<PAGE> 1
FORM 10-Q. - QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1999
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 13,916,238 Shares as of May 14, 1999
1
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TABLE OF CONTENTS
Item Number and Caption Page Number
PART I - Financial Information
Item 1. Consolidated Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Qualitative and Quantitative Disclosure about Market Risk 20
PART II - Other Information
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
2
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PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
KTI, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31,
1999 1998
--------- ---------
(RESTATED)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 7,782 $ 9,444
Restricted funds 21,343 19,088
Accounts receivable, net of allowances of $1,481 and $1,466 37,177 30,162
Consumables and spare parts 5,074 4,483
Inventory 7,795 7,026
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 3,540
--------- ---------
Total current assets 95,656 84,591
Restricted funds 4,207 4,350
Notes receivable - officers/shareholders and affiliates 5,341 1,534
Other receivables 2,207 3,025
Other assets 6,307 6,195
Deferred costs, net of accumulated amortization
of $1,899 and $1,620 4,907 5,275
Goodwill and other intangibles, net of accumulated amortization
of $4,599 and $3,387 117,372 117,878
Property, equipment and leasehold improvements, net of
accumulated depreciation of $36,197 and $32,731 208,335 209,113
--------- ---------
Total assets $ 444,332 $ 431,961
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 19,361 $ 15,328
Accrued expenses 13,883 11,335
Debt, current portion 11,014 12,065
Other current liabilities 1,006 2,999
--------- ---------
Total current liabilities 45,264 41,727
Other liabilities 3,393 4,720
Debt, less current portion 215,845 207,544
Minority interest 20,679 19,526
Deferred taxes 2,459 2,877
Deferred revenue 32,294 33,871
Convertible subordinated notes 6,770 6,770
Commitments and contingencies
Stockholders' equity
Common stock; no par value (stated value $.01 per share);
authorized 40,000,000 in 1999 and 1998, issued and outstanding
13,916,237 and 13,726,204 shares in 1999 and 1998, respectively 139 138
Additional paid-in capital 117,211 115,358
Retained earnings (deficit) 278 (570)
--------- ---------
Total stockholders' equity 117,628 114,926
--------- ---------
Total liabilities and stockholders' equity $ 444,332 $ 431,961
========= =========
</TABLE>
See accompanying notes.
3
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KTI, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------
1999 1998
------------ ------------
(RESTATED)
<S> <C> <C>
Revenues $ 67,449 $ 40,013
Cost of operations 56,875 32,501
------------ ------------
Gross Profit 10,574 7,512
Selling, general and administrative 3,575 1,571
Restructuring charge 748
Merger-related costs 133
------------ ------------
Income from operations 6,118 5,941
Interest expense, net 3,796 1,631
Other expense 51
------------ ------------
Income before minority interest, provision for income taxes and
cumulative effect of change in accounting principal 2,271 4,310
Minority interest 592 1,069
------------ ------------
Income before provision for income taxes and cumulative effect
of change in accounting principle 1,679 3,241
Provision for income taxes 773 1,335
------------ ------------
Income before cumulative effect of change in accounting principal 906 1,906
Cumulative effect of change in accounting principle 58
------------ ------------
Net income 848 1,906
Accretion and accrued and paid dividends on preferred stock 509
------------ ------------
Net income available to common shareholders $ 848 $ 1,397
============ ============
Earnings per common share:
Basic:
Income before cumulative effect of change in accounting principle $ 0.07 $ 0.14
Cumulative effect of change in accounting principle (0.01)
------------ ------------
Net income $ 0.06 $ 0.14
============ ============
Weighted average number of shares used in computation 13,757,588 9,696,588
============ ============
Diluted:
Income before cumulative effect of change in accounting principle $ 0.06 $ 0.13
Cumulative effect of change in accounting principle
------------ ------------
Net income $ 0.06 $ 0.13
============ ============
Weighted average number of shares used in computation 14,428,676 10,503,025
============ ============
</TABLE>
See accompanying notes.
4
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KTI, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(UNAUDITED, RESTATED)
<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 9,372,630 $ 94
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
Other distributions
Additional costs related to preferred stock issuances
-------- -------- -------- -------- ---------- ----------
Balance at December 31, 1998 13,726,204 138
Net income
Issuance of common stock for:
Exercise of options 20,551
Exercise of warrants 19,482
Business combination 150,000 1
-------- -------- -------- -------- ---------- ----------
Balance at March 31, 1999 13,916,237 $ 139
======== ======== ======== ======== ========== ==========
<CAPTION>
ADDITIONAL RETAINED
PAID-IN EARNINGS
CAPITAL (DEFICIT) TOTAL
---------- ------- ----------
<S> <C> <C> <C>
Balance at December 31, 1997 $ 53,094 $(5,050) $ 73,270
Net income 6,577 6,577
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)
Other distributions (693) (693)
Additional costs related to preferred stock issuances (98) (98)
---------- ------- ----------
Balance at December 31, 1998 115,358 (570) 114,926
Net income 848 848
Issuance of common stock for:
Exercise of options 161 161
Exercise of warrants 193 193
Business combination 1,499 1,500
---------- ------- ----------
Balance at March 31, 1999 $ 117,211 $ 278 $ 117,628
========== ======= ==========
</TABLE>
See accompanying notes.
5
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KTI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months ended March 31,
---------------------
1999 1998
-------- --------
(restated)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 848 $ 1,906
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 4,949 2,700
Minority interest, net of distributions 1,153 1,069
Deferred revenue (1,577) (1,576)
Deferred income taxes (1,035) 1,204
Provision for losses on accounts receivable 15 54
Interest accrued and capitalized on debt 417
Other non-cash charges 42 41
Changes in operating assets and liabilities:
Accounts receivable (7,030) (2,338)
Consumables, spare parts and inventory (1,360) (850)
Other receivables 849 42
Other assets (2,012) 619
Accounts payable and accrued expenses 6,581 470
Other liabilities (1,930) 308
-------- --------
Net cash provided by (used in) operating activities (449) 4,066
INVESTING ACTIVITIES
Additions to property, equipment and leasehold improvements (3,261) (3,202)
Proceeds from sale of assets 22 18
Net change in restricted funds (2,112) (756)
Purchase of businesses, net of cash acquired (2,443)
Notes receivable--officers/shareholders and affiliates (3,351) (22)
-------- --------
Net cash used in investing activities (8,702) (6,405)
FINANCING ACTIVITIES
Deferred financing costs (398)
Net borrowings on lines of credit 9,847 5,508
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 7,489 (2,683)
-------- --------
Increase (decrease) in cash and cash equivalents (1,662) 344
Cash and cash equivalents at beginning of period 9,444 11,515
-------- --------
Cash and cash equivalents at end of period $ 7,782 $ 11,859
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 5,358 $ 1,023
Taxes paid 797
</TABLE>
-Continued-
6
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KTI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months ended March 31,
----------------------
1999 1998
------- -------
(unaudited) (restated)
<S> <C> <C>
NON CASH INVESTING AND FINANCING ACTIVITIES
Capital lease obligation entered into for lease of equipment $ 115
Purchase of businesses and additional partnership interest, net of cash acquired:
Working capital deficit, net of cash acquired $ (158)
Property, equipment and leasehold improvements 933
Purchase price in excess of net assets acquired 2,834
Other assets 104
Non-current liabilities 1,270
Common stock and common stock purchase warrants issued
</TABLE>
See accompanying notes
7
<PAGE> 8
KTI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
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 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. KTI, Inc. (the
"Company" or "KTI") has restated the previously issued consolidated balance
sheet as of December 31, 1998 and the previously issued statements of income,
stockholders' equity and cash flows for the three months ended March 31, 1998
to reflect an acquisition accounted for using the pooling of interests method
of accounting. In addition, certain 1998 financial information contained herein
has been reclassified to conform with the 1999 presentation.
2. MERGER AND ACQUISITION
On May 12, 1999, 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. This Merger
Agreement was an amendment to the original agreement dated January 12, 1999.
The merger will be completed through the exchange of all of the shares of the
Company's common stock for shares of Casella's Class A common stock based on an
exchange ratio specified in the Amended Merger Agreement. In addition, all of
the Company's outstanding and unexercised stock options and stock purchase
warrants will be converted into similar rights to acquire Casella's Class A
common stock under the same terms and conditions and the same exchange ratio.
Subsequent to the completion of the merger the current Casella stockholders
will own a majority of the combined company. Under the terms of the Merger
Agreement, Casella is required to file a registration statement with the
Securities and Exchange Commission to register the shares of its Class A common
stock to be issued in the merger. The merger is subject to, among other things,
approval of the Company's and Casella's stockholders. No assurance can be given
that the conditions of the merger will be satisfied or that the merger will be
consummated. Upon consummation of the merger, the Company will pay fees to its
investment bankers and recognize certain other merger related costs which have
been deferred.
On January 27, 1999 the Company completed its acquisition of AFA
Group, Inc. and subsidiaries ("AFA") in a business combination recorded as a
pooling of interests and accordingly, the accompanying unaudited financial
statements have been restated to include the accounts and operations of AFA for
all periods presented. AFA is an integrated wood waste processing and hauling
business located in Newark, New Jersey. The Company issued 460,000 shares of
common stock in exchange for all of the outstanding shares of AFA. In
connection with this acquisition, the Company expensed approximately $133 of
merger-related costs which consisted of external costs incurred to complete the
transaction. Revenues and net income (loss) for the individual companies for
the three months ended March 31, 1998 were as follows:
<TABLE>
<CAPTION>
KTI AFA TOTAL
------- ------- -------
<S> <C> <C> <C>
Revenues $37,632 $ 2,381 $40,013
Net income (loss) 1,992 (86) 1,906
</TABLE>
8
<PAGE> 9
On March 24, 1999, pursuant to the Second Amended, Restated and
Extended Waste Disposal Agreement among PERC and the municipalities named
therein, the municipalities made a capital contribution to PERC totaling $720 in
exchange for a 1.30% limited partnership interest in PERC.
3. 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
------------ ------------
(restated)
<S> <C> <C>
Numerator:
Net income $ 848 $ 1,906
Preferred stock dividends (467)
Accretion of preferred stock (42)
------------ ------------
Numerator for basic earnings per share-net income available to
common stockholders 848 1,397
Numerator for diluted earnings per share-net income available
to common stockholders after assumed conversions(1) $ 848 $ 1,397
============ ============
Denominator:
Denominator for basic earnings per share-weighted average shares 13,757,588 9,696,588
Effect of dilutive securities:
Employee stock options 486,768 418,861
Warrants 184,320 387,576
------------ ------------
Dilutive potential common shares 671,088 806,437
------------ ------------
Denominator for diluted earnings per share-adjusted weighted-
average shares and assumed conversions 14,428,676 10,503,025
============ ============
Net income per share-Basic $ 0.06 $ 0.14
============ ============
Net income per share-Diluted $ 0.06 $ 0.13
============ ============
</TABLE>
________
(1) The Convertible Subordinated notes payable were anti-dilutive in 1999 and
1998 and the preferred shares were anti-dilutive in 1998.
4. CONTINGENCIES
The Company is a defendant in a consolidated purported class action,
which alleges violations of certain sections of the federal securities laws. The
Company believes the allegations are without merit and intends to defend the
litigation vigorously.
Two lawsuits have been filed against a subsidiary of the Company 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.
5. SEGMENT REPORTING
During the three months ended March 31, 1999, the Company operated in
the business segment as indicated below.
9
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<TABLE>
<CAPTION>
WASTE-TO-ENERGY COMMERCIAL FINISHED PRODUCTS RESIDENTIAL
RECYCLING RECYCLING
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues
Unaffiliated customers $ 24,864 $ 21,138 $ 12,345 $ 9,087
Intersegment revenues 33 31 748
Segment Profit 6,392 315 786 559
Depreciation and Amortization 2,406 607 821 914
Identifiable Assets 232,069 65,728 58,868 58,640
Capital Expenditures 1,129 315 1,403 384
</TABLE>
During the three months ended March 31, 1998 the Company operated in the
business segments indicated below.
<TABLE>
<CAPTION>
WASTE-TO-ENERGY COMMERCIAL FINISHED
RECYCLING PRODUCTS
-------- -------- --------
<S> <C> <C> <C>
Revenues
Unaffiliated customers $ 19,614 $ 18,665 $ 1,719
Intersegment revenues 3,644 15
Segment Profit 5,665 674 259
Depreciation and Amortization 2,197 458 25
Identifiable Assets 212,925 42,533 1,635
Capital Expenditures 2,149 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 $ 67,434 $ 39,998
Holding company revenues 15 15
Intersegment revenues for reportable segments 4,591 3,659
Elimination of intersegment revenues (4,591) (3,659)
-------- --------
Total consolidated revenues $ 67,449 $ 40,013
======== ========
PROFIT AND LOSS
Total segment profit for reportable segments $ 8,052 $ 6,598
Holding company segment loss (1,934) (657)
-------- --------
Total segment profit 6,118 5,941
Unallocated amounts:
Interest expense, net 3,796 1,631
Other expenses 51
Minority interest 592 1,069
-------- --------
Income before provision for income taxes and cumulative effect
of change in accounting principal $ 1,679 $ 3,241
======== ========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
1999
--------
<S> <C>
ASSETS
Total identifiable assets for reportable segments $415,305
Holding company assets 29,027
--------
Total consolidated assets $444,332
========
</TABLE>
6. ACCOUNTING CHANGE
10
<PAGE> 11
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.
7. RESTRUCTURING CHARGE
In the first quarter of 1999, the Company recorded a $738 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.
8. INCOME TAXES
The income tax provision was approximately $0.8 million for the three
months ended March 31, 1999 compared to approximately $1.3 million 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.
9. 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 ratio, and a maximum debt to capitalization ratio, each as
defined in the Amended Agreement. The Company expects to be in compliance with
these covenants. However, 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.
11
<PAGE> 12
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 $27.4 million or
68.6%.
Waste-to-Energy Segment
The Waste-to-Energy segment consists of the operations of Maine Energy
Recovery Company, Limited Partnership ("Maine Energy"), Penobscot Energy
Recovery Company, Limited Partnership ("PERC"), Timber Energy Resources, Inc.
("TERI"), KTI Specialty Waste Services, Inc., American Ash Recycling of
Tennessee, Ltd. , KTI BioFuels, Inc. ("BioFuels"), Total Waste Management
Corporation ("TWM"), Multitrade Group, Inc. ("Multitrade"), Russell Stull
Companies ("Russell Stull"), KTI Recycling of Canada ("KTI Tire"), and AFA
Group, Inc. ("AFA"). Total revenues for this business unit were approximately
$24.9 million for the three months ended March 31, 1999, compared to
approximately $19.6 million for the same period in 1998. This represents an
increase of approximately $5.3 million or 27.0% for the three months ended March
31, 1999 as compared to the same period in 1998.
Revenues in the Waste-to-Energy segment are primarily derived from
waste processing and electric power sales. Total tons received by Maine Energy
and PERC decreased 8.4% and 3.0%, respectively, in 1999, compared to 1998. The
decrease at Maine Energy was due to lower production as a result of repairs to
the primary processing equipment. The decrease at PERC was the result of the
scheduled plant outage in January 1999. In 1998, PERC's scheduled outage
occurred in the second quarter. Waste processing revenues increased by
approximately $2.0 million or 27.3% for the year. This increase is a result of
increased prices charged per ton during 1999 versus 1998 of approximately 26.4%
and additional revenues from the TWM, Multitrade, Russell Stull and KTI Tire
acquisitions. The increases from the acquisitions was offset by reductions at
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 $1.3 million or 12.5% over the same period in 1998. The
increase in revenues is a combination of the acquisition of Multitrade offset by
lower kilowatt hours at Maine Energy due to lower production discussed above.
Residential Recycling Segment
This segment includes the residential recycling plants of FCR, Inc.
("FCR"). This segment posted revenues of approximately $9.1 million for 1999 and
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 consists of the operations of I.
Zaitlin and Sons, Inc. ("Zaitlin"), K-C International, Inc. ("K-C"), the
commercial recycling plants acquired from Prins, and KTI New Jersey Fibers, Inc.
("NJ Fibers"), which consists of the operations of Gaccione Bros., Inc. & Co.
and PGC Corporation (collectively, "Gaccione") and Atlantic Coast Fibers, Inc.
("Atlantic Coast"). Total revenue for this segment for the three months ended
March 31, 1999 was 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 primarily as a result of the
acquisition
12
<PAGE> 13
of NJ Fibers which was completed in the third quarter of 1998. These increases
were partially offset by lower commodity prices for paper fibers in the first
quarter of 1999 versus the first quarter of 1998 and lower volumes at the
commercial processing plants.
Finished Products Segment
The Finished Products segment consists of the operations of Power Ship
Transport, Inc., Manner Resins, Inc. ("Manner"), the cellulose insulation plants
and the plastic reprocessing plants of FCR, the plastic reprocessing operations
of First State Recycling, Inc. and the glass pellet processor Seaglass, Inc.
Total revenue for this segment for the three months ended March 31, 1999 was
approximately $12.3 million compared to approximately $1.7 million for the same
period in 1998. This represents an 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 the first quarter of 1999 versus the first quarter of 1998.
COSTS AND EXPENSES
Waste-to-Energy Segment
Cost of operations in this segment consist primarily of electric power
and waste handling operating costs which were approximately $18.5 million during
the three months ended March 31, 1999, compared to approximately $14.0 million
for the same period in 1998. This represents an increase of approximately $43.5
million or 32.1%. The increase was primarily a result of the TWM, Multitrade,
Russell Stull, and KTI Tire acquisitions discussed above which had total costs
of operations of approximately $2.8 million. In addition, PERC's operating costs
increased $1.8 million due to the costs associated with the planned outage and
an increase in performance credits as a result of the amended Power Purchase
Agreement ("PPA")and Waste Disposal agreements. These increases were offset by
decreases at Timber as a result of an increase in tipping fee based material
which reduces fuel costs and the elimination of costs associated with the
brokerage sales discussed above at BioFuels.
Residential Recycling Segment
Cost of operations in this segment was approximately $8.5 million for
1999 and there was no cost of operations for the same period in 1998 since 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 compared to approximately $18.0 million
during the same period in 1998. This represents an increase of approximately
$2.8 million. This increase is due primarily to the acquisition of NJ Fibers in
August 1998 and was offset by lower purchase prices due to lower commodity
prices and lower volumes at the commercial processing plants, during the first
quarter of 199 versus the first quarter of 1998.
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 due to decreases in
plastics price in 1999.
OTHER ITEMS
Selling, general and administrative expenses increased by approximately
$2.0 million or 127.6% for the three months ended March 31,1999 compared to the
same period in 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
13
<PAGE> 14
and acquisitions; and to develop internal information systems to identify
revenue enhancement and cost savings programs in newly acquired entities.
Interest expense increased approximately $2.2 million or 132.7% during
1999 compared to the same periods in 1998. These increases are related
principally to increased borrowings on the Company's line of credit to fund
several acquisitions, incremental interest expense on debt assumed as part of
these acquisitions and the conversion of the Series B Preferred Stock to
convertible debt. These increases were partially offset by lower interest rates
at PERC as a result of the refinancing of the bonds payable and lower debt
levels at Maine Energy.
The cumulative effect of a change in accounting principle represents a
change in the Company's method of accounting for start-up costs. The change
involved expensing these costs as incurred, rather than capitalizing and
subsequently amortizing such costs.
LIQUIDITY AND CAPITAL RESOURCES
The Company is a holding company and receives certain of its cash flows
from its subsidiaries. Receipt of cash flow from PERC is currently restricted by
covenants under loan agreements, distribution restrictions under partnership
agreements with PERC's equity investors, and put-or-pay agreements with
municipalities. Maine Energy's cash flow is required to retire the remaining
outstanding subordinated debt balance of approximately $11.5 million as of March
31, 1999 before partners' cash distributions can begin (approximately $7.6
million of these notes are owned by the Company). TERI's cash flow is restricted
by covenants under its bond agreements. As a result, the following discussion is
organized to present liquidity and capital resources of the Company separate
from Maine Energy, PERC and TERI and liquidity and capital resources of each of
Maine Energy, PERC and TERI independently.
THE COMPANY
The Company operates in industries that require a high level of capital
investment. The Company's capital requirements basically stem from (i) its
working capital for ongoing operations, (ii) capital expenditures for new plants
and equipment and (iii) business acquisitions. The Company's strategy is to meet
these capital needs from internally generated funds which are not contractually
restricted, drawings under its lines of credit and collateralized equipment
financing and proceeds from the sale of the Company's common stock.
On July 10, 1998 KTI closed on a $150.0 million acquisition credit
line. This line of credit can be utilized to fund acquisitions, capital
expenditures and working capital. As of March 31, 1999, the Company was in
default of a debt covenants. On May 12, 1999, the Company signed an amended
agreement with KeyBank in which the covenants were amended. Management of the
Company believes that the Company will remain in compliance with the amended
agreement; although no assurances can be given in this regard.
As of March 31, 1999, the Company 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, the Company had working capital and cash on hand without
regard to Maine Energy, PERC and TERI of approximately $19.9 million (ratio of
current assets to current liabilities of 1.55:1) and approximately $3.2
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<PAGE> 15
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, the Company had approximately $22,000 available
under the revolving credit agreement. Though management of the Company believes
that cash flows from its subsidiaries will meet its current needs for working
capital and capital expenditures, the ability of the Company to expand its
current operations is dependent on cash flow from its subsidiaries. Management
believes that the Company has the ability to access additional facilities to
fund capital expenditures if needed; although no assurance can be given in this
regard.
The Company's ability to make future acquisitions is dependent on its
ability to increase its line of credit. The ability to increase the line of
credit is dependent on the Company's ability to raise additional equity or raise
capital from financial instruments which are subordinated to the KeyBank credit
line. Management believes that the Company has the ability to raise additional
capital if needed; however, there can be no assurances that this can be
accomplished at terms and conditions that would be acceptable to the Company.
The Company and its subsidiaries, other than Maine Energy, PERC and
TERI, at March 31, 1999 had current maturities of indebtedness of approximately
$7.7 million, including borrowings under existing revolving credit facilities.
During the three months ended March 31, 1999, the Company, other than Maine
Energy, PERC and Timber Energy increased net borrowings on the Company's line of
credit facilities by approximately $9.8 million, primarily for the refinancing
of debt assumed from certain acquisitions, the funding of business operations
and capital expenditures.
In general, the Company's capital expenditures and working capital
requirements have increased as a result of the Company's business strategy of
growth through acquisitions. Management of the Company believes that cash flow
from operations will meet its current needs for liquidity.
MAINE ENERGY
Maine Energy has financed its operations and capital expenditures from
cash flows from operations. Cash provided by operations was approximately $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 had on account an additional approximately $6.0 million and
$6.0 million, respectively, of cash reserves to be used under certain
circumstances for capital improvements, debt service, operating shortfalls and
working capital requirements. As of March 31, 1999, Maine Energy had total
indebtedness of approximately $11.5 million.
Management of the Company believes Maine Energy's cash flows from
operations and cash resources available will be sufficient to fund anticipated
capital expenditures and debt service requirements. Capital expenditures for
Maine Energy for the remainder of 1999 are expected to be approximately $0.7
million.
PERC
PERC 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. PERC's capital expenditures were
approximately $0.6 million and $0.1 million during the three months ended March
31, 1999 and 1998, respectively.
15
<PAGE> 16
On June 26, 1998 KTI completed a major restructuring of the various
contracts and obligations of PERC, which included refinancing PERC's tax exempt
bonds. The refinancing was made possible through the sale of approximately $45.0
million in Electric Rate Stabilization Revenue Refunding Bonds issued by the
Finance Authority of Maine ("FAME") ("Revenue Bonds"). The proceeds, plus
certain funds from operations were utilized to repay the outstanding bonds. The
interest rate on the Revenue Bonds ranges from 3.75% for one-year bonds to 5.20%
for 20-year term bonds. The refinancing reduced PERC's debt service costs
while extending its payment obligation over 20 years.
As of March 31, 1999, in addition to PERC's operating cash of
approximately $2.6 million, PERC, as required under the terms of the trust
indenture governing the Revenue Bonds, had on account an additional
approximately $15.4 million of cash reserves to be used for capital
improvements, debt service, operating shortfalls and working capital
requirements.
Company management believes PERC's cash flows from operations and cash
resources available will be sufficient to fund anticipated capital expenditures
and debt service requirements. PERC plans capital expenditures for the remainder
of 1999 of approximately $1.1 million which principally has been set aside in
the above-mentioned reserve accounts.
TERI
TERI 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. TERI's 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.
TERI has two 1997 Industrial Development Revenue Bond issues (the "1997
Bonds") outstanding that carry interest at a fixed rate of 7% and have annual
sinking fund payments due each December 1 with a final payment due December 1,
2002. As of March 31, 1999, TERI had approximately $11.6 million outstanding in
1997 Bonds.
As of March 31, 1999 and December 31, 1998, in addition to TERI's
operating cash of approximately $0.7 million and $0.8 million, respectively,
TERI, as required under the terms of its the 1997 Bonds, had on account
approximately $2.9 and $2.1 million, respectively, of cash reserves to be used
under certain circumstances for capital improvements, debt service, operating
shortfalls and working capital requirements.
Management believes TERI's cash flows from operations and cash
resources available will be sufficient to fund anticipated capital expenditures
and debt service requirements. Capital expenditures for TERI for the remainder
of 1999 are expected to be approximately $0.3 million. TERI intends to finance
the requirements through cash flow from operations.
TAX LOSS CARRYFORWARDS
At March 31, 1999, the Company had net operating loss carryforwards of
approximately $51.0 million for income tax purposes that expire in years 2002
through 2018 and are subject to the limitations as described below. In addition,
the Company has general business credit carryforwards of approximately $0.5
million that expire in the years 1999 through 2006 and alternative minimum tax
credit carryforwards of approximately $0.9 million that are not subject to
limitation.
The Tax Reform Act of 1986 enacted a complex set of rules limiting the
potential utilization of net operating loss and tax credit carryforwards in
periods following a corporate "ownership change." In general, for federal income
tax purposes, an ownership change is deemed to occur if the percentage of stock
of a loss corporation owned (actually, constructively and, in some cases,
deemed) by one or more "5% shareholders" has increased by more than fifty (50)
percentage points over the lowest percentage of such stock owned during a
three-year testing period.
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<PAGE> 17
During 1994, such a change in ownership of the Company occurred. As a
result of the change, the Company's ability to utilize its net operating loss
carryforwards and general business credits will be limited to approximately $1.2
million of taxable income, or approximately $0.4 million of equivalent credit
per year. This limitation may be increased if the Company recognizes a gain on
the disposition of an asset which had a fair market value greater than its tax
basis on the date of the ownership change.
In conjunction with the acquisition of TERI, FCR and TWM, the Company
recorded additional net operating loss carryforwards of approximately $25.6
million, $12.5 million and $0.5 million respectively, which are also subject to
a corporate "ownership change". As a result of the change, the Company's ability
to utilize the net operating loss carryforwards related to these entities is
limited to approximately $1.0 million, $3.2 million and $0.1 million,
respectively, per year.
ENVIRONMENTAL CONTINGENCIES
While increasing environmental regulation often presents new business
opportunities to the Company, Maine Energy, PERC and TERI, it likewise often
results in increased operating costs as well. The Company, Maine Energy, PERC
and TERI strive to conduct their operations in compliance with applicable laws
and regulations, including environmental rules and regulations, and have as
their goal 100% compliance with such laws and regulations. This effort requires
programs to promote compliance, such as training employees and customers,
purchasing health and safety equipment, and in some cases hiring outside
consultants and lawyers. Even with these programs, management of the Company
believes that in the ordinary course of doing business, companies in the
environmental services and waste disposal industry are faced with governmental
enforcement proceedings resulting in fines or other sanctions and will likely be
required to pay civil penalties or to expend funds for remedial work on waste
management facilities.
The TERI Telogia facility is currently in violation of its Waste Water
Discharge Permit (the "Permit"). This violation involves the temperature of the
water used in the cooling process and in the opinion of management, does not
involve a significant environmental issue. The Company has requested a
modification to the Permit from the Florida Department of Environmental
Protection to change the monitoring procedures and enable the Company to operate
in compliance with the permit.
At March 31, 1999, there were no pending governmental environmental
enforcement proceedings where the Company, Maine Energy, PERC or TERI believe
potential monetary sanctions will exceed $0.1 million. The possibility always
exists that substantial expenditures could result from governmental proceedings,
which would have a negative impact on earnings for a particular reporting
period. More importantly, federal, state and local regulators have the power to
suspend or revoke permits or licenses needed for operation of the plants,
equipment, and vehicles of the Company, Maine Energy, PERC or any other
operating subsidiary of the Company based on the applicable company's compliance
record, and customers may decide not to use a particular disposal facility or do
business with a company because of concerns about its compliance record.
Suspension or revocation of permits or licenses would have a negative impact on
the Company's business and operations and could have a material adverse impact
on the Company's financial results.
INFLATION
The effect of inflation on operating costs has been minimal in the past
three (3) years. Most of the Company's operating expenses are inflation
sensitive, with increases in inflation generally resulting in increased costs of
operation. The effect of inflation-driven cost increases on each of the
Company's project's overall operating costs is not expected to be greater for
such project than for its respective competitor's projects. In addition, each of
Maine Energy and PERC and the majority of the Residential Recycling contracts
can contractually increase its waste processing fees to municipal customers
annually based on inflation.
YEAR 2000 ISSUE
Year 2000 compliance is the ability of computer hardware and software
to respond to the problems posed by the fact that computer programs have
traditionally been written using two digits rather
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<PAGE> 18
than four to define the applicable year. As a consequence, unless modified,
computer systems will not be able to differentiate between the year 2000 and
1900. Systems must also recognize the Year 2000 as a leap year. Failure to
address this problem could result in system failures and the generation of
erroneous data. This could potentially impact the Company's ability to perform
its obligations under long-term contracts which could result in legal and other
liabilities which would have a material adverse effect on the Company.
The Company has contacted its customers and vendors and has received
letters from each of its applications vendors stating that the majority of the
Company's information technology systems, such as accounting, data processing,
plant operations systems and telephone/PBX systems, are Year 2000 compliant.
Several insignificant software applications representing 20% of the Company's
applications are not Year 2000 compliant. They are scheduled to be replaced or
upgraded by Year 2000 compliant versions of the applications from the vendor by
the end of the third quarter of 1999. The Company has also begun an assessment
of its non-information technology systems, such as its security systems and
telephones, to determine if they are Year 2000 compliant. The Company has
initiated formal communications with the vendors of its remaining
non-information technology systems. Based on its assessment to date, the Company
is not aware that any of its non-information technology systems will not be Year
2000 compliant prior to the Year 2000.
The Company has also begun an assessment of its significant vendors,
suppliers, and service providers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
compliance issues. To date, the Company has determined, based on information
published or otherwise provided by such third parties, that all of such parties'
systems are or will be Year 2000 compliant. The Company plans to initiate formal
communications with the remaining third parties with whom the Company has a
significant relationship. Based on its assessment to date, the Company is not
aware that any of its significant vendors, suppliers and service providers will
not be Year 2000 compliant prior to the Year 2000.
The following table summarizes the status of the Company's Year 2000 compliance
program:
<TABLE>
<CAPTION>
ASSESSMENT REMEDIATION TESTING IMPLEMENTATION
---------- ----------- ------- --------------
<S> <C> <C> <C> <C>
Information 95% Complete 75% Complete 75% Complete 75% Complete
Technology
Expected completion Expected completion Expected completion
date, September 1999 date, September 1999 date, September 1999
Operating 90% Complete 85% Complete 85% Complete 85% Complete
Equipment with
Embedded Chips or Expected completion Expected completion Expected completion
Software date, June 1999 date, June 1999 date, June 1999
3rd Party 80% Complete 80% Complete for 80% Complete for 80% Complete for system
for system system interface. system interface. interface.
interface. 66%
Complete for Develop contingency Expected completion Expected completion
all other plans as appropriate, date for system date for system
material June 1999. interface work, June interface work, June
exposures. 1999 1999
60% Complete Implement contingency
Expected plans or other
completion date alternatives as
for surveying necessary, August 1999.
all remaining
third parties,
June 1999
</TABLE>
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<PAGE> 19
In addition to the assessments and investigations described above, the
Company has conducted tests of all of its internal information and
non-information technology systems and all of its system interfaces with
significant vendors, suppliers and service providers to ensure Year 2000
compliance. All of the Company's accounting and data processing equipment is
based on microcomputer hardware and related software, of which 80% has been
certified as Year 2000 compliant by the applicable manufacturer or developer.
However, the Company has determined that the plant control systems may contain
embedded technology which is not Year 2000 compliant. The Company has ordered
the hardware containing the embedded logic to replace the hardware that is not
Year 2000 compliant with hardware which is Year 2000 compliant. In addition,
these systems will be tested during scheduled outage periods at the plants
during the second and third quarters of 1999. However, despite the Company's
efforts to ensure that its internal systems and the systems of its significant
vendors, suppliers and service providers are Year 2000 compliant, there can be
no guarantee that the failure of certain systems will not have a material
adverse effect on the Company.
To date, the Company has utilized internal resources to reprogram, or
replace, test, and implement the software and hardware modifications for Year
2000. The only costs incurred by the Company have been the salary costs of its
internal staff of four. To date, the Company has incurred approximately $0.1
million (30% expensed and 70% capitalized for new systems and equipment),
related to all phases of the Year 2000 project. The Company estimates that the
remaining project costs will be less than $0.1 million for the purchase of new
software and hardware and approximately $0.1 million of internal resources.
Although at the current time, the Company expects that it will be able to
complete its Year 2000 compliance program using only internal resources, there
can be no assurance that the Company will not require external resources to
complete its Year 2000 compliance program.
The most significant risk identified by the Company is the inability of
the power plants to generate electric power. The Company has received assurances
that the process control systems will be Year 2000 compliant with the
installation of new hardware components. The Company will perform a complete
test of the systems during the planned outage periods that are to be completed
by the end of the third quarter of 1999. In addition, the Company has developed
contingency plans for this risk as well as other internal and external
applications which involve, among other actions, manual workarounds, increasing
inventories and adjusting staffing strategies. The impact of this risk could
include default under the respective PPA with customers and a loss of
electric power revenue. The Company is unable to reasonably estimate the impact
of this risk; however, there can be no guarantee that this risk will not have a
material adverse effect on the Company. There is also no guarantee that the
Company has identified all the significant risks associates with Year 2000
compliance.
RECENT ACCOUNTING PRONOUNCEMENTS
Recent accounting pronouncements which are not required to be adopted
at 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 will be required to be adopted by the Company as of January 1,
2000, establishes standards for derivative instruments including those embedded
in other contracts and for hedging activities. The new standard requires the
Company to recognize all derivatives as either assets or liabilities and measure
those instruments at fair value. Management believes that the adoption of SFAS
No. 133 will not have a material impact on the Company's financial statements.
SOP 98-1, Accounting for Costs of Computer Software Developed or
Obtained for Internal Use is required to be adopted by the Company as of January
1, 2000. The Company's current policy falls within the guidelines of SOP 98-1.
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<PAGE> 20
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
The Company currently utilizes no material derivative financial
instruments which expose it to significant market risk. The Company is exposed
to cash flow and fair value risk due to changes in interest rates with respect
to its debt. The table below presents principal cash flows and related weighted
average interest rates of the Company's debt at 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, 1999.
Forward rates should not be considered a predictor of actual future interest
rates.
INTEREST RATE SENSITIVITY
PRINCIPAL AMOUNT BY EXPECTED MATURITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 THEREAFTER FAIR VALUE
-------- -------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate Debt $ 3,943 $ 5,979 $ 5,128 $ 6,772 $ 2,091 $ 49,950 $ 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>
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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<PAGE> 21
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 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 the Company and returned the case to the Trial
Court.
Two lawsuits have been filed on September 30, 1997 and March 6, 1998 by
Capital Recycling of Connecticut ("Capital") in a Connecticut State Court
against K-C, certain officers of K-C and other parties. The suits allege fraud,
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. The contracts require all disputes to be resolved by
arbitration in Portland, Oregon. Pursuant to this requirement, K-C has initiated
the arbitration process in Portland, Oregon. Subsequently, the parties agreed to
arbitrate the dispute in Hartford, Connecticut. Discovery is now in process and
the arbitration is expected to be held in June 1999.
The Equal Employment Opportunity Commission has filed a lawsuit against
FCR Tennessee, Inc., a subsidiary of FCR, in the District Court for the Western
District of Tennessee, Western Division, alleging sexual harassment by two
managers and a sexually hostile work environment. The complaintants 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 & 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.
On April 1, 1999, William F. Kaiser, a former Executive Vice President
and Treasurer of the Company, 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 damages
for salary, bonus and other payments, including severance, and damages from his
sale of approximately 50,000 shares of Common Stock resulting from the Company's
allegedly inaccurate financial reports. Mr. Kaiser is also seeking a declaratory
judgment that, upon closing of the Company's proposed merger with Casella, the
change of control provision entitles him to receive two years' salary and to
exercise 132,000 unvested options for the Company's Common Stock.
C.H. Lee, a former employee of FCR and a former majority shareholder of
Resource Recycling, Inc. ("RRI"), instigated arbitration proceedings in
Charlotte, North Carolina against the Company, FCR and FCR Plastics, Inc. ("FCR
Plastics") in connection with the acquisition of RRI 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 to receive. 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 request punitive damages, treble damages and attorneys fees. The
Company, FCR and FCR Plastics have responded to the demand, denying liability
and filed a counterclaim for $1.0 million for misrepresentations. The Company
believes it has meritorious defenses to these claims
On or about April 26, 1999, Salvatore Russo purported to have filed an
action in the U.S. District Court, District of New Jersey against the Company
and two of its principal officers, Ross Pirasteh and
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<PAGE> 22
Martin J. Sergi, on behalf of all stockholders who purchased common stock of the
Company from May 4, 1998 through and including August 14, 1998. The complaint
alleges that the defendants made material misrepresentations in the Company'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 its
allowance for doubtful accounts and net income. The plaintiff is seeking
undisclosed damages. The Company believes it has meritorious defenses to the
complaint.
Dennis McDonnell filed a lawsuit dated April 6, 1999 against U.S.
Fiber, Inc., a subsidiary of FCR. Mr. McDonnell, a former employee of U.S.
Fiber, Inc. 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, Inc. The Company is defending the suit and believes it
has meritorious defenses.
The Company 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.
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
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
Five reports on Form 8-K were filed in the first quarter of
1999. The following is a list of the Forms 8-K filed and the dates thereof.
(i) A Form 8-K was filed on January 6, 1999 reporting that the
Company purchased a 9.6% limited partnership interest in Maine Energy from CNA
Realty Corp. for $2.4 million in cash on December 30, 1998. The Company also
purchased approximately $6.34 million par amount Maine Energy 12% subordinated
note from CNA Realty Corp. The total purchase price was approximately $6.5
million which included the par amount plus accrued and unpaid interest.
(ii) A Form 8-K was filed on January 13, 1999 reporting that
the Company entered into an Agreement and Plan of Merger with Casella Waste
Systems, Inc. ("Casella") in which the KTI shareholders would receive .91 shares
of Casella common stock for each share of KTI common stock. The
22
<PAGE> 23
closing is subject to approval by the stockholders of the companies, antitrust
clearance, and qualification of the merger as a tax-free pooling of interest.
(iii) A Form 8-K was filed on January 15, 1999 reporting that
the Company purchased 1,730,056 shares of common stock in Oakhurst Company, Inc.
("OCI") for $865,000 in cash. In connection with this transaction, the Company
transferred its ownership interest in New Heights Recovery & Power, LLC ("New
Heights") to a subsidiary of OCI. The Company also agreed to loan New Heights up
to $1.8 million to fund operating expenses.
(iv) A Form 8-K was field on January 21, 1999 which included
the Agreement and Plan of Merger among the Company, Casella and Rutland
Acquisition Sub, Inc.
(v) A Form 8-K was filed on February 10, 1999 reporting that
on January 27, 1999 the Company purchased all the stock of eight of the AFA
Group, Inc. companies (collectively, the "AFA Group"). As consideration for the
stock of the AFA Group, the Company issued 460,000 shares of its common stock.
23
<PAGE> 24
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: May 17, 1999
24
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