<PAGE>
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/A
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 May 14, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION PAGE NUMBER
- ----------------------- -----------
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at March 31, 1999 (unaudited) and December 31, 1998 3
Consolidated Statements of Income (unaudited) for the three months ended
March 31, 1999 and 1998 4
Consolidated Statements of Changes in Stockholders' Equity for the three
months ended March 31, 1999 (unaudited) and the year ended December 31, 1998 5
Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31,
1999 and 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 13
Item 3. Qualitative and Quantitative Disclosure about Market Risk 22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
KTI, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------------ -------------
<S> <C> <C>
(UNAUDITED)
ASSETS
Current Assets
Cash and cash equivalents........................................................... $ 7,782 $ 9,426
Restricted funds.................................................................... 21,343 19,088
Accounts receivable, net of allowances of $1,328 and $1,313......................... 37,180 29,272
Consumables and spare parts......................................................... 5,074 4,483
Inventory........................................................................... 7,855 4,866
Notes receivable--officers/shareholders and affiliates.............................. 1,402 1,858
Other receivables................................................................... 3,309 4,158
Deferred taxes...................................................................... 5,449 4,832
Other current assets................................................................ 6,325 3,370
----------- ----------
Total current assets............................................................ 95,719 81,353
Restricted funds...................................................................... 4,207 4,350
Notes receivable--officers/shareholders and affiliates................................ 5,341 1,534
Other receivables..................................................................... 2,207 3,025
Other assets.......................................................................... 6,264 6,167
Deferred costs, net of accumulated amortization of $1,899 and $1,610.................. 4,900 5,268
Deferred taxes........................................................................ 1,546 1,407
Goodwill and other intangibles, net of accumulated amortization of $5,550 and
$4,354.............................................................................. 125,480 119,712
Property, equipment and leasehold improvements, net of accumulated depreciation of
$31,241 and $27,724................................................................. 221,462 213,669
----------- ----------
Total assets.................................................................... $ 467,126 $ 436,485
----------- ----------
----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable.................................................................... $ 19,361 $ 14,940
Accrued expenses.................................................................... 13,855 9,313
Debt, current portion............................................................... 11,014 9,775
Other current liabilities........................................................... 1,006 4,499
----------- ----------
Total current liabilities....................................................... 45,236 38,527
Other liabilities..................................................................... 2,874 4,227
Debt, less current portion............................................................ 215,845 202,153
Minority interest..................................................................... 13,684 12,437
Deferred revenue...................................................................... 59,577 61,396
Customer advance...................................................................... 12,612 12,788
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, issued and outstanding 13,916,238 and 13,266,204 shares in 1999 and
1998, respectively.................................................................. 139 133
Additional paid-in capital............................................................ 126,396 115,026
Accumulated deficit................................................................... (16,007) (16,972)
----------- ----------
Total stockholders' equity............................................................ 110,528 98,187
----------- ----------
Total liabilities and stockholders' equity...................................... $ 467,126 $ 436,485
----------- ----------
----------- ----------
</TABLE>
See accompanying notes.
3
<PAGE>
KTI, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
31,
-------------------------
<S> <C> <C>
1999 1998
----------- -----------
Revenues........................................................................... $ 66,128 $ 37,876
Cost of operations................................................................. 55,463 30,713
----------- -----------
Gross Profit..................................................................... 10,665 7,163
Selling, general and administrative................................................ 3,571 1,136
Restructuring charge............................................................... 748
----------- -----------
Income from operations........................................................... 6,346 6,027
Interest expense, net.............................................................. 3,734 1,510
Other expense...................................................................... 51
----------- -----------
Income before minority interest, provision for income taxes and cumulative effect
of change in accounting principle.............................................. 2,561 4,517
Minority interest.................................................................. 686 1,132
----------- -----------
Income before provision for income taxes and cumulative effect of change in
accounting principle........................................................... 1,875 3,385
Provision for income taxes......................................................... 852 1,346
----------- -----------
Income before cumulative effect of change in accounting principle................ 1,023 2,039
Cumulative effect of change in accounting principle................................ 58
----------- -----------
Net income....................................................................... 965 2,039
Accretion and accrued and paid dividends on preferred stock........................ 509
----------- -----------
Net income available to common shareholders...................................... $ 965 $ 1,530
----------- -----------
----------- -----------
Earnings per common share:
Basic:
Income before cumulative effect of change in accounting principle................ $ 0.08 $ 0.17
Cumulative effect of change in accounting principle.............................. (0.01)
----------- -----------
Net income....................................................................... $ 0.07 $ 0.17
----------- -----------
----------- -----------
Weighted average number of shares used in computation............................ 13,619,588 9,236,588
----------- -----------
----------- -----------
Diluted:
Income before cumulative effect of change in accounting principle................ $ 0.07 $ 0.15
Cumulative effect of change in accounting principle (0.01)
----------- -----------
Net income....................................................................... $ 0.06 $ 0.15
----------- -----------
----------- -----------
Weighted average number of shares used in computation............................ 14,290,677 10,043,025
----------- -----------
----------- -----------
</TABLE>
See accompanying notes
4
<PAGE>
KTI, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SERIES A SERIES B
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
--------------------- --------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- --------- ---------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997..................... 447,500 $ 3,732 856,000 $ 21,400 8,912,630 $ 89
Net income.....................................
Accretion of preferred stock................... 42
Issuance of common stock and common stock
purchase warrants for:
Exercise of options.......................... 235,682 2
Exercise of warrants......................... 411,894 4
Non-employee director's compensation.........
Conversion of preferred stock:
Series A................................... (447,500) (3,774) 447,500 4
Series B................................... (856,000) (21,400) 25,531 1
Conversion of debt........................... 1,283,399 13
Employee savings plan contribution........... 4,215
Business combinations........................ 1,945,353 20
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..................... 13,266,204 133
Net income.....................................
Issuance of common stock for:
Exercise of options.......................... 20,552
Exercise of warrants......................... 19,482
Business combinations........................ 610,000 6
---------- --------- ---------- --------- ------------ -----
Balance at March 31, 1999 (unaudited)............ 13,916,238 $ 139
---------- --------- ---------- --------- ------------ -----
---------- --------- ---------- --------- ------------ -----
<CAPTION>
ADDITIONAL RETAINED
PAID-IN EARNINGS
CAPITAL (DEFICIT) TOTAL
---------- --------- ----------
<S> <C> <C> <C>
Balance at December 31, 1997..................... $ 52,762 $ (18,267) $ 59,716
Net income..................................... 2,699 2,699
Accretion of preferred stock................... (42)
Issuance of common stock and common stock
purchase warrants for:
Exercise of options.......................... 1,894 1,896
Exercise of warrants......................... 1,648 1,652
Non-employee director's compensation......... 205 205
Conversion of preferred stock:
Series A................................... 3,770
Series B................................... 300 (21,099)
Conversion of debt........................... 15,686 15,699
Employee savings plan contribution........... 41 41
Business combinations........................ 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..................... 115,026 (16,972) 98,187
Net income..................................... 965 965
Issuance of common stock for:
Exercise of options.......................... 161 161
Exercise of warrants......................... 193 193
Business combinations........................ 11,016 11,022
---------- --------- ----------
Balance at March 31, 1999 (unaudited)............ $ 126,396 $ (16,007) $ 110,528
---------- --------- ----------
---------- --------- ----------
</TABLE>
See accompanying notes.
5
<PAGE>
KTI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
<S> <C> <C>
1999 1998
--------- ---------
OPERATING ACTIVITIES
Net income...................................................................................... $ 965 $ 2,039
Adjustments to reconcile net income to net cash provided (used in) by operating activities:
Cumulative effect of change in accounting principle........................................... 58
Depreciation and amortization................................................................. 5,196 2,593
Minority interest, net of distributions....................................................... 1,247 1,132
Deferred revenue.............................................................................. (1,996) (1,820)
Deferred income taxes......................................................................... (967) 1,196
Provision for losses on accounts receivable................................................... 15 54
Interest accrued and capitalized on debt...................................................... 417
Other non-cash charges........................................................................ 42 22
Changes in operating assets and liabilities:
Accounts receivable......................................................................... (7,224) (2,030)
Consumables, spare parts and inventory...................................................... (1,414) (999)
Other receivables........................................................................... 849 42
Other assets................................................................................ (2,015) 629
Accounts payable and accrued expenses....................................................... 8,370 685
Other liabilities........................................................................... (3,456) 325
--------- ---------
Net cash provided by (used in) operating activities............................................. (330) 4,285
INVESTING ACTIVITIES
Additions to property, equipment and leasehold improvements..................................... (3,369) (3,154)
Proceeds from sale of assets.................................................................... 22 18
Net change in restricted funds.................................................................. (2,112) (756)
Purchase of businesses, net of cash acquired.................................................... (150) (2,443)
Notes receivable--officers/shareholders and affiliates.......................................... (3,351) 31
--------- ---------
Net cash used in investing activities........................................................... (8,960) (6,304)
FINANCING ACTIVITIES
Deferred financing costs........................................................................ (398)
Net borrowings on lines of credit............................................................... 10,004 5,075
Proceeds from sale of common stock.............................................................. 354 850
Dividends paid.................................................................................. (468)
Principal payments on debt...................................................................... (2,712) (2,809)
--------- ---------
Net cash provided by financing activities....................................................... 7,646 2,250
--------- ---------
Increase (decrease) in cash and cash equivalents................................................ (1,644) 231
Cash and cash equivalents at beginning of period................................................ 9,426 11,181
--------- ---------
Cash and cash equivalents at end of period...................................................... $ 7,782 $ 11,412
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid................................................................................... $ 5,295 $ 902
Taxes paid...................................................................................... 797
NON CASH INVESTING AND FINANCING ACTIVITIES
Capital lease obligation entered into for lease of equipment.................................... $ 115
Purchase of businesses, net of cash acquired:
Working capital deficit, net of cash acquired................................................. (111) $ (158)
Property, equipment and leasehold improvements................................................ 8,621 933
Purchase price in excess of net assets acquired............................................... 6,363 2,834
Other assets.................................................................................. 104
Non-current liabilities....................................................................... 5,423 1,270
Common stock.................................................................................. 9,522
</TABLE>
See accompanying notes
6
<PAGE>
KTI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
MARCH 31, 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 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 ONP 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 months ended March 31,
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 footnotes 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. RESTATEMENT
The Company's balance sheet as of March 31, 1999 and the related statements
of income, stockholders' equity and cash flows for the three months ended
March 31, 1999 and 1998 have been restated. The restatement is a result of
the Securities Exchange Commission's review of the Company's proxy materials
related to the prospective merger with Casella Waste Systems (See Note 3).
The restatement relates to revenue recognized as a result of the
restructuring of a power purchase agreement and the sale of electric
generating capacity by two of the Company's majority-owned subsidiaries with
its customers, Bangor Hydro Electric and Central Maine Power, which were
completed in 1998 and 1996. At the time of these transactions, the Company
had recognized revenues representing a portion of the cash received in 1996
and the total consideration received in 1998. After discussions with the
staff of the Securities and Exchange Commission, the Company agreed to
defer these amounts and recognize them over the term of the respective power
purchase and capacity purchase agreements to comply with generally accepted
accounting principles. In addition, performance credits previously reported
as expense have been reclassified as a reduction of revenues. The impact of
the restatement on the Company's consolidated financial results as originally
reported is summarized as follows:
<TABLE>
<CAPTION>
AS REPORTED RESTATED
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues.............................................................. $66,977 $37,632 $66,128 $37,876
Income before cumulative effect of change in accounting principle..... 925 1,992 1,023 2,039
Net income............................................................ 867 1,992 965 2,039
Net income available to common shareholders........................... 867 1,483 965 1,530
Net income per share:
Basic............................................................... $ 0.06 $ 0.16 $ 0.07 $ 0.17
Diluted............................................................. $ 0.06 $ 0.15 $ 0.07 $ 0.17
</TABLE>
3. MERGER AND ACQUISITION
On September 23, 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. In
connection with the merger, Casella has agreed to reimburse the Company for
its investment banking fees and other merger related costs and as of June 30,
1999, approximately $1,427 of such costs have been deferred.
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
7
<PAGE>
KTI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
MARCH 31, 1999
3. MERGER AND ACQUISITION (CONTINUED)
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.
On March 31, 1999, pursuant to the Second Amended, Restated and Extended
Waste Disposal Agreement among Penobscot Energy Recovery Company ("PERC"), a
majority owned subsidiary of the Company, and the municipalities named therein,
the municipalities made a capital contribution to PERC totaling $730 in exchange
for a 1.31% limited partnership interest in PERC.
4. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Numerator:
Net income.......................................................................... $ 965 $ 2,039
Preferred stock dividends........................................................... (467)
Accretion of preferred stock........................................................ (42)
----------- -----------
Numerator for basic earnings per share-net income available to common
stockholders...................................................................... 965 1,530
Effect of dilutive securities:
Numerator for diluted earnings per share-net income available to common stockholders
after assumed conversions......................................................... $ 965 $ 1,530
----------- -----------
----------- -----------
Denominator:
Denominator for basic earnings per share-weighted average shares.................... 13,619,588 9,236,588
Effect of dilutive securities:
Employee stock options.............................................................. 486,769 387,576
Warrants............................................................................ 184,320 418,861
----------- -----------
Dilutive potential common shares.................................................... 671,089 806,437
----------- -----------
Denominator for diluted earnings per share-adjusted weighted-average shares and
assumed conversions............................................................... 14,290,677 10,043,025
----------- -----------
----------- -----------
Net income per share-Basic............................................................ $ 0.07 $ 0.17
----------- -----------
----------- -----------
Net income per share-Diluted.......................................................... $ 0.06 $ 0.15
----------- -----------
----------- -----------
</TABLE>
8
<PAGE>
KTI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
MARCH 31, 1999
5. 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 and certain
of its officers, 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 law suits alleging various claims
incurred in the ordinary course of business. Management of the Company does not
believe that the outcome of these matters, individually or in the aggregate,
will have a material effect on the Company's financial condition, cash flows or
results of operations.
6. SEGMENT REPORTING
During the three months ended March 31, 1999, the Company operated in the
business segment as indicated below.
<TABLE>
<CAPTION>
WASTE-TO- COMMERCIAL FINISHED RESIDENTIAL
ENERGY RECYCLING PRODUCTS RECYCLING
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Revenues
Unaffiliated customers............................................ $ 23,543 $ 21,138 $ 12,345 $ 9,087
Intersegment revenues............................................. 33 31 748
Segment Profit.................................................... 6,541 315 786 559
Depreciation and Amortization..................................... 2,599 607 821 914
Identifiable Assets............................................... 251,537 65,728 58,868 58,640
Capital Expenditures.............................................. 1,129 315 1,403 384
</TABLE>
9
<PAGE>
KTI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
MARCH 31, 1999
6. SEGMENT REPORTING (CONTINUED)
During the three months ended March 31, 1998 the Company operated in the
business segments indicated below.
<TABLE>
<CAPTION>
WASTE-TO- COMMERCIAL FINISHED
ENERGY RECYCLING PRODUCTS
--------- ----------- -----------
<S> <C> <C> <C>
Revenues
Unaffiliated customers....................................................... $ 17,477 $ 18,665 $ 1,719
Intersegment revenues........................................................ 64 15
Segment Profit................................................................. 5,805 674 259
Depreciation and Amortization.................................................. 2,034 458 25
Identifiable Assets............................................................ 211,643 42,533 1,635
Capital Expenditures........................................................... 1,901 1,225 2
</TABLE>
The segment reporting detailed above reconciles to consolidated revenues and
income before provision for income taxes and cumulative effect of a change in
accounting principal as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
REVENUES
Total unaffiliated customers revenue for reportable segments................................ $ 66,113 $ 37,861
Holding company revenues.................................................................... 15 15
Intersegment revenues for reportable segments............................................... 812 79
Elimination of intersegment revenues........................................................ (812) (79)
--------- ---------
Total consolidated revenues................................................................. $ 66,128 $ 37,876
--------- ---------
--------- ---------
PROFIT AND LOSS
Total segment profit for reportable segments................................................ $ 8,201 $ 6,738
Holding company segment loss................................................................ (1,855) (711)
--------- ---------
Total segment profit........................................................................ 6,346 6,027
Unallocated amounts:
Interest expense, net..................................................................... 3,734 1,510
Other expenses............................................................................ 51
Minority interest......................................................................... 686 1,132
--------- ---------
Income before provision for income taxes and cumulative effect of change in accounting
principle............................................................................... $ 1,875 $ 3,385
--------- ---------
--------- ---------
</TABLE>
10
<PAGE>
KTI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
MARCH 31, 1999
6. SEGMENT REPORTING (CONTINUED)
<TABLE>
<CAPTION>
MARCH 31,
1999
----------
<S> <C>
ASSETS
Total identifiable assets for reportable segments........................................ $ 434,773
Holding company assets................................................................... 32,353
----------
Total consolidated assets................................................................ $ 467,126
----------
----------
</TABLE>
7. ACCOUNTING CHANGE
During the first quarter of 1999, the Company adopted the provisions of the
American Institute of Certified Public Accountants Statement of Position (SOP)
98-5, REPORTING ON THE COSTS OF START-UP ACTIVITIES. The SOP requires costs of
start-up activities and organization costs to be expensed as incurred. Upon
adoption of the SOP, the Company recorded a charge of $58 (net of income taxes
of $50). This amount has been reflected as a cumulative effect of change in
accounting principle in the income statement for the quarter ended March 31,
1999.
8. RESTRUCTURING CHARGE
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. All amounts accrued as part of the restructuring
charge remain in accrued liabilities as of March 31, 1999. 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.
9. INCOME TAXES
The income tax provision was approximately $852 for the three months ended
March 31, 1999 compared to approximately $1,346 during the same period in 1998.
During the first quarter of 1999, the effective tax rate utilized by the Company
of 46.0% 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 the first quarter of 1998 was 41.2% and the increase in the
effective rate in 1999 is primarily due to an increase in nondeductible
goodwill.
10. SUBSEQUENT EVENTS
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
11
<PAGE>
KTI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
MARCH 31, 1999
10. SUBSEQUENT EVENTS (CONTINUED)
ratio, and a maximum debt to capitalization ratio, each as defined in the
Amended Agreement. The Company's ability to satisfy these covenants is
dependent on its ability to substantially achieve its operating plan.
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.
12
<PAGE>
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
Consolidated revenue for the three months ended March 31, 1999, compared
with the same period in 1998, increased approximately $28.3 million or
74.6%.
WASTE-TO-ENERGY SEGMENT
Revenues in the waste-to-energy segment derive primarily from waste
processing and electric power sales. In the first quarter of 1999, compared
to 1998, total tons received by Maine Energy decreased by 8.4% and by
Penobscot decreased by 3.0%. The decreases at Maine Energy was due to lower
production as a result of repairs to the primary processing equipment. The
decrease at Penobscot was the result of the annual scheduled plant shutdown
in January 1999. In 1998, Penobscot's scheduled shutdown occurred in the
second quarter.
Total revenues for this business unit were approximately $23.5 million
for the three months ended March 31, 1999, compared to approximately $17.5
million for the same period in 1998. This represents an increase of
approximately $6.0 million or 34.7% for the three months ended March 31, 1999
as compared to the same period in 1998.
Waste processing revenues in the three months ended March 31, 1999
increased by approximately $3.2 million or 44.1%. This revenue increase is a
result of an approximately 26.4% increase in the price charged per ton in the
three months ended March 31, 1999 compared to the same period in 1998, as
well as additional revenues from the acquisition of Total Waste Management,
Russell Stull, KTI Recycling of Canada and AFA Group. The increases from the
acquisitions were offset by reductions at KTI BioFuels due to the elimination
of brokerage operations on March 31, 1998.
Electric power revenues for the three months ended March 31, 1999
increased approximately $0.7 million or 7.1% over the same period in 1998.
The increase in revenues resulted from a combination of the acquisition of
Multitrade offset by lower kilowatt hours at Maine Energy due to lower
production discussed above and increased customer rebates during 1999.
RESIDENTIAL RECYCLING SEGMENT
This segment includes the residential recycling plants of FCR which
posted revenues of approximately $9.1 million for the three months ended
March 31, 1999. There were no revenues from this segment for the same period
in 1998 because the acquisition was completed in the third quarter of 1998.
COMMERCIAL RECYCLING SEGMENT
The commercial recycling segment had total revenue for the three months
ended March 31, 1999 of approximately $21.1 million compared to $18.7 million
for the same period in 1998. This represents an increase in sales of
approximately $2.4 million as compared to the same period in 1998. This
increase is primarily the result of the acquisition of KTI New Jersey Fibers,
Inc. that was completed in the third quarter of 1998. These increases were
partially offset by lower commodity prices for paper fibers and lower volumes
at the commercial processing plants in the three months ended March 31, 1999.
FINISHED PRODUCTS SEGMENT
Total revenue for this segment for the three months ended March 31, 1999
was approximately $12.3 million compared to approximately $1.7 million for
the same period in 1998. This represents and increase of approximately $10.6
million. The increase in revenues is primarily the result of acquisitions
discussed above which were partially offset by lower revenues at Manner due
to decreases in plastic prices in 1999.
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<PAGE>
COST AND EXPENSES
WASTE-TO-ENERGY SEGMENT
Cost of operations in this segment consists primarily of electric power
and waste handling. Operating costs were approximately $17.0 million during
the three months ended March 31, 1999, compared to approximately $11.7
million during the same period in 1998. This is an increase of approximately
$5.3 million or 45.7%. The increase was primarily the result of the
acquisitions of Total Waste Management, Russell Stull, Multitrade, KTI
Recycling of Canada and AFA Group, where the total costs of operations were
approximately $2.9 million. In addition, Penobscot's operating costs
increased by approximately $1.8 million due to the costs associated with the
planned shutdown and in increased performance credits as a result of the
revised power purchase agreement and waste disposal agreements. These
increases were offset by decreases in Timber Energy Resources' operating
costs that resulted from an increase in the supply of tipping fee based
materials which reduces fuel costs and eliminates the costs associated with
the brokerage sales discussed above at KTI BioFuels.
RESIDENTIAL RECYCLING SEGMENT
Cost of operations in this segment was approximately $8.5 million for
the first three months of 1999. There were no cost of operations for the same
period in 1998 because the acquisition of FCR was completed in the third
quarter of 1998.
COMMERCIAL RECYCLING SEGMENT
Cost of operations in this segment for the three months ended March 31,
1999 were approximately $20.8 million in 1999 compared to approximately $18.0
million in 1998. This is an increase of approximately $2.8 million compared
to the same period in 1998. This increase is primarily due to the acquisition
of KTI New Jersey Fibers in August 1998 and was offset by lower purchase
prices that were caused by lower commodity prices and lower volumes at the
commercial processing plants.
FINISHED PRODUCTS
Cost of operations in this segment for the three months ended March 31,
1999 were approximately $11.6 million compared to approximately $1.5 million
in 1998. The increase was primarily a result of the acquisitions discussed
above and was partially offset by lower purchase prices at Manner that was
due to decreases in plastics prices in 1999.
OTHER ITEMS
Selling, general and administrative expenses increased by approximately
$2.4 million during the first three months of 1999 compared to the first three
months of 1998. The increase is a result of 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 analytical systems
to identify revenue enhancement and cost savings programs in newly acquired
entities.
Interest expenses increased approximately $2.2 million or 147.3% during
the first three months of 1999 compared to the same period in 1998. These
increases are related principally to increased borrowings on our line of
credit used to fund acquisitions, incremental interest expenses on debt
assumed as part of these acquisitions and the conversion of the Series B
Preferred Stock to convertible debt. These increases were partially offset by
lower interest rates at Penobscot as a result of the refinancing of the bonds
payable and lower debt levels at Maine Energy.
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<PAGE>
The income tax provision was approximately $0.9 million during the first
three months of 1999 compared to approximately $1.3 million in the first
three months of 1998. During the first quarter of 1999, the effective tax
rate of 46.0% utilized by KTI represents the estimated annual effective rate
based on the total estimated pretax income of KTI for the year ended December
31, 1999. The effective rate in the first quarter of 1998 was 40.3%. The
increase in the effective rate in 1999 is primarily a result of higher
amounts of nondeductible goodwill.
The cumulative effect of a change in accounting principle represents a
change in our method of accounting for start-up costs. The change involves
expensing these costs as incurred, rather than capitalizing and subsequently
amortizing them.
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LIQUIDITY AND CAPITAL RESOURCES
We are a holding company and receive a portion of the cash flows of our
subsidiaries. Receipt of cash flow from Penobscot is currently restricted by
covenants under loan agreements, distribution restrictions under partnership
agreements with Penobscot'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
March 31, 1999 before partners' cash distribution can begin (approximately
$7.6 million of these notes are owned by KTI). Timber Energy Resources' 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 KTI separate from Maine Energy, Penobscot and Timber Energy Resources and
liquidity and capital resource of each of Maine Energy, Penobscot and Timber
Energy Resources independently.
We operate in industries that require high levels of capital investment.
Our capital requirements basically stem from (i) our working capital for
ongoing operations, (ii) capital expenditures for new plants and equipment
and (iii) business acquisitions. Our strategy has been to meet these capital
needs from internally generated funds that are not contractually restricted,
drawings under our lines of credit, collateralized equipment financing and
proceeds from the sale of our common stock.
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<PAGE>
On July 10, 1998, we closed on a $150.0 million acquisition credit line
from KeyBank. We can use this line of credit for acquisitions, capital
expenditures and working capital. As of December 31, 1998 and March 31, 1999,
we were not in compliance with one of the covenants of the agreement with
KeyBank. We received a waiver of this covenant before December 31, 1998 and
on May 12, 1999, we signed an amendment to the agreement with KeyBank
amending the covenants. We believe that we will remain in compliance with the
covenants in the amended agreement. Our ability to remain in compliance is
dependent on our ability to achieve our operating plan; however, we cannot
give any assurances in this regard.
As of March 31, 1999, we had working capital of approximately $50.4
million (ratio of current assets to current liabilities of 2.11:1) and a cash
balance of approximately $7.8 million which compared to working capital of
approximately $42.9 million (a ratio of current assets to current liabilities
of 2.03:1) and a cash balance of approximately $9.4 million at December 31,
1998. As of March 31, 1999, we had working capital and cash on hand without
regard to Maine Energy, Penobscot and Timber Energy Resources of
approximately $19.9 million (a ratio of current assets to current liabilities
of 1.55:1) and approximately $3.2 million, respectively, which compared to
working capital of approximately $13.9 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.
As of March 31, 1999, we had approximately $22,000 available under the
revolving credit agreement. Though we believe that cash flows from our
subsidiaries will meet our current needs for working capital and capital
expenditures, our ability to expand current operations is dependent on cash
flow from our subsidiaries. We believe that KTI has the ability to access
additional facilities to fund capital expenditures if needed; although no
assurance can be given in this regard.
Our ability to make future acquisitions depends on our ability to
increase our line of credit. Our ability to increase the line of credit is
dependent on our ability to raise additional equity or raise capital from
financial instruments that are subordinated to the KeyBank credit line. We
believe that we have the ability to raise additional capital if needed;
however, there can be no assurance that this can be accomplished at terms and
conditions that would be acceptable to us.
As of March 31, 1999, we and our subsidiaries, other than Maine Energy,
Penobscot and Timber Energy Resources, had current maturities of indebtedness
of approximately $7.7 million, including borrowings under revolving credit
facilities. During the three months ended March 31, 1999, we, apart from
Maine Energy, Penobscot and Timber Energy, increased net borrowings on our
lines of credit by approximately $9.8 million, primarily for the refinancing
of debt assumed form acquisitions, the funding of business operations and
capital expenditures.
MAINE ENERGY
Maine Energy has financed its operations and capital expenditures from
cash flows from operations. Cash provided by operations was approximately
$1.1 million for the three months ended March 31, 1999 compared to
approximately $1.5 million during the same period in 1998. Maine Energy's
capital expenditures were approximately $0.3 million and $0.5 million during
the three months ended March 31, 1999 and 1998, respectively.
As of March 31, 1999 and December 31, 1998, Maine Energy had operating
cash of approximately $1.4 million and $2.4 million, respectively, and as
required under the terms of the credit agreement underlying its letter of
credit. Maine Energy has on account an additional approximately $6.0 million
and $6.0 million, respectively, of reserves to be used under certain
circumstances for capital improvements, debt service, operating shortfalls
and working capital requirements. As of March 31, 1999, Maine Energy had
total indebtedness of approximately $11.5 million.
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<PAGE>
We believe 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 expected to be approximately $0.7 million.
PENOBSCOT
Penobscot has financed its operations and capital expenditures primarily
by cash flow from operations. Cash provided by operations was approximately
$1.3 million for the three months ended March 31, 1999 compared to
approximately $2.0 million in the same period in 1998. Penobscot's capital
expenditures were approximately $0.6 million and $0.1 million during the
three months ended March 31, 1999 and 1998, respectively.
On June 26, 1998, we completed a major restructuring of the various
contracts and obligations of Penobscot, which included refinancing
Penobscot's tax exempt bonds. The refinancing was made possible by the sale
of approximately $45.0 million in Electric Rate Stabilization Revenue
Refunding Bonds issued by Finance Authority of Maine. The proceeds, and
certain funds from operations were used to repay the outstanding Revenue
Bonds. The interest rate on the bonds rages from 3.75% for one-year bonds to
5.20% for 20-year term bonds. The refinancing will reduce Penobscot's debt
service costs while extending its payment obligation over 20 years.
As of March 31, 1999, in addition to Penobscot's operating cash of
approximately $2.6 million, Penobscot, as required under the terms of the
trust indenture governing the FAME 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.
We believe Penobscot's cash flows from operations and cash resources
available will be sufficient to fund anticipated capital expenditures and
debt service requirements. Penobscot plans capital expenditures for the
remainder of 1999 of approximately $1.1 million, which has largely been set
aside in the reserve accounts.
TIMBER ENERGY RESOURCES
Timber Energy Resources has financed its operations and capital
expenditures primarily by cash flows from operations. Cash provided by
operations was approximately $0.9 million for the three months ended March
31, 1999 compared to approximately $0.8 million during the same period in
1998. Timber Energy Resources' capital expenditures were approximately
$132,000 for the three months ended March 31, 1999 compared to approximately
$67,000 during the same period in 1998.
Timber Energy Resources has two 1997 Industrial Development Revenue Bond
issues 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 March 31, 1999, Timber Energy Resources had $11.6 million
outstanding in 1997 Bonds.
As of March 31, 1999 and December 31, 1998, in addition to Timber Energy
Resources' operating cash of approximately $0.7 million and $0.8 million,
respectively, Timber Energy Resources, as required under the terms of its
then-existing debt agreements, had on account approximately $2.9 and $2.1
million, respectively, of reserves to be used under certain circumstances for
capital improvements, debt service, operating shortfalls and working capital
requirements.
We believe Timber Energy Resources' cash flows from operations and cash
resources available will be sufficient to fund anticipated capital
expenditures and debt service requirements. We expect capital expenditures
for Timber Energy Resources for the remainder of 1999 to be approximately
$0.3 million. Timber Energy Resources intends to finance the requirements
through cash flow from operations.
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<PAGE>
TAX LOSS CARRYFORWARDS
At March 31, 1999, we had net operating loss carryforwards of
approximately $52.5 million for income tax purposes that expire in years 2002
through 2018 and are subject to the limitations described below. In addition,
we have 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 occurs if the percentage of stock of
a loss corporation owned, actually, constructively and, in some cases,
deemed, by one or more "5% shareholders" increases by more than fifty (50)
percentage points over the lowest percentage of such stock owned during a
three-year testing period.
During 1994, we had such a change in ownership. As a result of the
change, our ability to use our 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 we recognize a gain on the disposition of an
asset that had a fair market value greater than its tax basis on the date of
the ownership change.
For the acquisition of Timber Energy Resources, FCR and Total Waste
Management, we 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, our ability to use 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.
ENVIRONMENTAL CONTINGENCIES
While increasing environmental regulation often presents new business
opportunities to us and our subsidiaries, it likewise often results in
increased operating costs as well. We and our subsidiaries strive to conduct
our operations in full compliance with applicable laws and regulations,
including environmental rules 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, we believe that in the ordinary course of
doing business, companies in the environmental services and waste disposal
industry face governmental enforcement proceedings resulting in fines or
other sanctions and will likely be required to pay civil penalties or the
expend funds for remedial work on waste management facilities.
The Telogia, Florida facility is currently in violation of its waste
water discharge permit and related reporting obligations. This violation
involves the temperature of the water used in the cooling process. KTI has
requested a modification of the permit from the Florida Department of
Environmental Protection to change the monitoring procedures and to enable
KTI to operate in compliance with the permit. KTI and its subsidiaries, and
certain of its officers, could be subject to penalties resulting from these
violations.
As of March 31, 1999, no pending governmental environmental enforcement
proceedings exist for which we or any of our subsidiaries believe that
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 our 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
the operation of our or our subsidiaries' plants, equipment, and vehicles
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 of
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revocation of permits or licenses would negatively impact our business and
operations and could have a material adverse impact on our financial
results.
INFLATION
Inflation has had a minimal effect on our operating costs in the past
three years. Most of our 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 our project's
overall operating costs is not expected to be greater for such projects than
for our competitor's projects. In addition, each of Maine Energy's and
Penobscot's contracts and the majority of our residential recycling contracts
allow us to increase waste processing fees paid by 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 our ability to perform our obligations under long-term
contracts, which could result in legal and other liabilities that would have
a material adverse effect.
We are in the process of contacting our customers and vendors and have
received letters from each of our applications vendors stating that the
majority of our information technology systems, such as accounting, data
processing, plant operations systems and telephone/PBX systems, are Year 2000
compliant. We plan to replace or upgrade these applications with compliant
versions by the end of the third quarter of 1999. We have also begun an
assessment of our non-information technology systems, such as our security
systems and telephones, to determine if they are Year 2000 compliant. We plan
to initiate formal communications with the vendors of our remaining
non-information technology systems. Based on our assessment to date, we
believe that our non-information technology systems will be Year 2000
complaint prior to the Year 2000.
We have also begun an assessment of our significant vendors, suppliers,
and service providers to determine the extent to which we are vulnerable to
those third parties' failure to remediate their own Year 2000 compliance
uses. To date, we believe, based on information published or otherwise
provided by the third parties, that all of their systems are or will be Year
2000 complaint. We plan to initiate formal communications with significant
remaining third parties. Based on our assessment to date, we believe that our
significant vendors, suppliers and service providers will be Year 2000
compliant prior to the Year 2000.
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The following table summarizes the status of our Year 2000 compliance
program:
<TABLE>
<CAPTION>
ASSESSMENT REMEDIATION TESTING IMPLEMENTATION
-------------- ---------------- ---------------- -------------------
<S> <C> <C> <C> <C>
Information Technology.............. 95% Complete 75% Complete 75% Complete 75% Complete
Expected Expected Expected
completion date, completion date, completion date,
September 1999 September 1999 September 1999
Operating Equipment with
Embedded Chips or Software.......... 90% Complete 85% Complete 85% Complete 85% Complete
Expected Expected Expected
completion date completion date completion date
June 1999 June 1999 June 1999
3rd Party........................... 80% Complete for 80% Complete for 80% Complete for 80% Complete for
system interface system interface system interface system interface
66% Complete for
all other material Develop Expected Expected
exposures. contingency plans as completion date for completion date for
appropriate, June system interface system interface
1999. work, June 1999 work, June 1999
60% Complete Implement
Expected contingency plans or
completion date for other alternatives as
surveying all necessary, August
remaining third 1999.
parties, June 1999
</TABLE>
We have also conducted tests of all of our internal information and
non-information technology systems and all of our system interfaces with
significant vendors, suppliers and service providers to ensure Year 2000
compliance. All of our accounting and data processing equipment is based on
microcomputer hardware and related software. 80% of this equipment has been
certified as Year 2000 compliant by the applicable manufacturer or developer.
However, we have determined that the plant control systems may contain
embedded technology that is not Year 2000 compliant. We have ordered the
vendor of the hardware containing the embedded logic boards to replace the
hardware that is not Year 2000 compliant with hardware that is Year 2000
compliant. In addition, these systems will be tested during scheduled
shutdown periods at the plants during the second and third quarters of 1999.
However, despite our efforts to ensure that our internal systems and the
systems of our significant vendors, suppliers and service providers are Year
2000 compliant, we cannot guarantee that the failure of certain systems will
not have a material adverse effect on us.
To date, we have used internal resources to reprogram or replace, test
and implement the software and hardware modifications for Year 2000. Our only
costs have been the salary costs of our internal staff of four. To date, we
have incurred approximately $100,000 (30% expensed and 70% capitalized for
new systems and equipment), related to all phases of the Year 2000 project.
We estimate 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 we currently expect to be able to complete
our Year 2000 compliance program using only internal resources, we cannot
guarantee that we be able to do so.
The most significant risk identified by us is the inability of the power
plants to generate electric power. We have received assurances that the
process control systems will be Year 2000 compliant with the installation of
new hardware components. We will perform a complete test of the systems
during the planned shutdown periods that are to be completed by the end of
the third quarter of 1999. In addition, we have developed contingency plans
for this risk as well as other internal and external
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applications which involve manual workarounds, increasing inventories and
adjusting staffing strategies. This risk could cause a default under our
power purchase agreements with customers or a loss of electric power
revenue. We are 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 us. We also cannot guarantee that we have identified all
the significant risks associated with Year 2000 compliance.
RECENT ACCOUNTING PRONOUNCEMENTS
Recent accounting pronouncements that are not required to be adopted as
of March 31, 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 we will be required to adopt as of January 1, 2000,
establishes standards for derivative instruments including those embedded in
other contracts and for hedging activities. The new standard requires us to
recognize all derivatives as either assets or liabilities and measure those
instruments at fair value. We believe that the adoption of SFAS No. 133 will
not have a material impact on our financial statements.
SOP 98-1, ACCOUNTING FOR COSTS OF COMPUTER SOFTWARE DEVELOPED OR
OBTAINED FOR INTERNAL USE will be required to be adopted by us as of
January 1, 2000. Our current policy falls within the guidelines of SOP 98-1.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
KTI currently utilizes no material derivative financial instruments
which expose it to significant market risk. KTI 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 KTI's debt at March 31, 1999 by expected maturity
dates. Weighted average variable rates are based on forward rates in United
States Government Treasury Constant Maturities at March 31, 1998. 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......... $ 3,943 $ 5,979 $ 5,128 $ 6,772 $ 2,091 $ 49,954 $ 74,436
Average Interest Rate... 6.42% 6.36% 6.92% 6.27% 6.29% 5.06%
Variable Rate Debt...... 4,000 $155,762 $ 159,762
Average Interest Rate... 8.86% 8.91%
</TABLE>
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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.
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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,
24
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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
25
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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.
26
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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: October 29, 1999
27
