<PAGE>
FORM 10-Q - QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 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
- --------------
(Registrant's 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 14,023,838 Shares as of November 15, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION PAGE NUMBER
PART I - FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at September 30, 1999 (unaudited) and December 31, 1998 3
Consolidated Statements of Operations (unaudited) for the three and nine months
ended September 30, 1999 and 1998 4
Consolidated Statements of Changes in Stockholders' Equity for the nine
months ended September 30, 1999 (unaudited) and the year ended December 31, 1998 5
Consolidated Statements of Cash Flows (unaudited) for the nine months ended
September 30, 1999 and 1998 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 15
Item 3. Qualitative and Quantitative Disclosure about Market Risk 22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
KTI, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
-------------------- -----------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 9,711 $ 9,426
Restricted funds 19,813 19,088
Accounts receivable, net of allowances of $1,386 and $1,313 39,548 29,272
Consumables and spare parts 5,005 4,483
Inventory 8,381 4,866
Notes receivable - officers/shareholders and affiliates 187 1,858
Other receivables 1,940 4,158
Deferred taxes 3,414 4,832
Other current assets 4,028 3,370
------------- -------------
Total current assets 92,027 81,353
Restricted funds 4,185 4,350
Notes receivable - officers/shareholders and affiliates 8,288 1,534
Other receivables 1,784 3,025
Other assets 6,087 6,167
Deferred taxes 4,804 1,407
Deferred costs, net of accumulated amortization of $2,001 and $1,610 5,284 5,268
Goodwill and other intangibles, net of accumulated amortization of $8,242
and $4,354 125,731 119,712
Property, equipment and leasehold improvements, net of
accumulated depreciation and amortization of $38,425 and $27,724 212,179 213,669
------------- -------------
Total assets $460,369 $436,485
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 22,176 $ 14,940
Accrued expenses 13,754 9,313
Debt, current portion 159,716 9,775
Other current liabilities 912 4,499
------------- -------------
Total current liabilities 196,558 38,527
Other liabilities 1,419 4,227
Debt, less current portion 65,699 202,153
Minority interest 15,354 12,437
Deferred revenue 55,820 61,396
Customer advance 12,263 12,788
Convertible subordinated notes 6,770 6,770
Commitments and contingencies
Stockholders' equity:
Preferred stock; 10,000,000 shares authorized; none outstanding
Common stock, no par value (stated value $.01 per share); authorized 40,000,000
in 1999 and 1998, issued and outstanding: 14,023,838 in 1999,
13,266,204 in 1998 140 133
Additional paid-in capital 127,874 115,026
Accumulated deficit (21,528) (16,972)
------------- -------------
Total stockholders' equity 106,486 98,187
------------- -------------
Total liabilities and stockholders' equity $460,369 $436,485
============= =============
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
KTI, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------- ------------------------------
1999 1998 1999 1998
--------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenues $68,335 $44,987 $199,256 $117,653
Cost of operations 56,300 35,931 165,546 99,623
------------- ------------ ----------- ------------
Gross Profit 12,035 9,056 33,710 18,030
Selling, general and administrative 4,870 2,523 17,051 5,745
Restructuring charge 3,719
Asset impairment charge 3,000
------------- ------------ ----------- ------------
Income from operations 7,165 6,533 9,940 12,285
Interest expense, net 4,498 2,730 13,551 5,790
Loss (gain) on sale of business (299) 145
Equity loss in subsidiaries 169 463
Other charges 131
Other income, net (782) (658)
------------- ------------ ----------- ------------
Income (loss) before minority interest, provision
(benefit) for income taxes, extraordinary item and
cumulative effect of change in accounting principle 3,579 3,803 (3,692) 6,495
Minority interest 699 1,462 1,875 2,508
------------- ------------ ----------- ------------
Income (loss) before provision (benefit) for income
taxes, extraordinary item and cumulative effect of change
in accounting principle 2,880 2,341 (5,567) 3,987
Provision (benefit) for income taxes 1,496 (2,172) (1,069) (1,558)
------------- ------------ ----------- ------------
Income (loss) before extraordinary item and cumulative
effect of change in accounting principle 1,384 4,513 (4,498) 5,545
Extraordinary item (495)
------------- ------------ ----------- ------------
Income (loss) before cumulative effect of change in
accounting principle 1,384 4,513 (4,498) 5,050
Cumulative effect of change in accounting principle (58)
------------- ------------ ----------- ------------
Net income (loss) 1,384 4,513 (4,556) 5,050
Accretion and accrued and paid dividends on preferred stock 157 1,134
------------- ------------ ----------- ------------
Net income (loss) available to common shareholders $ 1,384 $4,356 $(4,556) $3,916
============= ============ =========== ============
Earnings per common share:
Basic:
Income (loss) before extraordinary item and cumulative
effect of change in accounting principle $0.10 $0.41 $(0.32) $0.45
Extraordinary item (0.05)
Cumulative effect of change in accounting principle (0.01)
------------- ------------ ----------- ------------
Net income (loss) $0.10 $0.41 $(0.33) $0.40
============= ============ =========== ============
Weighted average number of shares used in computation 14,014,877 10,573,258 13,851,716 9,813,101
============= ============ =========== ============
Diluted:
Income (loss) before extraordinary item and cumulative
effect of change in accounting principle $0.10 $0.37 $(0.32) $0.42
Extraordinary item (0.05)
Cumulative effect of change in accounting principle (0.01)
------------- ------------ ----------- ------------
Net income (loss) $0.10 $0.37 $(0.33) $0.37
============= ============ =========== ============
Weighted average number of shares used in computation 14,268,280 13,177,873 13,851,716 10,688,513
============= ============ =========== ============
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
<TABLE>
<CAPTION>
KTI, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
SERIES A SERIES B
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
---------------------------- ---------------------------- ------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------------ -------------- ------------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 447,500 $ 3,732 856,000 $ 21,400 8,912,630 $ 89
Net income
Accretion of preferred stock 42
Issuance of common stock and common stock
purchase warrants for:
Exercise of options 235,682 2
Exercise of warrants 411,894 4
Non-employee director's compensation
Conversion of preferred stock:
Series A (447,500) (3,774) 447,500 4
Series B (856,000) (21,400) 25,531 1
Conversion of debt 1,283,399 13
Employee savings plan contribution 4,215
Business combinations 1,945,353 20
Tax benefit realized from stock option
transactions
Dividends paid on Series B Preferred Stock
Additional costs related to preferred
stock issuances
------------ -------------- ------------- ------------- ------------- ---------
Balance at December 31, 1998 13,266,204 133
Net loss
Issuance of common stock for:
Exercise of options 20,552
Exercise of warrants 19,482
Business combinations 717,600 7
------------ -------------- ------------- ------------- ------------- ---------
Balance at September 30, 1999 (unaudited) 14,023,838 $ 140
============ ============== ============= ============= ============= =========
</TABLE>
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN ACCUMULATED
CAPITAL DEFICIT TOTAL
------------- ------------- -------------
<S> <C> <C> <C>
Balance at December 31, 1997 $ 52,762 $ (18,267) $ 59,716
Net income 2,699 2,699
Accretion of preferred stock (42)
Issuance of common stock and common stock
purchase warrants for:
Exercise of options 1,894 1,896
Exercise of warrants 1,648 1,652
Non-employee director's compensation 205 205
Conversion of preferred stock:
Series A 3,770
Series B 300 (21,099)
Conversion of debt 15,686 15,699
Employee savings plan contribution 41 41
Business combinations 38,122 38,142
Tax benefit realized from stock option 738 738
transactions
Dividends paid on Series B Preferred Stock (1,404) (1,404)
Additional costs related to preferred (98) (98)
stock issuances
------------- ------------- -------------
Balance at December 31, 1998 115,026 (16,972) 98,187
Net loss (4,556) (4,556)
Issuance of common stock for:
Exercise of options 161 161
Exercise of warrants 193 193
Business combinations 12,494 12,501
------------- ------------- -------------
Balance at September 30, 1999 (unaudited) $ 127,874 $ (21,528) $106,486
============= ============= =============
</TABLE>
SEE ACCOMPANYING NOTES
5
<PAGE>
KTI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months ended September 30,
------------------------------------------
1999 1998
------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $(4,556) $ 5,050
Adjustments to reconcile net income to net cash
provided by operating activities:
Asset impairment charge 3,000
Extraordinary item 495
Cumulative effect of change in accounting principle 58
Depreciation and amortization 16,294 8,937
Minority interest, net of distributions 2,917 (195)
Loss on sale of businesses, net 145
Equity loss in subsidiaries 463
Deferred revenue and customer advance (6,101) (5,812)
Deferred income taxes (2,190) (4,671)
Provision for losses on accounts receivable 634 579
Interest accrued and capitalized on debt 413 872
Other non-cash charges 394 (30)
Changes in operating assets and liabilities:
Accounts receivable (10,469) (886)
Consumables, spare parts and inventory (1,848) (1,316)
Other receivables 796 (4,220)
Other assets (1,925) 3,832
Accounts payable and accrued expenses 9,410 439
Other liabilities (2,905) 2,814
-------------- --------------
Net cash provided by operating activities 4,530 5,888
INVESTING ACTIVITIES
Additions to property, equipment and leasehold improvements (9,051) (5,088)
Proceeds from sale of assets 86 33
Net change in restricted funds (560) (2,714)
Proceeds from sale of businesses 4,283 1,985
Purchase of businesses, net of cash acquired (151) (62,154)
Notes receivable--officers/shareholders and affiliates (4,653) (380)
-------------- --------------
Net cash used in investing activities (10,046) (68,318)
FINANCING ACTIVITIES
Deferred financing costs (3,936)
Proceeds from issuance of debt 44,995
Net borrowings on lines of credit 10,532 114,373
Proceeds from other borrowings 3,251
Proceeds from amendment of power purchase agreement, net of transaction costs 5,900
Proceeds from sale of common stock 354 3,235
Dividends paid (1,092)
Principal payments on debt (8,336) (104,048)
-------------- --------------
Net cash provided by financing activities 5,801 59,427
-------------- --------------
Increase (decrease) in cash and cash equivalents 285 (3,003)
Cash and cash equivalents at beginning of period 9,426 11,181
-------------- --------------
Cash and cash equivalents at end of period $9,711 $8,178
============== ==============
</TABLE>
-Continued-
6
<PAGE>
KTI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months ended September 30,
----------------------------------------
1999 1998
-------------------- -------------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 15,239 $ 4,803
Taxes paid 1,665
NON CASH INVESTING AND FINANCING ACTIVITIES
Capital lease obligation entered into for lease of equipment 241 -
Purchase of businesses and additional partnership interest, net of cash
acquired:
Working capital, net of cash acquired (1,611) (3,040)
Property, equipment and leasehold improvements (8,621) (51,950)
Purchase price in excess of net assets acquired (7,843) (91,034)
Other assets (4,752)
Non-current liabilities 5,423 52,985
Common stock issued 12,501 35,637
</TABLE>
SEE ACCOMPANYING NOTES
7
<PAGE>
KTI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
SEPTEMBER 30, 1999
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of KTI,
Inc. (the "Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting only of normal recurring accruals)
considered necessary for a fair presentation have been included. The municipal
solid waste ("MSW") market in Maine, which provides material to the
waste-to-energy segment, is seasonal, with one-third more MSW generated in the
summer months than is generated during the rest of the year. The Residential and
Commercial Recycling segments experience increased volumes of newspaper in
November and December due to increased newspaper advertising and retail activity
during the holiday season. Additionally, the Residential Recycling segment
operates facilities in Florida which experience increased volumes of recyclable
materials during the winter months followed by decreases in the summer months in
connection with seasonal changes in population. Operating results for the three
and nine month periods ended September 30, 1999 and 1998 are not necessarily
indicative of the results that may be expected for the full year. For further
information, refer to the consolidated financial statements and notes thereto
included in the Company's annual report on Form 10-K for the year ended December
31, 1998. Certain 1998 financial information contained herein has been
reclassified to conform with the 1999 presentation.
2. RESTATEMENT
The Company's balance sheet as of December 31, 1998, the statement of
stockholders' equity for the twelve months ended December 31, 1998, the
statements of operations for the three and nine month periods ended September
30, 1998 and the statement of cash flows for the nine months ended September 30,
1998 have been restated. The restatement is a result of the Securities and
Exchange Commission's review of the Company's proxy materials related to the
prospective merger with Casella Waste Systems (See Note 3). The restatement
relates to revenue recognized as a result of the restructuring of a power
purchase agreement and the sale of electric generating capacity by two of the
Company's majority-owned subsidiaries with it's customers, Bangor Hydro-Electric
Company (BHE) and Central Maine Power, which were completed in 1998 and 1996,
respectively. At the time of these transactions, the Company had recognized
revenues representing a portion of the cash received in 1996 and the total
consideration received in 1998. After discussions with the staff of the
Securities and Exchange Commission, the Company agreed to defer these amounts
and recognize them over the term of the respective power purchase and capacity
purchase agreements to comply with generally accepted accounting principles. In
addition, performance credits previously reported as expense have been
reclassified as a reduction of revenues. The impact of the restatement on the
Company's consolidated financial results as originally reported is summarized as
follows:
<TABLE>
<CAPTION>
AS REPORTED RESTATED
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1998
------------------------ --------------------------
<S> <C> <C>
Revenues $46,195 $44,987
Income before extraordinary item and
cumulative effect of change in accounting principle $ 3,940 $ 4,513
</TABLE>
8
<PAGE>
KTI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
SEPTEMBER 30, 1999
2. RESTATEMENT (CONTINUED)
<TABLE>
<CAPTION>
AS REPORTED RESTATED
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1998
--------------------------- -------------------------
<S> <C> <C>
Net income $3,940 $4,513
Net income available to common shareholders $3,783 $4,356
Net income per share: $ 0.36 $ 0.41
Basic $ 0.32 $ 0.37
Diluted
</TABLE>
<TABLE>
<CAPTION>
AS REPORTED RESTATED
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1998
--------------------------- -------------------------
<S> <C> <C>
Revenues $ 133,625 $117,653
Income before extraordinary item and
cumulative effect of change in accounting principle $ 11,155 $ 5,545
Net income $ 10,660 $ 5,050
Net income available to common shareholders $ 9,525 $ 3,916
Net income per share:
Basic $ 0.97 $ 0.40
Diluted $ 0.87 $ 0.37
</TABLE>
3. MERGER AND ACQUISITIONS
On September 23, 1999, the Company entered into an Amended Agreement
and Plan of Merger (the "Merger Agreement") with Casella Waste Systems, Inc.,
("Casella") a publicly-owned company engaged in the waste services industry. The
merger will be completed through the exchange of all of the shares of the
Company's common stock for shares of Casella's Class A common stock based on an
exchange ratio specified in the Merger Agreement. In addition, all of the
Company's outstanding and unexercised stock options and stock purchase warrants
will be converted into similar rights to acquire Casella's Class A common stock
under the same terms and conditions and the same exchange ratio. Subsequent to
the completion of the merger, the current Casella stockholders will own a
majority of the combined company. Under the terms of the Merger Agreement,
Casella is required to file a registration statement with the Securities and
Exchange Commission to register the shares of its Class A common stock to be
issued in the merger. The merger is subject to, among other things, approval of
the Company's and Casella's stockholders. No assurance can be given that the
conditions of the merger will be satisfied or that the merger will be
consummated.
In connection with the merger, Casella has agreed to reimburse the
Company for its investment banking fees and other merger related costs and as of
September 30, 1999 approximately $1,514 of such costs have been deferred.
On March 31, 1999, May 19, 1999, and September 30, 1999 pursuant to the
Second Amended, Restated and Extended Waste Disposal Agreement among Penobscot
Energy Recovery Company, Limited Partnership ("PERC") and the municipalities
named therein, the municipalities made capital contributions to PERC, which were
recorded as additional minority interest, totaling $730, $240 and $1,300
respectively, in exchange for 1.31%, 0.43% and 2.33%, respectively, of limited
partnership interest in PERC.
9
<PAGE>
On January 27, 1999 the Company completed its acquisition of AFA Group,
Inc. and subsidiaries ("AFA"), an integrated wood waste processing and hauling
business located in Newark, New Jersey. Payment of the aggregate purchase price,
including all direct costs, of $9,682 consisted of (i) 460,000 shares of the
Company's common stock valued at $20.70 per share (based on the closing price of
the common stock on the date of announcement) and (ii) $150 in cash. In July
1999, the Company paid AFA an additional 104,038 shares of the Company's common
stock as a purchase price adjustment based on the final net worth, as defined,
of AFA as of the acquisition date. These shares were valued at $13.58 per share.
This acquisition was accounted for as a purchase, and accordingly, the assets
and liabilities have been recorded at their estimated fair value at the date of
acquisition. The excess of the purchase price over the fair value of the
acquired net assets of $7,776 has been recorded as goodwill and is being
amortized on a straight-line basis over 30 years. The Company's financial
statements include the results of operations of AFA since the date of
acquisition.
4. SALE OF BUSINESSES
In June 1999, the Company completed the sale of its Commercial
Recycling facility located in Franklin Park, Illinois. The proceeds from this
sale were approximately $1,757 and the Company recorded a loss of approximately
$444.
In September 1999, the Company completed the sale of substantially all
of the assets of the Waste-to-Energy segment's hauling operation located in
Maine to Casella. The proceeds from this sale were approximately $2,526 and the
Company recorded a gain of approximately $299.
5. EXERCISE OF BHE WARRANTS
In August 1999, the Company exercised its rights under a Warrant
Purchase Agreement (the "Warrant Agreement") to purchase 178,214 common shares
of BHE. Under the terms of the Warrant Agreement, BHE elected to pay cash in
lieu of issuing shares. The Waste-to-Energy segment received approximately
$1,699 in cash and recorded a gain of approximately $757 which is classified as
other income.
6. EARNINGS PER SHARE
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,
1999 1998 1999 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) $1,384 $ 4,513 $(4,556) $ 5,050
Preferred stock dividends 157 1,092
Accretion of preferred stock 42
----------- ----------- ------------ ------------
Numerator for basic earnings per share-net income (loss)
available to common stockholders 1,384 4,356 (4,556) 3,916
Effective of dilutive securities:
Preferred stock dividends 157
Convertible subordinated notes payable 310
----------- ----------- ------------ ------------
Numerator for diluted earnings per share-net income (loss)
available to common stockholders after assumed
conversions $1,384 $4,823 $(4,556) $3,916
=========== =========== ============ ============
Denominator:
Denominator for basic earnings per share-weighted
average shares 14,014,877 10,573,258 13,851,716 9,813,101
Effect of dilutive securities:
Employee stock options (1) 161,299 511,229 501,310
Warrants (1) 92,104 288,538 374,102
Convertible preferred stock (2) 1,804,848
Convertible subordinated notes (3)
----------- ----------- ------------ ------------
Dilutive potential common shares 253,403 2,604,615 875,412
----------- ----------- ------------ ------------
Denominator for diluted earnings per share-adjusted
weighted-average shares and assumed conversions 14,268,280 13,177,873 13,851,716 10,688,513
=========== =========== ============ ============
Net Income (loss) per share-Basic $0.10 $0.41 $(0.33) $0.40
=========== =========== ============ ============
Net income (loss) per share-Diluted $0.10 $0.37 $(0.33) $0.37
=========== =========== ============ ============
</TABLE>
10
<PAGE>
(1) The employee stock options and warrants outstanding during the nine months
ended September 30, 1999 are anti-dilutive.
(2) The convertible preferred stock is anti-dilutive in 1999 and the nine
months ended September 30, 1998.
(3) The convertible subordinated notes
payable are anti-dilutive.
7. CONTINGENCIES
The Company is a defendant in a consolidated purported class action,
which alleges violations of certain sections of the federal securities laws. The
Company believes the allegations are without merit and intends to defend the
litigation vigorously.
Two lawsuits have been filed against a subsidiary of the Company
alleging fraud and tortious interference. The actions are based on two contracts
between the plaintiff and the subsidiary, which contracts require all disputes
to be resolved by arbitration. The Company settled these lawsuits in October
1999 and paid $350 in final settlement of these claims, which was accrued at
September 30, 1999.
The majority shareholder of a company acquired by a subsidiary of the
Company instigated arbitration proceedings against the Company and two of its
subsidiaries, alleging the subsidiaries acted to frustrate the "earn-out"
provisions of the acquisition agreement and thereby precluding him from
receiving, or alternatively, reducing the sum to which he was entitled to
receive. He also alleges his employment agreement was wrongfully terminated. The
claim for arbitration alleges direct charges in excess of $5,000 and requests
punitive damages, treble damages and attorneys fees. The Company and its
subsidiaries have responded to the demand, denying liability and filed a
counterclaim for $1,000 for misrepresentations. The Company believes it has
meritorious defenses to the claims.
The Company is a defendant in certain lawsuits alleging various claims
incurred in the ordinary course of business. Management of the Company does not
believe that the outcome of these matters, individually or in the aggregate,
will have a material effect on the Company's financial condition, cash flows or
results of operations.
8. SEGMENT REPORTING
The Company operated in the business segments as indicated below.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMMERCIAL RESIDENTIAL
WASTE-TO-ENERGY RECYCLING FINISHED PRODUCTS RECYCLING
------------------ ---------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Revenues
Unaffiliated customers $24,222 $19,191 $14,162 $ 10,563
Intersegment revenues 60 25 5,148
Segment Profit 6,179 406 207 1,991
Depreciation and Amortization 2,865 390 911 1,145
Capital Expenditures 1,147 17 1,402 91
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMMERCIAL RESIDENTIAL
WASTE-TO-ENERGY RECYCLING FINISHED PRODUCTS RECYCLING
------------------ ---------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Revenues
Unaffiliated customers $ 73,180 $59,619 $40,568 $25,644
Intersegment revenues 149 108 9,784
Segment Profit (Loss) 17,400 (3,216) (56) 2,225
Depreciation and Amortization 8,235 1,500 2,608 3,123
Identifiable Assets 260,869 45,856 65,057 74,388
Capital Expenditures 3,891 679 3,787 643
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMMERCIAL RESIDENTIAL
WASTE-TO-ENERGY RECYCLING FINISHED PRODUCTS RECYCLING
------------------ ---------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Revenues
Unaffiliated customers $ 18,227 $ 18,044 $ 4,135 $ 4,516
Intersegment revenues 705 2,274 365 2,250
Segment Profit (Loss) 5,952 (692) 288 1,419
Depreciation and Amortization 2,261 330 261 598
Capital Expenditures 200 162 5 15
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMMERCIAL RESIDENTIAL
WASTE-TO-ENERGY RECYCLING FINISHED PRODUCTS RECYCLING
------------------ ----------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Revenues
Unaffiliated customers $53,967 $ 50,345 $ 5,033 $ 8,163
Intersegment revenues 2,244 7,694 882 6,003
Segment Profit (Loss) 11,985 (1,502) 332 2,322
Depreciation and Amortization 6,556 681 256 1,254
Capital Expenditures 2,917 1,136 426 607
</TABLE>
At December 31, 1998, the Company's identifiable assets were as follows:
<TABLE>
<S> <C>
Waste-to-Energy $235,008
Commercial Recycling 56,557
Finished Products 54,850
Residential Recycling 65,662
Holding Company 24,408
--------------
Total consolidated assets $436,485
==============
</TABLE>
The segment reporting detailed above reconciles to consolidated
revenues and income (loss) before provision (benefit) for income taxes,
extraordinary item and cumulative effect of a change in accounting principle as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ --------------------------------------
1999 1998 1999 1998
----------- -------------- ------------------ ------------------
<S> <C> <C> <C> <C>
REVENUES
Total unaffiliated customers revenue for reportable
segments $ 68,138 $44,922 $199,011 $ 117,508
Holding company revenues 317 65 365 145
Intersegment revenues for reportable segments 5,233 5,594 10,041 16,823
Elimination of intersegment revenues (5,353) (5,594) (10,161) (16,823)
----------- ------------- --------------- --------------
Total consolidated revenues $68,335 $44,987 $199,256 $117,653
=========== ============= =============== ==============
PROFIT AND LOSS
Total segment profit for reportable segments $8,783 $6,967 $16,353 $13,137
Holding company segment loss (1,618) (434) (6,413) (852)
----------- ------------- --------------- --------------
Income from operations 7,165 6,533 9,940 12,285
Unallocated amounts:
Interest expense, net 4,498 2,730 13,551 5,790
Other expense (income), net (912) 81
Minority interest 699 1,462 1,875 2,508
----------- ------------- --------------- --------------
Income (loss) before provision (benefit) for income
taxes, extraordinary item and cumulative effect
of change in accounting principle $2,880 $ 2,341 $(5,567) $3,987
=========== ============= =============== ==============
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999
--------------
<S> <C>
ASSETS
Total identifiable assets for reportable segments $ 446,170
Holding company assets 14,199
--------------
Total consolidated assets $ 460,369
==============
</TABLE>
12
<PAGE>
9. IMPAIRMENT OF COMMERCIAL RECYCLING LONG-LIVED ASSETS
As a result of the loss on the sale of the Franklin Park Facility (see
Note 4) and the continued poor operating performance of the Commercial Recycling
segment, the Company initiated an impairment review of the long-lived assets,
including goodwill, in the Commercial Recycling segment in the second quarter. A
revised operating plan for each of the remaining facilities in the Commercial
Recycling segment was developed. While revenues are stable, the Commercial
Recycling segment continues to operate at levels of profitability, which are
significantly below the levels anticipated when the acquisitions were completed.
In addition, with the continued consolidation of the solid waste industry and
the continued focus on the disposal aspects of this industry, the possibility of
selling these facilities for amounts approximating their carrying value is
remote.
In the second quarter of 1999, the Company determined that the
estimated future undiscounted cash flows for the KTI Recycling of New Jersey
("Newark Plant") facility were below the carrying value of the related equipment
and leasehold improvements. The Company adjusted the carrying value of the
related equipment and leasehold improvements of the Newark Plant by
approximately $3,000 to their estimated fair value of approximately $1,142. The
fair value of the long-lived assets was based on the expected cash flows
discounted at a rate commensurate with the risk involved.
10. PLANT CONSOLIDATION, RESTRUCTURING AND OTHER UNUSUAL ITEMS
In April 1999, FCR, Inc. ("FCR"), a subsidiary of the Company, signed a
new agreement with a municipality to operate a material recovery facility in
Charlotte, North Carolina. As part of this agreement, the Company committed to
relocate the cellulose insulation plant located in Ronda, North Carolina to the
material recovery facility in Charlotte. This secures the supply of raw material
for the cellulose insulation plant and provides additional cost savings from the
integration of recycling and the manufacturing of cellulose insulation into one
facility. As a result, the Company developed an exit plan for the closing of the
plant in Ronda, North Carolina and began the construction of the new cellulose
insulation plant during the second quarter. In the second quarter of 1999, the
Finished Products segment recorded a restructuring charge of approximately
$1,205, which consisted primarily of the write-down of equipment and leasehold
improvements and an accrual for the remaining payments under the noncancelable
lease of the Ronda facility. Payments against this reserve are expected to begin
in the fourth quarter of 1999.
During 1999, the Company reached agreement with an employee to
restructure the amounts paid under an employment contract. The Finished Products
segment recorded a restructuring charge of approximately $320 relating to
amounts due under the revised contract. Payments against this reserve are
expected to begin during the fourth quarter of 1999.
In June 1999, the Company initiated a plan to close the Residential
Recycling segment's material recovery facility located in Howes Cave, New York
and process the materials from this facility at another Residential Recycling
segment facility. In the second quarter of 1999, the Company recorded a
restructuring charge of $514, which consisted primarily of the remaining
payments under noncancelable leases of the building and equipment. The Company
made payments totaling $110 against this reserve during 1999.
Included in restructuring charges is $432 of deferred acquisition costs
related to acquisitions that were terminated during the second quarter.
In April 1998, a subsidiary of the Company, FCR, entered into an
amended agreement to operate a material recovery facility in Stratford,
Connecticut. This agreement requires FCR to add additional processing equipment
to this facility within a certain period of time as defined in the amended
agreement or pay the municipality $100 per year over the next five years. In
April 1999, FCR determined that this processing equipment was not cost effective
due to other alternative methods of processing and, thus, will not install the
equipment. As a result, in the second quarter of 1999, the Residential Recycling
segment recorded the penalty included in the agreement of $500 for the payments
to be made to the municipality. No payments were made during the third quarter
of 1999 and the entire amount is accrued and classified as other liabilities as
of September 30, 1999.
During 1999, other charges of $131 represents an accrual for penalties
assessed by the Florida Department of Environmental Protection related to the
temperature of the discharge water at the Waste-to-Energy segment's Telogia
Facility.
In the first quarter of 1999, the Company recorded a $748 restructuring
charge. The restructuring initiatives primarily involve the Company's Commercial
Recycling segment and represent primarily severance and other costs related to
employee reductions. In connection with the restructuring, the Company
terminated ten employees. The restructuring
13
<PAGE>
charges relate to integration of the brokerage operation acquired as part of the
New Jersey Fibers acquisition and elimination of costs as a result of
streamlining the operations of acquisitions completed in 1998. The Company made
payments totaling $442 against this reserve during 1999.
11. INCOME TAXES
The income tax benefit was approximately $1,069 and $1,558 for the nine
months ended September 30, 1999 and 1998, respectively. During 1999, the
effective tax rate utilized by the Company of 19.2% represents the estimated
annual effective rate based on the total estimated pretax loss of the Company
for the year ending December 31, 1999. The income tax benefit in 1998 was due to
the reduction of the valuation allowance for deferred tax assets of $3,160.
12. REVOLVING LINE OF CREDIT AGREEMENT
On May 12, 1999, the Company's Revolving Line of Credit Agreement with
a bank (the "Credit Agreement") was amended (the "Amended Agreement") modifying
certain financial covenants and requiring bank approval for all acquisitions.
The Amended Agreement requires that the Company and certain subsidiaries, as
defined, maintain certain specified financial covenants, including, a minimum
interest coverage ratio, a maximum funded debt to EBITDA ratio, a minimum fixed
charge coverage ratio, and a maximum debt to capitalization ratio, each as
defined in the Amended Agreement. The Company recorded a charge of $835 in
connection with the amendment. This charge was recorded in interest expense
during the second quarter.
As of September 30, 1999, the Company was in default of the financial
covenants of its line of credit. The Company's lender has waived the violation
of the financial covenants through January 1, 2000. As a result, the outstanding
amount under the line of credit has been classified as a current liability. Upon
the consummation of the merger, this line of credit will be replaced by the
credit facility of the merged company. However, no assurances can be given that
the conditions of the merger will be satisfied or that the merger will be
consummated.
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.
As of September 30, 1999, one of the Company's subsidiaries was in
violation of one of the financial covenants of its revolving line of credit.
Borrowings under this line of credit are classified as a current liability at
September 30, 1999. This violation was cured in October 1999.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The Company reports the results of operations by the following four
segments: Waste-to-Energy, Residential Recycling, Commercial Recycling and
Finished Products.
REVENUES
WASTE-TO-ENERGY SEGMENT
The Waste-to-Energy segment consists of the operations of Maine Energy
Recovery Company, Limited Partnership ("Maine Energy"), Penobscot Energy
Recovery Company, Limited Partnership ("PERC"), Timber Energy Resources, Inc.
("TERI"), KTI Specialty Waste Services, Inc., American Ash Recycling of
Tennessee, Ltd. ("AAR"), KTI BioFuels, Inc. ("BioFuels"), Total Waste Management
Corporation ("TWM"), Multitrade Group, Inc. ("Multitrade"), Russell Stull
Companies ("Russell Stull"), KTI Recycling of Canada ("KTI Tire"), and AFA
Group, Inc. ("AFA"). Total revenues for this segment were approximately $24.2
and $73.2 million for the three and nine months ended September 30, 1999,
respectively, compared to approximately $18.2 and $54.0 million, respectively,
for the same periods in 1998. This represents an increase of approximately $6.0
million or 33.0% for the three months ended September 30, 1999 and an increase
of approximately $19.2 million or 35.6% for the nine months ended September 30,
1999 compared to the same periods in 1998.
Revenues in the Waste-to-Energy segment are primarily derived from
waste processing and electric power sales. Total tons received by the
Waste-to-Energy segment increased by 41.4% and 14.5% for the three and nine
months ended September 30, 1999, respectively, compared to the same periods in
1998. The tons received by TERI and AAR increased 289.2% and 89.6%,
respectively, for the three months and 33.1% and 97.7%, respectively, for the
nine months ended September 30, 1999. The increase at TERI was due to the
planned shutdown of its major customer in the third quarter of 1998. The
increase at AAR is a result of higher production in 1999 as a result of a new
contract completed in 1998. These increases were offset by lower tons at Maine
Energy as a result of a scheduled plant outage occurring during the third
quarter of 1999 versus the fourth quarter of 1998.
Waste processing revenues increased by approximately $2.3 million or
25.6% and approximately $10.5 million or 43.2% for the three and nine months
ended September 30, 1999, respectively, compared to the same periods in 1998.
This increase is a result of net increase in tonnage discussed above, increased
prices per ton charged by Maine Energy during 1999 versus 1998 of approximately
12.3% and additional revenues from the Multitrade, Russell Stull, AFA, and KTI
Tire acquisitions.
Electric power revenues increased approximately $0.4 million or 3.3%
and approximately $2.8 million or 8.4% for the three and nine months ended
September 30, 1999, respectively, compared to the same periods in 1998. The
increase for the nine month period is primarily the result of the acquisition of
Multitrade in June 1998.
RESIDENTIAL RECYCLING SEGMENT
This segment includes the residential recycling plants of FCR, Inc.
("FCR", acquired August 1998) and the Boston recycling plant. This segment
posted revenues of approximately $10.6 million and $25.6 million for the three
and nine months ended September 30, 1999, respectively, compared to
approximately $4.5 and $8.2 million, respectively, for the same periods in 1998.
This represents an increase of approximately $6.1 and $17.4 million,
respectively, primarily as a result of the acquisition of FCR, which was
completed in the third quarter of 1998.
COMMERCIAL RECYCLING SEGMENT
The Commercial Recycling segment consists of the operations of I.
Zaitlin and Sons, Inc. ("Zaitlin"), K-C International, Inc. ("K-C"), Data
Destruction, Inc., the commercial recycling plant in Newark acquired from Prins,
and KTI New Jersey Fibers, Inc. ("NJ Fibers"), which consists of the operations
of Gaccione Bros., Inc. & Co. and PGC Corporation (collectively, "Gaccione") and
Atlantic Coast Fibers, Inc. ("Atlantic Coast"). Total revenue for this segment
for the three and nine months ended September 30, 1999 was approximately $19.2
and $59.6 million, respectively, compared to $18.0 and $50.3 million,
respectively, for the same periods in 1998. This represents an increase of
approximately $1.2 and $9.3
15
<PAGE>
million, respectively. These increases are primarily as a result of the
acquisition of NJ Fibers which was completed in the third quarter of 1998 and
higher commodity prices for paper fibers in the third quarter of 1999 versus the
same period in 1998. These increases were partially offset by lower volumes at
the commercial processing plants due to the sale of the Chicago facility during
the second quarter of 1999.
FINISHED PRODUCTS SEGMENT
The Finished Products segment consists of the operations of Power Ship
Transport, Inc., Manner Resins, Inc. ("Manner"), the cellulose insulation plants
and the plastic reprocessing plants of FCR, the plastic reprocessing operations
of First State Recycling, Inc. and the glass pellet processor Seaglass, Inc.
Total revenue for this segment for the three and nine months ended September 30,
1999 was approximately $14.2 and $40.6 million, respectively, compared to
approximately $4.1 and $5.0 million for the same periods in 1998. This
represents an increase of approximately $10.1 and $35.6 million, respectively.
The increase in revenues is primarily the result of the acquisition of FCR
discussed above and higher volumes at Manner and increases in plastic prices in
the third quarter of 1999 versus the same period in 1998.
COSTS AND EXPENSES
WASTE-TO-ENERGY SEGMENT
Cost of operations in this segment consist primarily of electric power
and waste processing operating costs which were approximately $18.0 and $55.8
million, during the three and nine months ended September 30, 1999,
respectively, compared to approximately $12.3 and $42.0 million, respectively,
for the same periods in 1998. This represents an increase of approximately $5.7
million or 46.3% and $13.8 million or 32.9%, respectively. The increase was
primarily a result of the Multitrade, Russell Stull, AFA and KTI Tire
acquisitions discussed above which had total costs of operations of
approximately $12.0 million for the nine months ended September 30, 1999. In
addition, Maine Energy's operating costs increased 13.0% in the third quarter of
1999 due to higher costs associated with the planned outage being completed in
the third quarter of 1999 versus the fourth quarter of 1998. TERI's costs
decreased by 14.0% as a result of an increase in tipping fee based material that
reduced fuel costs.
RESIDENTIAL RECYCLING SEGMENT
Cost of operations in this segment for the three and nine months ended
September 30, 1999 were approximately $8.6 and $23.4 million, respectively,
compared to approximately $3.1 and $5.8 million, respectively, for the same
periods in 1998. This represents an increase of approximately $5.5 and $17.6
million, respectively, primarily as a result of the acquisition of FCR, which
was completed in the third quarter of 1998.
COMMERCIAL RECYCLING SEGMENT
Cost of operations in this segment for three and nine months ended
September 30, 1999 were approximately $18.8 and $62.8 million, respectively,
compared to approximately $18.7 and $51.8 million, respectively, during the same
periods in 1998. This represents an increase of approximately $0.1 and $11.0
million, respectively. This increase is due primarily to the acquisition of NJ
Fibers in August 1998 and higher commodity purchase prices which were partially
offset by lower volumes at the commercial processing plants during 1999 versus
1998 as a result of the sale of the Chicago facility during the second quarter
of 1999.
FINISHED PRODUCTS
Cost of operations in this segment for the three and nine months ended
September 30, 1999 were approximately $14.0 and $40.6 million, respectively,
compared to approximately $3.8 and $4.7 million, respectively, during the same
periods in 1998. This represents an increase of approximately $10.2 and $35.9
million, respectively. The increase was primarily a result of the acquisitions
discussed above and increased volumes at Manner.
OTHER ITEMS
Selling, general and administrative expenses increased by approximately
$2.3 and $11.3 million for the three and nine months ended September 30, 1999,
respectively, 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
16
<PAGE>
budgeting process; to support Company wide credit and collection efforts; and to
develop cost savings programs in newly acquired entities.
During 1999, the Company recorded restructuring charges totaling $3.7
million for costs incurred on terminated acquisitions, the closure of a
cellulose insulation facility in the Finished Products segment, closure of a
material recovery facility in the Residential Recycling segment, severance in
the Commercial Recycling and Finished Products segment and a penalty to be paid
by the Residential Recycling segment for payments to a municipality in lieu of
constructing additional processing equipment.
On June 1, 1999, the Company completed the sale of its commercial
recycling facility located in Franklin Park, Illinois ("Chicago facility") and
recorded a loss of approximately $0.4 million. On September 30, 1999, the
Waste-to-Energy segment completed the sale of its hauling operation to Casella
and recorded a gain of approximately $0.3 million.
As a result of the loss from the sale of the Chicago facility, the
Company initiated an impairment review of the long-lived assets, including
goodwill, in the Commercial Recycling segment. A revised operating plan for each
of the remaining facilities in the Commercial Recycling segment was developed.
While revenues are stable, the Commercial Recycling segment continues to operate
at levels of profitability, which are significantly below the levels anticipated
when the acquisitions were completed. In addition, with the continued
consolidation of the solid waste industry and the continued focus on the
disposal aspects of this industry, the possibility of selling these facilities
for amounts approximating their carrying value is remote.
The Company continued to experience poor operating results in the
Commercial Recycling segment and determined that the estimated future
undiscounted cash flows for the KTI Recycling of New Jersey ("Newark Plant")
facility were below the carrying value of the long-lived assets. The Company
adjusted the carrying value of the equipment and leasehold improvements of the
Newark Plant by approximately $3.0 million to their estimated fair value of
approximately $1.1 million. The fair value of the long-lived assets was based on
the expected cash flows discounted at a rate commensurate with the risk
involved.
Interest expense, net increased approximately $1.8 and $7.8 million
during the three and nine months ended September 30, 1999, respectively,
compared to the same periods in 1998. These increases are related principally to
increased borrowings on the Company's line of credit to fund several
acquisitions, incremental interest expense on debt assumed as part of these
acquisitions, higher interest rates on the Company's line of credit, fees
associated with the amendment of financial covenants, and the conversion of the
Series B Preferred Stock to convertible debt. These increases were partially
offset by lower interest rates at PERC as a result of the refinancing of the
bonds payable and lower debt levels at Maine Energy.
LIQUIDITY AND CAPITAL RESOURCES
The Company is a holding company and receives certain of its cash flows
from its subsidiaries. Receipt of cash flow from PERC is currently restricted by
covenants under loan agreements, distribution restrictions under partnership
agreements with PERC's equity investors, and put-or-pay agreements with
municipalities. Maine Energy's cash flow is required to retire the remaining
outstanding subordinated debt balance of approximately $12.1 million as of
September 30, 1999 before partners' cash distributions can begin (approximately
$8.1 million of these notes are owned by the Company). TERI's cash flow is
restricted by covenants under its bond agreements. As a result, the following
discussion is organized to present liquidity and capital resources of the
Company separate from Maine Energy, PERC and TERI and liquidity and capital
resources of each of Maine Energy, PERC and TERI independently.
THE COMPANY
The Company operates in industries that require a high level of capital
investment. The Company's capital requirements basically stem from (i) its
working capital for ongoing operations, (ii) capital expenditures for new plants
and equipment and (iii) business acquisitions. The Company's strategy is to meet
these capital needs from internally generated funds which are not contractually
restricted, drawings under its lines of credit, collateralized equipment
financing and proceeds from the sale of the Company's common stock.
As of September 30, 1999, the Company was in default of the financial
covenants of its $150.0 million line of credit. The Company's lender has waived
the violation of the financial covenants through January 1, 2000. As a result,
the outstanding amount under the line of credit has been classified as a current
liability. Upon the consummation of the
17
<PAGE>
merger, this line of credit will be replaced by the credit facility of the
merged company. However, no assurances can be given that the conditions of the
merger will be satisfied or that the merger will be consummated.
If the merger is not consummated, the Company will be required to
modify the financial covenants or obtain a waiver from the lender. The lender is
under no obligation to amend the financial covenants or provide such a waiver.
Management believes that the Company will either obtain a waiver or an amendment
to the financial covenants; however, there can be no assurances that this can be
accomplished. As of September 30, 1999, the Company had no availability under
the revolving credit agreement. Though management of the Company believes that
cash flows from its subsidiaries will meet its current needs for working capital
and capital expenditures, the ability of the Company to expand its current
operations is dependent on cash flow from its subsidiaries.
As of September 30, 1999, the Company had a working capital deficit of
approximately $104.5 million (a ratio of current assets to current liabilities
of 0.47:1) and a cash balance of approximately $9.7 million which compared to
working capital of approximately $42.8 million (a ratio of current assets to
current liabilities of 2.11:1) and a cash balance of approximately $9.4 million
at December 31, 1998. As of September 30, 1999, the Company had a working
capital deficit and cash on hand without regard to Maine Energy, PERC and TERI
of approximately $136.8 million (a ratio of current assets to current
liabilities of 0.28:1) and approximately $3.4 million, respectively, which
compared to working capital of approximately $12.9 million (a ratio of current
assets to current liabilities of 1.41:1) and a cash balance of approximately
$3.9 million at December 31, 1998. The working capital deficit is a result of
the reclassification of the borrowings on the senior credit facility to current
portion of long-term debt.
The Company's ability to make future acquisitions is dependent on its
ability to increase its line of credit. The ability to increase the line of
credit is dependent on the Company's ability to raise additional equity or raise
capital from financial instruments which are subordinated to the line of credit.
Management believes that the Company has the ability to raise additional capital
if needed; however, there can be no assurances that this can be accomplished at
terms and conditions that would be acceptable to the Company.
The Company and its subsidiaries, other than Maine Energy, PERC and
TERI, at September 30, 1999 had current maturities of indebtedness of
approximately $153.5 million, including borrowings under existing revolving
credit facilities. During the nine months ended September 30, 1999, the Company
had net borrowings of approximately $10.5 million on the Company's line of
credit facilities.
In general, the Company's capital expenditures and working capital
requirements have increased as a result of the Company's business strategy of
growth through acquisitions. Management of the Company believes that cash flow
from operations will meet its current needs for liquidity.
MAINE ENERGY
Maine Energy has financed its operations and capital expenditures from
cash flows from operations. Cash provided by operations was approximately $3.2
million for the nine months ended September 30, 1999 compared to approximately
$4.3 million during the same period in 1998. Maine Energy's capital expenditures
were approximately $1.2 and $1.8 million during the nine months ended September
30, 1999 and 1998, respectively.
As of September 30, 1999 and December 31, 1998, Maine Energy had
operating cash of approximately $2.9 million and $2.4 million, respectively, and
as required under the terms of the credit agreement underlying its letter of
credit, Maine Energy had on account an additional approximately $5.7 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 September 30, 1999, Maine Energy had total
indebtedness of approximately $12.1 million.
Management of the Company believes Maine Energy's cash flows from
operations and cash resources available will be sufficient to fund anticipated
capital expenditures and debt service requirements. Capital expenditures for
Maine Energy for the remainder of 1999 are not expected to be significant.
PERC
PERC has financed its operations and capital expenditures primarily by
cash flow from operations. Cash provided by operations was approximately $4.0
million for the nine months ended September 30, 1999 compared to approximately
$4.4 million during the same period in 1998. PERC's capital expenditures were
approximately $1.7 and $0.6 million during the nine months ended September 30,
1999 and 1998, respectively.
18
<PAGE>
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 September 30, 1999 and December 31, 1998, in addition to
PERC's operating cash of approximately $2.7 million and $2.3 million,
respectively, PERC, as required under the terms of the trust indenture
governing the Revenue Bonds, had on account an additional approximately $13.7
million and $14.2 million, respectively, 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's capital expenditures for the remainder of
1999 are not expected to be significant.
TERI
TERI has a 1997 Industrial Development Revenue Bond issue (the "1997
Bond") outstanding that carries interest at a fixed rate of 7% and has an
annual sinking fund payment due each December 1 with a final payment due
December 1, 2002. As of September 30, 1999, TERI had approximately $11.6
million outstanding in 1997 Bonds.
As of September 30, 1999 and December 31, 1998, in addition to TERI's
operating cash of approximately $0.7 million and $0.8 million, respectively,
TERI, as required under the terms of it's the 1997 Bonds, had on account
approximately $4.1 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 not expected to be significant.
TAX LOSS CARRYFORWARDS
At September 30, 1999, the Company had net operating loss carryforwards
of approximately $55.4 million for income tax purposes that expire in years 2002
through 2018 and are subject to the limitations as described below. In addition,
the Company has general business credit carryforwards of approximately $0.5
million that expire in the years 1999 through 2006 and alternative minimum tax
credit carryforwards of approximately $0.9 million that are not subject to
limitation.
The Tax Reform Act of 1986 enacted a complex set of rules limiting the
potential utilization of net operating loss and tax credit carryforwards in
periods following a corporate "ownership change." In general, for federal income
tax purposes, an ownership change is deemed to occur if the percentage of stock
of a loss corporation owned (actually, constructively and, in some cases,
deemed) by one or more "5% shareholders" has increased by more than fifty (50)
percentage points over the lowest percentage of such stock owned during a
three-year testing period.
During 1994, such a change in ownership of the Company occurred. As a
result of the change, the Company's ability to utilize its net operating loss
carryforwards and general business credits will be limited to approximately $1.2
million of taxable income, or approximately $0.4 million of equivalent credit
per year. This limitation may be increased if the Company recognizes a gain on
the disposition of an asset which had a fair market value greater than its tax
basis on the date of the ownership change.
In conjunction with the acquisition of TERI, FCR and TWM, the Company
recorded additional net operating loss carryforwards of approximately $25.6
million, $12.5 million and $0.5 million respectively, which are also subject to
a corporate "ownership change". As a result of the change, the Company's ability
to utilize the net operating loss carryforwards related to these entities is
limited to approximately $1.0 million, $3.2 million and $0.1 million,
respectively, per year.
19
<PAGE>
ENVIRONMENTAL CONTINGENCIES
While increasing environmental regulation often presents new business
opportunities to the Company, Maine Energy, PERC and TERI, it likewise often
results in increased operating costs as well. The Company, Maine Energy, PERC
and TERI strive to conduct their operations in compliance with applicable laws
and regulations, including environmental rules and regulations, and have as
their goal 100% compliance with such laws and regulations. This effort requires
programs to promote compliance, such as training employees and customers,
purchasing health and safety equipment, and in some cases hiring outside
consultants and lawyers. Even with these programs, management of the Company
believes that in the ordinary course of doing business, companies in the
environmental services and waste disposal industry are faced with governmental
enforcement proceedings resulting in fines or other sanctions and will likely be
required to pay civil penalties or to expend funds for remedial work on waste
management facilities.
The TERI Telogia facility was in violation of its Waste Water Discharge
Permit (the "Permit"). This violation involves the temperature of the water used
in the cooling process and in the opinion of management, does not involve a
significant environmental issue. The Company has requested a modification to the
Permit from the Florida Department of Environmental Protection to change the
monitoring procedures and enable the Company to operate in compliance with the
permit. On July 28, 1999, the Company signed a consent order with the Florida
Department of Environmental Protection which included a penalty of approximately
$0.1 million to settle this matter.
At September 30, 1999, there were no pending governmental environmental
enforcement proceedings where the Company, Maine Energy, PERC or TERI believe
potential monetary sanctions will exceed $0.1 million. The possibility always
exists that substantial expenditures could result from governmental proceedings,
which would have a negative impact on earnings for a particular reporting
period. More importantly, federal, state and local regulators have the power to
suspend or revoke permits or licenses needed for operation of the plants,
equipment, and vehicles of the Company, Maine Energy, PERC or any other
operating subsidiary of the Company based on the applicable company's compliance
record, and customers may decide not to use a particular disposal facility or do
business with a company because of concerns about its compliance record.
Suspension or revocation of permits or licenses would have a negative impact on
the Company's business and operations and could have a material adverse impact
on the Company's financial results.
INFLATION
The effect of inflation on operating costs has been minimal in the past
three (3) years. Most of the Company's operating expenses are inflation
sensitive, with increases in inflation generally resulting in increased costs of
operation. The effect of inflation-driven cost increases on each of the
Company's project's overall operating costs is not expected to be greater for
such project than for its respective competitor's projects. In addition, each of
Maine Energy and PERC and the majority of the Residential Recycling contracts
can contractually increase its waste processing fees to municipal customers
annually based on inflation.
YEAR 2000 ISSUE
Year 2000 compliance is the ability of computer hardware and software
to respond to the problems posed by the fact that computer programs have
traditionally been written using two digits rather than four to define the
applicable year. As a consequence, unless modified, computer systems will not be
able to differentiate between the year 2000 and 1900. Systems must also
recognize the Year 2000 as a leap year. Failure to address this problem could
result in system failures and the generation of erroneous data. This could
potentially impact the Company's ability to perform its obligations under
long-term contracts which could result in legal and other liabilities which
would have a material adverse effect on the Company.
The Company has contacted its customers and vendors and has received
letters from each of its applications vendors stating that the majority of the
Company's information technology systems, such as accounting, data processing,
plant operations systems and telephone/PBX systems, are Year 2000 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 fourth 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.
20
<PAGE>
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 Completed 95% Completed 95% Completed 95% Completed
TECHNOLOGY
Expected completion Expected completion Expected completion date, December
date, December 1999 date, December 1999 1999
- --------------------- --------------- ------------------------ ------------------------ ------------------------------------
- --------------------- --------------- ------------------------ ------------------------ ------------------------------------
OPERATING EQUIPMENT Completed Completed Completed Completed
WITH EMBEDDED CHIPS
OR SOFTWARE
- --------------------- --------------- ------------------------ ------------------------ ------------------------------------
- --------------------- --------------- ------------------------ ------------------------ ------------------------------------
3RD PARTY Completed Completed for system 95% Complete for 95% Complete for system interface.
interface. system interface.
Expected completion date for
Contingency plans Expected completion system interface work, December
completed. date for system 1999.
interface work,
December 1999 Implement contingency plans or
other alternations as necessary in
December 1999.
- --------------------- --------------- ------------------------ ------------------------ ------------------------------------
</TABLE>
In addition to the assessments and investigations described above, the
Company has conducted tests of all of its internal information and
non-information technology systems and all of its system interfaces with
significant vendors, suppliers and service providers to ensure Year 2000
compliance. All of the Company's accounting and data processing equipment is
based on microcomputer hardware and related software, of which 80% has been
certified as Year 2000 compliant by the applicable manufacturer or developer.
However, the Company has determined that the plant control systems may contain
embedded technology which is not Year 2000 compliant. The Company replaced the
hardware that is not Year 2000 compliant with hardware which is Year 2000
compliant. 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 are Year 2000 compliant with the installation
of new hardware components during the third quarter. The Company successfully
performed a complete test of the systems during the planned outage periods
during 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
21
<PAGE>
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 September 30, 1999, include the following Statement of Financial Accounting
Standards ("SFAS") and the American Institute of Certified Public Accountants
Statement of Position ("SOP"):
SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES, which will be required to be adopted by the Company as of January 1,
2001, establishes standards for derivative instruments including those embedded
in other contracts and for hedging activities. The new standard requires the
Company to recognize all derivatives as either assets or liabilities and measure
those instruments at fair value. Management believes that the adoption of SFAS
No. 133 will not have a material impact on the Company's financial statements.
SOP 98-1, ACCOUNTING FOR COSTS OF COMPUTER SOFTWARE DEVELOPED OR
OBTAINED FOR INTERNAL USE is required to be adopted by the Company as of January
1, 2000. The Company's current policy falls within the guidelines of SOP 98-1.
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 September 30, 1999 by expected
maturity dates. Weighted average variable rates are based on forward rates in
United States Government Treasury Constant Maturities at September 30, 1999.
Forward rates should not be considered a predictor of actual future interest
rates.
INTEREST RATE SENSITIVITY
PRINCIPAL AMOUNT BY EXPECTED MATURITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 THEREAFTER FAIR VALUE
------------- ---------- ---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate Debt $ 3,537 $ 8,071 $ 7,510 $ 8,153 $ 3,088 $ 48,616 $ 78,982
Average Interest Rate 6.65% 6.56% 7.39% 6.39% 6.38% 5.12%
Variable Rate Debt $ 153,210 $ 153,210
Average Interest Rate 8.21%
</TABLE>
FORWARD LOOKING STATEMENTS
All statements contained herein which are not historical facts
including but not limited to statements regarding the Company's plans for future
cash flow and its uses are based on current expectations. These statements are
forward-looking in nature and involve a number of risks and uncertainties.
Actual results may differ materially. Among the factors that could cause actual
results to vary materially is the availability of sufficient capital to finance
the Company's business plan and other capital needs on terms satisfactory to the
Company. The Company wishes to caution readers not to place undue reliance on
any such forward looking statements, which statements are made pursuant to the
Private Litigation Reform Act of 1995 and as such speak only as of the date
made.
22
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Maine Energy is the plaintiff in a suit filed on May 11, 1994 in a
Maine state court against United Steel Structures, Inc. under a warranty to
recover the costs which were, or will be incurred to replace the roof and walls
of the Maine Energy tipping and processing building. The judge in the case
entered an order awarding Maine Energy approximately $3.3 million plus interest
from May 10, 1994, to the date of the filing of the lawsuit, and court costs.
The defendant filed an appeal on December 19, 1997. In February 1999, the
appellate court reversed the trial court's verdict in favor of KTI and returned
the case to the trial court, which ordered a new trial.
Two lawsuits have been filed on September 30, 1997 and March 6, 1998 by
Capital Recycling of Connecticut ("Capital") in a Connecticut state court
against K-C International, certain officers of K-C International and other
parties. The suits allege fraud, tortious interference with business expectancy
and violations of the Connecticut Unfair Trade Practices Act. The actions are
based on two contracts between Capital and K-C International. The contracts
require all disputes to be resolved by arbitration in Portland, Oregon. Pursuant
to this requirement, K-C International initiated the arbitration process on
November 6, 1997 in Portland, Oregon. Subsequently, the parties agreed to
arbitrate the dispute in Hartford, Connecticut. On October 20, 1999, KTI paid
Capital $0.4 million in final settlement of these claims, which was accrued at
September 30, 1999.
The Equal Employment Opportunity Commission filed a lawsuit on
September 30, 1998 against FCR Tennessee, Inc. in the U.S. District Court for
the Western District of Tennessee, Western Division, alleging sexual harassment
by two managers and a sexually hostile work environment. The complainants seek
compensation for past and future pecuniary and non-pecuniary losses as well as
punitive damages and potential reinstatement of employment for Valerie L.
Jacobs. FCR has retained counsel to defend this suit and has reported the
lawsuit to FCR's Directors and Officers insurance carrier. Management is
currently reviewing the lawsuit. The plaintiffs have demanded $0.1 million and
the Company has offered $30,000 in settlement. No agreement on settlement has
been reached. KTI's insurance carrier has agreed to defend the case.
On April 1, 1999, William F. Kaiser, a former Executive Vice President
and Treasurer of KTI, filed a lawsuit against the Company in the U.S. District
Court for the District of New Jersey. The suit alleges breach of contract,
wrongful termination, breach of the implied covenant of good faith and fair
dealing, misrepresentation of employment terms and failure to pay wages, all
arising out of Mr. Kaiser's employment agreement with the Company. The suit also
alleges that the Company inaccurately reported its financial results for the
first quarter of 1998 and failed to properly disclose the change of control
provision in Mr. Kaiser's employment agreement. Mr. Kaiser is seeking a
declaratory judgment that, upon closing of the merger, the change of control
provision entitles him to receive a severance payment of two years' salary, in
the amount of $0.3 million and to exercise 132,000 unvested options for KTI
common stock. Mr. Kaiser is also seeking damages in the amount of $0.1 million
for an additional severance payment, as well as undisclosed damages for
outstanding salary, bonus and other payments and from his sale of approximately
50,000 shares of KTI common stock resulting from KTI's allegedly inaccurate
financial reports.
Dennis McDonnell filed a lawsuit dated April 6, 1999 in a Florida state
court against U.S. Fiber, Inc., a subsidiary of FCR. Mr. McDonnell, a former
employee of U.S. Fiber, seeks a declaratory judgment regarding his rights and
obligations under an Employment Non-Competition Agreement and an Employment
Agreement that he previously had signed with two corporations that subsequently
were merged with and into U.S. Fiber. KTI is defending the suit and believes it
has meritorious defenses.
C.H. Lee, a former employee of FCR and a former majority shareholder of
Resource Recycling, Inc. ("Resource"), instigated arbitration proceedings on
April 15, 1999 in Charlotte, North Carolina against KTI, FCR and FCR Plastics,
Inc. in connection with the acquisition of Resource by FCR. Mr. Lee alleges that
FCR and FCR Plastics acted to frustrate the "earn-out" provisions of the
acquisition agreement and thereby precluded Mr. Lee from receiving, or
alternatively, reduced, the sums to which he was entitled under the agreement.
He also alleges that FCR and FCR Plastics wrongfully terminated his employment
agreement. The claim for arbitration alleges direct charges in excess of $5.0
million and requests punitive damages, treble damages and attorneys fees. KTI,
FCR and FCR Plastics responded to the demand, denying liability, and filed a
counterclaim for $1.0 million for misrepresentations. KTI believes it has
meritorious defenses to these claims. If, however, the damages and charges
claimed by Mr. Lee are awarded, KTI's business, financial condition and results
of operation could be materially adversely affected.
23
<PAGE>
On or about April 26, 1999, Salvatore Russo filed an action in the U.S.
District Court, District of New Jersey against KTI and two of its principal
officers, Ross Pirasteh and Martin J. Sergi, purportedly on behalf of all
stockholders who purchased common stock of KTI from May 4, 1998 through and
including August 14, 1998. Melanie Miller filed an identical complaint on May
14, 1999. The complaints allege that the defendants made material
misrepresentations in KTI's Form 10-Q for the period ended March 31, 1998 in
violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as
amended, concerning KTI's allowance for doubtful accounts and net income. The
plaintiffs are seeking undisclosed damages. KTI believes it has meritorious
defenses to the complaint. On June 15, 1999, Mr. Russo and Ms. Miller, together
with Fransisco Muncro, Timothy Ryan and Steven Storch, moved to consolidate the
two complaints. This motion is currently pending in the District Court of New
Jersey.
On July 1, 1999, Michael P. Kuruc filed a demand for arbitration with
the American Arbitration Association in Charlotte, North Carolina, seeking
approximately $1.0 million for compensation due under an employment agreement
that he alleges he has with KTI and losses allegedly suffered in connection with
his sale of KTI common stock. KTI believe that it has meritorious defenses and
has retained counsel to defend this suit and has filed an action to stay the
arbitration in Mecklenburg County Superior Court in North Carolina. On October
22, 1999, the Superior Court denied KTI's request to stay the arbitration. If
the damages claimed by Mr. Kuruc are awarded, KTI's business, financial
condition and results of operation could be materially adversely affected.
On October 22, 1999, Kyle Trayner filed an action in Putnam Superior
Court in Connecticut against K-C International seeking approximately $0.4
million allegedly due for compensation under an employment agreement and for
payment on a promissory note issued by K-C International to Mr. Trayner. KTI
believes that it has meritorious defenses to these claims and intends to retain
counsel to defend this suit.
Through a newspaper report dated October 19, 1999, KTI learned that the
City Counsel of Biddeford has authorized the filing of a lawsuit to enjoin the
merger of KTI and Casella. The City of Biddeford has claimed that, under Maine
Energy's waste handling agreements with the City of Biddeford and the City of
Saco, KTI would be required, if the merger is completed, to make payment to the
cities equal to 20% of Maine Energy's value. The waste handling agreement
provides in part that, in the event that cash proceeds from a capital
transaction become distributable to the partners of Maine Energy (including KTI)
on account of the partners' equity interests, then the Cities (Biddeford and
Saco) shall be entitled to receive a residual cancellation payment equal to
their proportionate share of 20% of such cash distribution. KTI is neither
engaging in a capital transaction relating to Maine Energy, nor receiving cash
in the merger. To date no litigation has been brought. KTI believes it has
meritorious defenses to these claims if litigation is commenced by the City of
Biddeford.
KTI is a defendant in certain other lawsuits alleging various claims
incurred in the ordinary course of business, none of which, either individually
or in the aggregate, the Company believes are material to its financial
condition, results of operations or cash flows.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
24
<PAGE>
(b) Reports on Form 8-K
Five reports on Form 8-K were filed in the third quarter of
1999. The following is a list of the Forms 8-K and the dates thereof:
(i) On September 10, 1999, the Company filed a Form 8-K reporting a
second amendment to the Agreement and Plan of Merger between the
Company and Casella Waste Systems, Inc., and attaching the press
release issued in conjunction with the amendment.
(ii) On September 10, 1999, the Company filed a Form 8-K/A, amending
its Form 8-K filed on September 14, 1998, announcing that the
Company completed its merger with FCR, Inc. on August 28, 1998.
(iii) On September 29, 1999, the Company filed a Form 8-K reporting a
third amendment to the Agreement and Plan of Merger between the
Company and Casella Waste Systems, Inc., and attaching the press
release issued in conjunction with the amendment.
(iv) On November 1, 1999, the Company filed a Form 8-K reporting the
sale of substantially all the assets of its Commercial Recycling
facility located in Franklin Park, Illinois and attaching a copy
of the sales agreement.
(v) On November 12, 1999, the Company filed a Form 8-K/A amending its
Form 8-K filed on November 1, 1999 discussed in (iv) above.
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 15, 1999
25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 9,711
<SECURITIES> 19,813
<RECEIVABLES> 40,934
<ALLOWANCES> 1,386
<INVENTORY> 8,381
<CURRENT-ASSETS> 92,027
<PP&E> 250,604
<DEPRECIATION> 38,425
<TOTAL-ASSETS> 460,369
<CURRENT-LIABILITIES> 196,558
<BONDS> 232,185
0
0
<COMMON> 140
<OTHER-SE> 127,874
<TOTAL-LIABILITY-AND-EQUITY> 460,369
<SALES> 68,335
<TOTAL-REVENUES> 68,335
<CGS> 56,300
<TOTAL-COSTS> 56,300
<OTHER-EXPENSES> 3,958
<LOSS-PROVISION> 634
<INTEREST-EXPENSE> 4,498
<INCOME-PRETAX> 2,880
<INCOME-TAX> 1,496
<INCOME-CONTINUING> 1,384
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,384
<EPS-BASIC> 0.10
<EPS-DILUTED> 0.10
</TABLE>
