,983 $ 13,133
========= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 7,841 $ 3,582 $ 1,272
Accrued expenses 3,087 3,132 850
Current portion of long-term debt and capital leases 2,524 2,358 80
Line of credit 4,000 4,300
Income taxes payable 251
Other current liabilities 2,020
--------- -------- --------
Total current liabilities 19,723 13,372 2,202
Other long-term obligations 3,327 565 821
Long-term debt, net of current portion 103,667 11,306 10,110
Subordinated debt 5,910
Deferred tax liabilities 1,251
Deferred revenue 34,474
Minority interest 23,788
Shareholders' equity, total 80,216 9,579
--------- -------- --------
Total Liabilities and Shareholders' Equity $ 265,195 $ 41,983 $ 13,133
========= ======== ========
<CAPTION>
KTI, Inc. pro
KTI Adjustments Notes forma
--------------- ----- ---------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ -- $ 10,270
Restricted funds, current portion 16,367
Accounts receivable, net 27,967
Inventory 3,864
Spare parts 4,156
Receivable from shareholders 1,809
Notes and other receivables, current portion 2,114
Deferred tax assets 4,400 (C) 7,232
Other current assets 1,930
--------- ---------
Total current assets 4,400 75,709
Restricted funds, net of current portion 4,851
Notes receivable, affiliates 87
Notes and other receivables 204
Deferred project development costs 932
Deferred costs 4,690
Property, plant,and equipment, net 9,453 (B) 208,896
Goodwill, net 34,318 (D) 69,191
Other assets 3,922
--------- ---------
Total Assets $ 48,171 $ 368,482
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $ --
Accounts payable $ 12,695
Accrued expenses 7,069
Current portion of long-term debt and capital leases 4,962
Line of credit 8,300
Income taxes payable 251
Other current liabilities 2,020
--------- ---------
Total current liabilities -- 35,297
Other long-term obligations 4,713
Long-term debt, net of current portion 30,000 (B) 155,083
Subordinated debt 5,910
Deferred tax liabilities 1,251
Deferred revenue 34,474
Minority interest 23,788
Shareholders' equity, total 18,171 (B) 107,966
--------- ---------
Total Liabilities and Shareholders' Equity $ 48,171 $ 368,482
========= =========
</TABLE>
F-31
<PAGE> 34
KTI, Inc.
December 31, 1997 and June 30, 1998
Notes to Pro forma Condensed Combined financial
Statements (Unaudited)
1. Description of Transactions
On August 28, 1998, FCR, Inc., a Delaware corporation ("FCR"), was
merged (the "Merger") with and into KTI Acquisition Sub, Inc., a Delaware
Corporation and a wholly owned subsidiary of the Registrant ("Merger Sub"),
pursuant to an Agreement and Plan of Merger, dated July 22, 1998 (the "Merger
Agreement"), by and among the Registrant, Merger Sub, FCR and the
securityholders of FCR (the "Holders"). Pursuant to the Merger Agreement, at the
closing of the Merger, the securities of FCR held by the Holders were converted
into the right to receive an aggregate of (i) $30.0 million in cash (the
"Initial Cash Consideration"),(ii) 1,714,285 shares of common stock, no par
value (the "Common Stock"), of the Registrant (the "Initial Stock
Consideration"), and (iii) an additional payment of up to $30.0 million (the
"Earnout"), based upon the earnings from the operations of FCR for the period
from July 1, 1998 through December 31, 1998, payable in a combination of cash
and Common Stock, which Common Stock shall be valued at the greater of the
market value of the Common Stock on the date the Earnout is determined and $23
F-32
<PAGE> 35
per share; provided, that if the market value of the Common Stock on the date
the Earnout is determined is less than $18 per share, the FCR Holders shall be
entitled to an additional payment equal to the difference between $18 and such
market value (the "Makeup Payment," and together with the Earnout, the Initial
Cash Consideration and the Initial Stock Consideration, the "Merger
Consideration"). The Merger Consideration is payable in a combination of Cash
and Common Stock, and the value of the Common Stock portion of the Merger
Consideration shall be equal to at least 40% of the aggregate Merger
Consideration. As a result of the Merger, FCR became a whollyowned subsidiary of
the Registrant.
FCR is a diversified recycling company that provides residential and
commercial recycling processing and marketing services and manufactures
products, in particular, cellulose insulation, using recycled materials. FCR
owns or operates eighteen material recovery facilities, six cellulose insulation
manufacturing facilities and three plastic reprocessing facilities in twelve
states.
The Registrant utilized its $150.0 million line of credit with KeyBank
National Association to fund the $30.0 million Initial Cash Consideration.
Effective as of the closing of the Merger, Mr. Paul A. Garrett, Chief
Executive Officer of FCR, was named the Vice-Chairman of the Board of Directors
of the Registrant and was elected to the Board of Directors of the Registrant.
Mr. Brian J. Noonan, Chief Financial Officer of FCR, was named Chief Financial
Officer of the Registrant. In connection with the acquisition, certain officers
of FCR entered into three year employment agreements.
On July 2, 1998, FCR acquired all the outstanding shares of stock of
Resource Recovery Systems, Inc. (RRS). RRS provides residential and commercial
recycling processing and marketing services with plants located in Berlin,
Connecticut, Howes Cave, New York, Claverack, New York, Saginaw, Michigan, Ann
Arbor, Michigan, Athens, Georgia, and Sarasota, Florida. The aggregate purchase
price for the stock was $4.41 million. In connection with this transaction,
certain debt of RRS totaling approximately $3.96 million was refinanced under
FCR's existing credit agreement and approximately $2.13 million remained
outstanding. In addition, two
F-33
<PAGE> 36
former shareholders of RRS signed a five year covenant-not-to-compete for
$500,000.
F-34
<PAGE> 37
2. Historical Statements of Operations for Acquisitions
The historical statements of operations for acquisitions consist of the
combined historical statement of operations for the acquisitions completed in
1997 and 1998 for the period from January 1, 1997 through their respective dates
of acquisition as follows:
<TABLE>
<CAPTION>
COMPLETED ACQUISITIONS SIX MONTHS
YEAR ENDED 12/31/97 ENDED
---------------------------------------------------------------------------- JUNE 30,1998
RESOURCE USF RESOURCE TOTAL RESOURCE
SUNCOAST(a) RECYCLING(b) INSULATION(c) RECOVERY(d) ACQUISITIONS RECOVERY(d)
----------- ------------ ------------- ----------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Net revenues $ 5,320,079 $ 6,785,503 $ 1,959,512 $ 10,305,445 $ 24,370,539 $ 4,183,073
Processing and
Manufacturing Costs 2,714,528 7,269,259 1,966,788 8,351,361 20,301,936 4,181,588
Gross Margin 2,605,551 (483,756) (7,276) 1,954,084 4,068,603 1,485
Selling General and
Administrative Expenses 2,325,357 649,620 44,299 604,268 3,623,544 594,264
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
Operating Income (Loss) 280,194 (1,133,376) (51,575) 1,349,816 445,059 (592,779)
Interest & Other Expenses (38,585) (103,454) (4,704) (1,265,015) (1,411,758) (354,598)
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
Income (Loss) Before Income
Taxes 241,609 (1,236,830) (56,279) 84,801 (966,699) (947,377)
Income Taxes 95,400 0 (30,582) 162,227 227,045 0
--------------------------------------------------------------------------------------------
Net Income (Loss) $ 146,209 $ (1,236,830) $ (25,697) $ (77,426) $ (1,193,744) (947,377)
--------------------------------------------------------------------------------------------
</TABLE>
a) Acquisition completed on May 7, 1997
b) Acquisition completed on September 2, 1997
c) Acquisition completed on December 1, 1997
d) Acquisition completed on July 1, 1998
See the footnotes to the FCR 1997 audited Financial statement located in F-7 to
F-21 for a description of these transactions.
F-35
<PAGE> 38
All of the completed acquisitions were accounted for using the purchase method
of accounting for business combinations.
3. Pro Forma Adjustments (all amounts in thousands unless indicated otherwise)
Balance Sheet as of June 30, 1998.
(A) Reflects the acquisition by FCR of all the outstanding common shares of
Resource Recovery, Inc. (RRS) which has been accounted for using the
purchase method. The total purchase price was $4,409. In connection with
this transaction certain debt of RRS totaling approximately $3,960 was
refinanced under FCR's existing credit agreement and approximately
$2,131 of debt of RRS remained outstanding. In addition, two former
shareholders of RRS signed a five year covenant-not-to-compete for
$500.
(B) Reflects the acquisition by KTI of the outstanding stock of FCR which has
been accounted for using the purchase method of accounting. The initial
aggregate purchase price was approximately $57,800 which included the
issuance of 1,714,285 shares of Company's common stock valued at $16.19
per share and a cash payment of $30,000. In addition, debt totaling $2,000
of FCR remained outstanding. The Company utilized it's line of credit with
KeyBank National Associates to finance the acquisition of FCR. The Merger
Agreement provides for an additional payment of up to $30,000. The pro
forma financial statements were prepared with the assumption that no
additional payment will be made.
(C) Reflects the recording of a current deferred tax asset resulting from
FCR's net operating loss carryforward of approximately $11,000.
(D) Reflects the recording of goodwill resulting from the acquisition of FCR.
Results of Operations, year ended December 31, 1997 and the six month period
ended June 30, 1998.
(E) Reflects additional depreciation of $180, and $25, for the year ended
December 31, 1997 and the six months ended June 30, 1998, respectively.
F-36
<PAGE> 39
Depreciation is recorded over the estimated remaining lives of the fixed
assets.
(F) Reflects additional goodwill amortization expense of $270, and $90, for
the year ended December 31, 1997 and the six months ended June 30, 1998,
respectively. Goodwill is amortized over 20 years.
(G) Reflects the additional interest expense on the incremental debt
outstanding assuming an interest rate of 9.25%.
(H) Reflects elimination of selling, general and administrative expenses for
the year ended December 31, 1997 for reductions of officer's salaries and
other compensation items per employment agreements.
(I) The provision for income taxes on the pro forma adjustments at a 39.5%
rate before nondeductible depreciation and goodwill amortization.
(J) Reflects additional depreciation of FCR assets of $946 for the year ended
December 31, 1997 and $473 for the six months ended June 30, 1998 using a
useful life of 10 years. Reflects additional goodwill amortization of
$1,335, for the year ended December 31, 1997 and $660 for the six months
ended June 30, 1998 using a useful life of 20 years.
(K) Reflects the additional interest expense on the incremental debt
outstanding assuming an interest rate of 7.75%.
(L) Reflects the effect of the additional shares issued in connection with the
acquisition of FCR net of the impact of securities which become
antidilutive based on pro forma operating results.
(M) Reflects elimination of legal, investment banking, and search fees
incurred by FCR in connection with the acquisition of FCR by KTI.
F-37
<PAGE> 40
(c) Exhibits.
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
*4.1 Agreement and Plan of Merger, dated July 22, 1998, between
KTI, Inc., KTI Acquisition Sub, Inc., FCR, Inc. and certain
securityholders of FCR, Inc. (Incorporated by reference to
Exhibit 4.1 to the Registant's Current Report on Form 8-K,
dated July 22, 1998.)
*4.3 Employment Agreement, dated August 28, 1998, between the
Registrant and Paul A. Garrett.
*4.4 Employment Agreement, dated August 28, 1998, between the
Registrant and Brian J. Noonan.
*4.5 Employment Agreement, dated August 28, 1998, between the
Registrant and Michael P. Kuruc.
*99.1 Press Release dated August 31, 1998.
+99.2 Fairness Opinion of Donaldson, Lufkin & Jenrette dated
July 7, 1998.
</TABLE>
* Previously Filed.
+ Filed Herewith.
<PAGE> 41
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.
Dated: October 7, 1998 By: /s/ Martin J. Sergi
---------------------------
Name: Martin J. Sergi
Title: President
<PAGE> 42
EXHIBIT INDEX
99.2 Fairness Opinion of Donaldson, Lufkin & Jenrette
<PAGE> 1
Exhibit 99.2
[DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION LETTERHEAD]
July 7, 1998
Board of Directors
KTI, Inc.
7000 Boulevard East
Guttenberg, NJ 07093
Dear Sirs:
You have requested our opinion as to the fairness from a financial point
of view to KTI, Inc. (the "Company") of the consideration to be paid by the
Company pursuant to the terms of the Agreement and Plan of Merger (the
"Agreement"), by and among the Company, KTI Acquisition Sub, Inc. ("Merger
Sub") a wholly owned subsidiary of the Company, FCR, Inc. ("FCR") and all of
the security holders of FCR, pursuant to which FCR will be merged (the
"Merger") with and into the Merger Sub.
Pursuant to the Agreement, the shares of common stock and each class of
preferred stock of FCR will be converted into the right to receive, in the
aggregate, $30 million in cash, 1,714,285 shares of common stock, no par value
("Company Common Stock") of the Company and Earn-Out Consideration (as defined
in the Agreement) of up to $30 million of a combination of Company Common Stock
and cash.
In arriving at our opinion, we have reviewed the draft dated June 30, 1998
of the Agreement. We also have reviewed financial and other information that
was publicly available or furnished to us by the Company and FCR, including
information provided during discussions with their respective managements.
Included in the information provided during discussions with the respective
managements were certain financial projections of FCR pro forma for the RRS
acquisition for the period beginning 1998 and ending 2002 prepared by the
management of FCR and certain financial projections of the Company for the
period beginning 1998 and ending 2002 prepared by the management of the
Company. In addition, we have compared certain financial and securities data
of the Company and FCR with various other companies whose securities are traded
in public markets, reviewed the historical stock prices and trading volumes of
Company Common Stock, reviewed prices paid in certain other business
combinations, and conducted such other financial studies, analyses and
investigations as we deemed appropriate for purposes of this opinion. We were
not provided an opportunity to discuss with management of Applegate Fibers
Insulation ("Applegate") the historical and future operating and financial
performance of Applegate.
In rendering our opinion, we have relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available
to us from public sources, that was provided to us by the Company and FCR or
their respective representatives, or that was otherwise reviewed by us. In
particular, we have relied upon the estimates of the management of the Company
of the operating synergies achievable as a result of the Merger and upon our
discussion of such synergies with the management of FCR. With respect to the
financial projections supplied to us
<PAGE> 2
related to the Company and FCR, we have assumed that they have been reasonably
prepared on the basis reflecting the best currently available estimates and
judgments of the management of the Company and FCR as to the future operating
and financial performance of the Company and FCR. We have assumed that the
consummation of the acquisition of Applegate prior to December 31, 1998 will
not result in FCR assuming directly or indirectly any material liabilities
other than outstanding indebtedness reflected on the consolidated balance sheet
of KTI/FCR as of December 31, 1998. In addition, we have assumed that the cash
flow for the period from July 1, 1998 through December 31, 1998 of Applegate is
consistent with its long term cash flow generating capacity and is consistent
with the cash flow generating capacity of FCR. We have not assumed any
responsibility for making any independent evaluation of any assets or
liabilities or for making any independent verification of any of the
information reviewed by us.
Our opinion is necessarily based on economic, market, financial and other
conditions as they exist on, and on the information made available to us as of,
the date of this letter. It should be understood that, although subsequent
developments may affect this opinion, we do not have any obligation to update,
revise or reaffirm this opinion. We are expressing no opinion herein as to the
prices at which Company Common Stock will actually trade at any time. Our
opinion does not address the relative merits of the Merger and the other
business strategies being considered by the Company's Board of Directors, nor
does it address the Board's decision to proceed with the Merger. Our opinion
does not constitute a recommendation to any stockholder as to how such
stockholder should vote on the proposed transaction.
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), as part of
its investment banking services, is regularly engaged in the valuation of
businesses and securities in connection with mergers, acquisitions,
underwritings, sales and distributions of listed and unlisted securities,
private placements and valuations for corporate and other purposes.
Based upon the foregoing and such other factors as we deem relevant, we
are of the opinion that the consideration to be paid by the Company pursuant to
the Agreement is fair to the Company from a financial point of view.
Very truly yours,
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: /s/ Sam C. Pina
------------------------
Sam C. Pina
Vice President
