<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------------
FORM 8-KA
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
November 14, 1997
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 November 14, 1997, the Company completed the acquisition of three
recycling facilities located in Franklin Park, Illinois, a suburb of Chicago,
Charlestown, Massachusetts, a suburb of Boston, and in Newark, New Jersey. The
facilities will be operated by wholly owned subsidiaries of the Company under
the name of KTI Recycling. The three facilities are capable of processing
approximately 50,000 tons of post consumer and commercial recyclables per month.
The facilities were purchased as part of an asset purchase from Prins
Recycling Corp. and its subsidiaries ("Prins") pursuant to an order of the
Bankruptcy Court for the District of New Jersey entered on November 6, 1997. In
addition to the facilities, the Company purchased substantially all of the
remaining assets of Prins, principally property, plant, and equipment and
accounts receivable, and assumed certain post-petition liabilities. The
purchase price was approximately $14.4 million, including $14.2 million in
cash and the assumption of $200,000 of trade payables.
The purchase was financed in part by a term loan of $7.5 million provided
by Key Bank, National Association, bearing interest at said Bank's base rate
plus 1.25% per annum, amortized with level monthly principal payments amortized
over 60 months. The term loan is secured by a mortgage on the Franklin Park,
Illinois facilities, all property and equipment at the three facilities not
pledged to third parties and accounts receivable of the three facilities. The
balance of the purchase price was paid using cash on hand and by a temporary
draw of $3,000,000 on the Company's revolving line of credit provided by Key
Bank, National Association.
A subsidiary of the Company had operated Prins from May 1, 1997 until the
closing of the purchase. Pursuant to an agreement with Prins' principal secured
lender, the Company received a one-time management fee of $700,000, paid by said
lender.
Item 5. Other Events
The Company completed an amendment to its Amended and Restated Revolving
and Term Loan Agreement with Key Bank, National Association, adding the Term
Loan provision referred to above, effective as of November 14, 1997.
Item 7. Financial Statements and Exhibits
(a) Financial Statements of the business acquired.
The audited balance sheets of Prins Recycling Corp. (Debtor-in-possession)
and its subsidiaries as of December 31, 1996 and 1995 and the related statements
of operations, changes in shareholders' equity (deficit), and cash flows for the
years then ended are included on pages F-1 through F-19. In addition, the
interim unaudited financial statements for the periods ending September 30, 1997
and 1996 are included on pages F-19 through F-23.
F-20
<PAGE> 3
(b) Pro Forma Financial information.
The following pro forma condensed combined financial statements are based
on the historical financial statements of the Company, of PERC, and of Prins.
The pro forma condensed combined statement of operations assumes that the
Company purchased the increased interest in PERC and the Prins assets at the
beginning of the respective periods. The Company's financial statements on Form
10-Q for the quarterly period ended September 30, 1997 consolidate PERC for
balance sheet purposes. Accordingly, the adjustments shown here are for the
consolidation of Prins, and for the increase in ownership of PERC to 71.3%.
The pro forma condensed combined statements of operations are not
necessarily indicative of operating results which would have been achieved had
this transaction been completed at the beginning of the respective periods and
should not be construed as representative of future operations.
<PAGE> 4
KTI, Inc.
December 30, 1996 and September 30, 1997
Notes to Pro Forma Condensed Combined Financial Statements (Unaudited)
1. Description of Transactions
On September 30 and November 12, 1997, the Company purchased 49.5% and 14.8%
limited partnership interests in Penobscot Energy Recovery Company, Limited
Partnership, a Maine limited partnership ("PERC"), respectively, from The
Prudential Insurance Company of America ("Prudential") for approximately $12
million and $2.1 million, respectively. Prior to September 30, 1997, the
Company held a 7% general partnership interest in PERC. The September purchase
price included a $300,000 option to purchase an additional percentage of PERC,
which was exercised as part of the November 12 transaction.
On November 14, 1997, the Company completed the acquisition of three recycling
facilities located in Franklin Park, Illinois, a suburb of Chicago, Charlestown,
Massachusetts, a suburb of Boston, and in Newark, New Jersey. The facilities
will be operated by wholly owned subsidiaries of the Company under the name of
KTI Recycling. The three facilities are capable of processing approximately
50,000 tons of post consumer and commercial recyclables per month. The
facilities were purchased as part of an asset purchase from Prins Recycling
Corp. and its subsidiaries ("Prins") pursuant to an order of the Bankruptcy
Court for the District of New Jersey entered on November 6, 1997. In addition to
the facilities, the Company purchased substantially all of the remaining assets
of Prins, principally property, plant, and equipment and accounts receivable,
and assumed certain post-petition liabilities. The purchase price was
approximately $14.4 million, including $14.2 million in cash and the
assumption of $200,000 of trade payables.
The purchase was financed in part by a term loan of $7.5 million provided by
Key Bank, National Association, bearing interest at said Bank's base rate plus
1.25% per annum, amortized with level monthly principal payments amortized over
60 months. The term loan is secured by a mortgage on the Franklin Park,
Illinois facilities, all property and equipment at the three facilities not
pledged to third parties and accounts receivable of the three facilities. The
balance of the purchase price was paid using cash on hand and by a temporary
draw of $3,000,000 on the Company's revolving line of credit provided by Key
Bank, National Association.
2. Pro Forma Adjustments
Balance Sheet as of September 30, 1997
(i) Payment of $14.2 million of cash for the acquisition of Prins assets.
(ii) Purchase of additional interest of 14.8% in PERC for $2,100,000 in cash,
exercise of the $300,000 option to purchase, and the resulting
adjustment of property, plant and equipment and minority interest of
PERC.
<PAGE> 5
(iii) Recording of goodwill resulting from acquisition of Prins assets.
(iv) Elimination of liabilities paid at closing.
(v) Eliminate Prins liabilities subject to compromise not assumed as part
of purchase price.
(vi) Record term loan of $7,500,000 payable used to finance a portion of
the Prins asset purchase.
(vii) Elimination of Prins' equity accounts.
Results of Operations, year ended December 31, 1996
(1) Elimination of Management fees charged by the Company to PERC.
(2) Reduction in depreciation of property, plant, and equipment as a result of
the adjustment of PERC asset values in connection with the purchase of
the additional PERC partnership interests.
(3) Elimination of the Company's 7% equity earnings in PERC.
(4) Recording of additional minority interest in earnings of PERC.
(5) Dividends on $21,400,000 of 8.75% Preferred Stock. Net proceeds were used
to complete the PERC transactions and the Prins acquisition.
(6) Elimination of antidilutive common stock equivalents.
(7) Amortization of goodwill resulting from Prins acquisition.
(8) Elimination of asset impairment which would not arise based on fair values
assigned to the assets acquired in the Prins acquisition.
(9) Elimination of bankruptcy and reorganization costs incurred by Prins.
(10) Elimination of interest on Prins' debt at default rate and recording of
interest expense on $7,500,000 term loan.
Results of Operations, nine months ended September 30, 1997.
(a) Reduction in depreciation of property, plant, and equipment, as a result
of the adjustment of PERC asset values for the purchase of the additional
PERC partnership interests.
(b) Elimination of pre-acquisition earnings of PERC.
(c) Recording of additional minority interest in earnings of PERC.
(d) Dividends on $21,400,000 of 8.75% Preferred Stock. Net proceeds were used
to complete the PERC transactions and the Prins acquisition.
(e) Additional common shares assumed outstanding based on the dilutive
effect of the Preferred Stock issue at $11.75 per share.
(f) Elimination of fees paid by Prins' principal secured lender to KTI for
management services which the Company provided between April 1997 and the
completion of the asset purchase.
(g) Amortization of goodwill resulting from Prins acquisition.
(h) Elimination of bankruptcy and reorganization costs incurred by Prins.
(i) Elimination of interest on Prins debt at default rate and recording of
interest expense on $7,500,000 term loan.
<PAGE> 6
KTI Inc.
Pro Forma Combined Balance Sheet
September 30, 1997
<TABLE>
<CAPTION>
Prins
Recycling Pro Forma Pro Forma
KTI, Inc. Corp. Adjustments KTI, Inc.
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 15,866,847 $ - $ (8,300,000)(i),(ii)(iv) $ 7,566,847
Restricted Funds, current portion 15,397,651 (500,000)(i) 14,897,651
Accounts receivable, net 19,274,847 2,739,093 22,013,940
Consumables and Spare Parts 5,669,746 120,494 5,790,240
Notes Receivable, current portion 441,151 18,012 459,163
Other Receivables 552,474 552,474
Prepaid expenses and other current assets 1,631,759 75,500 (300,000) (ii) 1,407,259
------------ ------------ ------------- ------------
Total current assets 58,834,475 2,953,099 (9,100,000) 52,687,574
Restricted Funds, net of current portion 4,828,519 4,828,519
Deferred Costs, net 4,354,847 4,354,847
Goodwill and other intangibles, net 12,192,534 4,189,204 (iii) 16,381,738
Other assets 1,374,135 465,751 1,839,886
Property, plant, and equipment, net 152,232,501 6,836,975 (2,733,898) (ii) 156,335,578
------------ ------------ ------------- ------------
$233,817,011 $ 10,255,825 $ (7,644,694) $236,428,142
============ ============ ============= ============
Liabilities and stockholders' (deficiency)
equity
Current liabilities
Accounts payable $ 7,820,304 $ 4,338,412 $ (4,138,412) (iv) $ 8,020,304
Accrued expenses 2,143,435 33,286 (33,286) (iv) 2,143,435
Liabilities subject to compromise 26,266,710 (26,266,710) (v) -
Capital leases, current portion 45,029 45,029
Short-term and current portion of long-term
debt 12,258,403 1,500,000 (vi) 13,758,403
Other current liabilities 1,739,718 1,739,718
----------- ------------ ------------- ------------
Total current liabilities 23,961,860 30,683,437 (28,938,408) 25,706,889
Other Liabilities 2,513,741 2,513,741
Amounts payable to banks, less current portion 75,361,922 6,000,000 (vi) 81,361,922
Minority Interest 26,795,520 (5,133,898) (ii) 21,661,622
Deferred income 37,500,000 37,500,000
Stockholders' (deficiency) equity
Preferred stock, 10,000,000 shares
authorized:
Series A 3,707,744 3,707,744
Series B 19,984,240 19,984,240
Common Stock 82,709 16,604 (16,604) (vii) 82,709
Additional paid-in capital 52,318,330 42,177,202 (42,177,202) (vii) 52,318,330
Accumulated deficit (8,409,055) (62,621,418) 62,621,418 (vii) (8,409,055)
----------- ------------ ------------- ------------
Total stockholders' (deficiency) equity 67,683,968 (20,427,612) 20,427,612 67,683,968
----------- ------------ ------------- ------------
$ 233,817,011 $ 10,255,825 $ (7,644,694) $236,428,142
============= ============ ============= ============
</TABLE>
<PAGE> 7
KTI, Inc.
Pro Forma Condensed Combined Statement of Operations (Unaudited)
Year ended December 31, 1996
<TABLE>
<CAPTION>
Pro forma Pro forma
KTI, Inc. PERC Prins Adjustments KTI, Inc.
--------- ---- ----- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues
Electric Power Revenues $ 20,820,860 $ 18,478,405 $ 39,299,265
Gain on Sale of Capacity 33,203,252 33,203,252
Waste Processing Revenues 11,024,265 11,807,454 $ (530,786) (1) 22,300,933
Other Waste Handling Revenues 3,459,546 $ 24,997,168 28,456,714
------------ ------------ ------------- ------------ -------------
Total Revenues
68,507,923 30,285,859 24,997,168 (530,786) 123,260,164
Costs and Expenses
Electric power and waste processing and handling
operating costs 26,453,290 15,660,582 19,235,108 (319,685) (2) 60,498,509
(530,786) (1)
Selling, general, and administrative expenses 2,389,008 5,353,385 22,488,360 837,841 (7) 31,068,594
Impairment of Long-lived Assets 26,678,000 (26,678,000) (8) -
Reorganization Costs 800,000 (800,000) (9) -
Interest, net 4,463,873 3,170,785 3,480,822 (2,749,572) (10) 8,365,908
------------ ------------ ------------- ------------ -------------
Total Costs and Expenses 33,306,171 24,184,752 72,682,290 (30,240,202) 99,933,011
Equity in net income of PERC 332,655 (332,655) (3) -
Loss on Sale and abandonment of Assets (2,718,530) (2,718,530)
Loss of Sale of Investments (296,459) (296,459)
------------ ------------ ------------- ------------ -------------
Income (loss) from continuing operations before
minority interest 35,237,948 6,101,107 (50,403,652) 29,376,761 20,312,164
Minority Interest 18,609,797 1,751,018 (4) 20,360,815
------------ ------------ ------------- ------------ -------------
Income (loss) from continuing operations available
for Shareholders 16,628,151 6,101,107 (50,403,652) 27,625,743 (48,651)
Preferred Dividends 1,872,500 (5) 1,872,500
------------ ------------ ------------- ------------ -------------
Income (loss) from continuing operations for common
shareholders $ 16,628,151 $ 6,101,107 $ (50,403,652) $ 25,753,243 $ (1,921,151)
============ ============ ============= ============ =============
Income (loss) from continuing operations per common
share and common share equivalent:
Primary: ------------ -------------
Income from continuing operations $2.61 ($.33)
============ =============
Weighted average number of common shares and common 6,359,593 (567,685) (6) 5,791,908
share equivalents outstanding
Fully Diluted: ------------ -------------
Income from continuing operations $2.40 ($.33)
============ =============
Weighted average number of common shares and common 6,925,976 (1,134,068) (6) 5,791,908
share equivalents outstanding
</TABLE>
<PAGE> 8
KTI, Inc.
Pro Forma Combined Statement of Operations (Unaudited)
Nine months ended September 30, 1997
<TABLE>
<CAPTION>
Pro forma Pro Forma
KTI, Inc. Prins Adjustments KTI, Inc.
--------- ----- ----------- ---------
Revenues
<S> <C> <C> <C> <C>
Electric Power Revenues $ 30,389,250 $ 30,389,250
Waste Processing Revenues 19,513,711 19,513,711
Other Waste Handling Revenues 16,096,812 13,529,223 (700,000) (f) 28,926,035
------------ ------------- ----------- ------------
Total Revenues 65,999,773 13,529,223 78,828,996
Costs and Expenses
Electric Power and Waste Processing Operating Costs 50,180,577 12,793,456 $ (239,764) (a) 62,734,269
Selling, General, and Administrative expenses 2,375,680 1,945,608 628,381 (g) 4,949,669
Reorganization Costs 1,205,803 (1,205,803) (h) -
Interest, Net 3,699,876 732,894 (184,457) (i) 4,248,314
------------ ------------- ----------- ------------
Total Costs and Expenses 56,256,133 16,677,761 (1,001,642) 71,932,252
------------ ------------- ----------- ------------
Income from Continuing Operations before Minority Interest 9,743,640 (3,148,538) 1,001,642 6,896,744
Pre-acquisition Earnings Minority Interest (3,983,766) 3,983,766 (b) -
Minority Interest in Subsidiaries (1,229,287) (1,229,399) (c) (2,458,686)
------------ ------------- ----------- ------------
Income from Continuing Operations before Minority
Interest 4,530,587 (3,148,538) 3,756,010 4,438,059
Preferred Dividends 1,400,527 (d) 1,400,527
------------ ------------- ----------- ------------
Income from continuing operations available to Common
Shareholders $ 4,530,587 $ (3,148,538) $ 2,355,483 $ 3,037,532
============ ============ ============ =============
Income (loss) from continuing operations per common
share and common share equivalent
Primary: ------------ ------------
Income from continuing operations $0.59 $0.39
============ ============
Weighted Average number of common shares and common 7,726,900 7,726,900
share equivalents outstanding
Diluted: ------------ ------------
Income from continuing operations $0.59 $0.46
============ ============
Weighted Average number of common shares and common 8,040,449 1,507,728 (e) 9,548,177
share equivalents outstanding
</TABLE>
<PAGE> 9
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.
(the Registrant)
Dated: January 26, 1998 By: /s/ Martin J. Sergi
----------------------------
Name: Martin J. Sergi
Title: President
<PAGE> 10
EXHIBIT INDEX
-------------
Exhibit Number Description
-------------- -----------
4.1 * News release dated November 13, 1997
4.2 * Release dated November 14, 1997
4.3 Financial Statements of Prins Recycling
23.1 Consent of Ernst and Young LLP
-------
* As previously filed
<PAGE> 1
REPORT OF INDENDENT AUDITORS
Board of Directors
Prins Recycling Corp.
We have audited the accompanying consolidated balance sheets of Prins Recycling
Corp. and subsidiaries (debtor-in-possession) as of December 31, 1996 and 1995
and the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, Prins Recycling
Corp. and its subsidiaries filed voluntary petitions for reorganization under
Chapter 11 of the Federal Bankruptcy Code in the United States Bankruptcy Court
on July 12, 1996. Subsequent thereto, the Company and its subsidiaries continued
to operate their businesses as debtors-in-possession. On November 12, 1997, the
United States Bankruptcy Court approved a Plan of Reorganization under which the
Company was permitted to sell substantially all of its remaining operating
assets. Such sale occurred on November 14, 1997. The accompanying financial
statements do not include any adjustments relating to the recoverability and
classification of reported asset amounts or adjustments relating to the
establishment, settlement and classification of liabilities that may ultimately
be required in connection with the proceedings under Chapter 11 of the United
States Bankruptcy Code. The Company adopted the liquidation basis of accounting
commencing November 14, 1997.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Prins Recycling
Corp. and subsidiaries (debtor-in-possession) at December 31, 1996 and 1995, and
the consolidated results of their operations and their cash flows for each of
the years then ended in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Hackensack, New Jersey
January 16, 1998
1
<PAGE> 2
Prins Recycling Corp. and Subsidiaries
(Debtor-in-Possession)
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31
1996 1995
---------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 118,217 $ 1,097,352
Accounts receivable, net of allowance for doubtful
accounts of $3,495,000 and $1,189,000 2,852,983 7,015,666
Inventories 865,952
Equipment lease receivable - current portion 49,032 292,574
Recoverable income taxes 1,480,326
Due from officer stockholder 219,498
Prepaid expenses and other current assets 96,234 3,013,536
---------------------------
Total current assets 3,116,466 13,984,904
Property, plant and equipment, net of
accumulated depreciation 7,018,452 20,405,791
Equipment loans receivable, net of current portion 127,835 523,033
Intangibles and goodwill, net of accumulated
amortization of $927,000 18,538,441
Other assets 258,044 1,201,337
---------------------------
$ 10,520,797 $54,653,506
===========================
Liabilities and stockholders' equity (deficit)
Current liabilities:
Accounts payable - post petition $ 1,703,826 $ 9,620,536
Accrued liabilities - post petition 1,498,353 2,645,399
Liabilities subject to compromise 24,597,692
Amounts payable to banks - current portion 10,245,121
Obligations under capital leases - current portion 760,764
Notes and advances payable - current portion:
Related parties 3,761,374
Others 295,990
---------------------------
Total current liabilities 27,799,871 27,329,184
Long-term debt:
Amounts payable to banks - less current portion 5,571,574
Obligations under capital lease - less current portion 1,080,516
Notes and advances payable - less current portion:
Related parties 2,460,707
Others 267,019
Deferred taxes 50,500
Commitments and contingencies
Stockholders' (deficiency) equity:
Preferred stock, $.001 par value; authorized
5,000,000 shares, none issued
Common stock, $.001 par value; authorized
20,000,000 shares, issued
and outstanding 16,604,460 and 10,475,057,
respectively 16,604 10,475
Additional paid-in capital 42,177,202 26,952,759
Retained earnings (deficit) (59,472,880) (9,069,228)
---------------------------
Total stockholders' equity (deficit) (17,279,074) 17,894,006
---------------------------
Total liabilities and stockholders' equity (deficit) $ 10,520,797 $54,653,506
===========================
</TABLE>
See accompanying notes.
1
<PAGE> 3
Prins Recycling Corp. and Subsidiaries
(Debtor-in-Possession)
Consolidated Statements of Operations
Year ended December 31
1996 1995
-----------------------------
Net sales $ 24,997,168 $76,692,200
Cost of goods sold 19,235,108 59,484,277
-----------------------------
Gross profit 5,762,060 17,207,923
Selling, general and administrative expenses 20,048,826 17,200,844
Depreciation and amortization 2,489,034 2,346,811
Impairment of long-lived assets 26,678,000
Loss on sale and abandonment of assets 2,718,530
-----------------------------
Total operating expenses 51,935,390 19,547,655
-----------------------------
Loss before reorganization costs, interest
expense and income taxes
(46,173,330) (2,339,732)
Reorganization costs 800,000
Interest expense, net 3,480,822 1,010,708
-----------------------------
Loss before income tax benefit (50,454,152) (3,350,440)
Income tax benefit (50,500) (117,600)
-----------------------------
Net loss $(50,403,652) $(3,232,840)
=============================
Net loss per share $ (3.45) $ (0.32)
=============================
Weighted average common shares outstanding 14,612,040 9,949,876
=============================
See accompanying notes.
2
<PAGE> 4
Prins Recycling Corp. and Subsidiaries
(Debtor-in-Possession)
Consolidated Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Common Stock Additional Retained
-------------------------- Paid-in Earnings
Shares Amount Capital (Deficit) Total
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 9,785,085 $ 9,785 $19,617,325 $ (5,836,388) $ 13,790,722
Capital contributions 900,000 900,000
Issuance of common stock 9,438 9 28,115 28,124
Issuance of shares in
connection with business
acquisitions 430,534 431 5,907,569 5,908,000
Exercise of stock purchase
warrants 250,000 250 499,750 500,000
Net loss (3,232,840) (3,232,840)
----------------------------------------------------------------------
Balance at December 31,1995 10,475,057 10,475 26,952,759 (9,069,228) 17,894,006
Issuance of common stock 332,000 332 1,679,456 1,679,788
Issuance of shares in
connection with business
acquisitions 172,619 173 345,065 345,238
Discount on convertible
subordinated debt issuance 2,400,000 2,400,000
Issuance of common stock upon
conversion of debt 5,624,784 5,624 10,799,922 10,805,546
Net loss (50,403,652) (50,403,652)
----------------------------------------------------------------------
Balance at December 31, 1996 16,604,460 $16,604 $42,177,202 $(59,472,880) $(17,279,074)
======================================================================
</TABLE>
See accompanying notes.
3
<PAGE> 5
Prins Recycling Corp. and Subsidiaries
(Debtor-in-Possession)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31
1996 1995
------------------------------
<S> <C> <C>
Operating activities
Net loss $(50,403,652) $ (3,232,840)
Adjustments to reconcile net loss to cash provided
by operations:
Depreciation and amortization 2,489,034 2,346,811
Impairment of long-lived assets 26,678,000
Non-cash interest on subordinated debt issuance 2,400,000
Provision for bad debts 3,414,596 1,683,381
Deferred taxes (50,500) (481,600)
Loss (gain) on sale and abandonment of assets 2,718,530 (15,027)
Changes in operating assets and liabilities
(net of effects of acquired companies):
Decrease in accounts receivable 1,472,017 249,828
Decrease in equipment lease receivables 134,308 407,219
Decrease (increase) in inventories 865,952 (348,966)
Decrease (increase) in recoverable income taxes 1,480,326 (1,480,326)
Decrease in prepaid expenses and other current assets 2,917,302 (2,094,696)
(Increase) decrease in other assets 943,293 (585,645)
Increase in accounts payable and accrued liabilities 1,041,657 4,206,793
Decrease in taxes payable (531,064)
------------------------------
Net cash (used in) provided by operations (3,899,137) 123,868
Investing activities
Purchases of property, plant and equipment (557,638) (12,058,683)
Cash paid for acquired businesses, net of cash acquired (4,690,575)
Proceeds from sale of assets 1,067,235 32,522
------------------------------
Net cash provided by (used in) investing activities 509,597 (16,716,736)
Financing activities
(Decrease) increase in borrowings under bank line
of credit (2,245,396) 3,284,475
Repayment of debt principal and capital lease obligations (9,179,081) (3,915,505)
Proceeds from other borrowings 875,094 13,087,830
Proceeds from sale of subordinated notes 11,280,000
Proceeds from issuance of common stock 1,679,788 328,124
Capital contribution 900,000
------------------------------
Net cash provided by financing activities 2,410,405 13,684,924
------------------------------
Net decrease in cash and cash equivalents (979,135) (2,907,944)
Cash and cash equivalents, beginning of year 1,097,352 4,005,296
------------------------------
Cash and cash equivalents, end of year $ 118,217 $ 1,097,352
==============================
</TABLE>
See accompanying notes.
4
<PAGE> 6
Prins Recycling Corp. and Subsidiaries
(Debtor-in-Possession)
Consolidated Statements of Cash Flows (continued)
Year ended December 31
1996 1995
-------------------------
Supplemental information
Cash paid for interest $ 960,775 $ 987,432
Cash paid for (recovered from) taxes (1,480,326) 1,981,142
Non-cash investing and financing activities
Common stock issued for:
Business combinations 345,238 3,908,000
Settlement of debt 500,000
Conversion of subordinated notes 10,805,546
Exercise of stock purchase warrant 200,000
Debt issued in connection with business combinations 4,485,781
Liabilities assumed in business combinations 3,765,871
Debt transferred with sale of assets 135,784
Debt issued in settlement of contract liability 1,136,207
See accompanying notes.
5
<PAGE> 7
PRINS RECYCLING CORP. AND SUBSIDIARIES
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
1. PROCEEDINGS UNDER CHAPTER 11
On July 12, 1996, Prins Recycling Corp., (the "Company") and its
subsidiaries filed voluntary petitions for reorganization under Chapter 11
of the Federal Bankruptcy Code in the United States Bankruptcy Court for
District of New Jersey. Under Chapter 11, enforcement of certain claims in
existence prior to the filing of the petitions was stayed, while the
debtor continued to operate in the ordinary course of business as
Debtor-in-Possession. The stayed claims are reflected in the December 31,
1996 consolidated balance sheet as "liabilities subject to compromise," as
discussed in Note 9. Significant additional claims have arisen subsequent
to the petition date resulting from the rejection of executory contracts
and/or leases, and from the allowance by the Bankruptcy Court of
contingent or disputed claims. The Bankruptcy Court established November
26, 1996 (January 8, 1997 for governmental entities) as the claims bar
date. Enforcement of claims secured by the debtor's assets ("secured
claims") was also stayed, although the holders of such claims have the
right to petition the Bankruptcy Court for relief from the claim. Secured
claims are secured by liens on substantially all of the Company's assets.
For financial statement presentation, secured debt is also reported as
"liabilities subject to compromise."
At various dates subsequent to the petition dates, the Company and certain
of its subsidiaries have received permission from the Bankruptcy Court to
sell certain of their assets. On November 12, 1997, the creditors
committee and the Bankruptcy Court approved the Company's First Amended
Joint Plan of Reorganization (the "Reorganization Plan"). Among other
things, the Reorganization Plan allowed the Company to sell substantially
all of its remaining operating assets and certain causes of action. In
addition, the buyer agreed to assume certain claims and other
administrative obligations of the Company. As a result of this
transaction, the Company's indebtedness to its principal lender was
settled which resulted in a compromise of $800,000. The creditors
committee received approximately $850,000 of cash and retained certain
causes of actions against third parties. A formal plan of liquidation of
the Company has not been adopted.
The accompanying consolidated financial statements have been prepared
under the going concern basis of accounting, which contemplates continuity
of operations, realization of assets and the liquidation of liabilities in
the ordinary course of business. The use of the going concern basis
remains appropriate until the date a formal plan of liquidation is adopted
or other such events occur which will result in the liquidation of the
Company. The Company has accounted for all transactions related to the
reorganization proceedings in accordance with Statement of Position 90-7,
"Financial Reporting by Entities in Reorganization Under the Bankruptcy
Code," issued by the American Institute of Certified Public Accountants.
The Company adopted the liquidation basis of accounting effective November
14, 1997.
F-6
<PAGE> 8
PRINS RECYCLING CORP. AND SUBSIDIARIES
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
2. ORGANIZATION AND DESCRIPTION OF BUSINESS
The Company operated material recovery facilities located principally in
the northeast and midwest United States and was a supplier of recyclable
materials, primarily wastepaper and secondary fibers, to paper and
building products mills throughout the world.
On April 24, 1995, the Company completed a merger with Paper Chase
Exchange, Inc. in a transaction accounted for using the pooling of
interest method. The accompanying consolidated financial statements give
retroactive effect to this business combination.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and cash equivalents - Cash equivalents consist of highly-liquid
investments with maturities of three months or less.
Principles of consolidation - The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany transactions and balances have been eliminated.
Credit risk - The Company performs periodic credit evaluations of its
customers but generally does not require collateral.
Inventories - Inventories, consisting of secondary fibers and other
recyclables, are stated at the lower of cost (first-in, first-out) or
market.
Property, plant and equipment - Property, plant and equipment, including
assets under capitalized leases, are stated at cost. Depreciation is
provided on the straight-line method over the estimated useful lives of
the assets, ranging from five to thirty years (See Note 4).
Income taxes - Deferred income taxes are determined using the liability
method. Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases
of assets and liabilities and are measured using the enacted tax rates and
laws that will be in effect when the differences are expected to reverse.
Intangibles and Goodwill - Intangible assets include values assigned to a
recyclables and disposal agreement and certain non-competition agreements.
The recyclables and disposal agreement were being amortized over the
ten-year term of the agreement. The non-competition agreements were being
amortized over the five-year term of the agreements. Goodwill represents
the cost in excess of fair value of the net assets of businesses acquired
and was being amortized over 15 years (See Note 4).
F-7
<PAGE> 9
PRINS RECYCLING CORP. AND SUBSIDIARIES
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
Evaluation of Long-Lived Assets - The Company continually assesses
long-lived assets, including goodwill and other intangibles, for
recoverability from estimated future operating results. (See Note 4).
Earnings per share - Earnings per share is based on the weighted average
number of shares outstanding. Common stock equivalents consisting of stock
options and warrants are included in the computation of earnings per share
to the extent dilutive. During 1996 and 1995 such common stock equivalents
were antidilutive.
Use of estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ
from those estimates.
Stock-Based Compensation - In October 1995, the FASB issued Statement No.
123, Accounting for Stock-Based Compensation. SFAS No. 123 encourages but
does not require entities to adopt the fair value based method of
accounting for all employee stock compensation plans, under which
compensation cost is measured based on the fair value of the award at the
grant date and recognized over the service period. Entities may continue
to account for these plans using the intrinsic value based method of
accounting, under which compensation cost is measured as the excess, if
any, of the quoted market price of the stock at the grant date over the
amount an employee must pay to acquire the stock. The Company has elected
to use the intrinsic value based method to measure compensation costs for
these plans.
Fair Value of Financial Instruments - The carrying value of cash
equivalents and accounts receivable approximate their fair value. It is
not practicable to estimate the fair value of the Company's debt
instruments because of the Company's status as a Debtor-in-Possession.
4. ASSET IMPAIRMENT LOSS
During 1996, market prices of recyclable fibers remained at levels
significantly below those needed to generate cash flows required to
recover the carrying amounts of certain of the Company's long-lived
assets. Accordingly, the Company evaluated the ongoing value of certain
plant and equipment along with the related goodwill and other intangibles
resulting from previous business combinations. Based on this evaluation,
the Company recorded an impairment loss of approximately $26,678,000. The
fair value of these assets was determined through appraisal.
F-8
<PAGE> 10
PRINS RECYCLING CORP. AND SUBSIDIARIES
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
December 31, December 31,
1996 1995
------------ ------------
Land and building $ 890,000 $ 890,000
Machinery and equipment 6,546,911 15,457,929
Furniture, fixtures and office equipment -- 987,364
Leasehold improvements -- 2,613,707
Construction in progress -- 2,929,244
------------ ------------
7,436,911 22,878,244
Less: accumulated depreciation (418,459) (2,472,453)
------------ ------------
$ 7,018,452 $ 20,405,791
============ ============
The Company capitalized interest of $266,954 in 1995.
6. OTHER CURRENT ASSETS
Included in other current assets at December 31, 1995 is $1,800,000
representing a deposit on equipment which was refunded to the Company in
1996.
7. EQUIPMENT LEASE RECEIVABLES
The Company provided several direct financing type leases for equipment
utilized by certain of its vendors. These leases had original terms
ranging from three to five years. During 1996, certain of the lessees
ceased making payments. The Company has valued these leases at their net
realizable value based on the estimated payments to be received or the
value of the underlying asset at December 31, 1996.
8. DUE FROM OFFICER-STOCKHOLDER
The balance due from officers at December 31, 1995 carried interest at 8%.
During 1996, the Company provided an allowance for this balance.
9. LIABILITIES SUBJECT TO COMPROMISE
Liabilities recorded by the Company as of the petition date that are
expected to be compromised under a plan of reorganization are separately
classified in the Consolidated Balance Sheet at December 31, 1996 and
include the following:
F-9
<PAGE> 11
PRINS RECYCLING CORP. AND SUBSIDIARIES
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
Accounts payable $ 7,750,870
Accrued liabilities 1,452,717
Debt 15,394,105
At the Company's request, the Bankruptcy Court established a bar date of
November 26, 1996 (January 8, 1997 for governmental agencies) for all
pre-petition claims against the Company other than those arising from
rejection of unexpired leases. A bar date is the date by which claims
against the Company must be filed if the claimants wish to receive any
distribution in the bankruptcy cases. Approximately 600 proofs of claims
have been filed in connection with the November 26, 1996 and January 8,
1997 bar dates. Certain creditors have filed claims substantially in
excess of amounts reflected in the Company's records. Consequently, the
amount included in the consolidated balance sheet at December 31, 1996 as
liabilities subject to compromise is subject to adjustment.
10. DUE TO BANK
At December 31, 1996 the Company had a Bankruptcy Court approved
debtor-in-possession financing agreement which provided a $9.5 million
revolving credit facility (the "Facility") with a bank. Borrowings under
the Facility were secured by liens on substantially all of the Company's
assets and were afforded administrative priority under the Bankruptcy
Code. Interest on borrowings under the Facility was charged at 11.25%
which represented the banks default rate under the previous debt agreement
with the Company. Through various orders of the Bankruptcy Court, the
Facility was maintained in effect until the date the Reorganization Plan
was approved. As a result of the sale of substantially all of the
Company's operating assets the Facility was repaid and the outstanding
balance was compromised by $800,000. The outstanding balance under the
Facility is included in liabilities subject to compromise at December 31,
1996.
The balances reflected in amounts due to banks at December 31, 1995
represent borrowings under the Company's Revolving and Term Loan and
Security Agreement with a bank (the "Bank Agreement"). The revolving line
of credit and term loans carried interest at the banks prime rate and
prime rate plus 1/2%, respectively. The outstanding balances under the
Bank Agreement were converted into the Facility subsequent to the date of
the bankruptcy filing.
F-10
<PAGE> 12
PRINS RECYCLING CORP. AND SUBSIDIARIES
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
11. NOTES AND ADVANCES PAYABLE - RELATED PARTIES
Notes and advances payable-related parties at
December 31, 1995 consist of:
10% Note payable to employee-stockholder (a) $4,250,000
10% Demand note payable to investment fund (b) 615,000
6.5% notes payable to employee-stockholders due in monthly
installments beginning July 1996 through December 1999. (c) 975,000
7% notes payable to employee stockholders (d) 170,000
Note payable to employee stockholder (e) 145,000
6% demand note payable to employee-stockholders 67,081
----------
6,222,081
Less: current portion: 3,761,374
----------
$2,460,707
==========
(a) The note was issued in connection with the acquisition of Vic Barick Paper
Co., Inc. and according to its terms was due February 1, 1996. On February
27, 1996 the Company and the stockholder-employee agreed to exchange the
note for $2,125,000 in cash and 100,000 shares of the Company's common
stock and a term note in the amount of $1,625,000 that bears interest at
6% and matures on the earlier of a change in control of the Company or
February, 1999. The outstanding balance of the term note is $1,625,000 and
is included in liabilities subject to compromise at December 31, 1996.
(b) The investment fund includes certain stockholders and several members of
the Company's management and was repaid in February, 1996.
(c) The note carried interest at 6.5% payable monthly. The outstanding
principal balance of $975,000 is included in liabilities subject to
compromise at December 31, 1996.
(d) The note carried interest at 7% payable monthly. The outstanding principal
of $170,000 was due December 31, 1996. The balance of this obligation is
included in liabilities subject to compromise at December 31, 1996.
(e) The note was issued in connection with the acquisition of Basic Waste
Systems, Inc. and was repaid in February, 1996.
During 1995, the Company's President made a $750,000 loan to the Company. The
loan carried interest at 10% and was repaid in full prior to December 31, 1995.
F-11
<PAGE> 13
PRINS RECYCLING CORP. AND SUBSIDIARIES
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
12. NOTES AND ADVANCES PAYABLE - OTHERS
Notes payable - others at December 31, 1995 consists of:
Term notes payable (a) $ 222,129
8% notes payable in aggregate monthly installments of
$2,062 through March 2002 125,839
Other 215,041
---------
563,009
Less: Current portion 295,990
---------
$ 267,019
=========
(a) The term notes of a subsidiary carried interest at prime rate (8.5% at
December 31, 1995) and were payable in varying monthly installments plus
interest through 1999. These notes are secured by lease receivables and
equipment leased to others.
The aggregate outstanding balances of these obligations of $423,508, including
the secured term notes, which may be under secured, are included in liabilities
subject to compromise at December 31, 1996.
13. OBLIGATIONS UNDER CAPITALIZED LEASES
The Company acquired equipment and certain other assets under capital
lease agreements. The equipment had an aggregate carrying value of
approximately $534,000 and $2,026,000 at December 31, 1996 and 1995,
respectively. In connection with the bankruptcy proceedings the Company
rejected certain of these leases. The balances of these obligations are
included in liabilities subject to compromise at December 31, 1996.
14. STOCKHOLDERS' EQUITY
During 1996, the Company sold 332,000 shares of its common stock in a
private placement for net proceeds of $1,679,788.
During 1996, the Company issued $12,000,000 of 8% convertible subordinated
debentures and received net proceeds of $11,280,000. The convertible
subordinated debentures were convertible into shares of the Company's
common stock at the option of the holders at a variable percentage of the
market price, as defined, of the Company's common stock. Based on the
beneficial conversion terms of the convertible subordinated debentures,
the Company recorded a discount of $2.4 million
F-12
<PAGE> 14
PRINS RECYCLING CORP. AND SUBSIDIARIES
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
which was charged to interest expense and credited to additional paid in
capital. During 1996 an aggregate principal amount of $11,000,000, and
accrued interest of $92,900, of these convertible subordinated debentures
were converted into 5,524,784 shares of the Company's common stock. The
remaining outstanding principal balance of $1,000,000 is included in
liabilities subject to compromise at December 31, 1996.
The Company's 1992 Stock Option Plan (the "Plan") was approved by the
Company's Board of Directors and stockholders in September 1992. Options
granted under the Plan may include those qualified as incentive stock
options under Section 422A of the Internal Revenue Code of 1986, as
amended, as well as non-qualified stock options. In July 1995, the
Company's Board of Directors increased the number of shares of common
stock for which options may be granted under the Plan to 850,000. Options
expired five years from the date of grant.
Changes in outstanding options are as follows:
December 31, 1995
----------------------------------
Price
Options Range
----------------------------------
Options outstanding at January 1 233,340 $2.50-$3.00
Granted 207,500 $9.00
Exercised (2,625) $2.50
Canceled (39,425) $2.50-$9.00
---------
Options outstanding at December 31 398,790 $2.50-$9.00
=========
Options exercisable at December 31 214,753 $2.50-$3.00
Options available for grant 448,585
Total shares reserved for issuance
under options 850,000
No options were granted under the Plan during 1996. The Company rejected all
outstanding stock options in the bankruptcy proceedings and related Plan of
Reorganization.
The Company has determined that options granted in 1995 would not have had a
material effect on the determination of proforma net income calculated in
accordance with the provisions of Statement of Financial Accounting Standards
No. 123, "Accounting For Stock-Based Compensation."
F-13
<PAGE> 15
PRINS RECYCLING CORP. AND SUBSIDIARIES
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
15. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
1996 1995
------------ -------------
Current
- Federal - $134,000
- State - 230,000
-------------
364,000
Deferred
- Federal - (434,000)
- State $(50,500) (47,600)
------------ -------------
(50,500) (481,600)
------------ -------------
$(50,500) $(117,600)
============ =============
A reconciliation of the recorded income tax provision to that computed
utilizing the federal statutory income tax rate is as follows:
1996 1995
--------------------------
Tax (benefit) at federal statutory income
tax rate $(17,697,000) $(1,099,000)
Goodwill amortization/write-downs 4,864,000 154,000
Change in federal and state tax asset
valuation allowance 15,119,000 2,560,000
Pooling expenses 272,000
State recycling tax credits (2,200,000)
State income taxes (net of federal
tax benefit) (2,256,000) 62,000
Other (net) (80,500) 133,400
--------------------------
$ (50,500) $ (117,600)
==========================
F-14
<PAGE> 16
PRINS RECYCLING CORP. AND SUBSIDIARIES
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
The deferred income tax accounts reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts utilized for income tax
purposes. The significant components of the deferred assets and
liabilities are as follows:
December 31,
------------------------------
1996 1995
------------------------------
Deferred tax liability:
Property, plant and equipment - $685,000
------------------------------
Deferred tax assets:
Property, plant and equipment $2,345,000 -
Net operating loss carryforward 8,938,000 627,000
Restructuring reserves 3,170,000 320,000
State recycling tax credits 2,200,000 2,200,000
Other 1,026,000 47,500
Less: Valuation allowance (17,679,000) (2,560,000)
------------------------------
- 634,500
Net deferred tax liability - $50,500
==============================
At December 31, 1996, the Company has available net operating loss
carryforwards of approximately $22,300,000 expiring in the years 2010 to
2011, and available state recycling tax credits of approximately
$2,200,000 which are not subject to expiration. A reduction of the
Company's liabilities which may result from the proceedings under Chapter
11 of the Bankruptcy Code may result in utilization of its available net
operating loss carryforwards.
The Tax Reform Act of 1986 enacted a complex set of rules limiting the
potential utilization of net operating loss and tax credit carryforwards
in periods following a corporate "ownership change". In general, for
federal income tax purposes, an ownership change is deemed to occur if the
percentage of stock of a loss corporation owned (actually, constructively
and, in some cases, deemed) by one or more "5% shareholders" has increased
by more than 50 percentage points over the lowest percentage ownership of
such stock owned during a three-year testing period. The Company has not
determined if such an ownership change occurred as of December 31, 1996.
However, if such an ownership change is determined to have occurred the
Company's ability to utilize its net operating loss carryforwards could be
significantly limited.
16. BUSINESS TRANSACTIONS
During the third quarter of 1995, the Company acquired all of the
outstanding common stock of Basic Waste Systems, Inc. and Vic Barick Paper
Co., Inc. and substantially all of the assets of P. Pepe Sons, Inc. all
F-15
<PAGE> 17
PRINS RECYCLING CORP. AND SUBSIDIARIES
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
engaged in the recycling industry (collectively, the "1995
Acquisitions"). The aggregate purchase price for these businesses,
including all direct costs, was approximately $15,997,000 and was
partially financed through additional debt aggregating approximately
$9,645,000 and the issuance of 377,534 shares of the Company's common
stock. These acquisitions were accounted for under the purchase method of
accounting. The purchase price was allocated to the assets and
liabilities of the 1995 Acquisitions based on their estimated respective
fair values. During 1996, an additional 172,619 shares of the Company's
common stock were issued in connection with one of the 1995 acquisitions
due to a guarantee of value provision contained in the applicable
acquisition agreement. The cost of the acquisitions exceeded the fair
value of the assets acquired by approximately $14,202,000 which was
recorded as goodwill. The results of operations of the 1995 Acquisitions
are included in the Company's consolidated statement of operations
beginning on the respective closing date of each of the acquisitions.
On April 24, 1995, the Company issued 1,106,667 shares of its common stock
in exchange for all of the outstanding common stock of Paper Chase
Exchange, Inc. ("Paper Chase"). Paper Chase collects, markets and sells
waste paper and other secondary fibers to paper mills. The merger was
accounted for as a pooling of interests and, accordingly, the accompanying
consolidated financial statements include Paper Chase as if the
combination had occurred at the beginning of 1995.
Also, during 1994 the then sole stockholder of Paper Chase formed an
affiliate and acquired certain property used in connection with the
business. This transaction resulted in the issuance of 606,667 shares of
the Company's common stock. There were no intercompany transactions
between Prins Recycling Corp. and Paper Chase prior to the merger.
Expenses relating to the pooling totaling approximately $900,000 were paid
directly by the former stockholder of Paper Chase and have been reflected
in the Company's operations and in stockholders' equity as a capital
contribution.
The following unaudited pro-forma summary presents the consolidated
results of operations as if the 1995 Acquisitions had occurred at the
beginning of the year. These results do not purport to be indicative of
what would have occurred had the acquisitions been made as of that date or
of results which may occur in the future.
Net sales $93,181,000
===========
Net income $ 24,000
===========
17. COMMITMENTS
The Company leases certain property and equipment, including property
related to its material recovery facilities and administrative offices,
under non-cancelable operating leases. In addition to the fixed rentals,
certain of the property leases require the Company to pay real estate
taxes.
F-16
<PAGE> 18
PRINS RECYCLING CORP. AND SUBSIDIARIES
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
utilities and insurance. Certain of the leases provide for renewal options
of up to ten years. In connection with the bankruptcy proceedings, the
Company rejected certain other lease agreements for property and
equipment. Total rent expense for all operating leases amounted to
$2,670,916 and $1,427,908 for 1996 and 1995, respectively.
Total minimum annual lease payments for operating leases which were not
rejected in bankruptcy having initial or remaining terms in excess of one
year are as follows:
1997 1,193,000
1998 1,200,000
1999 1,191,000
2000 1,190,000
Thereafter 5,632,000
The Company entered into long-term employment agreements with several
employees. The agreements have terms of three to five years and provide
fixed annual compensation plus bonuses, based on certain earnings, as
defined. The Company rejected all such agreements in connection with the
bankruptcy proceedings. Certain of these employees have filed proofs of
claims
In connection with the operation of its material recovery facilities, the
Company entered into long-term supply agreements with certain third
parties to accept recyclable materials delivered to its facilities.
Certain of these agreements required the Company to pay specified fixed
fees . The Company rejected substantially all such contracts in connection
with the bankruptcy proceedings. Certain of these parties have filed
proofs of claims regarding these agreements.
18. EMPLOYEE SAVINGS PLANS
The Company has two defined contribution employee savings plans pursuant
to Internal Revenue Code Section 401(k) covering all eligible employees.
Under one plan the Company at its discretion may match a portion of
eligible contributions. The other plan requires the Company to contribute
an amount equal to 25 percent of each employee's contributions. In
connection with the bankruptcy proceedings the Company ceased making
contributions to the Plan which required contributions. Total
contributions to these employee benefit plans by the Company were $27,023
and $200,933 for 1996 and 1995, respectively.
F-17
<PAGE> 19
PRINS RECYCLING CORP. AND SUBSIDIARIES
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
19. MARKET CONCENTRATIONS
Export sales consist of sales made directly to foreign customers, and
sales made to export brokers, who in-turn resell the wastepaper to foreign
customers. Export sales totaled approximately 48% and 52% of consolidated
net sales in 1996 and 1995, respectively. Geographically, these sales were
distributed as follows:
1996 1995
----------------------------
Export brokers 42% 45%
Mexico 5 6
Canada 1 1
----------------------------
48% 52%
============================
20. CONTINGENCIES
The Company is also involved in litigation arising in the normal course of
its business. Certain of the parties have filed claims with the Bankruptcy
Court.
21. SUBSEQUENT EVENT
On November 14, 1997 the Company sold substantially all of its operating
assets and certain liabilities to KTI for an aggregate purchase price of
$14.4 million.
F-18
<PAGE> 20
Prins Recycling Corp. (Debtor-in-Possession)
Consolidated Balance Sheets (unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
------------ ------------
1997 1996
---- ----
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ - $ 118,217
Accounts receivable, net 2,739,093 2,852,983
Other Receivables 18,012 49,032
Prepaid expenses and other current assets 195,994 96,234
------------ ------------
Total current assets 2,953,099 3,116,466
Equipment loans receivable, net of current portion 127,835
Other assets 465,751 258,044
Property, plant, and equipment, net 6,836,975 7,018,452
------------ ------------
$ 10,255,825 $ 10,520,797
============ ============
Liabilities and stockholders' deficiency
Current liabilities
Accounts payable $ 4,338,412 $ 1,703,826
Accrued expenses 33,286 1,498,353
Liabilities subject to compromise 26,266,710 24,597,692
Capital leases, current portion 45,029
------------ ------------
Total current liabilities 30,683,437 27,799,871
Stockholders' deficiency
Common Stock 16,604 16,604
Additional paid-in capital 42,177,202 42,177,202
Retained earnings (deficit) (62,621,418) (59,472,880)
------------ ------------
Total stockholders' (deficiency) equity (20,427,612) (17,279,074)
------------ ------------
$ 10,255,825 $ 10,520,797
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
F-19
<PAGE> 21
Prins Recycling Corp. (Debtor-in-Possession)
Consolidated Statements of Operations (unaudited)
Nine months ending September 30,
1997 1996
---- ----
Net Sales $ 13,529,223 $ 20,411,823
Cost of Goods Sold 12,793,456 25,230,483
------------ -------------
Gross Profit 735,767 (4,818,660)
Selling, General, and Administrative Expenses 1,737,561 16,761,821
Depreciation and Amortization 181,477 2,664,706
------------ -------------
Total Operating Expenses 1,919,038 19,426,527
Income (loss) before reorganization items and
interest expense (1,183,271) (24,245,187)
Reorganization Costs and Other Expense (Income) 1,205,803 1,556,149
Other Expense (Income) 26,570 (64,998)
Interest Expense, net 732,894 1,297,999
------------ -------------
Net Loss $ (3,148,538) $ (27,034,337)
============ =============
Net Loss per Share ($0.19) ($1.93)
Weighted average common shares outstanding 16,604,460 14,018,855
See notes to condensed consolidated financial statements.
F-20
<PAGE> 22
Prins Recycling Corp. (Debtor-in-Possession)
Condensed Consolidated Statements of Cash Flows (unaudited)
Nine months ended September 30,
1997 1996
---- ----
Operating Activities
Net Cash provided by (used in) operations $(1,645,964) $(2,667,783)
Investing Activities
Purchases of property, plant, and equipment - (557,638)
---------- -----------
Net cash provided by (used in) investing
activities - (557,638)
Financing Activites
(Decrease) increase in borrowings under bank
line of credit 1,714,047 (2,178,094)
Repayment of debt principal and capital lease
obligations (186,300) (9,355,943)
Proceeds from other borrowings 980,000
Proceeds from sale of subordinated notes - 11,280,000
Proceeds from issuance of common stock - 1,679,788
---------- -----------
Net cash provided by financing activities 1,527,747 2,405,751
Net decrease in cash and cash equivalents (118,217) (819,670)
Cash and cash equivalents, beginning of period 118,217 1,097,352
---------- -----------
Cash and cash equivalents, end of period $ - $ 277,682
========== ===========
See notes to condensed consolidated financial statements.
F-21
<PAGE> 23
Prins Recycling Corp.
Notes to Interim Consolidated Financial Statements
September 30, 1997 and 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 or nine months ended September 30, 1997 are not necessarily indicative
of the results that may be expected for the year ending December 31, 1997. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended December 31, 1996. Certain 1996 financial information contained
herein has been reclassified to conform with the 1997 presentation.
2. Proceedings Under Chapter 11
On July 13, Prins Recycling Corp. (the "Company") and its subsidiaries
filed voluntary petitions for reorganization under Chapter 11 of the Federal
Bankruptcy Code in the United States Bankruptcy Court for District of New
Jersey. Under Chapter 11, enforcement of certain claims in existence prior to
the filing of the petitions was stayed, while the debtor continues to operate
in the ordinary course of business as debtor in possession. The stayed claims
are reflected in the December 31, 1996 consolidated balance sheet as
"liabilities subject to compromise," Significant additional claims have arisen
subsequent to the petition date resulting from the rejection of executory
contracts and/or leases, and from the allowance by the Bankruptcy Court of
contingent or dispute claims. The Bankruptcy Court established November 26,
1996 (January 8, 1997 for governmental entities) as the claims bar date.
Enforcement of claims secured by the debtor's assets ("secured claims") was
also stayed, although the holders of such claims have the right to petition the
Bankruptcy Court for relief from the claim. Secured claims are secured by liens
on substantially all of the Company's assets. For financial statement
presentation, secured debt is also being reported as "liabilities subject to
compromise."
At various dates subsequent to the petition dates the Company and
certain of its subsidiaries have received permission from the Bankruptcy Court
to sell certain of its assets. On November 12, 1997, the creditors committee
and the Bankruptcy Court approved the Company's First Amended Joint Plan of
Reorganization (the "Reorgnization Plan"). Among other things, the
Reorganization Plan allowed the Company to sell substantially all of its
remaining operating assets. In addition, the buyer agreed to assume certain
claims and other administrative obligations of the Company. The creditors
committee received approximately $850,000 of cash and retained certain causes
of actions against third parties. A formal plan of liquidation of the Company
has not been adopted.
The accompanying consolidated financial statements have been prepared
under the going concern basis of accounting, which contemplates continuity of
operations, realization of assets and the liquidation of liabilities in the
ordinary course of business. The use of the going on concern basis remains
appropriate until the date a formal lplan of liqidation is adopted or other such
events occur which will result in the liquidation of the Company. The Company
has accounted for all transactions related to the rorganization proceedings in
accordance with Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code," issued by the American Institute of
Certified Public Accountants. The Company adopted the liquidation basis of
accounting effective November 14, 1997.
F-22
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 333-34327, Form S-3 No. 333-30813, Form S-3 No. 333-28067, Form
S-8 No. 333-26757, Form S-3 No. 333-80089 and Form S-3 No. 333-44507) and in
the related Prospectus of our report dated January 16, 1998 with respect to the
consolidated financial statements of Prins Recycling Corp. and subsidiaries
(debtor-in-possession) included in this Current Report (Form 8-K/A) of KTI, Inc.
dated January 28, 1998.
Ernst & Young LLP
Hackensack, New Jersey
January 27, 1998
