<PAGE>
FORM 10-Q - QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q/A
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
Commission File No. 0-25490
KTI, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
New Jersey 22-2665282
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
7000 Boulevard East
Guttenberg, New Jersey 07093
(Address of principal executive offices) (zip code)
(201) 854-7777
(Registrant's telephone number including area code)
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date:
Common Stock, No Par Value 13,916,238 Shares as of August 13, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item Number and Caption Page Number
- ----------------------- -----------
<S> <C>
PART I
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at June 30, 1999 (unaudited) and December 31, 1998 3
Consolidated Statements of Operations (unaudited) for the three and six months
ended June 30, 1999 and 1998 4
Consolidated Statements of Changes in Stockholders' Equity for the six
months ended June 30, 1999 (unaudited) and the year ended December 31, 1998 6
Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30,
1999 and 1998 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 19
Item 3. Qualitative and Quantitative Disclosure about Market Risk 29
PART II
Item 1. Legal Proceedings 30
Item 2. Changes in Securities 32
Item 3. Defaults Upon Senior Securities 32
Item 4. Submission of Matters to a Vote of Security Holders 32
Item 5. Other Information 32
Item 6. Exhibits and Reports on Form 8-K 32
</TABLE>
2
<PAGE>
Part I. Financial Information
Item 1. Consolidated Financial Statements
KTI, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents.......................................................................... $ 5,391 $ 9,426
Restricted funds................................................................................... 21,053 19,088
Accounts receivable, net of allowances of $1,343 and $1,313........................................ 38,754 29,272
Consumables and spare parts........................................................................ 5,012 4,483
Inventory.......................................................................................... 8,011 4,866
Notes receivable--officers/shareholders and affiliates............................................. 115 1,858
Other receivables.................................................................................. 2,836 4,158
Deferred taxes..................................................................................... 3,483 4,832
Other current assets............................................................................... 5,163 3,370
---------- ----------
Total current assets............................................................................. 89,818 81,353
Restricted funds..................................................................................... 4,177 4,350
Notes receivable--officers/shareholders and affiliates............................................... 6,469 1,534
Other receivables.................................................................................... 2,476 3,025
Other assets......................................................................................... 7,275 6,167
Deferred taxes....................................................................................... 5,322 1,407
Deferred costs, net of accumulated amortization of $1,623 and $1,610................................. 4,300 5,268
Goodwill and other intangibles, net of accumulated amortization of $7,027 and $4,354................. 126,420 119,712
Property, equipment and leasehold improvements, net of accumulated depreciation and amortization of
$35,655 and $27,724................................................................................ 216,777 213,669
---------- ----------
Total assets....................................................................................... $ 463,034 $ 436,485
---------- ----------
---------- ----------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current Liabilities
Accounts payable................................................................................... $ 19,109 $ 14,940
Accrued expenses................................................................................... 16,389 9,313
Debt, current portion.............................................................................. 161,436 9,775
Other current liabilities.......................................................................... 224 4,499
---------- ---------
Total current liabilities........................................................................ 197,158 38,527
Other liabilities.................................................................................... 1,382 4,227
Debt, less current portion........................................................................... 69,869 202,153
Minority interest.................................................................................... 14,037 12,437
Deferred revenue..................................................................................... 57,756 61,396
Customer advance..................................................................................... 12,438 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; issued and
outstanding: 13,916,238 in 1999 and 13,266,204 in 1998............................................. 139 133
Additional paid-in capital........................................................................... 126,396 115,026
Accumulated deficit.................................................................................. (22,911) (16,972)
---------- ----------
Total stockholders' equity........................................................................... 103,624 98,187
---------- ----------
Total liabilities and stockholders' equity....................................................... $ 463,034 $ 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 JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
1999 1998 1999 1998
------------- ------------ ------------- ------------
Revenues............................................... $ 64,793 $ 34,790 $ 130,921 $ 72,666
Cost of operations..................................... 56,188 32,980 109,246 63,693
------------- ------------ ------------- ------------
Gross Profit....................................... 8,605 1,810 21,675 8,973
Selling, general and administrative.................... 6,285 2,086 12,181 3,222
Restructuring charge................................... 2,971 3,719
Asset impairment charge................................ 3,000 3,000
------------- ------------ ------------- ------------
Income (loss) from operations...................... (3,651) (276) 2,775 5,751
Interest expense, net.................................. 5,319 1,550 9,053 3,060
Loss on sale of business............................... 444 444
Equity loss in subsidiary.............................. 214 294
Other charges.......................................... 131 131
Other expense, net..................................... 72 123
------------- ------------ ------------- ------------
Income (loss) before minority interest, provision
(benefit) for income taxes, extraordinary item and
cumulative effect of change in accounting
principle.......................................... (9,831) (1,826) (7,270) 2,691
Minority interest...................................... 490 (86) 1,176 1,046
------------- ------------ ------------- ------------
Income (loss) before provision (benefit) for income
taxes, extraordinary item and cumulative effect of
change in accounting principle..................... (10,321) (1,740) (8,446) 1,645
Provision (benefit) for income taxes................... (3,417) (732) (2,565) 614
------------- ------------ ------------- ------------
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle.......................................... (6,904) (1,008) (5,881) 1,030
Extraordinary item..................................... 495 495
------------- ------------ ------------- ------------
Income (loss) before cumulative effect in change in
accounting principle............................... (6,904) (1,503) (5,881) 536
Cumulative effect of change in accounting principle.... 58
------------- ------------ ------------- ------------
Net income (loss).................................. (6,904) (1,503) (5,939) 536
Accretion and accrued and paid dividends on preferred
stock................................................ 469 978
------------- ------------ ------------- ------------
Loss available to common shareholders.............. $ (6,904) $ (1,972) $ (5,939) $ (442)
------------- ------------ ------------- ------------
------------- ------------ ------------- ------------
</TABLE>
See accompanying notes.
4
<PAGE>
KTI, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- ---------------------------
1999 1998 1999 1998
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Earnings per common share:
Basic:
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle.......................................... $ (0.50) $ (0.16) $ (0.42) $ 0.01
Extraordinary item................................. (0.05) (0.05)
Cumulative effect of change in accounting
principle.......................................... (0.01)
------------- ------------ ------------- ------------
Net loss........................................... $ (0.50) $ (0.21) $ (0.43) $ (0.04)
------------- ------------ ------------- ------------
------------- ------------ ------------- ------------
Weighted average number of shares used in
computation........................................ 13,916,238 9,614,163 13,818,290 9,424,451
------------- ------------ ------------- ------------
------------- ------------ ------------- ------------
Diluted:
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle.......................................... $ (0.50) $ (0.16) $ (0.42) $ 0.01
Extraordinary item................................. (0.05) (0.05)
Cumulative effect of change in accounting
principle.......................................... (0.01)
------------- ------------ ------------- ------------
Net loss........................................... $ (0.50) $ (0.21) $ (0.43) $ (0.04)
------------- ------------ ------------- ------------
------------- ------------ ------------- ------------
Weighted average number of shares used in
computation........................................ 13,916,238 9,614,163 13,818,290 9,424,451
------------- ------------ ------------- ------------
------------- ------------ ------------- ------------
</TABLE>
See accompanying notes.
5
<PAGE>
KTI, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SERIES A SERIES B
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
-------------------- -------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------- -------- -------- -------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997..................... 447,500 $ 3,732 856,000 $ 21,400 8,912,630 $ 89
Net income.....................................
Accretion of preferred stock................... 42
Issuance of common stock and common stock
purchase warrants for:
Exercise of options........................ 235,682 2
Exercise of warrants....................... 411,894 4
Non-employee directors' 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 contributions........ 4,215
Business combinations...................... 1,945,353 20
Tax benefit realized from stock options
transactions.................................
Dividends paid on Series B Preferred Stock.....
Additional costs related to preferred stock
issuance.....................................
--------- ------- ---------- --------- ---------- ------
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........................ 610,000 6
--------- ------- ---------- --------- ---------- ------
Balance at June 30, 1999 (unaudited)............. 13,916,238 $ 139
--------- ------- ---------- --------- ---------- ------
--------- ------- ---------- --------- ---------- ------
<CAPTION>
ADDITIONAL
PAID-IN ACCUMULATED
CAPITAL DEFICIT TOTAL
---------- ----------- ---------
<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 directors' 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 contributions........ 41 41
Business combinations...................... 38,122 38,142
Tax benefit realized from stock options
transactions................................. 738 738
Dividends paid on Series B Preferred Stock..... (1,404) (1,404)
Additional costs related to preferred stock
issuance..................................... (98) (98)
--------- ----------- ---------
Balance at December 31, 1998..................... 115,026 (16,972) 98,187
Net loss....................................... (5,939) (5,939)
Issuance of common stock for:
Exercise of options.......................... 161 161
Exercise of warrants......................... 193 193
Business combinations........................ 11,016 11,022
--------- ----------- ---------
Balance at June 30, 1999 (unaudited)............. $ 126,396 $ (22,911) $ 103,624
--------- ----------- ---------
--------- ----------- ---------
</TABLE>
See accompanying notes.
6
<PAGE>
KTI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
--------------------
<S> <C> <C>
1999 1998
--------- ---------
OPERATING ACTIVITIES
Net income (loss)........................................................................... $ (5,939) $ 536
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Asset impairment charge................................................................... 3,000
Extraordinary item........................................................................ 495
Cumulative effect of change in accounting principle....................................... 58
Depreciation and amortization............................................................. 10,770 5,334
Minority interest, net of distributions................................................... 1,600 (461)
Loss on sale of business.................................................................. 444
Equity loss in subsidiary................................................................. 294
Deferred revenue and customer advance..................................................... (3,992) (3,815)
Deferred income taxes..................................................................... (2,777) (1,464)
Provision for losses on accounts receivable............................................... 45 570
Interest accrued and capitalized on debt.................................................. 114 701
Other non-cash charges.................................................................... 910 11
Changes in operating assets and liabilities:
Accounts receivable..................................................................... (8,828) 879
Consumables, spare parts and inventory.................................................. (1,508) (712)
Other receivables....................................................................... 914 (320)
Other assets............................................................................ (4,600) 286
Accounts payable and accrued expenses................................................... 8,563 (3,854)
Other liabilities....................................................................... (5,620) 4,078
--------- ---------
Net cash provided by (used in) operating activities......................................... (6,552) 2,264
INVESTING ACTIVITIES
Additions to property, equipment and leasehold improvements................................. (6,379) (4,183)
Proceeds from sale of assets................................................................ 27 33
Net change in restricted funds.............................................................. (1,792) (1,031)
Proceeds from sale of business.............................................................. 1,757
Purchase of businesses, net of cash acquired................................................ (150) (15,289)
Notes receivable--officers/shareholders and affiliates...................................... (2,936) (492)
--------- ---------
Net cash used in investing activities....................................................... (9,473) (20,962)
FINANCING ACTIVITIES
Deferred financing costs.................................................................... (2,995)
Proceeds from issuance of debt.............................................................. 46,995
Net borrowings on lines of credit........................................................... 12,414 19,267
Proceeds from other borrowings.............................................................. 3,259
Proceeds from amendment of power purchase agreement, net of transaction costs............... 5,900
Proceeds from sale of common stock.......................................................... 354 2,359
Dividends paid.............................................................................. (936)
Principal payments on debt.................................................................. (4,037) (53,046)
--------- ---------
Net cash provided by financing activities................................................... 11,990 17,544
--------- ---------
Decrease in cash and cash equivalents....................................................... (4,035) (1,154)
Cash and cash equivalents at beginning of period............................................ 9,426 11,181
--------- ---------
Cash and cash equivalents at end of period.................................................. $ 5,391 $ 10,027
--------- ---------
--------- ---------
</TABLE>
7
<PAGE>
KTI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
<S> <C> <C>
1999 1998
--------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid................................................................................ $ 10,909 $ 2,563
Taxes paid................................................................................... 1,128
NON CASH INVESTING AND FINANCING ACTIVITIES
Capital lease obligation entered into for lease of equipment................................. 241
Purchase of businesses and additional partnership interest, net of cash acquired:
Working capital, net of cash acquired...................................................... 111 101
Property, equipment and leasehold improvements............................................. 8,621 11,528
Purchase price in excess of net assets acquired............................................ 7,863 6,873
Other assets............................................................................... 104
Non-current liabilities.................................................................... 5,423 3,317
Common stock issued........................................................................ 11,022
</TABLE>
See accompanying notes
8
<PAGE>
KTI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
JUNE 30, 1999
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. The municipal solid waste ("MSW") market in Maine, which
provides material to the waste-to-energy segment, is seasonal, with one-third
more MSW generated in the summer months than is generated during the rest of the
year. The Residential and Commercial Recycling segments experience increased
volumes of newspaper in November and December due to increased newspaper
advertising and retail activity during the holiday season. Additionally, the
Residential Recycling segment operates facilities in Florida which experience
increased volumes of recyclable materials during the winter months followed by
decreases in the summer months in connection with seasonal changes in
population. Operating results for the three and six month periods ended June 30,
1999 and 1998 are not necessarily indicative of the results that may be expected
for the full year. For further information, refer to the consolidated financial
statements and notes thereto included in the Company's annual report on Form
10-K for the year ended December 31, 1998. Certain 1998 financial information
contained herein has been reclassified to conform with the 1999 presentation.
2. RESTATEMENT
The Company's balance sheet as of June 30, 1999 and the related statements
of operations, stockholders' equity and cash flows for each of the three and six
month periods ended June 30, 1999 and 1998 have been restated. The restatement
is a result of the Securities Exchange Commission's review of the Company's
proxy materials related to the prospective merger with Casella Waste Systems
(See Note 3). The restatement relates to revenue recognized as a result of the
restructuring of a power purchase agreement and the sale of electric generating
capacity by two of the Company's majority-owned subsidiaries with it's
customers, BHE and CMP, which were completed in 1998 and 1996. At the time of
these transactions, the Company had recognized revenues representing a portion
of the cash received in 1996 and the total consideration received in 1998. After
discussions with the staff of the Securities and Exchange Commission, the
Company agreed to defer these amounts and recognize them over the term of the
respective power purchase and capacity purchase agreements to comply with
generally accepted accounting principles. In addition, performance credits
previously reported as expense have been reclassified as a reduction of
revenues. The impact of the restatement on the Company's consolidated financial
results as originally reported is summarized as follows:
<TABLE>
<CAPTION>
AS REPORTED RESTATED
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30 JUNE 30
-------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues......................................................... $ 66,218 $ 49,458 $ 64,793 $ 34,790
Income (loss) before extraordinary item and cumulative
effect of change in accounting principle....................... (7,131) 5,222 (6,904) (1,008)
Net income (loss)................................................ (7,131) 4,727 (6,904) (1,503)
</TABLE>
9
<PAGE>
KTI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
JUNE 30, 1999
2. RESTATEMENT (CONTINUED)
<TABLE>
<CAPTION>
AS REPORTED RESTATED
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30 JUNE 30
-------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income (loss) available to common shareholders............... (7,131) 4,258 (6,904) (1,972)
Net income (loss) per share:
Basic.......................................................... $ (0.51) $ 0.44 $ (0.50) $ (0.21)
Diluted........................................................ $ (0.51) $ 0.38 $ (0.50) $ (0.21)
</TABLE>
<TABLE>
<CAPTION>
AS REPORTED RESTATED
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
--------------------- ---------------------
1999 1998 1999 1998
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Revenues....................................................... $ 133,195 $ 87,090 $ 130,921 $ 72,666
Income (loss) before extraordinary item and cumulative
effect of change in accounting principle..................... (6,206) 7,214 (5,881) 1,031
Net income (loss).............................................. (6,264) 6,719 (5,939) 536
Net income (loss) available to common shareholders............. (6,264) 5,741 (5,939) (442)
Net income (loss) per share:
Basic........................................................ $ (0.46) $ 0.61 $ (0.43) $ (0.04)
Diluted...................................................... $ (0.46) $ 0.51 $ (0.43) $ (0.04)
</TABLE>
3. MERGER AND ACQUISITIONS
On September 23, 1999, KTI, Inc. (the "Company") entered into an Agreement
and Plan of Merger (the "Merger Agreement") with Casella Waste Systems, Inc.,
("Casella") a publicly-owned company engaged in the waste services industry.
The merger will be completed through the exchange of all of the shares of the
Company's common stock for shares of Casella's Class A common stock based on
an exchange ratio specified in the Amended Merger Agreement. In addition, all
of the Company's outstanding and unexercised stock options and stock purchase
warrants will be converted into similar rights to acquire Casella's Class A
common stock under the same terms and conditions and the same exchange ratio.
Subsequent to the completion of the merger the current Casella stockholders
will own a majority of the combined company. Under the terms of the Merger
Agreement, Casella is required to file a registration statement with the
Securities and Exchange Commission to register the shares of its Class A
common stock to be issued in the merger. The merger is subject to, among
other things, approval of the Company's and Casella's stockholders. No
assurance can be given that the conditions of the merger will be satisfied or
that the merger will be consummated. In connection with the merger, Casella
has agreed to reimburse the Company for its investment banking fees and other
merger related costs and as of June 30, 1999, approximately $1,482 of such
costs have been deferred.
On March 31, 1999 and May 19, 1999, pursuant to the Second Amended, Restated
and Extended Waste Disposal Agreement among PERC and the municipalities named
therein, the municipalities made capital contributions to Penobscot Energy
Recovery Company, Limited Partnership ("PERC"),
10
<PAGE>
KTI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
JUNE 30, 1999
3. MERGER AND ACQUISITIONS (CONTINUED)
which were recorded as additional minority interest, totaling $730 and $240,
respectively, in exchange for 1.31% and 0.43%, respectively, of limited
partnership interest in PERC.
On January 27, 1999 the Company completed its acquisition of AFA Group, Inc.
and subsidiaries ("AFA"), an integrated wood waste processing and hauling
business located in Newark, New Jersey. Payment of the aggregate purchase price,
including all direct costs, of $9,682 consisted of (i) 460,000 shares of the
Company's common stock valued at $20.70 per share (based on the closing price of
the common stock on the date of announcement) and (ii) $150 in cash. This
acquisition was accounted for as a purchase, and accordingly, the assets and
liabilities have been recorded at their estimated fair value at the date of
acquisition. The excess of the purchase price over the fair value of the
acquired net assets of $6,363 has been recorded as goodwill and is being
amortized on a straight-line basis over 30 years.
11
<PAGE>
KTI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
JUNE 30, 1999
4. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss)................................. $ (6,904) $ (1,503) $ (5,939) $ 536
Preferred stock dividends......................... 469 936
Accretion of preferred stock...................... 42
------------- ------------- ------------- -------------
Numerator for basic earnings per share-net loss
available to common stockholders................ (6,904) (1,972) (5,939) (442)
Effective of dilutive securities:
Preferred stock dividends.......................
Accretion of preferred stock....................
------------- ------------- ------------- -------------
Numerator for diluted earnings per share-net
income (loss) available to common stockholders
after assumed conversions....................... $ (6,904) $ (1,972) $ (5,939) $ (442)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Denominator:
Denominator for basic earnings per share-weighted
average shares.................................. 13,916,238 9,614,163 13,818,290 9,424,451
Effect of dilutive securities:
Employee stock options (1)........................
Warrants (1)......................................
Convertible preferred stock (1)...................
Convertible subordinated notes (1)................
Dilutive potential common shares
Denominator for diluted earnings per share-
adjusted weighted-average shares and assumed
conversions..................................... 13,916,238 9,614,163 13,818,290 9,424,451
------------- ------------- ------------- -------------
Net income (loss) per share-Basic................... $(0.50) $(0.21) $(0.43) $(0.04)
------------- ------------- ------------- -------------
Net income (loss) per share-Diluted................. $(0.50) $(0.21) $(0.43) $(0.04)
------------- ------------- ------------- -------------
</TABLE>
- ------------------------
(1) The employee stock options and warrants outstanding during the periods and
the convertible preferred stock and subordinated notes payable are
anti-dilutive.
12
<PAGE>
KTI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
JUNE 30, 1999
5. CONTINGENCIES
The Company is a defendant in a consolidated purported class action, which
alleges violations of certain sections of the federal securities laws. The
Company believes the allegations are without merit and intends to defend the
litigation vigorously.
Two lawsuits have been filed against a subsidiary of the Company alleging
fraud and tortious interference. The actions are based on two contracts between
the plaintiff and the subsidiary, which contracts require all disputes to be
resolved by arbitration. Arbitration proceedings have commenced. The Company
believes it has meritorious defenses to the allegations.
The majority shareholder of a company acquired by a subsidiary of the
Company instigated arbitration proceedings against the Company and two of its
subsidiaries, alleging the subsidiaries acted to frustrate the "earn-out"
provisions of the acquisition agreement and thereby precluding him from
receiving, or alternatively, reducing the sum to which he was entitled to
receive. He also alleges his employment agreement was wrongfully terminated. The
claim for arbitration alleges direct charges in excess of $5,000 and requests
punitive damages, treble damages and attorneys fees. The Company and its
subsidiaries have responded to the demand, denying liability and filed a
counterclaim for $1,000 for misrepresentations. The Company believes it has
meritorious defenses to the claims.
The Company is a defendant in certain lawsuits alleging various claims
incurred in the ordinary course of business.
Management of the Company does not believe that the outcome of these
matters, individually or in the aggregate, will have a material effect on the
Company's financial condition, cash flows or results of operations.
6. SEGMENT REPORTING
The Company operated in the business segments as indicated below.
THREE MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
WASTE-TO- COMMERCIAL FINISHED RESIDENTIAL
ENERGY RECYCLING PRODUCTS RECYCLING
---------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Revenues
Unaffiliated customers......................................... $ 25,433 $ 19,290 $ 14,061 $ 5,994
Intersegment revenues.......................................... 56 52 3,888
Segment Profit (Loss)............................................ 4,650 (3,937) (1,049) (325)
Depreciation and Amortization.................................... 2,771 502 876 1,066
Capital Expenditures............................................. 1,615 347 982 168
</TABLE>
13
<PAGE>
KTI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
JUNE 30, 1999
6. SEGMENT REPORTING (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
WASTE-TO- COMMERCIAL FINISHED RESIDENTIAL
ENERGY RECYCLING PRODUCTS RECYCLING
---------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Revenues
Unaffiliated customers......................................... $ 48,958 $ 40,428 $ 26,406 $ 15,081
Intersegment revenues.......................................... 89 83 4,636
Segment Profit (Loss)............................................ 11,221 (3,622) (263) 234
Depreciation and Amortization.................................... 5,370 1,110 1,697 1,978
Identifiable Assets.............................................. 258,218 48,070 62,827 70,729
Capital Expenditures............................................. 2,744 662 2,385 552
</TABLE>
THREE MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
WASTE-TO- COMMERCIAL FINISHED RESIDENTIAL
ENERGY RECYCLING PRODUCTS RECYCLING
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues
Unaffiliated customers.......................................... $ 17,272 $ 13,461 $ 2,546 $ 1,496
Intersegment revenues........................................... 2,603 24 136 1,135
Segment Profit (Loss)............................................. 771 (667) (36) 232
Depreciation and Amortization..................................... 2,165 255 25 224
Capital Expenditures.............................................. 789 526
</TABLE>
SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
WASTE-TO- COMMERCIAL FINISHED RESIDENTIAL
ENERGY RECYCLING PRODUCTS RECYCLING
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues
Unaffiliated customers......................................... $ 35,809 $ 29,493 $ 4,172 $ 3,162
Intersegment revenues.......................................... 5,187 24 244 2,102
Segment Profit (Loss)............................................ 6,577 (348) 223 628
Depreciation and Amortization.................................... 4,199 506 50 431
Identifiable Assets.............................................. 227,726 30,785 1,883 10,783
Capital Expenditures............................................. 2,415 1,751 2
</TABLE>
14
<PAGE>
KTI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
JUNE 30, 1999
6. SEGMENT REPORTING (CONTINUED)
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 principal as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------ --------------------------
<S> <C> <C> <C> <C>
1999 1998 1999 1998
-------------- -------------- ------------ ------------
REVENUES
Total unaffiliated customers revenue for reportable
segments.......................................... $ 64,778 $ 34,775 $ 130,873 $ 72,636
Holding company revenues............................ 15 15 48 30
Intersegment revenues for reportable segments....... 3,996 3,898 4,808 7,557
Elimination of intersegment revenues................ (3,996) (3,898) (4,808) (7,557)
-------------- ------- ------------ ------------
Total consolidated revenues......................... $ 64,793 $ 34,790 $ 130,921 $ 72,666
-------------- ------- ------------ ------------
-------------- ------- ------------ ------------
PROFIT AND LOSS
Total segment profit (loss) for reportable
segments.......................................... $ (661) $ 300 $ 7,570 $ 7,080
Holding company segment profit (loss)............... (2,990) (576) (4,795) (1,329)
-------------- ------- ------------ ------------
Total segment profit (loss)......................... (3,651) (276) 2,775 5,751
Unallocated amounts:
Interest expense, net............................. 5,319 1,550 9,053 3,060
Other expenses, net............................... 861 992
Minority interest................................. 490 (86) 1,176 1,046
-------------- ------- ------------ ------------
Income (loss) before provision (benefit) for
income taxes, extraordinary item and cumulative
effect of change in accounting principle........ $ (10,321) $ (1,740) $ (8,446) $ 1,645
-------------- ------- ------------ ------------
-------------- ------- ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
1999
----------
<S> <C>
ASSETS
Total identifiable assets for reportable segments................................. $ 439,844
Holding company assets............................................................ 23,190
----------
Total consolidated assets......................................................... $ 463,034
----------
----------
</TABLE>
7. IMPAIRMENT OF COMMERCIAL RECYCLING LONG-LIVED ASSETS
On June 1, 1999, the Company completed the sale of its commercial recycling
facility located in Franklin Park, Illinois and recorded a loss of approximately
$444.
15
<PAGE>
KTI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
JUNE 30, 1999
7. IMPAIRMENT OF COMMERCIAL RECYCLING LONG-LIVED ASSETS (CONTINUED)
As a result of this loss and the continued poor operating performance of
this segment, the Company initiated an impairment review of the long-lived
assets, including goodwill, in the Commercial Recycling segment. A revised
operating plan for each of the remaining facilities in the Commercial Recycling
segment was developed. While revenues are stable, the Commercial Recycling
segment continues to operate at levels of profitability, which are significantly
below the levels anticipated when the acquisitions were completed. In addition,
with the continued consolidation of the solid waste industry and the continued
focus on the disposal aspects of this industry, the possibility of selling these
facilities for amounts approximating their carrying value is remote.
The Company determined that the estimated future undiscounted cash flows for
the KTI Recycling of New Jersey ("Newark Plant") facility were below the
carrying value of the related equipment and leasehold improvements. The Company
adjusted the carrying value of the related equipment and leasehold improvements
of the Newark Plant by approximately $3,000 to their estimated fair value of
approximately $1,142. The fair value of the long-lived assets was based on the
expected cash flows discounted at a rate commensurate with the risk involved.
8. PLANT CONSOLIDATION, RESTRUCTURING AND OTHER UNUSUAL ITEMS
In April 1999, FCR, Inc., a subsidiary of the Company, signed a new
agreement with a municipality to operate a material recovery facility in
Charlotte, North Carolina. As part of this agreement, the Company committed to
relocate the cellulose insulation plant located in Ronda, North Carolina to the
material recovery facility in Charlotte. This secures the supply of raw material
for the cellulose insulation plant and provides additional cost savings from the
integration of recycling and the manufacturing of cellulose insulation into one
facility. As a result, the Company developed an exit plan for the closing of the
plant in Ronda, North Carolina and began the construction of the new cellulose
insulation plant during the second quarter. The Company recorded a restructuring
charge of approximately $1,205, which consisted primarily of the write-down of
equipment and leasehold improvements and an accrual for the remaining payments
under the noncancelable lease of the Ronda facility, in the second quarter.
During the second quarter, the Company reached agreement with an employee to
restructure the amounts paid under an employment contract. The Company recorded
a restructuring charge of approximately $320 relating to amounts due under the
revised contract.
In June 1999, the Company initiated a plan to close the Residential
Recycling Segment's material recovery facility located in Howes Cave, New York
and process the materials from this facility at another Residential Recycling
Segment facility. The Company recorded a restructuring charge of $514, which
consisted primarily of the remaining payments under noncancelable leases of the
building and equipment, in the second quarter.
Included in restructuring charges is $433 of deferred acquisition costs
related to acquisitions that were terminated during the second quarter.
16
<PAGE>
KTI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
JUNE 30, 1999
8. PLANT CONSOLIDATION, RESTRUCTURING AND OTHER UNUSUAL ITEMS (CONTINUED)
In April 1998, a subsidiary of the Company, FCR, Inc. ("FCR"), entered into
an amended agreement to operate a material recovery facility in Stratford,
Connecticut. This agreement requires FCR to add additional processing equipment
to this facility within a certain period of time as defined in the amended
agreement or pay the municipality $100 per year over the next five years. In
April 1999, FCR determined that this processing equipment was not cost effective
due to other alternative methods of processing and, thus, will not install the
equipment. As a result, the Company recorded the penalty included in the
agreement of $500 for the payments to be made to the municipality. The amount is
accrued and classified as other liabilities as of June 30, 1999.
Other charges of $131 represents an accrual for penalties assessed by the
Florida Department of Environmental Protection related to the temperature of the
discharge water at the TERI Telogia Facility.
In the first quarter of 1999, the Company recorded a $748 restructuring
charge. The restructuring initiatives primarily involve the Company's Commercial
Recycling segment and represent primarily severance and other costs related to
employee reductions. In connection with the restructuring, the Company
terminated ten employees. The restructuring charges relate to integration of the
brokerage operation acquired as part of the New Jersey Fibers acquisition and
elimination of costs as a result of streamlining the operations of acquisitions
completed in 1998. The Company recorded $374 against this reserve during 1999.
9. INCOME TAXES
The income tax benefit was approximately $2,565 for the six months ended
June 30, 1999 compared to an income tax provision of approximately $614 during
the same period in 1998. During 1999, the effective tax rate utilized by the
Company of 30.4% represents the estimated annual effective rate based on the
total estimated pretax income of the Company for the year ended December 31,
1999. The effective rate in 1998 was 37.3% and the decrease in the effective
rate in 1999 is primarily due to an increase in nondeductible goodwill.
10. REVOLVING LINE OF CREDIT AGREEMENT
On May 12, 1999, the Company's Revolving Line of Credit Agreement with a
bank (the "Credit Agreement") was amended (the "Amended Agreement") modifying
certain financial covenants and requiring bank approval for all acquisitions.
The Amended Agreement requires that the Company and certain subsidiaries, as
defined, maintain certain specified financial covenants, including, a minimum
interest coverage ratio, a maximum funded debt to EBITDA ratio, a minimum fixed
charge coverage ratio, and a maximum debt to capitalization ratio, each as
defined in the Amended Agreement. The Company recorded a charge of $835 in
connection with the amendment. This charge was recorded in interest expense
during the second quarter.
As of June 30, 1999, the Company was in default of the financial covenants
of its $150.0 million line of credit. The Company's lender has waived the
violation of the financial covenants through January 1, 2000. As a result, the
outstanding amount under the line of credit has been classified as a
17
<PAGE>
KTI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
JUNE 30, 1999
10. REVOLVING LINE OF CREDIT AGREEMENT (CONTINUED)
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 June 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
June 30, 1999. Upon the consummation of the merger, this line of credit will
be replaced by the credit facility of the merged company.
18
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
The Company reports the results of operations by the following four
segments: waste-to-energy, residential recycling, commercial recycling and
finished Products.
REVENUES
Consolidated revenues for the three and six months ended June 30, 1999 were
$64.8 million and $130.9 million, respectively. Compared with the same periods
in 1998, consolidated revenues increased $30.0 million or 86.2% and $58.3
million or 80.2%, respectively.
WASTE-TO-ENERGY SEGMENT
Total revenues for this business unit were approximately $25.4 and $49.0
million for the three and six months ended June 30, 1999, respectively, compared
to approximately $17.3 and $35.8 million, respectively, for the same periods in
1998. This represents an increase of approximately $8.1 million or 46.8% and
$13.2 million or 36.9% for the three and six months ended June 30, 1999,
respectively, compared to the same periods in 1998.
Revenues in the waste-to-energy segment are primarily derived from waste
processing and electric power sales. Total tons received by the waste-to-energy
facilities increased by 5.0% and 4.2% for the three and six months ended June
30, 1999, respectively, compared to the same periods in 1998. The tons received
at Penobscot increased approximately 3.3% and 0.2% for the three and six months
ended June 30, 1999, respectively, compared to the same periods in 1998. This
increase at Penobscot was a result of the scheduled plant shutdown occurring
during the first quarter in 1999. In 1998, Penobscot's scheduled plant shutdown
occurred in the second quarter. The tons received by American Ash Recycling
increased approximately 79.9% and 81.3% for the three and six months ended June
30, 1999, respectively compared to the same periods in 1998. The increases at
the American Ash facility were partially offset by a 3.8% and 4.4% decrease in
tons at Maine Energy for the three and six months ended June 30, 1999,
respectively, compared to the same periods in 1998. The decrease at Maine Energy
was due to lower production as a result of repairs to the primary processing
equipment.
Waste processing revenues increased by approximately $2.8 million or 31.1%
and approximately $3.8 million or 22.4% for the three and six months ended June
30, 1999, respectively, compared to the same periods in 1998. This increase in
revenue is a result of the net increase in tonnage discussed above, increased
prices charged per ton during 1999 compared to 1998 of approximately 7.2% and
19
<PAGE>
additional revenues from the Multitrade, Russell Stull, AFA Group and KTI
Recycling of Canada acquisitions. The increases from the acquisitions were
offset by reductions at KTI BioFuels due to the elimination of brokerage
operations on March 31, 1998.
Electric power revenues for the three and six months ended June 30, 1999
increased approximately $0.5 million or 3.9% and approximately $1.4 million or
4.1% compared to the same periods in 1998. The increase in revenues is due to
amortization of the customer advance at Penobscot and additional revenues from
Multitrade which was acquired in June 1998. This was offset by higher
performance credits as a result of the amended Power Purchase and Waste Disposal
Agreements.
RESIDENTIAL RECYCLING SEGMENT
This segment, which includes the residential recycling plants of FCR and the
KTI Recycling of New England facilities in Boston posted revenues of
approximately $6.0 million and $15.1 million for the three and six months ended
June 30, 1999, respectively, compared to approximately $1.5 and $3.2 million,
respectively, for the same periods in 1998. This increase of approximately $4.5
and $11.9 million, respectively, is a result of the acquisition of FCR being
completed in the third quarter of 1998.
COMMERCIAL RECYCLING SEGMENT
The commercial recycling segment had total revenues for the three and six
months ended June 30, 1999 of approximately $19.3 and $40.4 million,
respectively, compared to $13.5 and $29.5 million, respectively, for the same
periods in 1998. This represents an increase of approximately $5.8 and $10.9
million, respectively. These increases are primarily as a result of the
acquisition of KTI New Jersey Fibers, Inc., which was completed in the third
quarter of 1998, and higher commodity prices for paper fibers in the second
quarter of 1999 compared to the second quarter of 1998. These increases were
partially offset by lower volumes at the commercial processing plants due to the
sale of the KTI Recycling of Illinois facility in Chicago.
FINISHED PRODUCTS SEGMENT
Total revenues for this segment for the three and six months ended June 30,
1999 were approximately $14.1 and $26.4 million, respectively, compared to
approximately $2.5 and $4.2 million for the same periods in 1998. This
represents an increase of approximately $11.5 and $22.2 million, respectively.
The increase in revenues is primarily the result of acquisitions discussed above
and higher volumes at Manner. These volumes were partially offset by decreases
in plastic prices in the second quarter of 1999 compared to the same period in
1998.
COSTS AND EXPENSES
WASTE-TO-ENERGY SEGMENT
Cost of operations in this segment consists primarily of electric power and
waste handling costs which were approximately $20.8 and $37.7 million, during
the three and six months ended June 30, 1999, respectively, compared to
approximately $16.5 and $29.2 million, respectively, for the same periods in
1998. This is an increase of approximately $4.3 million or 26.1% and $8.5
million or 29.1%, respectively. The increase was primarily a result of the Total
Waste Management, Multitrade, Russell Stull, AFA Group and KTI Recycling of
Canada acquisitions discussed above which had total costs of operations of
approximately $5.4 million for the six months ended June 30, 1999. In addition,
Penobscot's operating costs decreased 5.3% due to lower costs associated with
the planned plant shutdown. Timber Energy Resources costs decreased by 12.5% as
a result of an increase in tipping fee based material which reduced fuel costs
and the elimination of the costs associated with the KTI BioFuels brokerage
discussed above.
20
<PAGE>
RESIDENTIAL RECYCLING SEGMENT
Cost of operations in this segment for the three and six months ended June
30, 1999 was approximately $6.3 and $14.8 million, respectively, compared to
approximately $1.3 and $2.5 million, respectively, for the same periods in 1998.
This was because of our acquisition of FCR in the third quarter of 1998.
COMMERCIAL RECYCLING SEGMENT
Cost of operations in this segment for the three and six months ended June
30, 1999 was approximately $23.2 and $44.1 million, respectively, compared to
approximately $14.1 and $29.8 million, respectively, during the same periods in
1998. This increase is primarily due to our acquisition of KTI New Jersey Fibers
in August 1998 and higher commodity purchase prices which were partially offset
by lower volumes at the commercial processing plants.
FINISHED PRODUCTS
Cost of operations in this segment for the three and six months ended June
30, 1999 was approximately $15.1 and $26.7 million, respectively, compared to
approximately $2.6 and $3.9 million, respectively, during the same periods in
1998. The increase was primarily a result of the acquisitions discussed above
and increased volumes at Manner. The increased volumes at Manner were partially
offset by lower purchase prices in 1999.
OTHER ITEMS
Selling, general and administrative expenses increased by approximately $4.2
and $9.0 million for the three and six months ended June 30, 1999, respectively,
compared to the same periods in 1998. The increase is a result of selling,
general administrative costs added through acquisitions throughout 1998 and the
addition of administrative staff to develop and install corporate-wide
information systems; to develop and support a formal strategic planning and
budgeting process; to support company-wide credit and collection efforts; to
identify and pursue potential mergers and acquisitions; and to develop internal
information systems to identify revenue enhancement and cost savings programs in
newly acquired entities.
On June 1, 1999, KTI completed the sale of its Chicago commercial recycling
facility and recorded a loss of approximately $0.4 million.
As a result of this loss, KTI 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.
KTI continued to experience low operating results in the commercial
recycling segment and determined that the estimated future undiscounted cash
flows for the KTI Recycling of New Jersey facility in Newark were below the
carrying value of the long-lived assets. KTI adjusted the carrying value of the
equipment and leasehold improvements of the Newark facility by approximately
$3.0 million to their estimated fair value of approximately $1.2 million. The
fair value of the long-lived assets was based on the expected cash flows
discounted at a rate commensurate with the risk involved.
21
<PAGE>
Interest expense increased approximately $3.8 and $6.0 million during the
three and six months ended June 30, 1999, respectively, compared to the same
periods in 1998. These increases are related principally to increased borrowings
on KTI's line of credit to fund several acquisitions, incremental interest
expense on debt assumed as part of these acquisitions, higher interest rates on
KTI'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 Penobscot as a result
of the refinancing of the bonds payable and lower debt levels at Maine Energy.
22
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
We are a holding company and receive a portion of the cash flows of our
subsidiaries. Receipt of cash flow from Penobscot is currently restricted by
covenants under loan agreements, distribution restrictions under partnership
agreements with Penobscot's equity investors, and put-or-pay agreements with
municipalities. Maine Energy's cash flow is required to retire the remaining
outstanding subordinated debt balance of approximately $11.5 million as of June
30, 1999 before partners' cash distributions can begin (approximately $7.6
million of these notes are owned by KTI). Timber Energy Resources' cash flow is
restricted by covenants under its bond agreements. As a result, the following
discussion is organized to present liquidity and capital resources of KTI
separate from Maine Energy, Penobscot and Timber Energy Resources and liquidity
and capital resource of each of Maine Energy, Penobscot and Timber Energy
Resources independently.
We operate in industries that require high levels of capital investment. Our
capital requirements basically stem from (i) our working capital for ongoing
operations, (ii) capital expenditures for new plants and equipment and (iii)
business acquisitions. Our strategy has been to meet these capital needs from
internally generated funds that are not contractually restricted, drawings under
our lines of credit, collateralized equipment financing and proceeds from the
sale of our common stock.
As of June 30, 1999, KTI was in default of the financial covenants of its
$150.0 million line of credit. KTI's lender has waived the violation of the
financial covenants through January 1, 2000. As a result of the default, the
outstanding amount under the line of credit has been classified as a current
liability as of June 30, 1999. Upon the consummation of the merger, this line of
credit will be replaced by the credit facility of the combined 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, KTI will be required to modify the
financial covenants or obtain an additional waiver from the lender. The lender
is under no obligation to amend the financial covenants or provide such a
waiver. KTI management believes that KTI will either obtain an additional waiver
or an amendment to the financial covenants; however, there can be no assurances
that this can be accomplished. As of June 30, 1999, no funds were available to
KTI under its revolving credit agreement. Though KTI management believes that
cash flows from its subsidiaries will meet its current needs for working capital
and capital expenditures, KTI's ability to expand its current operations is
23
<PAGE>
dependent on cash flow from its subsidiaries. We believe that KTI has the
ability to access additional facilities to fund capital expenditures if needed;
although no assurance can be given in this regard.
As of June 30, 1999, as a result of a reclassification of the outstanding
balance under the Revolving Credit Agreement, we had a working capital deficit
of approximately $107.3 million (ratio of current assets to current liabilities
of 0.46:1) and a cash balance of approximately $5.4 million which compared to
working capital of approximately $42.8 million (a ratio of current assets to
current liabilities of 2.11:1) and a cash balance of approximately $9.4 million
at December 31, 1998. As of June 30, 1999, we had a working capital deficit and
cash on hand without regard to Maine Energy, Penobscot and Timber Energy
Resources of approximately $137.7 million (a ratio of current assets to current
liabilities of 0.28:1) and approximately $1.6 million, respectively, which
compared to working capital of approximately $12.9 million (a ratio of current
assets to current liabilities of 1.41:1) and a cash balance of approximately
$3.9 million at December 31, 1998.
Our ability to make future acquisitions depends on our ability to increase
our line of credit. Our ability to increase the line of credit is dependent on
our ability to raise additional equity or raise capital from financial
instruments that are subordinated to the KeyBank credit line. We believe that we
have the ability to raise additional capital if needed; however, there can be no
assurance that this can be accomplished at terms and conditions that would be
acceptable to us.
As of June 30, 1999, we and our subsidiaries, other than Maine Energy,
Penobscot and Timber Energy Resources, had current maturities of indebtedness of
approximately $155.3 million (including the reclassified debt), including
borrowings under revolving credit facilities. During the six months ended June
30, 1999, we, apart from Maine Energy, Penobscot and Timber Energy, increased
net borrowings on our lines of credit by approximately $12.4 million, primarily
for the refinancing of debt assumed from acquisitions, the funding of business
operations and capital expenditures.
MAINE ENERGY
Maine Energy has financed its operations and capital expenditures from cash
flows from operations. Cash provided by operations was approximately $0.1
million for the six months ended June 30, 1999 compared to approximately $1.2
million during the same period in 1998. Maine Energy's capital expenditures were
approximately $1.0 million and $1.7 million during the six months ended June 30,
1999 and 1998, respectively.
As of June 30, 1999 and December 31, 1998, Maine Energy had operating cash
of approximately $0.3 million and $2.4 million, respectively, and as required
under the terms of the credit agreement underlying its letter of credit, Maine
Energy has on account an additional approximately $5.5 million and $6.0 million,
respectively, of reserves to be used under certain circumstances for capital
improvements, debt service, operating shortfalls and working capital
requirements. As of June 30, 1999, Maine Energy had total indebtedness of
approximately $11.5 million.
We believe Maine Energy's cash flows from operations and cash resources
available will be sufficient to fund anticipated capital expenditures and debt
service requirements. Capital expenditures for Maine Energy for the remainder of
1999 are not expected to be significant.
PENOBSCOT
Penobscot has financed its operations and capital expenditures primarily by
cash flow from operations. Cash provided by operations was approximately $2.7
million for the six months ended June 30, 1999 compared to approximately $5.9
million in the same period in 1998. Penobscot's capital expenditures were
approximately $1.3 million and $0.2 million during the six months ended June 30,
1999 and 1998, respectively.
24
<PAGE>
On June 26, 1998, we completed a major restructuring of the various
contracts and obligations of Penobscot, which included refinancing Penobscot's
tax exempt bonds. The refinancing was made possible by the sale of approximately
$45.0 million in Electric Rate Stabilization Revenue Refunding Bonds issued by
Finance Authority of Maine. The proceeds, and certain funds from operations were
used to repay the outstanding Revenue Bonds. The interest rate on the bonds
ranges from 3.75% for one-year bonds to 5.20% for 20-year term bonds. The
refinancing will reduce Penobscot's debt service costs while extending its
payment obligation over 20 years.
As of June 30, 1999, in addition to Penobscot's operating cash of
approximately $2.8 million, Penobscot, as required under the terms of the trust
indenture governing the FAME Bonds, had on account an additional approximately
$15.4 million of cash reserves to be used for capital improvements, debt
service, operating shortfalls and working capital requirements.
We believe Penobscot's cash flows from operations and cash resources
available will be sufficient to fund anticipated capital expenditures and debt
service requirements. Penobscot plans capital expenditures for the remainder of
1999 of approximately $0.4 million, which has largely been set aside in the
reserve accounts.
TIMBER ENERGY RESOURCES
Timber Energy Resources has financed its operations and capital expenditures
primarily by cash flows from operations. Cash provided by operations was
approximately $0.7 million for the six months ended June 30, 1999 compared to
approximately $0.8 million during the same period in 1998.
Timber Energy Resources has two 1997 Industrial Development Revenue Bond
issues outstanding that carry interest at a fixed rate of 7% and have annual
sinking fund payments due each December 1 with a final payment due December 1,
2002. As of June 30, 1999, Timber Energy Resources had $11.6 million outstanding
in 1997 Bonds.
As of June 30, 1999 and December 31, 1998, in addition to Timber Energy
Resources' operating cash of approximately $0.7 million and $0.8 million,
respectively, Timber Energy Resources, as required under the terms of its
then-existing debt agreements, had on account approximately $1.8 and $2.1
million, respectively, of reserves to be used under certain circumstances for
capital improvements, debt service, operating shortfalls and working capital
requirements.
We believe Timber Energy Resources' cash flows from operations and cash
resources available will be sufficient to fund anticipated capital expenditures
and debt service requirements. We expect capital expenditures for Timber Energy
Resources for the remainder of 1999 to be approximately $0.2 million. Timber
Energy Resources intends to finance the requirements through cash flow from
operations.
TAX LOSS CARRYFORWARDS
At June 30, 1999, we 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 described below. In addition, we have general
business credit carryforwards of approximately $0.5 million that expire in the
years 1999 through 2006 and alternative minimum tax credit carryforwards of
approximately $0.9 million that are not subject to limitation.
The Tax Reform Act of 1986 enacted a complex set of rules limiting the
potential utilization of net operating loss and tax credit carryforwards in
periods following a corporate "ownership change." In general, for federal income
tax purposes, an ownership change occurs if the percentage of stock of a loss
corporation owned, actually, constructively and, in some cases, deemed, by one
or more "5% shareholders" increases by more than fifty (50) percentage points
over the lowest percentage of such stock owned during a three-year testing
period.
25
<PAGE>
During 1994, we had such a change in ownership. As a result of the change,
our ability to use our net operating loss carryforwards and general business
credits will be limited to approximately $1.2 million of taxable income, or
approximately $0.4 million of equivalent credit per year. This limitation may be
increased if we recognize a gain on the disposition of an asset that had a fair
market value greater than its tax basis on the date of the ownership change.
In connection with the acquisition of Timber Energy Resources, FCR and Total
Waste Management, we recorded net operating loss carryforwards of approximately
$25.6 million, $12.5 million and $0.5 million, respectively, which are included
in the total of $55.4 million in loss carryforwards and which are also subject
to a corporate "ownership change". As a result of the change, our ability to use
the net operating loss carryforwards related to these entities is limited to
approximately $1.0 million, $3.2 million and $0.1 million, respectively, per
year.
ENVIRONMENTAL CONTINGENCIES
While increasing environmental regulation often presents new business
opportunities to us and our subsidiaries, it likewise often results in increased
operating costs as well. We and our subsidiaries strive to conduct our
operations in full compliance with applicable laws and regulations, including
environmental rules and regulations. This effort requires programs to promote
compliance, such as training employees and customers, purchasing health and
safety equipment, and in some cases hiring outside consultants and lawyers. Even
with these programs, we believe that in the ordinary course of doing business,
companies in the environmental services and waste disposal industry face
governmental enforcement proceedings resulting in fines or other sanctions and
will likely be required to pay civil penalties or to expend funds for remedial
work on waste management facilities.
In March 1999, KTI voluntarily disclosed to civil regulatory
authorities at the Florida Department of Environmental Protection ("FDEP")
violations of a condition of its Clean Water Act waste water discharge permit
and related reporting obligations at its Telogia, Florida facility. On July
28, 1999, KTI entered into an administrative consent order with FDEP
resolving the state civil aspects of those violations. The violations
involved the temperature of the water discharged from the cooling process.
Under the consent order, KTI was required to pay penalties and expenses of
approximately $0.1 million and must satisfy certain interim waste water
discharge monitoring and reporting requirements, submit and implement a plan
of study for the purpose of obtaining a revised permit, and either obtain a
revised permit or install additional cooling equipment at the facility. KTI
believes it is currently in compliance with the interim requirements.
As of June 30, 1999, no pending governmental environmental enforcement
proceedings exist for which we or any of our subsidiaries believe that potential
monetary sanctions will exceed $0.1 million. The possibility always exists that
substantial expenditures could result from governmental proceedings, which would
have a negative impact on our earnings for a particular reporting period. More
importantly, federal, state and local regulators have the power to suspend or
revoke permits or licenses needed for the operation of our or our subsidiaries'
plants, equipment, and vehicles based on the applicable company's compliance
record, and customers may decide not to use a particular disposal facility or do
business with a company because of concerns about its compliance record.
Suspension or revocation of permits or licenses would negatively impact our
business and operations and could have a material adverse impact on our
financial results.
INFLATION
Inflation has had a minimal effect on our operating costs in the past three
years. Most of our operating expenses are inflation sensitive, with increases in
inflation generally resulting in increased costs of operation. The effect of
inflation-driven cost increases on each of our project's overall operating costs
is not expected to be greater for such projects than for our competitor's
projects. In
26
<PAGE>
addition, each of Maine Energy's and Penobscot's contracts and the majority of
our residential recycling contracts allow us to increase waste processing fees
paid by municipal customers annually based on inflation.
YEAR 2000 ISSUE
Year 2000 compliance is the ability of computer hardware and software to
respond to the problems posed by the fact that computer programs have
traditionally been written using two digits rather than four to define the
applicable year. As a consequence, unless modified, computer systems will not be
able to differentiate between the year 2000 and 1900. Systems must also
recognize the Year 2000 as a leap year. Failure to address this problem could
result in system failures and the generation of erroneous data. This could
potentially impact our ability to perform our obligations under long-term
contracts, which could result in legal and other liabilities that would have a
material adverse effect.
We are in the process of contacting our customers and vendors and have
received letters from each of our applications vendors stating that the majority
of our information technology systems, such as accounting, data processing,
plant operations systems and telephone/PBX systems, are Year 2000 compliant.
Several insignificant software applications that represent 20% of our
applications are not Year 2000 compliant. We plan to replace or upgrade these
applications with compliant versions by the end of the third quarter of 1999. We
have also begun an assessment of our non-information technology systems, such as
our security systems and telephones, to determine if they are Year 2000
compliant. We plan to initiate formal communications with the vendors of our
remaining non-information technology systems. Based on our assessment to date,
we believe that our non-information technology systems will be Year 2000
compliant prior to the Year 2000.
We have also begun an assessment of our significant vendors, suppliers, and
service providers to determine the extent to which we are vulnerable to those
third parties' failure to remediate their own Year 2000 compliance issues. To
date, we believe, based on information published or otherwise provided by the
third parties, that all of their systems are or will be Year 2000 compliant. We
plan to initiate formal communications with significant remaining third parties.
Based on our assessment to date, we believe that our significant vendors,
suppliers and service providers will be Year 2000 compliant prior to the Year
2000.
27
<PAGE>
The following table summarizes the status of our Year 2000 compliance
program:
<TABLE>
<CAPTION>
ASSESSMENT REMEDIATION TESTING IMPLEMENTATION
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Information Technology........ 100% Complete 80% Complete 80% Complete 80% Complete
Expected Expected Expected
completion date, completion date, completion date,
September 1999 September 1999 September 1999
Operating Equipment with 100% Complete 90% Complete 90% Complete 90% Complete
Embedded Chips or Software....
Expected Expected Expected
completion date, completion date, completion date,
September 1999 September 1999 September 1999
3(rd) Party................... 90% Complete for 90% Complete for 90% Complete for 90% Complete for
system interface. system interface. system interface. system interface.
80% Complete for
all other material Develop Expected Expected
exposures. contingency plans completion date completion date
as appropriate, for system for system
September 1999. interface work, interface work,
September 1999 September 1999
Expected Implement
completion date contingency plans
for surveying all or other
remaining third alternatives as
parties, September necessary,
1999 September 1999.
</TABLE>
We have also conducted tests of all of our internal information and
non-information technology systems and all of our system interfaces with
significant vendors, suppliers and service providers to ensure Year 2000
compliance. All of our accounting and data processing equipment is based on
microcomputer hardware and related software. 80% of this equipment has been
certified as Year 2000 compliant by the applicable manufacturer or developer.
However, we have determined that the plant control systems may contain embedded
technology that is not Year 2000 compliant. We have ordered the vendor of the
hardware containing the embedded logic boards to replace the hardware that is
not Year 2000 compliant with hardware that is Year 2000 compliant. In addition,
these systems will be tested during scheduled shutdown periods at the plants
during the second and third quarters of 1999. However, despite our efforts to
ensure that our internal systems and the systems of our significant vendors,
suppliers and service providers are Year 2000 compliant, we cannot guarantee
that the failure of certain systems will not have a material adverse effect on
us.
To date, we have used internal resources to reprogram or replace, test, and
implement the software and hardware modifications for Year 2000. Our only costs
have been the salary costs of our internal staff of four. To date, we have
incurred approximately $0.1 million (30% expensed and 70% capitalized for new
systems and equipment), related to all phases of the Year 2000 project. We
estimate that the remaining project costs will be less than $0.1 million for the
purchase of new software and hardware and approximately $0.1 million of internal
resources. Although we currently expect to be able to complete our Year 2000
compliance program using only internal resources, we cannot guarantee that we be
able to do so.
The most significant risk identified by us is the inability of the power
plants to generate electric power. We have received assurances that the process
control systems will be Year 2000 compliant with the installation of new
hardware components. We will perform a complete test of the systems during the
planned shutdown periods that are to be completed by the end of the third
quarter of 1999. In addition, we have developed contingency plans for this risk
as well as other internal and external
28
<PAGE>
applications which involve manual workarounds, increasing inventories and
adjusting staffing strategies. This risk could cause a default under our power
purchase agreements with customers or a loss of electric power revenue. We are
unable to reasonably estimate the impact of this risk; however, there can be no
guarantee that this risk will not have a material adverse effect on us. We also
cannot guarantee that we have identified all the significant risks associated
with Year 2000 compliance.
RECENT ACCOUNTING PRONOUNCEMENTS
Recent accounting pronouncements that are not required to be adopted as of
June 30, 1999, include the following Statement of Financial Accounting Standards
("SFAS") and the American Institute of Certified Public Accountants Statements
of Position ("SOP"):
SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES,
which we will be required to adopt as of January 1, 2001, establishes standards
for derivative instruments including those embedded in other contracts and for
hedging activities. The new standard requires us to recognize all derivatives as
either assets or liabilities and measure those instruments at fair value. We
believe that the adoption of SFAS No. 133 will not have a material impact on our
financial statements.
SOP 98-1, ACCOUNTING FOR COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED
FOR INTERNAL USE will be required to be adopted by us as of January 1, 2000. Our
current policy falls within the guidelines of SOP 98-1.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
KTI currently utilizes no material derivative financial instruments which
expose it to significant market risk. KTI is exposed to cash flow and fair value
risk due to changes in interest rates with respect to its debt. The table below
presents principal cash flows and related weighted average interest rates of the
KTI's debt at June 30, 1999 by expected maturity dates. Weighted average
variable rates are based on forward rates in United States Government Treasury
Constant Maturities at June 30, 1999. Forward rates should not be considered a
predictor of actual future interest rates.
INTEREST RATE SENSITIVITY
PRINCIPAL AMOUNT BY EXPECTED MATURITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 THEREAFTER FAIR VALUE
---------- --------- ---------- --------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate Debt............ $ 5,696 $ 8,071 $ 7,509 $ 8,153 $ 3,088 $ 50,466 $ 83,115
Average Interest Rate...... 6.60% 6.50% 7.30% 6.30% 6.27% 5.04%
Variable Rate Debt......... 155,092 $ 155,092
Average Interest Rate...... 8.53%
</TABLE>
FORWARD LOOKING STATEMENTS
All statements contained herein which are not historical facts including
but not limited to statements regarding the Company's plans for future cash
flow and its uses are based on current expectations. These statements are
forward-looking in nature and involve a number of risks and uncertainties.
Actual results may differ materially. Among the factors that could cause
actual results to vary materially is the availability of sufficient capital
to finance the Company's business plan and other capital needs on terms
satisfactory to the Company. The Company wishes to caution readers not to
place undue reliance on any such forward looking statements, which statements
are made pursuant to the Private Litigation Reform Act of 1995 and as such
speak only as of the date made.
29
<PAGE>
Part II - Other Information
Item 1. LEGAL PROCEEDINGS
On May 11, 1994, Maine Energy filed a suit 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.
On September 30, 1997 and March 6, 1998, Capital Recycling of Connecticut
filed two suits 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 in Portland, Oregon.
Subsequently, the parties agreed to arbitrate the dispute in Hartford,
Connecticut. Discovery is now in process and the parties are currently
attempting to mediate the dispute before going to arbitration. The plaintiffs
are seeking approximately $1.9 million in damages. KTI believes it has
meritorious defenses to these claims. If, however, the damages claimed by the
plaintiffs are awarded, KTI's business, financial condition and results of
operations could be materially adversely affected.
On September 30, 1998, the Equal Employment Opportunity Commission filed a
lawsuit against FCR Tennessee, Inc. in the United States District Court for the
Western District of Tennessee, 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 director's and
officer's insurance carrier. Management is currently reviewing the lawsuit. The
plaintiffs have demanded $105,000 and KTI has offered $30,000 in settlement. No
agreement on a 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 KTI 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 KTI. The suit also alleges that KTI
inaccurately reported its financial results for the first quarter of 1998 and
failed to properly disclose the change of control provision in Mr. Kaiser's
employment agreement. Mr. Kaiser is seeking a declaratory judgment that, upon
closing of the merger, the change of control provision entitles him to receive a
severance payment of two years' salary, in the amount of $320,000, and to
exercise 132,000 unvested options for KTI common stock. Mr. Kaiser is also
seeking damages in the amount of $40,000 for an additional severance payment, as
well as undisclosed damages for outstanding salary, bonus and other payments and
from his sale of approximately 50,000 shares of KTI common stock resulting from
KTI's allegedly inaccurate financial reports.
On April 6, 1999, Dennis McDonnell filed a lawsuit in a Florida state court
against U.S. Fiber, Inc., a subsidiary of FCR. Mr. McDonnell, a former employee
of U.S. Fiber, seeks a declaratory judgment regarding his rights and obligations
under an employment non-competition agreement and an employment agreement that
he previously had signed with two corporations that subsequently were merged
with and into U.S. Fiber. KTI is defending the suit and believes it has
meritorious defenses.
On April 15, 1999, C.H. Lee, a former employee of FCR and a former majority
shareholder of Resource Recycling, Inc., commenced arbitration proceedings in
Charlotte, North Carolina against KTI, FCR and FCR Plastics, Inc. in connection
with the acquisition of Resource Recycling by FCR. Mr. Lee alleges that FCR and
FCR Plastics acted to frustrate the "earn-out" provisions of the acquisition
30
<PAGE>
agreement and thereby precluded Mr. Lee from receiving, or alternatively,
reduced, the sums to which he was entitled to 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.
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
shareholders who purchased KTI common stock from May 4, 1998 through 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
quarterly report on 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 allowance for doubtful accounts and net income. The plaintiffs
are seeking undisclosed damages. KTI believes it has meritorious defenses to
these complaints. On June 15, 1999, Mr. Russo and Ms. Miller, together with
Fransisco Munero, 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 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 believes
that it has meritorious defenses and has retained counsel to defend this suit.
If, however, the damages claimed by Mr. Kuruc are awarded, KTI's business,
financial condition and results of operation could be materially adversely
affected.
KTI is a defendant in certain other lawsuits alleging various claims
incurred in the ordinary course of business, none of which, either individually
or in the aggregate, KTI believes are material to its financial condition,
results of operations or cash flows.
31
<PAGE>
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
32
<PAGE>
Two reports on Forms 8-K were filed in the second quarter of 1999. The
following is a list of the Forms 8-K filed and the dates thereof.
(ii) A Form 8-K was filed on April 16, 1999 reporting that the Company
had received notice from Casella Waste Systems, Inc. ("Casella") stating its
intention to terminate the Agreement and Plan of Merger with the Company.
(i) A Form 8-K was filed on May 12, 1999 reporting that the Company
entered into an Amendment to the Agreement and Plan of Merger with Casella in
which KTI shareholders would receive .59 shares of Casella common stock for
each share of KTI common stock. The closing is subject to approval by the
stockholders of the companies, antitrust clearance and qualifications of the
merger as a tax-free pooling of interest.
33
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KTI, Inc.
(Registrant)
By: /s/ Martin J. Sergi
-----------------------------------
Name: Martin J. Sergi
Title: President
By: /s/ Brian J. Noonan
-----------------------------------
Name: Brian J. Noonan
Title: Chief Financial Officer
(Principal Accounting Officer)
Date: October 29, 1999
34
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 26,444
<SECURITIES> 0
<RECEIVABLES> 40,097
<ALLOWANCES> 1,343
<INVENTORY> 8,011
<CURRENT-ASSETS> 88,666
<PP&E> 252,432
<DEPRECIATION> 35,655
<TOTAL-ASSETS> 463,034
<CURRENT-LIABILITIES> 197,158
<BONDS> 238,075
0
0
<COMMON> 139
<OTHER-SE> 126,396
<TOTAL-LIABILITY-AND-EQUITY> 463,034
<SALES> 64,793
<TOTAL-REVENUES> 64,793
<CGS> 56,188
<TOTAL-COSTS> 12,256
<OTHER-EXPENSES> 1,351
<LOSS-PROVISION> 45
<INTEREST-EXPENSE> 5,319
<INCOME-PRETAX> (10,321)
<INCOME-TAX> (3,417)
<INCOME-CONTINUING> (6,904)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,904)
<EPS-BASIC> (0.50)
<EPS-DILUTED> (0.50)
</TABLE>
