<PAGE> 1
FORM 10-Q. - QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1999
Commission File No. 0-25490
KTI, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
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
(Registrant's telephone number including area code)
</TABLE>
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 13,916,238 Shares as of August 13, 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item Number and Caption Page Number
- ----------------------- -----------
<S> <C>
PART I
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at June 30, 1999 (unaudited) and December 31, 1998 3
Consolidated Statements of Operations (unaudited) for the three and six months
ended June 30, 1999 and 1998 4
Consolidated Statements of Changes in Stockholders' Equity for the six
months ended June 30, 1999 (unaudited) and the year ended December 31, 1998 5
Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30,
1999 and 1998 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 14
Item 3. Qualitative and Quantitative Disclosure about Market Risk 22
PART II
Item 1. Legal Proceedings 23
Item 2. Changes in Securities 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
KTI, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
--------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 5,391 $ 9,426
Restricted funds 21,053 19,088
Accounts receivable, net of allowances of
$1,343 and $1,313 38,754 29,272
Consumables and spare parts 5,012 4,483
Inventory 8,011 4,866
Notes receivable - officers/shareholders and affiliates 115 1,858
Other receivables 2,836 4,158
Deferred taxes 3,483 4,832
Other current assets 4,011 3,370
--------- --------
Total current assets 88,666 81,353
Restricted funds 4,177 4,350
Notes receivable - officers/shareholders and affiliates 6,469 1,534
Other receivables 2,476 3,025
Deferred costs, net of accumulated amortization
of $1,623 and $1,610 5,452 5,268
Goodwill and other intangibles, net of accumulated amortization
of $6,056 and $3,492 124,695 117,878
Other assets 7,275 6,167
Deferred taxes 1,366
Property, equipment and leasehold improvements, net of
accumulated depreciation and amortization of $34,588 and $26,873 206,715 203,391
--------- --------
Total assets $ 447,291 $422,966
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 19,109 $ 14,940
Accrued expenses 16,389 9,313
Debt, current portion 161,436 9,775
Other current liabilities 224 4,499
--------- --------
Total current liabilities 197,158 38,527
Other liabilities 1,382 4,227
Debt, less current portion 69,869 202,153
Minority interest 20,940 19,526
Deferred revenue 30,830 33,871
Deferred taxes 2,662
Convertible subordinated notes 6,770 6,770
Commitments and contingencies
Stockholders' equity
Preferred stock; 10,000,000 shares authorized; none outstanding
Common stock, no par value (stated value $.01 per share); authorized 40,000,000
in 1999 and 1998, respectively; issued and outstanding: 13,916,238 in 1999,
13,266,204 in 1998 139 133
Additional paid-in capital 126,396 115,026
Retained earnings (deficit) (6,193) 71
--------- --------
Total stockholders' equity 120,342 115,230
--------- --------
Total liabilities and stockholders' equity $ 447,291 $422,966
========= ========
</TABLE>
See accompanying notes.
3
<PAGE> 4
KTI, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------- -------------------------------
1999 1998 1999 1998
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues $ 66,218 $ 49,458 $ 133,195 $ 87,090
Cost of operations 58,036 34,799 112,253 65,432
------------ ----------- ------------ -----------
Gross Profit 8,182 14,659 20,942 21,658
Selling, general and administrative 6,230 2,031 12,072 3,113
Restructuring charge 2,971 3,719
Asset impairment charge 3,000 3,000
------------ ----------- ------------ -----------
Income (loss) from operations (4,019) 12,628 2,151 18,545
Interest expense, net 5,319 1,550 9,053 3,060
Loss on sale of business 444 444
Equity loss in subsidiary 214 294
Other charges 131 131
Other expense, net 72 123
------------ ----------- ------------ -----------
Income (loss) before minority interest,
provision (benefit) for income
taxes, extraordinary item and cumulative
effect of change in accounting principle (10,199) 11,078 (7,894) 15,485
Minority interest 398 2,509 990 3,578
------------ ----------- ------------ -----------
Income (loss) before provision (benefit)
for income taxes, extraordinary
item and cumulative effect of change in
accounting principle (10,597) 8,569 (8,884) 11,907
Provision (benefit) for income taxes (3,466) 3,347 (2,678) 4,693
------------ ----------- ------------ -----------
Income (loss) before extraordinary
item and cumulative effect of
change in accounting principle (7,131) 5,222 (6,206) 7,214
Extraordinary item 495 495
------------ ----------- ------------ -----------
Income (loss) before cumulative effect
in change in accounting principle (7,131) 4,727 (6,206) 6,719
Cumulative effect of change in accounting principle 58
------------ ----------- ------------ -----------
Net income (loss) (7,131) 4,727 (6,264) 6,719
Accretion and accrued and paid dividends on preferred stock 469 978
------------ ----------- ------------ -----------
Net income (loss) available to common shareholders $ (7,131) $ 4,258 $ (6,264) $ 5,741
============ =========== ============ ===========
Earnings per common share:
Basic:
Income (loss) before extraordinary item and cumulative
effect of change in accounting principle $ (0.51) $ 0.49 $ (0.45) $ 0.66
Extraordinary item 0.05 0.05
Cumulative effect of change in accounting principle 0.01
------------ ----------- ------------ -----------
Net income (loss) $ (0.51) $ 0.44 $ (0.46) $ 0.61
============ =========== ============ ===========
Weighted average number of shares used in computation 13,916,238 9,614,163 13,818,290 9,424,451
============ =========== ============ ===========
Diluted:
Income (loss) before extraordinary item and cumulative
effect of change in accounting principle $ (0.51) $ 0.42 $ (0.45) $ 0.55
Extraordinary item 0.04 0.04
Cumulative effect of change in accounting principle 0.01
------------ ----------- ------------ -----------
Net income (loss) $ (0.51) $ 0.38 $ (0.46) $ 0.51
============ =========== ============ ===========
Weighted average number of shares used in computation 13,916,238 12,344,172 13,818,290 12,275,785
============ =========== ============ ===========
</TABLE>
See accompanying notes.
4
<PAGE> 5
KTI, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SERIES A SERIES B
PREFERRED STOCK PREFERRED STOCK
--------------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
----------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 447,500 $ 3,732 856,000 $ 21,400
Net income
Accretion of preferred stock 42
Issuance of common stock and common
stock purchase warrants for:
Exercise of options
Exercise of warrants
Non-employee director's compensation
Conversion of preferred stock:
Series A (447,500) (3,774)
Series B (856,000) (21,400)
Conversion of debt
Employee savings plan contribution
Business combinations
Tax benefit realized from stock option
transactions
Dividends paid on Series B Preferred Stock
Additional costs related to preferred
stock issuances
----------- -------- -------- --------
Balance at December 31, 1998
Net loss
Issuance of common stock for:
Exercise of options
Exercise of warrants
Business combinations
----------- -------- -------- --------
Balance at June 30, 1999 (unaudited)
=========== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK ADDITIONAL RETAINED
------------------------- PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
---------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 8,912,630 $ 89 $52,762 $(5,243) $72,740
Net income 6,718 6,718
Accretion of preferred stock (42)
Issuance of common stock and common
stock purchase warrants for:
Exercise of options 235,682 2 1,894 1,896
Exercise of warrants 411,894 4 1,648 1,652
Non-employee director's compensation 205 205
Conversion of preferred stock:
Series A 447,500 4 3,770
Series B 25,531 1 300 (21,099)
Conversion of debt 1,283,399 13 15,686 15,699
Employee savings plan contribution 4,215 41 41
Business combinations 1,945,353 20 38,122 38,142
Tax benefit realized from stock option
transactions 738 738
Dividends paid on Series B Preferred Stock (1,404) (1,404)
Additional costs related to preferred
stock issuances (98) (98)
---------- -------- -------- ------- --------
Balance at December 31, 1998 13,266,204 133 115,026 71 115,230
Net loss (6,264) (6,264)
Issuance of common stock for:
Exercise of options 20,552 161 161
Exercise of warrants 19,482 193 193
Business combinations 610,000 6 11,016 11,022
---------- -------- -------- ------- --------
Balance at June 30, 1999 (unaudited) 13,916,238 $ 139 $126,396 $(6,193) $120,342
========== ======== ======== ======= ========
</TABLE>
See accompanying notes.
5
<PAGE> 6
KTI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months ended June 30,
-------------------------
1999 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (6,264) $ 6,719
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Asset impairment charge 3,000
Extraordinary item 495
Cumulative effect of change in accounting principle 58
Depreciation and amortization 10,443 5,065
Minority interest, net of distributions 1,414 2,071
Loss on sale of business 444
Equity loss in subsidiary 294
Deferred revenue (3,041) (3,026)
Deferred income taxes (2,890) 2,615
Provision for losses on accounts receivable 45 570
Interest accrued and capitalized on debt 114 701
Security received for sale of power (7,386)
Other non-cash charges 910 11
Changes in operating assets and liabilities:
Accounts receivable (8,828) 879
Consumables, spare parts and inventory (1,508) (712)
Other receivables 914 (320)
Other assets (4,600) 258
Accounts payable and accrued expenses 8,563 (3,854)
Other liabilities (5,620) 4,078
-------- --------
Net cash provided by (used in) operating activities (6,552) 8,164
INVESTING ACTIVITIES
Additions to property, equipment and leasehold improvements (6,379) (4,183)
Proceeds from sale of assets 27 33
Net change in restricted funds (1,792) (1,031)
Proceeds from sale of business 1,757
Purchase of businesses, net of cash acquired (150) (15,289)
Notes receivable--officers/shareholders and affiliates (2,936) (492)
-------- --------
Net cash used in investing activities (9,473) (20,962)
FINANCING ACTIVITIES
Deferred financing costs (2,995)
Proceeds from issuance of debt 46,995
Net borrowings on lines of credit 12,414 19,267
Proceeds from other borrowings 3,259
Proceeds from sale of common stock 354 2,359
Dividends paid (936)
Principal payments on debt (4,037) (53,046)
-------- --------
Net cash provided by financing activities 11,990 11,644
-------- --------
Decrease in cash and cash equivalents (4,035) (1,154)
Cash and cash equivalents at beginning of period 9,426 11,181
======== ========
Cash and cash equivalents at end of period $ 5,391 $ 10,027
======== ========
</TABLE>
-Continued-
6
<PAGE> 7
KTI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months ended June 30,
-------------------------
1999 1998
-------- -------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 10,909 $ 2,563
Taxes paid 1,128
NON CASH INVESTING AND FINANCING ACTIVITIES
Capital lease obligation entered into for lease of equipment 241
Purchase of businesses and additional partnership interest, net of cash
acquired:
Working capital, net of cash acquired 111 101
Property, equipment and leasehold improvements 8,621 11,528
Purchase price in excess of net assets acquired 7,863 6,873
Other assets 104
Non-current liabilities 5,423 3,317
Common stock issued 11,022
</TABLE>
See accompanying notes
7
<PAGE> 8
KTI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
JUNE 30, 1999
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. The municipal solid waste ("MSW") market in Maine, which
provides material to the waste-to-energy segment, is seasonal, with one-third
more MSW generated in the summer months than is generated during the rest of the
year. The Residential and Commercial Recycling segments experience increased
volumes of newspaper in November and December due to increased newspaper
advertising and retail activity during the holiday season. Additionally, the
Residential Recycling segment operates facilities in Florida which experience
increased volumes of recyclable materials during the winter months followed by
decreases in the summer months in connection with seasonal changes in
population. Operating results for the three and six month periods ended June 30,
1999 and 1998 are not necessarily indicative of the results that may be expected
for the full year. For further information, refer to the consolidated financial
statements and notes thereto included in the Company's annual report on Form
10-K for the year ended December 31, 1998. Certain 1998 financial information
contained herein has been reclassified to conform with the 1999 presentation.
2. MERGER AND ACQUISITIONS
On May 12, 1999, KTI, Inc. (the "Company") entered into an Agreement
and Plan of Merger (the "Merger Agreement") with Casella Waste Systems, Inc.,
("Casella") a publicly-owned company engaged in the waste services industry. The
merger will be completed through the exchange of all of the shares of the
Company's common stock for shares of Casella's Class A common stock based on an
exchange ratio specified in the Amended Merger Agreement. In addition, all of
the Company's outstanding and unexercised stock options and stock purchase
warrants will be converted into similar rights to acquire Casella's Class A
common stock under the same terms and conditions and the same exchange ratio.
Subsequent to the completion of the merger the current Casella stockholders will
own a majority of the combined company. Under the terms of the Merger Agreement,
Casella is required to file a registration statement with the Securities and
Exchange Commission to register the shares of its Class A common stock to be
issued in the merger. The merger is subject to, among other things, approval of
the Company's and Casella's stockholders. No assurance can be given that the
conditions of the merger will be satisfied or that the merger will be
consummated. Upon consummation of the merger, the Company will pay fees to its
investment bankers and recognize certain other merger related costs which have
been deferred.
On March 31, 1999 and May 19, 1999, pursuant to the Second Amended,
Restated and Extended Waste Disposal Agreement among PERC and the municipalities
named therein, the municipalities made capital contributions to Penobscot Energy
Recovery Company, Limited Partnership ("PERC"), which were recorded as
additional minority interest, totaling $730 and $240, respectively, in exchange
for 1.31% and 0.43%, respectively, of limited partnership interest in PERC.
On January 27, 1999 the Company completed its acquisition of AFA Group,
Inc. and subsidiaries ("AFA"), an integrated wood waste processing and hauling
business located in Newark, New Jersey. Payment of the aggregate purchase price,
including all direct costs, of $9,682 consisted of (i) 460,000 shares of the
Company's common stock valued at $20.70 per share (based on the closing price of
the common stock on the date of announcement) and (ii) $150 in cash. This
acquisition was accounted for as a purchase, and accordingly, the assets and
liabilities have been recorded at their estimated fair value at the date of
acquisition. The excess of the purchase price over the fair value of the
acquired net assets of $6,363 has been recorded as goodwill and is being
amortized on a straight-line basis over 30 years.
8
<PAGE> 9
3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1999 1998 1999 1998
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) $ (7,131) $ 4,727 $ (6,264) $ 6,719
Preferred stock dividends 469 936
Accretion of preferred stock 42
------------ ------------ ------------ -----------
Numerator for basic earnings per share-net income (loss)
available to common stockholders (7,131) 4,258 (6,264) 5,741
Effective of dilutive securities:
Preferred stock dividends 469 936
Accretion of preferred stock 42
------------ ------------ ------------ -----------
Numerator for diluted earnings per share-net income
(loss) available to common stockholders after assumed
conversions $ (7,131) $ 4,727 $ (6,264) $ 6,719
============ ============ ============ ===========
Denominator:
Denominator for basic earnings per share-weighted
average shares 13,916,238 9,614,163 13,818,290 9,424,451
Effect of dilutive securities:
Employee stock options(1) 559,010 498,330
Warrants(1) 349,722 432,574
Convertible preferred stock(1) 1,821,277 1,920,430
------------ ------------ ------------ -----------
Dilutive potential common shares
Denominator for diluted earnings per share-adjusted
weighted-average shares and assumed conversions 13,916,238 12,344,172 13,818,290 12,275,785
============ ============ ============ ===========
Net income (loss) per share-Basic $ (0.51) $ 0.44 $ (0.46) $ 0.61
============ ============ ============ ===========
Net income (loss) per share-Diluted $ (0.51) $ 0.38 $ (0.46) $ 0.51
============ ============ ============ ===========
(1) The employee stock options and warrants outstanding during the year and the convertible subordinated notes payable are
anti-dilutive in 1999.
</TABLE>
4. CONTINGENCIES
The Company is a defendant in a consolidated purported class action,
which alleges violations of certain sections of the federal securities laws. The
Company believes the allegations are without merit and intends to defend the
litigation vigorously.
Two lawsuits have been filed against a subsidiary of the Company
alleging fraud and tortious interference. The actions are based on two contracts
between the plaintiff and the subsidiary, which contracts require all disputes
to be resolved by arbitration. Arbitration proceedings have commenced. The
Company believes it has meritorious defenses to the allegations.
The majority shareholder of a company acquired by a subsidiary of the
Company instigated arbitration proceedings against the Company and two of its
subsidiaries, alleging the subsidiaries acted to frustrate the "earn-out"
provisions of the acquisition agreement and thereby precluding him from
receiving, or alternatively, reducing the sum to which he was entitled to
receive. He also alleges his employment agreement was wrongfully terminated. The
claim for arbitration alleges direct charges in excess of $5,000 and requests
punitive damages, treble damages and attorneys fees. The Company and its
subsidiaries have responded to the demand, denying liability and filed a
counterclaim for $1,000 for misrepresentations. The Company believes it has
meritorious defenses to the claims.
The Company is a defendant in certain lawsuits alleging various claims
incurred in the ordinary course of business.
Management of the Company does not believe that the outcome of these
matters,
9
<PAGE> 10
individually or in the aggregate, will have a material effect on the Company's
financial condition, cash flows or results of operations.
5. SEGMENT REPORTING
The Company operated in the business segments as indicated below.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1999 WASTE-TO-ENERGY COMMERCIAL FINISHED PRODUCTS RESIDENTIAL
RECYCLING RECYCLING
--------------- ---------- ----------------- -----------
<S> <C> <C> <C> <C>
Revenues
Unaffiliated customers $ 26,840 $ 19,290 $ 14,061 $ 5,994
Intersegment revenues 56 52 3,888
Segment Profit (Loss) 4,277 (3,937) (1,049) (325)
Depreciation and Amortization 2,663 502 876 1,066
Capital Expenditures 1,615 347 982 168
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999 WASTE-TO-ENERGY COMMERCIAL FINISHED PRODUCTS RESIDENTIAL
RECYCLING RECYCLING
--------------- ---------- ----------------- -----------
<S> <C> <C> <C> <C>
Revenues
Unaffiliated customers $ 51,232 $ 40,428 $ 26,406 $ 15,081
Intersegment revenues 89 83 4,636
Segment Profit (Loss) 10,588 (3,622) (263) 234
Depreciation and Amortization 5,154 1,110 1,697 1,978
Identifiable Assets 247,956 48,070 62,827 70,729
Capital Expenditures 2,744 662 2,385 552
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1998 WASTE-TO-ENERGY COMMERCIAL FINISHED PRODUCTS RESIDENTIAL
RECYCLING RECYCLING
--------------- ---------- ----------------- -----------
<S> <C> <C> <C> <C>
Revenues
Unaffiliated customers $ 28,126 $ 13,461 $ 2,546 $ 1,496
Intersegment revenues 2,603 24 136 1,135
Segment Profit (Loss) 9,857 (667) (36) 232
Depreciation and Amortization 2,085 255 25 224
Capital Expenditures 789 526
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998 WASTE-TO-ENERGY COMMERCIAL FINISHED PRODUCTS RESIDENTIAL
RECYCLING RECYCLING
--------------- ---------- ----------------- -----------
<S> <C> <C> <C> <C>
Revenues
Unaffiliated customers $46,419 $ 29,493 $ 4,172 $ 3,162
Intersegment revenues 5,187 24 244 2,102
Segment Profit (Loss) 15,498 (348) 223 628
Depreciation and Amortization 4,039 506 50 431
Identifiable Assets 219,934 30,785 1,883 10,783
Capital Expenditures 2,415 1,751 2
</TABLE>
10
<PAGE> 11
The segment reporting detailed above reconciles to consolidated revenues and
income before provision (benefit) for income taxes, extraordinary item and
cumulative effect of a change in accounting principal as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1999 1998 1999 1998
-------- -------- --------- --------
<S> <C> <C> <C> <C>
REVENUES
Total unaffiliated customers revenue for
reportable segments $ 66,185 $ 45,629 $ 133,147 $ 83,246
Holding company revenues 33 3,829 48 3,844
Intersegment revenues for reportable segments 3,996 3,898 4,808 7,557
Elimination of intersegment revenues (3,996) (3,898) (4,808) (7,557)
-------- -------- --------- --------
Total consolidated revenues 66,218 49,458 133,195 87,090
======== ======== ========= ========
PROFIT AND LOSS
Total segment profit (loss) for reportable
segments (1,034) 9,386 6,937 16,001
Holding company segment profit (loss) (2,985) 3,242 (4,786) 2,544
-------- -------- --------- --------
Total segment profit (loss) (4,019) 12,628 2,151 18,545
Unallocated amounts:
Interest expense, net 5,319 1,550 9,053 3,060
Other expenses, net 861 992
Minority interest 398 2,509 990 3,578
======== ======== ========= ========
Income (loss) before provision (benefit) for
income taxes, extraordinary item and cumulative
effect of change in accounting principle $(10,597) $ 8,569 $ (8,884) $ 11,907
======== ======== ========= ========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
1999
---------
<S> <C>
ASSETS
Total identifiable assets for reportable segments $ 429,582
Holding company assets 17,709
---------
Total consolidated assets $ 447,291
=========
</TABLE>
6. IMPAIRMENT OF COMMERCIAL RECYCLING LONG-LIVED ASSETS
On June 1, 1999, the Company completed the sale of its commercial
recycling facility located in Franklin Park, Illinois and recorded a loss of
approximately $444.
As a result of this loss and the continued poor operating performance
of this segment, the Company initiated an impairment review of the long-lived
assets, including goodwill, in the Commercial Recycling segment. A revised
operating plan for each of the remaining facilities in the Commercial Recycling
segment was developed. While revenues are stable, the Commercial Recycling
segment continues to operate at levels of profitability, which are significantly
below the levels anticipated when the acquisitions were completed. In addition,
with the continued consolidation of the solid waste industry and the continued
focus on the disposal aspects of this industry, the possibility of selling these
facilities for amounts approximating their carrying value is remote.
The Company determined that the estimated future undiscounted cash
flows for the KTI Recycling of New Jersey ("Newark Plant") facility were below
the carrying value of the related equipment and leasehold improvements. The
Company adjusted the carrying value of the related equipment and leasehold
improvements of the Newark Plant by approximately $3,000 to their estimated
fair value of approximately $1,142. The fair value of the long-lived assets was
based on the expected cash flows discounted at a rate commensurate with the
risk involved.
7. PLANT CONSOLIDATION, RESTRUCTURING AND OTHER UNUSUAL ITEMS
11
<PAGE> 12
In April 1999, FCR, Inc., a subsidiary of the Company, signed a new
agreement with a municipality to operate a material recovery facility in
Charlotte, North Carolina. As part of this agreement, the Company committed to
relocate the cellulose insulation plant located in Ronda, North Carolina to the
material recovery facility in Charlotte. This secures the supply of raw material
for the cellulose insulation plant and provides additional cost savings from the
integration of recycling and the manufacturing of cellulose insulation into one
facility. As a result, the Company developed an exit plan for the closing of the
plant in Ronda, North Carolina and began the construction of the new cellulose
insulation plant during the second quarter. The Company recorded a restructuring
charge of approximately $1,205, which consisted primarily of the write-down of
equipment and leasehold improvements and an accrual for the remaining payments
under the noncancelable lease of the Ronda facility, in the second quarter.
During the second quarter, the Company reached agreement with an
employee to restructure the amounts paid under an employment contract. The
Company recorded a restructuring charge of approximately $320 relating to
amounts due under the revised contract.
In June 1999, the Company initiated a plan to close the Residential
Recycling Segment's material recovery facility located in Howes Cave, New York
and process the materials from this facility at another Residential Recycling
Segment facility. The Company recorded a restructuring charge of $514, which
consisted primarily of the remaining payments under noncancelable leases of the
building and equipment, in the second quarter.
Included in restructuring charges is $433 of deferred acquisition costs
related to acquisitions that were terminated during the second quarter.
In April 1998, a subsidiary of the Company, FCR, Inc. ("FCR"), entered
into an amended agreement to operate a material recovery facility in Stratford,
Connecticut. This agreement requires FCR to add additional processing equipment
to this facility within a certain period of time as defined in the amended
agreement or pay the municipality $100 per year over the next five years. In
April 1999, FCR determined that this processing equipment was not cost effective
due to other alternative methods of processing and, thus, will not install the
equipment. As a result, the Company recorded the penalty included in the
agreement of $500 for the payments to be made to the municipality. The amount is
accrued and classified as other liabilities as of June 30, 1999.
Other charges of $131 represents an accrual for penalties assessed by
the Florida Department of Environmental Protection related to the temperature of
the discharge water at the TERI Telogia Facility.
In the first quarter of 1999, the Company recorded a $748 restructuring
charge. The restructuring initiatives primarily involve the Company's
Commercial Recycling segment and represent primarily severance and other costs
related to employee reductions. In connection with the restructuring, the
Company terminated ten employees. The restructuring charges relate to
integration of the brokerage operation acquired as part of the New Jersey
Fibers acquisition and elimination of costs as a result of streamlining the
operations of acquisitions completed in 1998. The Company recorded $374 against
this reserve during 1999.
8. INCOME TAXES
The income tax benefit was approximately $2,678 for the six months
ended June 30, 1999 compared to an income tax provision of approximately $4,693
during the same period in 1998. During 1999, the effective tax rate utilized by
the Company of 30.1% represents the estimated annual effective rate based on the
total estimated pretax income of the Company for the year ended December 31,
1999. The effective rate in 1998 was 39.4% and the decrease in the effective
rate in 1999 is primarily due to an increase in nondeductible goodwill.
9. REVOLVING LINE OF CREDIT AGREEMENT
On May 12, 1999, the Company's Revolving Line of Credit Agreement with
a bank (the "Credit Agreement") was amended (the "Amended Agreement") modifying
certain financial covenants and requiring bank approval for all acquisitions.
The Amended Agreement requires that the Company and certain subsidiaries, as
defined, maintain certain specified financial covenants, including, a minimum
interest coverage ratio, a maximum funded debt to EBITDA ratio, a minimum fixed
charge coverage ratio, and a maximum debt to capitalization ratio, each as
defined in the Amended Agreement. The Company recorded a charge of $835 in
connection with the amendment. This charge was recorded in interest expense
during the second quarter.
As of June 30, 1999, the Company was in default of the financial
covenants of its $150.0 million line of credit. The Company's lender has waived
the violation of the financial covenants through September 30, 1999. As a
result, the outstanding amount under the line of credit has been classified as a
current liability. Upon the consummation of the merger, this line of credit will
be replaced by the credit facility of the merged company. However, no assurances
can be given that the conditions of the merger will be satisfied or that the
merger will be consummated.
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The Company will continue to select interest rates on the outstanding
borrowings based on the bank's prime rate or LIBOR rates, however, the interest
rates range from the bank's prime rate to the bank's prime rate plus 1.50% or
LIBOR plus 1.88% to LIBOR plus 3.25% depending on the attainment of a financial
covenant, as defined, in the Amended Agreement.
10. OTHER MATTERS
In connection with the review of the Proxy Statement for the merger
with Casella, the Securities and Exchange Commission ("SEC") has informed the
Company that it does not concur with the accounting treatment regarding the
restructuring of the Power Purchase Agreements at Maine Energy Recovery
Company, Limited Partnership and PERC in 1996 and 1998, respectively. The
Company believes that the accounting is correct and continues to have dialogue
with the SEC regarding these matters. If there were to be any changes to the
accounting treatment for these transactions, the amounts reported in the
accompanying Form 10-Q would be revised. In addition, the amounts in the
financial statements for the three years ended December 31, 1998 would be
revised. The Company's estimate is that the decrease in pretax income could be
in excess of $14.0 million and $7.0 million for the years ended December 31,
1996 and 1998, respectively. In addition, pretax income in the future would be
increased as the impacts noted above are amortized over the life of the
respective agreements.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The Company reports the results of operations by the following four
segments: waste-to-energy, residential recycling, commercial recycling and
finished products.
REVENUES
Waste-to-Energy Segment
The Waste-to-Energy segment consists of the operations of Maine Energy
Recovery Company, Limited Partnership ("Maine Energy"), Penobscot Energy
Recovery Company, Limited Partnership ("PERC"), Timber Energy Resources, Inc.
("TERI"), KTI Specialty Waste Services, Inc., American Ash Recycling of
Tennessee, Ltd. ("AAR"), KTI BioFuels, Inc. ("BioFuels"), Total Waste Management
Corporation ("TWM"), Multitrade Group, Inc. ("Multitrade"), Russell Stull
Companies ("Russell Stull"), KTI Recycling of Canada ("KTI Tire"), and AFA
Group, Inc. ("AFA"). Total revenues for this business unit were approximately
$26.8 and $51.2 million for the three and six months ended June 30, 1999,
respectively, compared to approximately $28.1 and $46.4 million, respectively,
for the same periods in 1998. This represents a decrease of approximately $1.3
million or 4.6% for the three months ended June 30, 1999 and an increase of
approximately $4.8 million or 10.3% for the six months ended June 30, 1999
compared to the same periods in 1998.
Revenues in the Waste-to-Energy segment are primarily derived from
waste processing and electric power sales. Total tons received by the
waste-to-energy facilities increased by 5.0% and 4.2% for the three and six
months ended June 30, 1999, respectively, compared to the same periods in 1998.
The tons received at PERC increased approximately 3.3% and 0.2% for the three
and six months ended June 30, 1999, respectively, compared to the same periods
in 1998. These variances were a result of the scheduled plant outage occurring
during the first quarter in 1999 versus the second quarter in 1998. The tons
received by AAR increased approximately 79.9% and 81.3% for the three and six
months ended June 30, 1999, respectively compared to the same periods in 1998.
The increases at the AAR facility were partially offset by a 3.8% and 4.4%
decrease at Maine Energy for the three and six months ended June 30, 1999,
respectively, compared to the same periods in 1998. These decreases were due to
lower production as a result of repairs to the primary processing equipment.
Waste processing revenues increased by approximately $2.8 million or
31.1% and approximately $5.2 million or 30.7% for the three and six months ended
June 30, 1999, respectively, compared to the same periods in 1998. This increase
is a result of net increase in tonnage discussed above, increased prices
charged per ton during 1999 versus 1998 of approximately 7.2% and
additional revenues from the Multitrade, Russell Stull, AFA and KTI Tire
acquisitions. The increases from the acquisitions were offset by reductions at
BioFuels due to the elimination of brokerage operations on March 31, 1998.
Electric power revenues for the three and six months ended June 30,
1999 decreased approximately $12.3 million or 52.2% and approximately $11.1
million or 32.4%, respectively, compared to the same periods in 1998. The
decrease in revenues is due to the 1998 payments received from the restructuring
of the Power Purchase Agreement ("PPA") at PERC partially offset by 8.9% higher
output at the facilities.
Residential Recycling Segment
This segment includes the residential recycling plants of FCR, Inc.
("FCR") and the Boston recycling plant. This segment posted revenues of
approximately $6.0 million and $15.1 million for the three and six months ended
June 30, 1999, respectively, compared to approximately $1.5 and $3.2 million,
respectively, for the same periods in 1998. This represents an increase of
approximately $4.5 and $11.9 million, respectively, primarily as a result of the
acquisition of FCR, which was completed in the third quarter of 1998.
Commercial Recycling Segment
The Commercial Recycling segment consists of the operations of I.
Zaitlin and Sons, Inc. ("Zaitlin"), K-C International, Inc. ("K-C"), Data
Destruction, Inc., the commercial recycling plants in Chicago and Newark
acquired from Prins, and KTI New Jersey Fibers, Inc. ("NJ Fibers"), which
consists of the operations of Gaccione Bros., Inc. & Co. and PGC Corporation
(collectively, "Gaccione") and Atlantic Coast Fibers, Inc. ("Atlantic Coast").
Total revenue for this segment for the three and six months ended June 30, 1999
was approximately $19.3 and $40.4 million, respectively, compared to $13.5 and
$29.5 million, respectively, for the same periods in 1998. This represents an
increase of approximately $5.8 and $10.9 million, respectively. These increases
are primarily as a result of the acquisition of NJ Fibers which was
completed in the third quarter of 1998 and higher commodity prices for paper
fibers in the second quarter of 1999 versus the second quarter of 1998. These
increases were partially offset by lower volumes at the commercial processing
plants due to the sale of the Chicago Facility.
Finished Products Segment
The Finished Products segment consists of the operations of Power Ship
Transport, Inc., Manner Resins, Inc. ("Manner"), the cellulose insulation plants
and the plastic reprocessing plants of FCR, the plastic reprocessing operations
of First State Recycling, Inc. and the glass pellet processor Seaglass, Inc.
Total revenue for this segment for the three and six months ended June 30, 1999
were approximately $14.1 and $26.4 million, respectively, compared to
approximately $2.5 and $4.2 million for the same periods in 1998. This
represents an increase of approximately $11.6 and $22.2 million, respectively.
The increase in revenues is primarily the result of acquisitions discussed above
and higher volumes at Manner. These volumes were partially offset by decreases
in plastic prices in the second quarter of 1999 versus the same period in 1998.
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COSTS AND EXPENSES
Waste-to-Energy Segment
Cost of operations in this segment consist primarily of electric power
and waste handling operating costs which were approximately $22.6 and $40.6
million, during the three and six months ended June 30, 1999, respectively,
compared to approximately $18.3 and $30.9 million, respectively, for the same
periods in 1998. This represents an increase of approximately $4.3 million or
23.5% and $9.7 million or 31.4%, respectively. The increase was primarily a
result of the TWM, Multitrade, Russell Stull, AFA and KTI Tire acquisitions
discussed above which had total costs of operations of approximately $5.4
million. In addition, PERC's operating costs decreased 5.3% due to lower costs
associated with the planned outage being completed in the first quarter of 1999
versus the second quarter of 1998 which were offset by an increase in
performance credits as a result of the amended PPA and Waste Disposal
agreements. TERI's costs decreased by 12.5% as a result of an increase in
tipping fee based material which reduced fuel costs. In addition the costs
associated with the BioFuels brokerage discussed above were eliminated.
Residential Recycling Segment
Cost of operations in this segment for the three and six months ended
June 30, 1999 were approximately $6.3 and $14.8 million, respectively, compared
to approximately $1.3 and $2.5 million, respectively, for the same periods in
1998. This represents an increase of approximately $5.0 and $12.3 million,
respectively, primarily as a result of the acquisition of FCR, which was
completed in the third quarter of 1998.
Commercial Recycling Segment
Cost of operations in this segment for the three and six months ended
June 30, 1999 were approximately $23.2 and $44.1 million, respectively, compared
to approximately $14.1 and $29.8 million, respectively, during the same periods
in 1998. This represents an increase of approximately $9.1 and $14.3 million,
respectively. This increase is due primarily to the acquisition of NJ Fibers in
August 1998 and higher commodity purchase prices which were partially offset
by lower volumes at the commercial processing plants during 1999 versus 1998.
Finished Products
Cost of operations in this segment for the three and six months ended
June 30, 1999 were approximately $15.1 and $26.7 million, respectively, compared
to approximately $2.6 and $3.9 million, respectively, during the same periods in
1998. This represents an increase of approximately $12.5 and $22.8 million,
respectively. The increase was primarily a result of the acquisitions discussed
above and increased volumes at Manner. The increased volumes at Manner were
partially offset by decreased plastic prices in 1999 versus the same period in
1998.
OTHER ITEMS
Selling, general and administrative expenses increased by approximately
$4.2 and $9.0 million for the three and six months ended June 30, 1999,
respectively, compared to the same periods in 1998. The increase is a result of
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selling, general and administrative costs added through acquisitions throughout
1998 and the addition of administrative staff to develop and install
corporate-wide information systems; to develop and support a formal strategic
planning and budgeting process; to support Company wide credit and collection
efforts; to identify and pursue potential mergers and acquisitions; and to
develop internal information systems to identify revenue enhancement and cost
savings programs in newly acquired entities.
On June 1, 1999, the Company completed the sale of its commercial
recycling facility located in Franklin Park, Illinois and recorded a loss of
approximately $0.4 million.
As a result of this loss, the Company initiated an impairment review
of the long-lived assets, including goodwill, in the Commercial Recycling
segment. A revised operating plan for each of the remaining facilities in the
Commercial Recycling segment was developed. While revenues are stable, the
Commercial Recycling segment continues to operate at levels of profitability,
which are significantly below the levels anticipated when the acquisitions were
completed. In addition, with the continued consolidation of the solid waste
industry and the continued focus on the disposal aspects of this industry, the
possibility of selling these facilities for amounts approximating their
carrying value is remote.
The Company continued to experience low operating results in the
Commercial Recycling Segment and determined that the estimated future
undiscounted cash flows for the KTI Recycling of New Jersey ("Newark Plant")
facility were below the carrying value of the long-lived assets. The
Company adjusted the carrying value of the equipment and leasehold improvements
of the Newark Plant by approximately $3.0 million to their estimated fair value
of approximately $1.2 million. The fair value of the long-lived assets was
based on the expected cash flows discounted at a rate commensurate with the
risk involved.
Interest expense increased approximately $3.8 and $6.0 million during
the three and six months ended June 30, 1999, respectively, compared to the same
periods in 1998. These increases are related principally to increased borrowings
on the Company's line of credit to fund several acquisitions, incremental
interest expense on debt assumed as part of these acquisitions, higher interest
rates on the Company's line of credit, fees associated with the amendment of
financial covenants, and the conversion of the Series B Preferred Stock to
convertible debt. These increases were partially offset by lower interest rates
at PERC as a result of the refinancing of the bonds payable and lower debt
levels at Maine Energy.
LIQUIDITY AND CAPITAL RESOURCES
The Company is a holding company and receives certain of its cash flows
from its subsidiaries. Receipt of cash flow from PERC is currently restricted by
covenants under loan agreements, distribution restrictions under partnership
agreements with PERC's equity investors, and put-or-pay agreements with
municipalities. Maine Energy's cash flow is required to retire the remaining
outstanding subordinated debt balance of approximately $11.5 million as of June
30, 1999 before partners' cash distributions can begin (approximately $7.6
million of these notes are owned by the Company). TERI'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 TERI and liquidity and capital resources of each of
Maine Energy, PERC and TERI independently.
THE COMPANY
The Company operates in industries that require a high level of capital
investment. The Company's capital requirements basically stem from (i) its
working capital for ongoing operations, (ii) capital expenditures for new plants
and equipment and (iii) business acquisitions. The Company's strategy is to meet
these capital needs from internally generated funds which are not contractually
restricted, drawings under its lines of credit, collateralized equipment
financing and proceeds from the sale of the Company's common stock.
As of June 30, 1999, the Company was in default of the financial
covenants of its $150.0 million line of credit. The Company's lender has waived
the violation of the financial covenants through September 30, 1999. As a
result, the outstanding amount under the line of credit has been classified as a
current liability. Upon the consummation of the merger, this line of credit will
be replaced by the credit facility of the merged company. However, no assurances
can be given that the conditions of the merger will be satisfied or that the
merger will be consummated.
If the merger is not consummated, the Company will be required to
modify the financial covenants or obtain a waiver from the lender. The lender is
under no obligation to amend the financial covenants or provide such a waiver.
Management believes that the Company will either obtain a waiver or an amendment
to the financial covenants; however, there can be no assurances that this can be
accomplished. As of June 30, 1999, the Company had no availability under the
revolving credit agreement. Though management of the Company believes that cash
flows from its subsidiaries will meet its current needs for working capital and
capital expenditures, the ability of the Company to expand its current
operations is dependent on cash flow from its subsidiaries.
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As of June 30, 1999, the Company had a working capital deficit of
approximately $108.5 million (a ratio of current assets to current liabilities
of 0.45:1) and a cash balance of approximately $5.4 million which compared to
working capital of approximately $42.8 million (a ratio of current assets to
current liabilities of 2.11:1) and a cash balance of approximately $9.4 million
at December 31, 1998. As of June 30, 1999, the Company had a working capital
deficit and cash on hand without regard to Maine Energy, PERC and TERI of
approximately $137.7 million (a ratio of current assets to current liabilities
of 0.28:1) and approximately $1.6 million, respectively, which compared to
working capital of approximately $12.9 million (a ratio of current assets to
current liabilities of 1.41:1) and a cash balance of approximately $3.9
million at December 31, 1998.
The Company's ability to make future acquisitions is dependent on its
ability to increase its line of credit. The ability to increase the line of
credit is dependent on the Company's ability to raise additional equity or raise
capital from financial instruments which are subordinated to the line of credit.
Management believes that the Company has the ability to raise additional capital
if needed; however, there can be no assurances that this can be accomplished at
terms and conditions that would be acceptable to the Company.
The Company and its subsidiaries, other than Maine Energy, PERC and
TERI, at June 30, 1999 had current maturities of indebtedness of approximately
$155.3 million, including borrowings under existing revolving credit facilities.
During the six months ended June 30, 1999, the Company had net borrowings of
approximately $12.4 million on the Company's line of credit facilities.
In general, the Company's capital expenditures and working capital
requirements have increased as a result of the Company's business strategy of
growth through acquisitions. Management of the Company believes that cash flow
from operations will meet its current needs for liquidity.
MAINE ENERGY
Maine Energy has financed its operations and capital expenditures from
cash flows from operations. Cash provided by operations was approximately $0.1
million for the six months ended June 30, 1999 compared to approximately $1.2
million during the same period in 1998. Maine Energy's capital expenditures were
approximately $1.0 and $1.7 million during the six months ended June 30, 1999
and 1998, respectively.
As of June 30, 1999 and December 31, 1998, Maine Energy had operating
cash of approximately $0.3 million and $2.4 million, respectively, and as
required under the terms of the credit agreement underlying its letter of
credit, Maine Energy had on account an additional approximately $5.5 million and
$6.0 million, respectively, of cash reserves to be used under certain
circumstances for capital improvements, debt service, operating shortfalls and
working capital requirements. As of June 30, 1999, Maine Energy had total
indebtedness of approximately $11.5 million.
Management of the Company believes Maine Energy's cash flows from
operations and cash resources available will be sufficient to fund anticipated
capital expenditures and debt service requirements. Capital expenditures for
Maine Energy for the remainder of 1999 are not expected to be significant.
PERC
PERC has financed its operations and capital expenditures primarily by
cash flow from operations. Cash provided by operations was approximately $2.7
million for the six months ended June 30, 1999 compared to approximately $5.9
million during the same period in 1998. PERC's capital expenditures were
approximately $1.3 and $0.2 million during the six months ended June 30, 1999
and 1998, respectively.
On June 26, 1998 KTI completed a major restructuring of the various
contracts and obligations of PERC, which included refinancing PERC's tax exempt
bonds. The refinancing was made possible through the sale of approximately $45.0
million in Electric Rate Stabilization Revenue Refunding Bonds issued by the
Finance Authority of Maine ("FAME") ("Revenue Bonds"). The proceeds, plus
certain funds from operations were utilized to repay the outstanding bonds. The
interest rate on the Revenue Bonds ranges from 3.75% for one-year bonds to 5.20%
for 20-year term bonds. The refinancing reduced PERC's debt service costs while
extending its payment obligation over 20 years.
As of June 30, 1999, in addition to PERC's operating cash of
approximately $2.8 million, PERC, as required under the terms of the trust
indenture governing the Revenue Bonds, had on account an additional
approximately $15.4 million of cash reserves to be used for capital
improvements, debt service, operating shortfalls and working capital
requirements.
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Company management believes PERC's cash flows from operations and cash
resources available will be sufficient to fund anticipated capital expenditures
and debt service requirements. PERC plans capital expenditures for the remainder
of 1999 of approximately $0.4 million which principally has been set aside in
the above-mentioned reserve accounts.
TERI
TERI has two 1997 Industrial Development Revenue Bond issues (the "1997
Bonds") outstanding that carry interest at a fixed rate of 7% and have annual
sinking fund payments due each December 1 with a final payment due December 1,
2002. As of June 30, 1999, TERI had approximately $11.6 million outstanding in
1997 Bonds.
As of June 30, 1999 and December 31, 1998, in addition to TERI's
operating cash of approximately $0.7 million and $0.8 million, respectively,
TERI, as required under the terms of it's the 1997 Bonds, had on account
approximately $1.8 and $2.1 million, respectively, of cash reserves to be used
under certain circumstances for capital improvements, debt service, operating
shortfalls and working capital requirements.
Management believes TERI's cash flows from operations and cash
resources available will be sufficient to fund anticipated capital expenditures
and debt service requirements. Capital expenditures for TERI for the remainder
of 1999 are expected to be approximately $0.2 million. TERI intends to finance
the requirements through cash flow from operations.
TAX LOSS CARRYFORWARDS
At June 30, 1999, the Company had net operating loss carryforwards of
approximately $55.4 million for income tax purposes that expire in years 2002
through 2018 and are subject to the limitations as described below. In addition,
the Company has general business credit carryforwards of approximately $0.5
million that expire in the years 1999 through 2006 and alternative minimum tax
credit carryforwards of approximately $0.9 million that are not subject to
limitation.
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 fifty (50)
percentage points over the lowest percentage of such stock owned during a
three-year testing period.
During 1994, such a change in ownership of the Company occurred. As a
result of the change, the Company's ability to utilize its net operating loss
carryforwards and general business credits will be limited to approximately $1.2
million of taxable income, or approximately $0.4 million of equivalent credit
per year. This limitation may be increased if the Company recognizes a gain on
the disposition of an asset which had a fair market value greater than its tax
basis on the date of the ownership change.
In conjunction with the acquisition of TERI, FCR and TWM, the Company
recorded additional net operating loss carryforwards of approximately $25.6
million, $12.5 million and $0.5 million respectively, which are also subject to
a corporate "ownership change". As a result of the change, the Company's ability
to utilize the net operating loss carryforwards related to these entities is
limited to approximately $1.0 million, $3.2 million and $0.1 million,
respectively, per year.
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ENVIRONMENTAL CONTINGENCIES
While increasing environmental regulation often presents new business
opportunities to the Company, Maine Energy, PERC and TERI, it likewise often
results in increased operating costs as well. The Company, Maine Energy, PERC
and TERI strive to conduct their operations in compliance with applicable laws
and regulations, including environmental rules and regulations, and have as
their goal 100% compliance with such laws and regulations. This effort requires
programs to promote compliance, such as training employees and customers,
purchasing health and safety equipment, and in some cases hiring outside
consultants and lawyers. Even with these programs, management of the Company
believes that in the ordinary course of doing business, companies in the
environmental services and waste disposal industry are faced with governmental
enforcement proceedings resulting in fines or other sanctions and will likely be
required to pay civil penalties or to expend funds for remedial work on waste
management facilities.
The TERI Telogia facility was in violation of its Waste Water Discharge
Permit (the "Permit"). This violation involves the temperature of the water used
in the cooling process and in the opinion of management, does not involve a
significant environmental issue. The Company has requested a modification to the
Permit from the Florida Department of Environmental Protection to change the
monitoring procedures and enable the Company to operate in compliance with the
permit. On July 28, 1999, the Company signed a consent order with the Florida
Department of Environmental Protection which included a penalty of
approximately $0.1 million to settle this matter.
At June 30, 1999, there were no pending governmental environmental
enforcement proceedings where the Company, Maine Energy, PERC or TERI believe
potential monetary sanctions will exceed $0.1 million. The possibility always
exists that substantial expenditures could result from governmental proceedings,
which would have a negative impact on earnings for a particular reporting
period. More importantly, federal, state and local regulators have the power to
suspend or revoke permits or licenses needed for operation of the plants,
equipment, and vehicles of the Company, Maine Energy, PERC or any other
operating subsidiary of the Company based on the applicable company's compliance
record, and customers may decide not to use a particular disposal facility or do
business with a company because of concerns about its compliance record.
Suspension or revocation of permits or licenses would have a negative impact on
the Company's business and operations and could have a material adverse impact
on the Company's financial results.
INFLATION
The effect of inflation on operating costs has been minimal in the past
three (3) years. Most of the Company's operating expenses are inflation
sensitive, with increases in inflation generally resulting in increased costs of
operation. The effect of inflation-driven cost increases on each of the
Company's project's overall operating costs is not expected to be greater for
such project than for its respective competitor's projects. In addition, each of
Maine Energy and PERC and the majority of the Residential Recycling contracts
can contractually increase its waste processing fees to municipal customers
annually based on inflation.
YEAR 2000 ISSUE
Year 2000 compliance is the ability of computer hardware and software
to respond to the problems posed by the fact that computer programs have
traditionally been written using two digits rather than four to define the
applicable year. As a consequence, unless modified, computer systems will not be
able to differentiate between the year 2000 and 1900. Systems must also
recognize the Year 2000 as a leap year. Failure to address this problem could
result in system failures and the generation of erroneous data. This could
potentially impact the Company's ability to perform its obligations under
long-term contracts which could result in legal and other liabilities which
would have a material adverse effect on the Company.
The Company has contacted its customers and vendors and has received
letters from each of its applications vendors stating that the majority of the
Company's information technology systems, such as accounting, data processing,
plant operations systems and telephone/PBX systems, are Year 2000
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compliant. Several insignificant software applications representing 20% of the
Company's applications are not Year 2000 compliant. They are scheduled to be
replaced or upgraded by Year 2000 compliant versions of the applications from
the vendor by the end of the third quarter of 1999. The Company has also begun
an assessment of its non-information technology systems, such as its security
systems and telephones, to determine if they are Year 2000 compliant. The
Company has initiated formal communications with the vendors of its remaining
non-information technology systems. Based on its assessment to date, the Company
is not aware that any of its non-information technology systems will not be Year
2000 compliant prior to the Year 2000.
The Company has also begun an assessment of its significant vendors,
suppliers, and service providers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
compliance issues. To date, the Company has determined, based on information
published or otherwise provided by such third parties, that all of such parties'
systems are or will be Year 2000 compliant. The Company plans to initiate formal
communications with the remaining third parties with whom the Company has a
significant relationship. Based on its assessment to date, the Company is not
aware that any of its significant vendors, suppliers and service providers will
not be Year 2000 compliant prior to the Year 2000.
The following table summarizes the status of the Company's Year 2000 compliance
program:
<TABLE>
<CAPTION>
ASSESSMENT REMEDIATION TESTING IMPLEMENTATION
---------- ----------- ------- --------------
<S> <C> <C> <C> <C>
Information 100% Complete 80% Complete 80% Complete 80% Complete
Technology
Expected completion Expected completion Expected completion
date, September 1999 date, September 1999 date, September 1999
Operating 100% Complete 90% Complete 90% Complete 90% Complete
Equipment with
Embedded Chips or Expected completion Expected completion Expected completion
Software date, September 1999 date, September 1999 date, September 1999
3rd Party 90% Complete 90% Complete for 90% Complete for 90% Complete for system
for system system interface. system interface. interface.
interface. 80%
Complete for Develop contingency Expected completion Expected completion
all other plans as appropriate, date for system date for system
material September 1999. interface work, interface work,
exposures. September 1999 September 1999.
100% Complete Implement contingency
Expected plans or other
completion date alternatives as
for surveying necessary, September 1999.
all remaining
third parties,
September 1999.
</TABLE>
In addition to the assessments and investigations described above, the
Company has conducted tests of all of its internal information and
non-information technology systems and all of its system interfaces with
significant vendors, suppliers and service providers to ensure Year 2000
compliance. All of the Company's accounting and data processing equipment is
based on microcomputer hardware and related software, of which 80% has been
certified as Year 2000 compliant by the applicable manufacturer or developer.
However, the Company has determined that the plant control systems may contain
embedded
20
<PAGE> 21
technology which is not Year 2000 compliant. The Company has ordered the
hardware containing the embedded logic to replace the hardware that is not Year
2000 compliant with hardware which is Year 2000 compliant. In addition, these
systems will be tested during scheduled outage periods at the plants during the
second and third quarters of 1999. However, despite the Company's efforts to
ensure that its internal systems and the systems of its significant vendors,
suppliers and service providers are Year 2000 compliant, there can be no
guarantee that the failure of certain systems will not have a material adverse
effect on the Company.
To date, the Company has utilized internal resources to reprogram, or
replace, test, and implement the software and hardware modifications for Year
2000. The only costs incurred by the Company have been the salary costs of its
internal staff of four. To date, the Company has incurred approximately $0.1
million (30% expensed and 70% capitalized for new systems and equipment),
related to all phases of the Year 2000 project. The Company estimates that the
remaining project costs will be less than $0.1 million for the purchase of new
software and hardware and approximately $0.1 million of internal resources.
Although at the current time, the Company expects that it will be able to
complete its Year 2000 compliance program using only internal resources, there
can be no assurance that the Company will not require external resources to
complete its Year 2000 compliance program.
The most significant risk identified by the Company is the inability of
the power plants to generate electric power. The Company has received assurances
that the process control systems will be Year 2000 compliant with the
installation of new hardware components. The Company will perform a complete
test of the systems during the planned outage periods that are to be completed
by the end of the third quarter of 1999. In addition, the Company has developed
contingency plans for this risk as well as other internal and external
applications which involve, among other actions, manual workarounds, increasing
inventories and adjusting staffing strategies. The impact of this risk could
include default under the respective PPA with customers and a loss of electric
power revenue. The Company is unable to reasonably estimate the impact of this
risk; however, there can be no guarantee that this risk will not have a material
adverse effect on the Company. There is also no guarantee that the Company has
identified all the significant risks associates with Year 2000 compliance.
RECENT ACCOUNTING PRONOUNCEMENTS
Recent accounting pronouncements which are not required to be adopted
at June 30, 1999, include the following Statement of Financial Accounting
Standards ("SFAS") and the American Institute of Certified Public Accountants
Statements of Position ("SOP"):
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, which will be required to be adopted by the Company as of January 1,
2001, establishes standards for derivative instruments including those embedded
in other contracts and for hedging activities. The new standard requires the
Company to recognize all derivatives as either assets or liabilities and measure
those instruments at fair value. Management believes that the adoption of SFAS
No. 133 will not have a material impact on the Company's financial statements.
SOP 98-1, Accounting for Costs of Computer Software Developed or
Obtained for Internal Use is required to be adopted by the Company as of January
1, 2000. The Company's current policy falls within the guidelines of SOP 98-1.
21
<PAGE> 22
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
The Company currently utilizes no material derivative financial
instruments which expose it to significant market risk. The Company is exposed
to cash flow and fair value risk due to changes in interest rates with respect
to its debt. The table below presents principal cash flows and related weighted
average interest rates of the Company's debt at June 30, 1999 by expected
maturity dates. Weighted average variable rates are based on forward rates in
United States Government Treasury Constant Maturities at June 30, 1999. Forward
rates should not be considered a predictor of actual future interest rates.
INTEREST RATE SENSITIVITY
PRINCIPAL AMOUNT BY EXPECTED MATURITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 THEREAFTER FAIR VALUE
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate Debt $ 5,696 $ 8,071 $ 7,509 $ 8,153 $ 3,088 $ 50,466 $ 83,115
Average Interest Rate 6.60% 6.50% 7.30% 6.30% 6.27% 5.04%
Variable Rate Debt $ 155,092 $ 155,092
Average Interest Rate 8.53%
</TABLE>
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.
22
<PAGE> 23
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Maine Energy is the plaintiff in a suit filed on May 11, 1994 in a
Maine state court 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 building. The judge in the case
entered an order awarding Maine Energy approximately $3.3 million 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. In February 1999, the
appellate court reversed the trial court's verdict in favor of KTI and returned
the case to the trial court, which ordered a new trial.
Two lawsuits have been filed on September 30, 1997 and March 6, 1998 by
Capital Recycling of Connecticut in a Connecticut state court against K-C
International, certain officers of K-C International and other parties. The
suits allege fraud, tortious 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 International. The contracts require
all disputes to be resolved by arbitration in Portland, Oregon. Pursuant to this
requirement, K-C International has initiated the arbitration process on November
6, 1997 in Portland, Oregon. Subsequently, the parties agreed to arbitrate the
dispute in Hartford, Connecticut. Discovery is now in process and the parties
are currently attempting to mediate the dispute before going to arbitration. The
plaintiffs are seeking approximately $1.9 million in damages. KTI believe it has
meritorious defenses to these claims. If, however, the damages claimed by the
plaintiffs are awarded, KTI's business, financial condition and results of
operations could be materially adversely affected.
The Equal Employment Opportunity Commission filed a lawsuit on
September 30, 1998 against FCR Tennessee, Inc. in the U.S. District Court for
the Western District of Tennessee, Western Division, alleging sexual harassment
by two managers and a sexually hostile work environment. The complainants seek
compensation for past and future pecuniary and non-pecuniary losses as well as
punitive damages and potential reinstatement of employment for Valerie L.
Jacobs. FCR has retained counsel to defend this suit and has reported the
lawsuit to FCR's Directors and Officers insurance carrier. Management is
currently reviewing the lawsuit. The plaintiffs have demanded $105,000 and the
Company has offered $30,000 in settlement. No agreement on settlement has been
reached. KTI's insurance carrier has agreed to defend the case.
On April 1, 1999, William F. Kaiser, a former Executive Vice President
and Treasurer of KTI, filed a lawsuit against the Company in the U.S. District
Court for the District of New Jersey. The suit alleges breach of contract,
wrongful termination, breach of the implied covenant of good faith and fair
dealing, misrepresentation of employment terms and failure to pay wages, all
arising out of Mr. Kaiser's employment agreement with the Company. The suit also
alleges that the Company inaccurately reported its financial results for the
first quarter of 1998 and failed to properly disclose the change of control
provision in Mr. Kaiser's employment agreement. Mr. Kaiser is seeking a
declaratory judgment that, upon closing of the merger, the change of control
provision entitles him to receive a severance payment of two years' salary, in
the amount of $320,000 and to exercise 132,000 unvested options for KTI common
stock. Mr. Kaiser is also seeking damages in the amount of $40,000 for an
additional severance payment, as well as undisclosed damages for outstanding
salary, bonus and other payments and from his sale of approximately 50,000
shares of KTI common stock resulting from KTI's allegedly inaccurate financial
reports.
C.H. Lee, a former employee of FCR and a former majority shareholder of
Resource Recycling, Inc., instigated arbitration proceedings on April 15, 1999
in Charlotte, North Carolina against KTI, FCR and FCR Plastics, Inc. in
connection with the acquisition of Resource Recycling by FCR. Mr. Lee alleges
that FCR and FCR Plastics acted to frustrate the "earn-out" provisions of the
acquisition agreement and thereby precluded Mr. Lee from receiving, or
alternatively, reduced, the sums to which he was entitled under the agreement.
He also alleges that FCR and FCR Plastics wrongfully terminated his employment
agreement. The claim for arbitration alleges direct charges in excess of $5.0
million and requests punitive damages, treble damages and attorneys fees. KTI,
FCR and FCR Plastics responded to the demand,
23
<PAGE> 24
denying liability, and filed a counterclaim for $1.0 million for
misrepresentations. KTI believes it has meritorious defenses to these claims.
If, however, the damages and charges claimed by Mr. lee are awarded, KTI's
business, financial condition and results of operation could be materially
adversely affected.
On or about April 26, 1999, Salvatore Russo filed an action in the U.S.
District Court, District of New Jersey against KTI and two of its principal
officers, Ross Pirasteh and Martin J. Sergi, purportedly on behalf of all
stockholders who purchased common stock of KTI from May 4, 1998 through and
including August 14, 1998. Melanie Miller filed an identical complaint on May
14, 1999. The complaints allege that the defendants made material
misrepresentations in KTI's Form 10-Q for the period ended March 31, 1998 in
violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as
amended, concerning KTI's allowance for doubtful accounts and net income. The
plaintiffs are seeking undisclosed damages. KTI believes it has meritorious
defenses to the complaint. On June 15, 1999, Mr. Russo and Ms. Miller, together
with Fransisco Muncro, Timothy Ryan and Steven Storch, moved to consolidate the
two complaints. This motion is currently pending in the District Court of New
Jersey.
Dennis McDonnell filed a lawsuit dated April 6, 1999 in a Florida state
court against U.S. Fiber, Inc., a subsidiary of FCR. Mr. McDonnell, a former
employee of U.S. Fiber, seeks a declaratory judgment regarding his rights and
obligations under an Employment Non-Competition Agreement and an Employment
Agreement that he previously had signed with two corporations that subsequently
were merged with and into U.S. Fiber. KTI is defending the suit and believes it
has meritorious defenses.
On July 1, 1999, Michael P. Kuruc filed a demand for arbitration in
Charlotte, North Carolina, seeking approximately $1.0 million for compensation
due under an employment agreement that he alleges he has with KTI and losses
allegedly suffered in connection with his sale of KTI common stock. KTI believe
that it has meritorious defenses and has retained counsel to defend this suit.
If, however, the damages claimed by Mr. Kuruc are awarded, KTI's business,
financial condition and results of operation could be materially adversely
affected.
KTI is a defendant in certain other lawsuits alleging various claims
incurred in the ordinary course of business, none of which, either individually
or in the aggregate, the Company believes are material to its financial
condition, results of operations or cash flows.
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
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
24
<PAGE> 25
Two reports on Form 8-K were filed in the second quarter of
1999. The following is a list of the Forms 8-K filed and the dates thereof.
(ii) A Form 8-K was filed on April 16, 1999 reporting that the
Company had received notice from Casella Waste Systems, Inc. ("Casella") stating
its intention to terminate the Agreement and Plan of Merger with the Company.
(i) A Form 8-K was filed on May 12, 1999 reporting that the
Company entered into an Amendment to the Agreement and Plan of Merger with
Casella in which the KTI shareholders would receive .59 shares of Casella common
stock for each share of KTI common stock. The closing is subject to approval by
the stockholders of the companies, antitrust clearance and qualifications of the
merger as a tax-free pooling of interest.
25
<PAGE> 26
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/ Martin J. Sergi
----------------------------------------
Name: Martin J. Sergi
Title: President
By: /s/ Brian J. Noonan
----------------------------------------
Name: Brian J. Noonan
Title: Chief Financial Officer
(Principal Accounting Officer)
Date: August 16, 1999
26
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 26,444
<SECURITIES> 0
<RECEIVABLES> 40,097
<ALLOWANCES> 1,343
<INVENTORY> 8,011
<CURRENT-ASSETS> 88,666
<PP&E> 241,503
<DEPRECIATION> 34,788
<TOTAL-ASSETS> 447,291
<CURRENT-LIABILITIES> 197,158
<BONDS> 238,075
0
0
<COMMON> 139
<OTHER-SE> 126,396
<TOTAL-LIABILITY-AND-EQUITY> 447,291
<SALES> 133,195
<TOTAL-REVENUES> 133,195
<CGS> 112,253
<TOTAL-COSTS> 131,044
<OTHER-EXPENSES> 17,754
<LOSS-PROVISION> 45
<INTEREST-EXPENSE> 9,053
<INCOME-PRETAX> (8,884)
<INCOME-TAX> (2,678)
<INCOME-CONTINUING> (6,206)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 58
<NET-INCOME> (6,264)
<EPS-BASIC> (0.51)
<EPS-DILUTED> (0.51)
</TABLE>
