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FORM 10-Q. - QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10Q
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
Commission File No. 0-25490
KTI, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
New Jersey 22-2665282
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
7000 Boulevard East
Guttenberg, New Jersey 07093
- ---------------------- -----
(Address of principal executive offices) (Zip code)
(201) 854-7777
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(Registrants telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date:
Common Stock, No Par Value 9,499,848 Shares as of April 24, 1998
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TABLE OF CONTENTS
Item Number and Caption Page Number
- ----------------------- -----------
PART I
Item 1. Financial Statements 2
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8K 14
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
KTI, Inc.
Consolidated Balance Sheet
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------- --------------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 11,412 $ 11,181
Restricted funds - current portion 14,567 13,103
Accounts receivable, net of allowances of
$348 and $294 24,885 22,126
Consumables and spare parts 4,370 4,041
Inventory 1,966 1,219
Notes receivable--officers/shareholders
and affiliates - current 29 29
Other receivables 409 461
Deferred taxes 2,751 2,751
Other current assets 1,508 793
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Total current assets 61,897 55,704
Restricted funds 5,923 6,527
Notes receivable - officers/shareholders and
affiliates 50 81
Other receivables 286 271
Deferred costs, net of accumulated amortization
of $ 848 and $676 3,307 2,911
Goodwill and other intangibles, net of
accumulated amortization
of $ 1,140 and $778 20,235 17,483
Other assets 522 1,768
Deferred project development costs 937 937
Property, equipment and leasehold
improvements, net of
accumulated depreciation of $ 19,857 and
$17,837 158,515 156,801
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Total assets $ 251,672 $ 242,483
============= ==============
Liabilities and stockholders' equity
Current Liabilities
Accounts payable $ 11,236 $ 8,779
Accrued expenses 3,024 3,825
Debt, current portion 14,637 19,794
Income taxes payable 165 165
Other current liabilities 1,187 1,184
------------- --------------
Total current liabilities 30,249 33,747
Other liabilities 2,515 1,918
Debt, less current portion 83,308 74,473
Minority interest 23,174 22,105
Deferred revenue 35,924 37,500
Commitments and contingencies
Stockholders' equity
Preferred stock; 10,000,000 shares authorized;
Series A, par value $8 per share,
447,500 shares authorized, issued and
outstanding in 1997 3,732
Series B, par value $25 per share, 8.75%,
880,000 shares authorized,
856,000 shares issued and outstanding in
1998 and 1997 21,400 21,400
Common stock, no par value (stated value $.01
per share); authorized 20,000,000 issued
and outstanding; 9,477,953 in 1998
8,912,630 in 1997 94 89
Additional paid-in capital 57,381 52,762
Accumulated (deficit) (2,373) (5,243)
-----------------------------
Total stockholders' equity 76,502 72,740
-----------------------------
Total liabilities and stockholders' equity $ 251,672 $ 242,483
=============================
</TABLE>
See accompanying notes.
2
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KTI, Inc.
Consolidated Statement of Operations
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Three months ended March 31,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
Revenues:
Waste to Energy:
Electric power revenues $ 10,413 $ 9,507
Waste processing revenues 8,081 7,084
Recycling 19,138 1,840
------------ ------------
37,632 18,431
Costs and expenses:
Electric power and waste
processing costs 10,754 9,900
Recycling 17,422 1,659
Selling, general and
administrative 1,082 1,045
Depreciation and amortization 2,457 2,213
Interest - net 1,510 1,000
------------ ------------
33,225 15,817
------------ ------------
Income before minority interest 4,407 2,617
Minority interest 1,069 355
Preacquisition earnings of PERC -- 903
------------ ------------
Net income 3,338 1,359
Accretion and paid and accrued
dividends on
preferred stock (509) --
------------ ------------
Net income available to common
shareholders $ 2,829 $ 1,359
============ ============
Earnings per common share
Basic $ .31 $ .19
============ ============
Weighted average number of shares
used in computation 9,236,588 7,088,233
============ ============
Diluted $ .28 $ .19
============ ============
Weighted average number of shares
used in computation 11,983,345 7,796,000
============ ============
</TABLE>
See accompanying notes.
3
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KTI, Inc.
Consolidated Statements of Cash Flows
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Three months ended March 31,
1998 1997
-------- --------
(Unaudited)
<S> <C> <C>
Operating activities
Net income $ 3,337 $ 1,359
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 2,457 1,202
Minority interest 1,069 355
Deferred Revenue (1,576) (938)
Provision for losses on accounts receivable 54 4
Interest accrued and capitalized on debt 417 429
Non-cash contribution to 401K plan 41
Equity in net income of PERC, net of
distributions -- (56)
Gain on sale of assets (8) (1)
Changes in operating assets and liabilities
Increasing (decreasing) cash:
Accounts receivable (1,759) (599)
Management fees receivable -- (94)
Other receivables 189 299
Consumables, spare parts and inventories (1,000) (710)
Other assets 546 (757)
Accounts payable 1,624 601
Accrued expenses (901) 31
Income taxes (11)
Other liabilities 350 (49)
-------- --------
Net cash provided by operating activities 4,829 1,076
Investing activities
Additions to property, equipment and leasehold
improvements (3,592) (1,049)
Proceeds from sale of assets 18 8
Increase in restricted cash and cash equivalents (860) (996)
Deferred project costs 0 (129)
Purchase of business net of cash acquired (3,431)
Notes receivable--officers/shareholders and affiliates 32 7
-------- --------
Net cash (used in) provided by investing activities (7,877) (2,159)
Financing activities
Proceeds from issuance of debt 5,548 424
Deferred financing costs (398)
Proceeds from sale of common stock 850 246
Dividends paid (468)
Principal payments on debt (2,253) (1,752)
-------- --------
Net cash provided by (used in) financing activities 3,279 (1,230)
-------- --------
Increase (decrease) in cash and cash equivalents 231 (2,313)
Cash and cash equivalents at beginning of period 11,181 5,227
-------- --------
Cash and cash equivalents at end of period $ 11,412 $ 2,914
======== ========
</TABLE>
-Continued-
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KTI, Inc.
Consolidated Statements of Cash Flows--(continued)
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
<S> <C> <C>
Supplemental disclosure of cash flow information
Interest paid $ 902 $ 318
====== ======
Non cash investing and financing
activities --
Issuance of stock for employee savings
plan contribution $ 41
Conversion of preferred stock 3,769
</TABLE>
See accompanying notes.
5
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KTI, Inc.
Consolidated Statements of Stockholders' Equity
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Series A Series B Additional
Preferred Stock Preferred Stock Common Stock Paid In Accumulated
Shares Amount Shares Amount Shares Amount Capital Deficit Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 5,946,973 $ 59 $33,427 $ (26,606) $ 6,881
Net income 13,666 13,666
Issuance of common stock
and common stock purchase
warrants for:
Exercise of options 55,346 1 280 281
Exercise of warrants 41,183 0 225 226
Conversion of debt 725,015 7 4,045 4,052
Business combinations 68,249 1 455 456
Issuance of stock
purchase warrants 144 144
--------------------------------------------------------------------------------------------------------
Balance at December 31,
1996 6,836,766 68 38,576 (12,940) 25,704
Net income 8,092 8,092
Issuance of Series A
Preferred Stock
and common stock
purchase warrants 487,500 $ 3,376 422 3,799
Accretion of Series A
Preferred Stock 700 (700)
Issuance of Series B
Preferred Stock
and common stock
purchase warrants 856,000 $21,400 (1,416) 19,984
Issuance of common stock
and common stock purchase
warrants for:
Exercise of options 85,353 1 502 503
Exercise of warrants 692,771 7 3,611 3,618
Conversion of debt 618,609 6 4,901 4,908
Conversion of
preferred stock (40,000) (344) 40,000 0 343 (1)
Employee savings
plan contribution 4,117 0 35 35
Business combinations 635,014 6 6,488 6,494
Dividends paid on Series
B Preferred Stock (395) (395)
--------------------------------------------------------------------------------------------------------
Balance at December 31,
1997 447,500 $3,732 856,000 $ 21,400 8,912,630 $89 $52,763 $ (5,243) $72,741
Net income 3,338 3,338
Accretion of Series A
Preferred Stock 41 (41) --
Issuance of common stock
and common stock purchase
warrants for:
Exercise of options 420 0 3 3
Exercise of warrants 113,188 1 846 847
Conversion of
preferred stock (447,500) (3,773) 447,500 4 3,769 --
Employee savings
plan contribution 4,215 0 41 41
Dividends paid on Series
B Preferred Stock (468) (468)
--------------------------------------------------------------------------------------------------------
Balance at March 31, 1998 -- -- 856,000 21,400 9,477,953 94 $57,381 $ (2,373) $ 76,502
========================================================================================================
</TABLE>
6
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KTI, Inc.
Notes to Consolidated Financial Statements
(in thousands of dollars except share and per share amounts)
March 31, 1996
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of Management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three months ended March 31, 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 annual
report on Form 10-K for the year ended December 31, 1997. Certain 1997 financial
information contained herein has been reclassified to conform with the 1998
presentation.
2. Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share. Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, the basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts have been presented, and
where appropriate, restated to conform to the Statement 128 requirements.
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
1998 1997
------------------------------
<S> <C> <C>
Numerator:
Income from continuing operations $ 3,338 $ 1,359
Preferred stock dividends (468)
Accretion of preferred stock (41)
------------------------------
Numerator for basic earnings per share-income from
continuing operations available to common stockholders 2,829 1,359
Effective of dilutive securities (1):
Convertible subordinated notes payable 100
------------------------------
Numerator for diluted earnings per share-income from
continuing operations available to common stockholders
after assumed conversions $ 2,829 $ 1,459
==============================
Denominator:
Denominator for basic earnings per share-weighted
average shares 9,236,588 6,844,350
Effect of dilutive securities:
Employee stock options 412,350 90,102
Warrants 314,825 243,883
Convertible preferred stock 198,306
Convertible subordinated notes payable 1,821,277 617,665
------------------------------
2,746,758 951,650
</TABLE>
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<TABLE>
<CAPTION>
1998 1997
------------------------------
<S> <C> <C>
Dilutive potential common shares
Denominator for diluted earnings per share-adjusted
weighted-average shares and assumed conversions 11,983,345 7,796,000
------------------------------
Income from continuing operations per share-Basic $ .31 $ .20
==============================
Income from continuing operations per share-Diluted $ .28 $ .19
==============================
</TABLE>
3. Contingencies
The Company is a defendant in certain law suits alleging various claims
incurred in the ordinary course of business. Management of the Company does not
believe that the outcome of these matters, individually or in the aggregate,
will have a material effect on the Company's financial condition, cash flows or
results of operations.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (in thousands, except share and per share amounts)
Results of Operations
Revenues
Consolidated revenue for the three months ended March 31, 1998, compared
with the same period in 1997, increased $19,201 or 104.2%. Approximately $17,298
of this increase is attributable to the recycling division and $1,903 is
attributable to the waste to energy division.
KTI's waste to energy division showed increases in electric power revenues
of $906 or 9.5% for the quarter ended March 31, 1998 as compared to the same
period in 1997. Approximately $248 of this increase is from PERC, principally as
a result of a 5% increase in electric generation coupled with an inflationary
increase in price per kilowatt received. The balance of the increase in electric
power revenues was at Maine Energy, which primarily was due to a 2% rate
increase and an additional capacity payment under its amended power purchase
agreement. Timber Energy experienced a reduction in electrical generation due to
problems with steam flow to the turbine generator which were repaired during its
annual outage in April, 1998. This revenue decrease was offset by an increase in
capacity payments.
Revenues from waste processing increased $997 or 19.8% compared to the
same period in 1997. PERC's and Maine Energy's waste processing revenues
increased by $288 and $254; or 10.9% and 13.0%, respectively, principally from
increases in tipping fees per ton at the facilities. Revenues at AAR Tennessee,
KTI Specialty Waste and SEMCO were $163 or 15.5% lower for the quarter ended
March 31, 1998 than the same period in 1997, principally because of lower
tonnage processed during in the current quarter. These decreases were offset by
increases in revenues at KTI Bio Fuels of $407 or 59%; which resulted from
increase waste brokerage activity; from revenues at Total Waste Management of
$529; and from revenues at Power Ship Transport of $184. Total Waste Management,
whose principal business is processing and disposing of oily waste and
contaminated water, was acquired January 27, 1998. Power Ship Transport is a
trucking brokerage division started by KTI during the second quarter of 1997.
Sales of recyclables increased $17,298 in the first quarter of 1998 as
compared to the same period in 1997. This increase is principally a result of
the acquisitions of Zaitlin, K-C International and the assets of the Prins
facilities during the third and fourth quarter of 1997. Recycling revenues are
generated from the sales of waste paper, ferrous and non-ferrous materials, and
plastic materials.
Costs and Expenses
Electric power and waste handling operating costs increased by $854 for
the quarter ended March 31, 1998 compared to the 1997 quarter. Operating costs
of Total Waste Management and Power Ship were of $492 and $418 respectively.
Maine Energy's operating expenses increased $212 or 6.7% while PERC's and
Timber's operating expenses decreased $308 and $324 or 22.2% and 31.0%
respectively. Bio Fuel's operating expenses increased $215 or 14.7%. The
increase in 1998 principally results from marginally higher operating costs at
the power plants, and from the new entities of Total Waste Management and Power
Ship Transport. Increases were offset by net reductions in operating costs of
other divisions during the quarter.
Selling, general and administrative expenses increased by $37 or .1% for
the quarter ended March 31, 1998 compared to the 1997 quarter.
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Interest
Interest expense increased $510 or 50% for the quarter ended March 31, 1998 as
compared to the same quarter in 1997. Interest expense at Timber Energy
increased $134 or 133.3% due to the restructuring of the variable rate bonds to
fixed coupon rates during the second quarter of 1997. The balance of the
increase of $376 is attributable to increased borrowings on the Company's line
of credit and term notes to fund a portion of the acquisitions of the Prins
assets, Total Waste Management, Vel-A-Tran and Zaitlin.
Liquidity and Capital Resources
The Company is a holding company and receives cash flow from its
subsidiaries. Receipt of cash flow from its affiliate PERC is currently
restricted by covenants under loan agreements, distribution restrictions under
partnership agreements with its equity investors, and put-or-pay agreements with
municipalities. Maine Energy's cash flow is required to retire the remaining
outstanding balance of $12,298 of subordinated notes payable as of March 31,
1998 before cash distributions to partners can begin. Timber Energy's cash flow
is restricted by covenants under its bond agreements. As a result, the following
discussion is organized to present liquidity and capital resources of the
Company separate from Maine Energy, PERC and Timber and liquidity and capital
resources of each of Maine Energy, PERC and Timber independently.
The Company
The Company has financed its operations and capital expenditures primarily
from cash flow from its subsidiaries which are not contractually restricted from
making distributions, management fees from contractually restricted
subsidiaries, collateralized equipment financing, unsecured subordinated debt,
drawings under its lines of credit and proceeds from the sale of the Company's
common stock.
On June 4, 1997, the Company consummated the private placement of 487,500
shares of its Series A Convertible Preferred Stock for gross proceeds of
$3.9 million. The Series A Convertible Preferred Stock was convertible into
shares of the Company's Common Stock, at a price of $8.00 per share, subject to
adjustment. Purchasers of the shares of Series A Convertible Preferred Stock
also received, in the aggregate, warrants to purchase 243,750 shares of Common
Stock at $9.00 per share and warrants to purchase 32,500 shares of Common Stock
at $10.00 per share. During 1997, 40,000 of the shares of Series A Convertible
Preferred Stock were converted to 40,000 shares of Common Stock. The remaining
shares of Series A Convertible Preferred Stock were converted into 447,500
shares of Common Stock in February 1998.
During August 1997, the Company consummated the offering of 856,000 shares
of its 8.75% Series B Preferred Stock. The gross proceeds of the offering were
$21.4 million and the net proceeds to the Company were $19,984.
The Series B Convertible Preferred is convertible into Common Stock at
$11.75 of liquidation value per share and is redeemable, at the option of the
Company: (a) on August 15, 1999 for $26.47 per share if the bid price of the
Common Stock has averaged not less than 1.5 times the then conversion price
during the preceding twenty (20) consecutive trading days; and (b) at $26.10 on
August 15, 2000 and declining at approximately $0.37 per share as of August 15
on each subsequent year until August 15, 2003 when the Series B Preferred Stock
may be called at $25.00 per share. The Series B Preferred Stock is subject to
mandatory redemption at $25.00 per share on August 15, 2004. At the option of
the Company, such mandatory redemption of the Series B Preferred Stock may be
made in cash or in shares of Common Stock of the Company, valued at 95% of the
average closing price of the Common Stock during the twenty (20) trading days
prior to such redemption date.
So long as any shares of the Series B Preferred Stock are outstanding, the
Company may not issue any new securities in parity with, or senior to, the
Series B Preferred Stock unless (a) the proforma ratios for the latest twelve
months of net income available for preferred dividends is not less than 1:1; and
(b) earnings before interest, taxes, depreciation and amortization, exclusive of
non-recurring items, less capital expenditures, securities amortization and
redemption, cash, taxes and changes in working capital to preferred dividends
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is not less than 1.2:1, unless an affirmative vote or consent of the majority
of the outstanding shares of Series B Preferred Stock has been received.
The Company, at its option, may exchange all, but not less than all, of
the then outstanding shares of Series B Preferred Stock into 8.75% Convertible
Subordinated Notes due August 15, 2004 (the "8.75% Convertible Subordinated
Notes") on the first business day of February, May, August or November of any
year. If the 8.75% Convertible Subordinated Notes are issued, the Company is
obligated to qualify the trust indenture for the 8.75% Convertible Subordinated
Notes and the trustee appointed thereby under the Trust Indenture Act of 1939,
as amended.
The Company and its subsidiaries, other than Maine Energy, PERC and Timber
Energy at March 31, 1998 had indebtedness maturing in the next year of $6,472.
During the first quarter of 1998, the Company, other than Maine Energy, PERC and
Timber Energy incurred additional debt of approximately $5,548, primarily as a
result of drawings under its lines of credit; and retired approximately $803 of
debt.
As of March 31, 1998, the Company had cash on hand without regard to Maine
Energy, PERC and Timber Energy of approximately $1,171 and $11,925 available in
lines of credit from a bank. On March 23, 1998 the Company received a commitment
from KeyBank to increase its credit line from $11 million to $22 million. This
line of credit can be utilized to fund acquisitions, capital expenditures and
for working capital. There can be no assurance such acquisitions or capital
expenditures will take place, or that working capital will be increased.
Management of the Company believes that cash flow from its subsidiaries and
affiliates and unused lines of credit will meet its current needs for liquidity.
Moreover, management believes that the Company has the ability to access
additional borrowing facilities if needed, although no assurance can be given in
this regard.
Maine Energy
Maine Energy has financed its operations and capital expenditures from
cash flows from operations. Cash provided by operations was $3,175 in 1997, as
compared to $89,280 in 1996. During 1996 Maine Energy sold its generating
capacity to CL One for a period through May 31, 2007. In exchange CL One agreed
to make a series of quarterly payments to Maine Energy including an initial
payment of $85 million. Maine Energy retired the entire outstanding principal
balance of $64.5 million of its tax exempt variable rate revenue bonds and $29.5
million of its subordinated loan accrued interest and principal from the
proceeds from the sale of capacity. As of March 31, 1998 Maine Energy had total
indebtedness of $12,298. Maine Energy capital expenditures were $2,559 and
$2,939 for additions to property, plant and equipment during 1997 and 1996,
respectively.
As of March 31, 1998, in addition to Maine Energy's operating cash of
$2,066, Maine Energy, as required under the terms of the credit agreement with
its letter of credit, has on account an additional $4,696 of reserves to be used
for capital improvements, debt service, operating shortfalls and working capital
requirements.
Management of the Company believes Maine Energy has adequate cash
resources available to fund its future operations and anticipated capital
expenditures. Capital expenditures for Maine Energy for the year ending December
31, 1998 are expected to be approximately $3,043, of which $1,850 has been set
aside in the above mentioned reserve accounts.
PERC
PERC has financed its recent operations and capital expenditures primarily
from cash flows from operations. Cash provided by operations was $11,313 in 1997
as compared to $8,493 in 1996. PERC's capital expenditures were $314 and $1,192
for additions to property, plant and equipment during 1997 and 1996,
respectively.
At March 31, 1998, PERC had outstanding tax-exempt, variable rate revenue
bonds backed by bank letters of credit in the aggregate amounts of $46,350. The
variable interest rate on the Orrington Bonds at March 31, 1998 was 3.37%. The
bonds are payable pursuant to a schedule through May 2003. During the first
quarter of 1998 PERC made principal payments to bondholders of $1,550.
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As of March 31, 1998, in addition to PERC's operating cash of $7,365,
PERC, as required under the terms of the credit agreement with its letter of
credit banks and the trust indenture governing the Orrington Bonds, had on
account an additional $8,132 of cash reserves to be used for capital
improvements, debt service, operating shortfalls and working capital
requirements.
Company management believes PERC has adequate cash resources available to
fund its current project operations and currently anticipated capital
expenditures. PERC plans capital expenditures for the year ending December 31,
1998 of approximately $765. PERC intends to finance this amount through cash
flow from operations.
Timber Energy
Timber Energy has financed its operations and capital expenditures
primarily from cash flow from operations since it was acquired on November 22,
1996. Cash provided by operations was $1,807 in 1997. Timber Energy's capital
expenditures were $1,329 during 1997, which were funded out of cash generated
from operations.
During 1997, Timber retired $13.4 million of variable rate revenues bonds
and paid certain debt financing costs with $13,708 of proceeds from two 1997
Industrial Development Revenue Bond issued (the "1997 Bonds") and cash on hand.
The outstanding 1997 Bonds carry interest at a fixed rate of 7% and have annual
sinking fund payments due each December 1 ($1,765 due December 1, 1998) with
a final payment of $4,620 due December 1, 2002. During 1997, Timber repaid
$308 which represented the entire balance of one of the 1997 Bond issuances.
As of March 31, 1998, Timber Energy had outstanding tax exempt bonds,
together with accrued interest, in the aggregate amount of $13,713. The bonds
are payable pursuant to a mandatory redemption schedule through December 1,
2002.
As of March 31, 1998, in addition to Timber Energy's operating cash of
$657, Timber Energy, as required by the terms of the refinancing, had an
additional $1,705 of cash reserves to be used for debt service.
Company management believes Timber Energy has adequate cash resources
available and expects additional cash from operations to fund its current
operations and debt obligations. Timber Energy plans capital expenditures in
1998 of approximately $526, which will be funded from cash provided by
operations.
Subsequent Events
On May 6, 1998, the Company announced that it has signed a letter to
acquire all of the outstanding stock of FCR, Inc, a Delaware corporation
("FCR"), having its headquarters in Charlotte, North Carolina. The purchase
price consists of: (a) 1,714,285 shares of the Company's common stock; (b)
$30.0 million in cash; and (c) an earnout of up to $30.0 million to be paid in
stock. The number of shares earned will be calculated at the higher of $23 per
share or the then market value of such shares, based on the average of closing
sale price per share during the ten trading days preceding the payment date.
The Company and FCR are currently preparing definitive documentation for
the transaction. The merger is contingent upon execution and delivery of such
documentation, compliance with the Hart Scott Rodino Antitrust Improvement Act,
the completion of due diligence by both sides and approval of the Boards of
Directors and Shareholders of both the Company and of FCR.
FCR is a national waste processing company, owning 26 plants in 12 states.
The plants operate in three businesses; material recovery facilities, cellulose
insulation and plastic recycling.
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Eighteen of the plants are material recovery facilities, based in 10
states. These plants currently process materials at the rate of 650,000 tons of
recyclables per year. The Company's existing material recovery facilities
currently process material at the rate of 500,000 tons of recyclables per year.
Five of the plants are cellulose insulation plants, based in four states.
A sixth cellulose insulation plant is under construction. The cellulose
insulation plants operate under the name of U.S. Fiber, Inc.
The plastic recycling business operates three plastic recycling plants.
These plants currently process plastic at the rate of 50 million pounds per
year. The Company has a subsidiary in the plastic trading and brokerage
business, which presently trades plastic at the rate of 40 million pounds per
year.
Based on information provided by FCR, FCR had revenue of approximately
$17.6 million, $3.2 million in EBITDA and $.9 million in net income in the
quarter ended March 31, 1998.
Forward Looking Statements
All statements contained herein which are not historical facts including
but not limited to statements regarding the Company's plans for future cash flow
and its uses are based on current expectations. These statements are
forward-looking in nature and involve a number of risks and uncertainties.
Actual results may differ materially. Among the factors that could cause actual
results to vary materially is the availability of sufficient capital to finance
the Company's business plan and other capital needs on terms satisfactory to the
Company. The Company wishes to caution readers not to place undue reliance on
any such forward looking statements, which statements are made pursuant to the
Private Litigation Reform Act of 1995 and as such speak only as of the date
made.
13
<PAGE> 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Maine Energy is the plaintiff in a suit in the State of Maine against
United Steel Structures, Inc. under a warranty to recover the costs, which were,
or will be incurred to replace the roof and walls of the Maine Energy tipping
and processing buildings. The judge in the case entered an order awarding Maine
Energy $3,334 plus interest from May 10, 1994, to the date of the filing of the
lawsuit and court costs. The defendant filed an appeal on December 19, 1997.
There can be no assurance that the Company will be able to collect any amount of
this judgement.
Lawsuits were filed on September 30, 1997 and March 6, 1998 by Capital
Recycling of Connecticut ("Capital") in a Connecticut State Court against K-C,
certain officers of K-C and other parties. The suits allege fraud, tortuous
interference with business expectancy and violations of the Connecticut Unfair
Trade Practices Act. The actions are based on two contracts between Capital and
K-C. The contracts require all disputes to be resolved by arbitration in
Portland, Oregon. Pursuant to this requirement, K-C has initiated the
arbitration process in Portland, Oregon. Capital then filed a motion in the same
Court to restrain the arbitration and added claims with respect to a company
managed by the parent of an officer of K-C. This claim alleges that the officer
aided and abetted the other company in defrauding the plaintiff. Company has
retained counsel to defend the various legal actions and to participate in the
arbitration proceedings. After several depositions, Capital and K-C agreed to
dismiss the motion to restrain the arbitration and to transfer the arbitration
proceedings to Hartford, Connecticut. The lawsuit was dismissed with prejudice
as to the officers of K-C and all claims between the parties are to be resolved
in the arbitration proceedings. The Company believes that it has meritorious
defenses to the arbitration proceedings.
Total Waste Management ("TWM") was a defendant in a lawsuit in the United
State District Court for the District of New Hampshire filed by Kleen Laundry &
Dry Cleaning Services. The plaintiff alleged that Total Waste Management caused
an underground gasoline storage tank to leak during an attempted removal of the
tank. The former shareholders of Total Waste Management have settled the claim
with no cost to the Company, other than for legal fees.
The Company is a defendant in certain other law suits alleging various
claims incurred in the ordinary course of business, none of which, either
individually or in the aggregate, the Company believes will have a material
adverse effect on the Company.
Management of the Company does not believe that the outcome of the
foregoing matters, individually or in the aggregate, will have a materially
adverse effect on the Company's financial condition, cash flows or results of
operations.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
14
<PAGE> 16
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
Six reports on Form 8-K were filed in the first quarter of 1998,
three of which were amended by Form 8-K/A also filed during the quarter. The
following is a list of the Forms 8-K filed and the dates thereof.
(i) A Form 8-K was filed on January 26, 1998 reporting that the
Company purchased Vel-A-Tran Recycling, Inc. for cash in the amount of $1.1
million.
(ii) A Form 8-KA was filed on January 28, 1998 in connection with a
previously Form 8-K filed on December 8, 1997 reporting the acquisition of three
recycling facilities as part of an asset purchase from Prins Recycling Corp. and
its subsidiaries.
(iii) A Form 8-KA was filed on January 29, 1998 in connection with a
previously Form 8-K filed on December 12, 1997 reporting that the Company
exercised its option to purchase an additional $14.8% limited partnership
interest in PERC from the Prudential Insurance Company of America for $2.1
million.
(iv) A Form 8-K was filed on February 4, 1998 reporting that the
Company purchased Total Waste Management Corporation for cash in the amount of
$1.35 million.
(v) A Form 8-KA, Amendment No. 2 was filed on February 4, 1998 in
connection with a previously Form 8-KA filed on January 28, 1998 reporting the
acquisition of three recycling facilities as part of an asset purchase from
Prins Recycling Corp. and its subsidiaries.
(vi) A Form 8-K was filed on February 23, 1998 reporting that the
Finance Authority of Maine executed and delivered a commitment to the Company to
refinance existing tax exempt bonds issued by the Town of Orrington, Maine to
finance the construction of the facility owned by PERC.
15
<PAGE> 17
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KTI, Inc.
(Registrant)
By: /s/ Ross Pirasteh
-----------------------------------------
Name: Ross Pirasteh
Title: Chairman of the Board of Directors
By: /s/ Martin J. Sergi
-----------------------------------------
Name: Martin J. Sergi
Title: President and Chief
Financial Officer
(Principal Accounting Officer)
Date: May 4, 1998
16
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