<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 10Q/A
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
Commission File No. 0-25490
KTI, INC.
(Exact name of registrant as specified in its charter)
New Jersey 22-2665282
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
7000 Boulevard East
Guttenberg, New Jersey 07093
(Address of principal executive offices) (Zip code)
(201) 854-7777
(Registrants telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date:
Common Stock, No Par Value 13,214,137 Shares as of November 16, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item Number and Caption Page Number
- ----------------------- -----------
PART I
<S> <C>
Item 1. Financial Statements 2
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 11
PART II
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8K 21
</TABLE>
1
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KTI, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
--------- ---------
ASSETS (UNAUDITED)
Current Assets
<S> <C> <C>
Cash and cash equivalents $ 8,178 $ 11,181
Restricted funds 20,476 13,103
Accounts receivable, net of allowances of
$873 and $294 32,033 22,126
Consumables and spare parts 4,627 4,041
Inventory 4,308 1,219
Notes receivable--officers/shareholders and affiliates 1,709 110
Other receivables 3,593 461
Deferred taxes -- 2,751
Other current assets 2,903 793
--------- ---------
Total current assets 77,827 55,785
Restricted funds 4,736 6,527
Other receivables 3,221 271
Deferred taxes 3,369
Deferred costs, net of accumulated amortization
of $2,778 and $676 5,871 2,916
Goodwill and other intangibles, net of accumulated amortization
of $2,141 and $778 107,154 17,483
Other assets 8,598 1,768
Deferred project development costs 933 932
Property, equipment and leasehold improvements, net of
accumulated depreciation of $24,285 and $17,837 207,568 156,801
--------- ---------
Total assets $ 419,277 $ 242,483
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 15,592 $ 8,779
Accrued expenses 6,361 3,825
Debt, current portion 7,203 19,794
Income taxes payable 2,701 165
Other current liabilities 3,466 1,184
--------- ---------
Total current liabilities 35,323 33,747
Other liabilities 10,608 1,918
Debt, less current portion 194,252 74,473
Minority interest 24,123 22,105
Convertible subordinated notes 21,099 --
Deferred revenue 33,750 37,500
Commitments and contingencies
Stockholders' equity
Preferred stock; 10,000,000 shares authorized;
Series A, par value $8 per share,
447,500 shares authorized, issued and outstanding in 1997 -- 3,732
Series B, par value $25 per share, 8.75%, 880,000 shares
authorized, 856,000 shares issued and outstanding in 1997 -- 21,400
Common stock, no par value (stated value $.01 per share); authorized 40,000,000
in 1998 and 20,000,000 in 1997 issued and outstanding; 11,880,509 in 1998
and 8,912,630 in 1997 118 89
Additional paid-in capital 95,679 52,762
Retained earnings (deficit) 4,325 (5,243)
--------- ---------
Total stockholders' equity 100,122 72,740
--------- ---------
Total liabilities and stockholders' equity $ 419,277 $ 242,483
========= =========
</TABLE>
See accompanying notes.
2
<PAGE> 4
KTI, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 46,195 $ 26,848 $ 133,285 $ 66,000
Cost of operations 38,330 20,529 103,761 50,180
------------ ------------ ------------ ------------
Gross Profit 7,865 6,319 29,524 15,820
Selling, general and administrative 2,469 520 5,582 2,376
------------ ------------ ------------ ------------
Income from operations 5,396 5,799 23,942 13,444
Interest expense, net 2,730 977 5,790 3,700
------------ ------------ ------------ ------------
Income before minority interest,
provision (benefit) for income taxes and
extraordinary item 2,666 4,822 18,152 9,744
Minority interest 1,143 883 4,721 1,229
Pre-acquisition earnings of PERC -- 1,543 -- 3,984
------------ ------------ ------------ ------------
Income before provision (benefit) for
income taxes and extraordinary item 1,523 2,396 13,431 4,531
Provision (benefit) for income taxes (2,417) -- 2,276 --
------------ ------------ ------------ ------------
Income before extraordinary item 3,940 2,396 11,155 4,531
Extraordinary item - Loss on early
extinguishment of debt, net of minority
interest and taxes -- -- 495 --
============ ============ ============ ============
Net income 3,940 2,396 10,660 4,531
Accretion and accrued and paid dividends on
preferred stock 157 325 1,134 823
------------ ------------ ------------ ------------
Net income available to common shareholders
$ 3,783 $ 2,071 $ 9,526 $ 3,708
============ ============ ============ ============
EARNINGS PER COMMON SHARE
BASIC
Income before extraordinary item $ 0.36 $ 0.29 $ 1.02 $ 0.53
Extraordinary item $ -- -- $ (0.05) --
------------ ------------ ------------ ------------
Net Income $ 0.36 $ 0.29 $ 0.97 $ 0.53
============ ============ ============ ============
Weighted average number of shares used
in computation 10,573,258 7,124,387 9,813,101 6,954,670
DILUTED
Income before extraordinary item $ 0.32 $ 0.26 $ 0.91 $ 0.53
Extraordinary item -- -- $ (0.04) --
------------ ------------ ------------ ------------
Net Income $ 0.32 $ 0.26 $ 0.87 $ 0.53
============ ============ ============ ============
Weighted average number of shares used in
computation 13,162,254 8,846,952 12,553,434 8,004,833
</TABLE>
See accompanying notes.
3
<PAGE> 5
KTI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
--------- ---------
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 10,660 $ 4,531
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 8,534 3,246
Minority interest, net of distributions 2,018 1,229
Deferred revenue (3,750) (2,975)
Deferred taxes (537) --
Provision for losses on accounts receivable 579 --
Interest accrued and capitalized on debt 872 2,529
Gain on sale of assets (30) (7)
Loss on early extinguishment of debt, net 495 --
Security received for sale of power (3,814) --
Changes in operating assets and liabilities:
Accounts receivable (886) (2,711)
Consumables, spare parts and inventories (1,316) 65
Other assets 230 224
Restricted funds 1,971 --
Notes and other receivables (4,220) 648
Accounts payable and accrued expenses (2,230) (1,961)
Income taxes payable 2,369 --
Other liabilities 2,814 (234)
--------- ---------
Net cash provided by operating activities 13,759 4,584
INVESTING ACTIVITIES
Additions to property, equipment and leasehold improvements (4,825) (2,336)
Proceeds from sale of assets 1,755 8
Net changes in restricted funds (4,685) (2,107)
Purchase of businesses, net of cash acquired (62,154) (9,125)
Notes receivable--affiliates (380) (171)
--------- ---------
Net cash used in investing activities (70,289) (13,731)
FINANCING ACTIVITIES
Deferred financing costs (3,936) (1,702)
Net borrowings on lines of credit 114,373 2,862
Proceeds from issuance of debt 44,995 --
Proceeds from exercise of warrants 1,600 --
Proceeds from exercise of stock options 1,635 --
Proceeds from sale of common stock -- 1,177
Proceeds from sale of preferred stock -- 23,692
Dividends paid on preferred stock (1,092) (6,242)
Principal payments on debt (104,048) --
--------- ---------
Net cash provided by financing activities 53,527 19,787
Increase (decrease) in cash and cash equivalents (3,003) 10,640
Cash and cash equivalents at beginning of period 11,181 5,227
--------- ---------
Cash and cash equivalents at end of period $ 8,178 $ 15,867
========= =========
</TABLE>
-Continued-
4
<PAGE> 6
KTI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 4,802 $ 1,082
======== ========
SUPPLEMENTAL NON CASH INVESTING AND FINANCE ACTIVITIES
Accretion and warrant valuation on Class A Preferred Stock $ 42 $ 599
Conversion of convertible subordinated notes to equity,
including accrued interest -- 5,008
Elimination of management fees receivable from affiliate upon
purchase of additional interest -- 2,742
Purchase of business, net of cash acquired:
Working capital, net of cash acquired (3,040) (5,953)
Property, plant and equipment (51,950) (63,650)
Purchase price in excess of net assets acquired (91,034) (7,525)
Other assets (4,752) 747
Non current liabilities 52,985 60,967
Common stock issued 35,637 6,289
</TABLE>
See accompanying notes.
5
<PAGE> 7
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>
Balance at December 31, 1996 -- $ -- -- $ --
Net income -- -- -- --
Issuance of Series A Preferred Stock
and common stock purchase warrants 487,500 3,376 -- --
Accretion of Series A Preferred Stock -- 700 -- --
Issuance of Series B Preferred Stock
and common stock purchase warrants -- -- 856,000 21,400
Issuance of common stock and
common stock purchase warrants for:
Exercise of options -- -- -- --
Exercise of warrants -- -- -- --
Conversion of debt -- -- -- --
Conversion of preferred stock (40,000) (344) -- --
Employee savings plan contribution -- -- -- --
Business combinations -- -- -- --
Dividends paid on Series B Preferred
Stock -- -- -- --
------------ ------------ ------------ ------------
Balance at December 31, 1997 447,500 3,732 856,000 21,400
Net income -- -- -- --
Accretion of Series A Preferred Stock -- 42 -- --
Issuance of common stock and common
stock purchase warrants for:
Exercise of options -- -- -- --
Exercise of warrants -- -- -- --
Conversion of preferred stock to
8.75% Convertible Debt -- -- (843,960) (21,099)
Conversion of preferred stock (447,500) (3,774) (12,040) (301)
Employee savings plan contribution -- -- -- --
Business combinations -- -- -- --
Dividends paid on Series B Preferred
Stock -- -- -- --
------------ ------------ ------------ ------------
Balance at September 30, 1998 (unaudited) -- $ -- -- $ --
============ ============ ============ ============
</TABLE>
KTI, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
ADDITIONAL RETAINED
COMMON STOCK PAID IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 6,836,766 $ 68 $ 38,576 $ (12,940) $ 25,704
Net income -- -- -- 8,092 8,092
Issuance of Series A Preferred Stock
and common stock purchase warrants -- -- 422 -- 3,798
Accretion of Series A Preferred Stock -- -- (700) -- --
Issuance of Series B Preferred Stock
and common stock purchase warrants -- -- (1,416) -- 19,984
Issuance of common stock and
common stock purchase warrants for:
Exercise of options 85,353 1 502 -- 503
Exercise of warrants 692,771 7 3,611 -- 3,618
Conversion of debt 618,609 6 4,901 -- 4,907
Conversion of preferred stock 40,000 -- 344 -- --
Employee savings plan contribution 4,117 -- 35 -- 35
Business combinations 635,014 7 6,487 -- 6,494
Dividends paid on Series B Preferred
Stock -- -- -- (395) (395)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1997 8,912,630 89 52,762 (5,243) 72,740
Net income -- -- -- 10,660 10,660
Accretion of Series A Preferred Stock -- -- (42) -- --
Issuance of common stock and common
stock purchase warrants for:
Exercise of options 217,742 2 1,633 -- 1,635
Exercise of warrants 403,888 4 1,596 -- 1,600
Conversion of preferred stock to
8.75% Convertible Debt -- -- -- -- (21,099)
Conversion of preferred stock 473,031 5 4,070 -- --
Employee savings plan contribution 4,215 -- 41 -- 41
Business combinations 1,869,003 18 35,619 -- 35,637
Dividends paid on Series B Preferred
Stock -- -- -- (1,092) (1,092)
------------ ------------ ------------ ------------ ------------
Balance at September 30, 1998 (unaudited) 11,880,509 $ 118 $ 95,679 $ 4,325 $ 100,122
============ ============ ============ ============ ============
</TABLE>
See accompanying notes.
6
<PAGE> 8
KTI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
SEPTEMBER 30, 1998
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the nine months ended September 30,
1997 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, 1997. Certain 1997 financial information
contained herein has been reclassified to conform with the 1998 presentation.
2. ACQUISITIONS
In August 1998, KTI, Inc. (the "Company") acquired FCR, Inc. ("FCR") a
diversified recycling company that provides residential and commercial
recycling, processing and marketing services and manufactures products, in
particular, cellulose insulation, using recycled materials. FCR owns or operates
eighteen material recovery facilities, six cellulose insulation manufacturing
facilities and three plastic reprocessing facilities in twelve states. Payment
of the aggregate purchase price of $63,432 consisted of (i) 1,714,285 shares of
the Company's common stock valued at $18.96 per share (based on the closing
price of the common stock on the date of announcement); (ii) $30,000 in cash and
(iii) incidental payments of approximately $925 in cash. An additional payment
of up to $30,000 may be made for the acquisition of FCR based on the earnings of
FCR for the period July 1, 1998 through December 31, 1998 (the "Earnout"). This
payment will be payable in a combination of cash and the Company's common stock.
The acquisition was recorded using the purchase method of accounting and the
cost of the acquisition exceeded the fair value of the acquired net assets by
approximately $69,156 which has been recorded as goodwill and is being amortized
on a straight line basis over 30 years. Any additional payments for the Earnout
will be recorded as goodwill.
In August 1998, the Company acquired Atlantic Coast Fibers, Inc.
("Atlantic Coast") and Gaccione Bros. & Co., Inc. and PGC Corporation
(collectively, "Gaccione"). Atlantic Coast operates a high-grade paper
processing plant in Passaic, New Jersey. Payment of the aggregate purchase price
for Atlantic Coast of $9,106 consisted of (i) 123,532 shares of the Company's
common stock valued at $20.29 per share (based on the closing price of the
common stock on the date of the announcement); (ii) $6,500 in cash and (iii)
incidental payments of approximately $100 in cash. The acquisition was recorded
using the purchase method of accounting and the cost of the acquisition exceeded
the fair value of the acquired net assets by approximately $7,619 which has been
recorded as goodwill and is being amortized on a straight line basis over 30
years.
Gaccione operates a high-grade paper processing facility in Clifton,
New Jersey. Payment of the aggregate purchase price of $6,361 consisted of (i)
$5,200 in cash; (ii) a 7% interest bearing promissory note in the principal
amount of $1,086 due in February 2001 and (iii) incidental payments totaling
approximately $75 in cash. The acquisition was recorded using the purchase
method of accounting and the cost of the acquisition exceeded the fair value of
the acquired net assets by approximately $7,157 which has been recorded as
goodwill and is being amortized on a straight line basis over 30 years.
In September 1998, the Company agreed to a payment of an additional
purchase price for Atlantic Coast and Gaccione of $3,000 consisting of 150,000
shares valued at $20.00 per share (based on the closing price of the common
stock on the date of the agreement). The Company recorded this amount
7
<PAGE> 9
as a liability and an addition to goodwill. Upon the approval of the Board of
Directors the common stock will be issued.
In August 1998, the Company acquired First State Recycling, Inc.
("First State"). First State processes post industrial and other waste plastics.
Payment of the aggregate purchase price of $1,743 consisted of (i) 31,186 shares
of the Company's common stock valued at $19.99 per share (based on the closing
price of the common stock on the date of announcement) and (ii) $1,120 in cash.
The acquisition was recorded using the purchase method of accounting and the
cost of the acquisition exceeded the fair value of the acquired net assets by
approximately $1,182 which has been recorded as goodwill and is being amortized
on a straight line basis over 30 years.
The financial statements include the results of operations of these
acquired companies since the date of acquisition.
3. EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share. Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, the basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts have been presented, and
where appropriate, restated to conform to the Statement 128 requirements.
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
Numerator:
<S> <C> <C> <C> <C>
Net income $ 3,940 $ 2,396 $ 10,660 $ 4,531
Preferred stock dividends 157 224 1,092 224
Accretion of preferred stock -- 101 42 599
----------- ----------- ----------- -----------
Numerator for basic earnings per share-net income
available to common stockholders 3,783 2,071 9,526 3,708
Effect of dilutive securities:
Accretion of Preferred Stock -- 101 42 --
Dividends on convertible preferred stock and
interest on convertible subordinated notes 467 100 1,396 523
----------- ----------- ----------- -----------
Numerator for diluted earnings per share-net income
available to common stockholders
after assumed conversions $ 4,250 $ 2,272 $ 10,964 $ 4,231
=========== =========== =========== ===========
Denominator:
Denominator for basic earnings per share-weighted
average shares 10,573,258 7,124,387 9,813,101 6,954,670
Effect of dilutive securities:
Employee stock options 511,350 199,771 500,100 128,878
Warrants 272,989 417,629 359,180 303,620
Convertible preferred stock and convertible
subordinated notes 1,804,657 1,105,165 1,881,053 617,665
----------- ----------- ----------- -----------
Dilutive potential common shares 2,588,996 1,722,565 2,740,333 1,050,163
=========== =========== =========== ===========
Denominator for diluted earnings per share-adjusted
weighted-average shares and assumed conversions 13,162,254 8,846,952 12,553,434 8,004,833
=========== =========== =========== ===========
Net income per share-Basic $ 0.36 $ 0.29 $ 0.97 $ 0.53
=========== =========== =========== ===========
Net income per share-Diluted $ 0.32 $ 0.26 $ 0.87 $ 0.53
=========== =========== =========== ===========
</TABLE>
4. CONTINGENCIES
8
<PAGE> 10
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.
5. SEGMENT REPORTING
For the three months ended September 30, 1998, the Company operated in
the business units as indicated below.
<TABLE>
<CAPTION>
WASTE-TO-ENERGY RESIDENTIAL COMMERCIAL FINISHED
RECYCLING RECYCLING PRODUCTS
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues
Unaffiliated customers $ 19,500 $ 4,371 $ 18,189 $ 4,135
Intersegment revenues 705 12 4,512 365
--------------- --------------- --------------- ---------------
Total Revenues $ 20,205 $ 4,383 $ 22,701 $ 4,500
=============== =============== =============== ===============
Segment Profit $ 4,381 $ 455 $ 272 $ 288
=============== =============== =============== ===============
Depreciation and Amortization $ 2,281 $ 427 $ 501 $ 261
=============== =============== =============== ===============
</TABLE>
For the three months ended September 30, 1997 the Company operated in
the business units indicated below.
<TABLE>
<CAPTION>
WASTE-TO-ENERGY RESIDENTIAL COMMERCIAL FINISHED
RECYCLING RECYCLING PRODUCTS
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues
Unaffiliated customers $ 19,927 -- $ 6,921 --
Intersegment revenues 600 -- -- --
--------------- --------------- --------------- ---------------
Total Revenues $ 20,527 -- $ 6,921 --
=============== =============== =============== ===============
Segment Profit $ 5,633 -- $ 166 --
=============== =============== =============== ===============
Depreciation and Amortization $ 2,278 -- $ 96 --
=============== =============== =============== ===============
</TABLE>
For the nine months ended September 30, 1998, the Company operated in
the business units as indicated below.
<TABLE>
<CAPTION>
WASTE-TO-ENERGY RESIDENTIAL COMMERCIAL FINISHED
RECYCLING RECYCLING PRODUCTS
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues
Unaffiliated customers $ 69,744 $ 7,104 $ 51,404 $ 5,033
Intersegment revenues 2,244 12 13,685 882
--------------- --------------- --------------- ---------------
Total Revenues $ 71,988 $ 7,116 $ 65,089 $ 5,915
=============== =============== =============== ===============
Segment Profit $ 22,790 $ 932 $ (112) $ 332
=============== =============== =============== ===============
Depreciation and Amortization $ 6,343 $ 710 $ 1,225 $ 256
=============== =============== =============== ===============
</TABLE>
9
<PAGE> 11
For the nine months ended September 30, 1997, the Company operated in
the business units indicated below.
<TABLE>
<CAPTION>
WASTE-TO-ENERGY RESIDENTIAL COMMERCIAL FINISHED
RECYCLING RECYCLING PRODUCTS
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues
Unaffiliated customers $ 55,935 -- $ 10,065 --
Intersegment revenues 894 -- -- --
--------------- --------------- --------------- ---------------
Total Revenues $ 56,829 -- $ 10,065 --
=============== =============== =============== ===============
Segment Profit $ 13,142 -- $ 302 --
=============== =============== =============== ===============
Depreciation and Amortization $ 6,756 -- $ 152 --
=============== =============== =============== ===============
</TABLE>
The segment reporting detailed above reconciles to Consolidated
Revenues and Income Before Taxes and Extraordinary Items on the accompanying
unaudited consolidated statement of operations as follows:
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES
Total unaffiliated customers revenue for
reportable segments $ 46,195 $ 26,848 $ 133,285 $ 66,000
Intersegment revenues for reportable 5,594 600 16,823 894
segments
Elimination of intersegment revenues (5,594) (600) (16,823) (894)
------------- ------------- ------------- -------------
Total consolidated revenues $ 46,195 $ 26,848 $ 133,285 $ 66,000
============= ============= ============= =============
PROFIT AND LOSS
Total segment profit $ 5,396 $ 5,799 $ 23,942 $ 13,444
Unallocated amounts:
Interest expense, net (2,730) (977) (5,790) (3,700)
Minority interest (1,143) (883) (4,721) (1,229)
Pre-acquisition earnings of PERC -- (1,543) -- (3,984)
------------- ------------- ------------- -------------
Income before taxes and extraordinary item $ 1,523 $ 2,396 $ 13,431 $ 4,531
============= ============= ============= =============
</TABLE>
10
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
RESULTS OF OPERATIONS
As a result of the acquisitions completed in the third quarter of 1998,
KTI began reporting the results of operations by the following four business
units: waste-to-energy, residential recycling, commercial recycling and finished
products
REVENUES
Consolidated revenue for the three months and nine months ended
September 30, 1998, compared with the same periods in 1997, increased $19,347 or
72.1% and $67,285 or 101.9%, respectively.
WASTE-TO-ENERGY
The waste-to-energy business unit consists of the operations of Maine
Energy, PERC, Timber Energy, KTI Specialty Waste, SEMCO, AAR Tennessee, KTI
Biofuels, Total Waste Management (acquired January 1998) and Multitrade
(acquired June 1998). Total revenues for this business unit were $20,205 for the
three months and $71,988 for the nine months ended September 30, 1998, compared
to $20,527 and $56,829, respectively, for the same periods in 1997. This
represents a decrease in sales of $322 or 1.6% for the three months and
an increase of $15,159 or 26.7% for the nine months ended September 30, 1998 as
compared to the same period in 1997.
Waste processing revenues at Maine Energy, PERC, and Timber increased
by $43 or 3.5% for the quarter. This result is the net of a decrease of 32.6%
due to volume, offset by an increase in 32.0% due to price. The change in volume
and average price were both due to decreased tons at Timber Energy caused by a
maintenance shutdown of Timber's major customer during the quarter. For the nine
months, waste processing revenues increased $596 or 3.5%, which was the net of a
7.8% decrease due to volume offset by a 9.5% increase in price.
Electric power revenues from the same three business units decreased
$2,268, or 22.3% during the quarter, due to a lower volume of power generated
and a 1.8% decrease due to price. The price change was due mainly to a decrease
in the average power rate at Timber. For the nine months, overall power revenues
from Maine Energy, PERC, and Timber Energy increased $5,933, or 19.5%. The
increase in revenues is the combination of the decrease in power revenues at
Timber, offset by revenues from the acquisitions of Total Waste Management and
Multitrade. In addition, revenues for the nine-month period were higher due to
the restructuring of the Power Purchase Agreement ("PPA") with Bangor
Hydro-Electric in the second quarter. In connection with the restructuring, the
Company received $6,000 in cash and an agreement from Bangor Hydro-Electric to
pay $250 per quarter over the next four years (total of $4,000). PERC recorded
the present value of these payments of approximately $3,600, plus the $6,000, as
revenue in the nine-month period. In addition, Bangor Hydro-Electric issued
warrants to purchase one million shares of Bangor Hydro-Electric common stock.
The Company's share, based upon its ownership percentage at PERC, was
approximately 713 thousand warrants. The estimated fair market value of these
warrants as of the date of issuance was $5.35 per warrant and the Company
recorded revenue of $3,814 in the nine-month period.
RESIDENTIAL RECYCLING
This business unit includes the residential recycling plants of FCR,
Inc., (acquired August 1998), and the residential recycling plant of KTI
Recycling of New England acquired from Prins (acquired November 1997). The
residential recycling division posted revenues of $4,383 for the three months
and $7,116 for the nine months ended September 30, 1998. There were no revenues
from this business unit for the same period in 1997 because all the acquisitions
were completed in the fourth quarter of 1997 or in 1998.
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COMMERCIAL RECYCLING
The commercial recycling business unit consists of the operations of I.
Zaitlin and Sons (acquired August 1997), K-C International (acquired September
1997), the commercial recycling plants acquired from Prins (acquired November
1997), Manner Resins (acquired November 1996) and KTI New Jersey Fibers which
consists of the operations of Gaccione Bros., Inc. and Atlantic Coast Fibers
(acquired August 1998). Total revenue for this business unit was $22,701 for the
three months and $65,089 for the nine months ended September 30, 1998 compared
to $6,921 and $10,065, respectively for the same period in 1997. This represents
an increase in sales of $15,780 or 228.0% for the three months and $55,024 or
546.7% for the nine months ended September 30, 1998 as compared to the same
period in 1997. The increase in revenues is primarily the result of acquisitions
discussed above.
FINISHED PRODUCTS
The finished products business unit consists of the operations of Power
Ship Transport, the cellulose insulation plants and the plastic reprocessing
plants of FCR, Inc. (acquired August 1998), plastic reprocessing operations of
First State Recycling, Inc. (acquired August 1998) and the glass pellet
processor Seaglass, Inc. (formed by KTI in February 1998). This business unit
posted revenues of $4,500 for the quarter and $5,915 for the nine months ended
September 30, 1998. There were no revenues from this business unit for the same
period in 1997 because all the acquisitions were completed in the fourth quarter
of 1997 or in 1998.
COSTS AND EXPENSES
WASTE-TO-ENERGY
Cost of operations in this business unit was $14,468 for the three
months and $45,359 for the nine months ended September 30, 1998. Electric power
and waste handling operating costs increased by $2,373 or 19.6% for the three
months and $10,229 or 29.6% for the nine months ended September 30, 1998 as
compared to the same periods in 1997. This increase in the quarter was primarily
a result of the Total Waste Management and Multitrade Group acquisitions
discussed above. The increase for the nine month period was due primarily to the
restructuring of PERC's PPA discussed above, which increased PERC's operating
costs by $3,907 for payments to municipalities and its electric power customer,
and the addition of Total Waste Management and Multitrade Group.
RESIDENTIAL RECYCLING
Cost of operations in this business unit was $3,486 for the three
months and $5,728 for the nine months ended September 30, 1998. There were no
operations in this business unit in the same period in 1997 as the acquisition
of the Boston residential plant did not occur until the fourth quarter of 1997.
COMMERCIAL RECYCLING
Cost of operations in this business unit was $22,117 for the three
months and $64,279 for the nine months ended September 30, 1998. This was an
increase of $15,458 or 232.1% for the three months and $54,668 or 568.8 % for
the nine months ended September 30, 1998 as compared to the same period in 1997.
This increase is due primarily to the acquisition of Gaccione Bros., Inc. and
Atlantic Coast Fibers in August 1998. In addition, the Commercial facilities
were purchased from Prins in the fourth quarter of 1997.
FINISHED PRODUCTS
Cost of operations in this business unit was $3,852 for the three
months and $5,218 for the nine months ended September 30, 1998. There were no
cost of operations in the prior year and the cost of operations for the three
months and the nine months ended September 30, 1998 are primarily the results of
acquisitions discussed above.
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Selling, general and administrative expenses increased by $1,949 or
374.8% for the three months and $3,206 or 134.9% for the nine months ended
September 30, 1998 as compared to 1997. Notwithstanding selling, general and
administrative costs added through recent acquisitions, the Company has added
administrative staff to develop and install Company information systems; 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.
Depreciation and amortization expenses were $3,470 for the quarter and
$8,534 for the nine months ended September 30, 1998.
INTEREST
Interest expense increased $1,753 or 179.4% for the three months and
$2,090 or 56.5% for the nine months ended September 30, 1998 as compared to the
same periods in 1997. These increases are related principally to increased
borrowings on the Company's line of credit to fund several acquisitions and the
conversion of the Series B Preferred Stock to 8.75% convertible debt.
INCOME TAXES
The Company recorded a benefit for income taxes of $2,417 for the three
months and a provision of $2,276 for the nine months ended September 30, 1998.
The income tax benefit was due to the reduction of the valuation allowance for
deferred tax assets of $3,160 as a result of the determination that the Company
will be able to utilize its net operating loss carryforwards. The remaining
difference in the income tax provision at the federal statutory rate and the
recorded amounts for the period is due to the impact of nondeductible goodwill.
EXTRAORDINARY LOSS ON EARLY RETIREMENT OF DEBT
The Company recorded an extraordinary loss on early retirement of the
PERC bonds for the quarter and nine months of $0 and $495, respectively, net of
minority interest and income tax benefits.
LIQUIDITY AND CAPITAL RESOURCES
The Company is a holding company and receives cash flow from its
subsidiaries. Receipt of cash flow from PERC is currently restricted by
covenants under loan agreements, distribution restrictions under partnership
agreements with its equity investors, and put-or-pay agreements with
municipalities. Maine Energy's cash flow is required to retire the remaining
outstanding balance of $14,105 of subordinated notes payable as of September 30,
1998 (approximately $2,368 of these notes are owned by the Company) before cash
distributions to partners can begin. Timber Energy's cash flow is restricted by
covenants under its bond agreements. As a result, the following discussion is
organized to present liquidity and capital resources of the Company separate
from Maine Energy, PERC and Timber and liquidity and capital resources of each
of Maine Energy, PERC and Timber independently.
THE COMPANY
The Company 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 and preferred
stock.
As of September 30, 1998, the Company had working capital of $42,504
(a ratio of current assets to current liabilities of 2.20:1) and a cash balance
of $8,178 which compares to a working capital of $22,038 (a ratio of current
assets to current liabilities of 1.65:1) at December 31, 1997. As of September
30, 1998, the Company had cash on hand without regard to funds associated with
Maine
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<PAGE> 15
Energy, PERC and Timber Energy of $1,996 and $27,575 available in lines of
credit from KeyBank. For the nine months ended September 30, 1998, consolidated
net cash from operating activities was $13,759 and net cash from financing
activities was $53,527, as compared to $4,584 and $19,787 respectively, for the
corresponding prior year periods. Net cash from operating and financing
activities was primarily used to fund the purchase of businesses of $62,154 and
$9,125 and for capital expenditures of $4,825 and $2,336 for the nine months
ended September 30, 1998 and 1997, respectively.
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 and unused lines of credit will meet its current needs for
liquidity.
SIGNIFICANT FINANCING EVENTS
On June 4, 1997, the Company consummated the private placement of
487,500 shares of its Series A Convertible Preferred Stock for gross proceeds of
$3,900 and net proceeds of $3,798. The Series A Convertible Preferred Stock was
convertible into shares of the Company's Common Stock, at a price of $8.00 per
share, subject to adjustment. Purchasers of the shares of Series A Convertible
Preferred Stock also received, in the aggregate, warrants to purchase 243,750
shares of Common Stock at $9.00 per share and warrants to purchase 32,500 shares
of Common Stock at $10.00 per share. During 1997, 40,000 of the shares of Series
A Convertible Preferred Stock were converted to 40,000 shares of Common Stock.
The remaining shares of Series A Convertible Preferred Stock were converted into
447,500 shares of Common Stock in January and February 1998. Substantially all
of the related warrants were exercised in August 1998.
During August 1997, the Company consummated the offering of 856,000
shares of its 8.75% Series B Preferred Stock. The gross proceeds of the offering
were $21,400 and the net proceeds to the Company were $19,984.
On June 5, 1998 the Company exercised its option to exchange all of the
outstanding shares of the Series B Preferred Stock for KTI's 8.75% Convertible
Subordinated Notes. The exchange was effective August 3, 1998. On or about
August 3, 1998, 40 shares of the Series B Preferred were exchanged for $1;
12,000 shares were converted into 25,531 shares of KTI Common Stock and 843,960
shares were converted into KTI's 8.75% convertible subordinated notes totaling
$21,099.
The Company and its subsidiaries, other than Maine Energy, PERC and
Timber Energy at September 30, 1998 had $5,624 of its long-term debt maturing in
the next year. During the first nine months of 1998, the Company, other than
Maine Energy, PERC and Timber Energy incurred additional debt of approximately
$114,373, primarily as a result of drawings under its lines of credit for
business acquisitions; and retired approximately $54,055 of debt.
On May 28, 1998 KeyBank increased its credit line from $22,000 to
$30,000. On July 13, 1998 KeyBank and KTI closed on the $150,000 acquisition
credit line. This line of credit can be utilized to fund acquisitions, capital
expenditures and for working capital. There can be no assurance such
acquisitions or capital expenditures will take place, or that working capital
will be increased. At September 30, 1998, the Company was in default of a debt
covenant and received a waiver from the bank for this default. Management of the
Company believes that cash flow from its subsidiaries and affiliates and unused
lines of credit will meet its current needs for liquidity.
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MAINE ENERGY
Maine Energy has financed its operations and capital expenditures from
cash flows from operations. Cash provided by operations for the nine month
periods was $4,295 in 1998, as compared to $3,521 in 1997. As of September 30,
1998 Maine Energy had total indebtedness of $14,105. Maine Energy capital
expenditures for the nine month periods were $1,864 and $727 for additions to
property, plant and equipment during 1998 and 1997, respectively.
As of September 30, 1998, in addition to Maine Energy's operating cash
of $2,832, Maine Energy, as required under the terms of the agreement underlying
its letter of credit, has on account an additional $1,468 of reserves to be used
for capital improvements, debt service, operating shortfalls and working capital
requirements.
Management of the Company believes Maine Energy has adequate cash
resources available to fund its future operations and anticipated capital
expenditures. Capital expenditures for Maine Energy for the year ending December
31, 1998 are expected to be approximately $3,043, of which $1,850 has been set
aside in the above mentioned reserve accounts.
PERC
PERC has financed its operations and capital expenditures primarily
from cash flows from operations. Cash provided by operations for the nine month
periods was $11,508 in 1998 as compared to $9,127 in 1997. PERC's capital
expenditures were $174 and $175 for additions to property, plant and equipment
during 1998 and 1997, 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 $45,000 in Electric
Rate Stabilization Revenue Refunding Bonds issued by the Finance Authority of
Maine ("FAME"). The interest rate on the bonds ranges from 3.75% for one-year
bonds to 5.20% for 20-year term bonds. This transaction will reduce PERC's debt
service costs while extending its payment obligation over 20 years.
As of September 30, 1998, in addition to PERC's operating cash of
$13,276, PERC, as required under the terms of the trust indenture governing the
FAME Bonds, had on account an additional $1,821 of cash reserves to be used for
capital improvements, debt service, operating shortfalls and working capital
requirements.
Company management believes PERC has adequate cash resources available
to fund its current project operations and currently anticipated capital
expenditures. PERC plans capital expenditures for the year ending December 31,
1998 of approximately $765, which will be financed from cash flow from
operations.
TIMBER ENERGY
Timber Energy has financed its operations and capital expenditures
primarily from cash flow from operations since it was acquired on November 22,
1996. Cash provided by operations was $1,649 for the nine months ended 1998.
Timber Energy's capital expenditures were $377 for the nine months ended
September 30, 1998, which were funded out of cash generated from operations.
As of September 30, 1998, Timber Energy had outstanding tax exempt
bonds, together with accrued interest, in the aggregate amount of $13,400. The
bonds are payable pursuant to a mandatory redemption schedule through December
1, 2002.
As of September 30, 1998, in addition to Timber Energy's operating cash
of $2,916, Timber Energy, as required by the terms of the refinancing, had an
additional $1,340 of cash reserves to be used for debt service.
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<PAGE> 17
Company management believes Timber Energy has adequate cash resources
available and expects additional cash from operations to fund its current
operations and debt obligations. Timber Energy plans capital expenditures in
1998 of approximately $526, which will be funded from cash provided by
operations.
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. Failure to address this
problem could result in system failures and the generation of erroneous data.
The Company is in the process of contacting 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 compliant. Several insignificant software applications have been identified
which are not Year 2000 compliant. They are scheduled to be upgraded by Year
2000 compliant versions of the application from the vendor by the end of the
first quarter 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 also Year 2000 compliant. To date, the Company has
determined, based on information published or otherwise provided by such
systems' vendors, that many of its non-information technology systems are or
will be Year 2000 compliant. The Company plans to initiate 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 not incurred any material costs to modify or replace any of its
information technology or non-information technology systems.
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 many 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.
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. The majority of the Company's accounting and data processing
equipment is based on microcomputer hardware and related software which 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 technology which is not Year 2000 compliant. The Company is in the
process of replacing the hardware containing the embedded logic with hardware
which is Year 2000 compliant. In addition, these systems will be tested during
scheduled outage periods at the plants during the second quarter 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 handled its Year 2000 compliance program using
only internal resources. Accordingly, the only costs incurred by the Company
have been the salary costs of its internal staff. 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 assurances that the
Company will not require external resources to complete its Year 2000 compliance
program.
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RECENT PRONOUNCEMENTS OF THE FINANCIAL ACCOUNTING STANDARDS BOARD
Recent pronouncements of the Financial Accounting Standards Board
("FASB") which are not required to be adopted at September 30, 1998, include the
following Statement of Financial Accounting Standards ("SFAS") and Statements of
Position ("SOP"):
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information," which will be effective for the Company for the fiscal year ending
December 31, 1998, establishes standards for reporting information about
operating segments in the annual financial statements, selected information
about operating segments in interim financial reports and disclosures about
products and services, geographic areas and major customers. This new standard
requires the Company to report financial information on the basis that is used
internally for evaluating segment performance and deciding how to allocate
resources to segments.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", which will be effective for the fiscal years beginning after June
15, 1999, establishes standards for derivative instruments 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 have no material impact on the Company's financial statements.
The American Institute of Certified Public Accountants (the "AICPA")
issued SOP 98-1, "Accounting for Costs of Computer Software Developed or
Obtained for Internal Use" which is effective for fiscal years beginning after
December 15, 1998. The Company's current policy falls within the guidelines of
SOP 98-1. Also the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities" which is effective for fiscal years beginning after December 15,
1998. Beginning in the first quarter of fiscal year 1999, the Company will elect
to adopt the provisions of SOP 98-5. Management believes that the adoption of
SOP 98-5 will have no material impact on the Company's financial statements.
SUBSEQUENT EVENTS
On October 28, 1998 the Company acquired Yarmouth Rubbish Removal,
Inc.; Capital City Transfer, Inc.; and TWTS, Inc., Maine corporations
headquartered in Scarborough, Maine for $0.6 million in cash and approximately
75,932 shares of KTI common stock. The total annual revenue of these
acquisitions is approximately $3.0 million.
On November 2, 1998, $13,829 of Convertible Subordinated Notes were
converted into 1,238,616 shares of the Company's common stock. In order to
effect this transaction, the Company paid nine months interest and a 3% premium
on the face value of the Convertible Subordinated Notes, all in the form of
Common Stock of the Company. The interest and the premium were expensed at the
time of payment.
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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 in the State of Maine against
United Steel Structures, Inc. under a warranty to recover the costs, which were,
or will be incurred to replace the roof and walls of the Maine Energy tipping
and processing buildings. The judge in the case entered an order awarding Maine
Energy $3,334 plus interest from May 10, 1994, to the date of the filing of the
lawsuit and court costs. The defendant filed an appeal on December 19, 1997. A
hearing on the appeal was held in October 1998 and a ruling is expected shortly.
There can be no assurance that the Company will be able to collect any amount of
this judgement.
Lawsuits were filed on September 30, 1997 and March 6, 1998 by Capital
Recycling of Connecticut ("Capital") in a Connecticut State Court against K-C
International ("K-C"), certain officers of K-C and other parties. The suits
allege fraud, tortuous interference with business expectancy and violations of
the Connecticut Unfair Trade Practices Act. The actions are based on two
contracts between Capital and K-C. The lawsuit was dismissed with prejudice as
to the officers of K-C and all claims between the parties are to be resolved in
the arbitration proceedings. The Company believes that it has meritorious
defenses to the arbitration proceedings.
The Company is a defendant in certain other law suits alleging various
claims incurred in the ordinary course of business, none of which, either
individually or in the aggregate, the Company believes will have a material
adverse effect on the Company.
Management of the Company does not believe that the outcome of the
foregoing matters, individually or in the aggregate, will have a materially
adverse effect on the Company's financial condition, cash flows or results of
operations.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
Eight reports on Form 8-K were filed in the third quarter of
1998. The following is a list of the Forms 8-K filed and the dates thereof.
(i) A Form 8-K was filed on July 8, 1998 reporting that the
Company completed the refinancing of the existing tax exempt bonds issued by the
Town of Orrington, Maine to finance the construction of the facility owned by
PERC.
(ii) A Form 8-K was filed on July 15, 1998 announcing the
signing of a $150 million revolving credit agreement with KeyBank.
(iii) A Form 8-K was filed on August 5, 1998 announcing that
the Company had executed definitive documentation in connection with the merger
with FCR, Inc. on July 22, 1998, contingent upon compliance with the Hart Scott
Rodino Antitrust Improvement Act.
(iv) A Form 8-K was filed on August 13, 1998 announcing the
purchase of substantially all of the assets of First State Recycling, Inc. for
cash and stock in the amount of $1.85 million. The Company is purchasing First
State Recycling subject to existing funded debt of $445.
(v) A Form 8-K was filed on August 13, 1998 announcing the
purchase of substantially all of the assets of Atlantic Coast Fibers, Inc., a
New Jersey corporation for cash and KTI common stock in the amount of $9.16
million. In addition, the filing announced the acquisition of substantially all
of the assets of Gaccione Bros. & Co. and PGC Corporation, both New Jersey
corporations for $5.2 million in cash; a 7% $1.1 million promissory note due in
February 2001; certain incidental payments totaling approximately $75; and
certain incentive payments.
(vi) A Form 8-K was filed on September 14, 1998 announcing
that the Company completed the merger with FCR, Inc. on August 28, 1998. The
securities of FCR held by the holders were converted into the right to receive
$30.0 million in cash; 1,714,285 shares of KTI common stock; and an additional
payment of up to $30.0 million based upon the earnings of FCR from July 1, 1998
through December 31, 1998.
(vii) A Form 8-K/A was filed on October 7, 1998 which modified
the Form 8-K filed on September 14, 1998.
(viii) A Form 8-K was filed on November 4, 1998 announcing the
acquisition of substantially all of the assets of the Russell Stull Companies.
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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: November 16, 1998
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