-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MoqSe1VaS7dcPMW+ymnHv6lro+NGq9cfEm1m9fA2NrNPLQpMTWMo7wUIRzH25Bh/ /wCsgu0V66Kd48cy6zxi8g== 0000950123-98-000635.txt : 19980129 0000950123-98-000635.hdr.sgml : 19980129 ACCESSION NUMBER: 0000950123-98-000635 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971114 ITEM INFORMATION: ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19980128 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: KTI INC CENTRAL INDEX KEY: 0000931581 STANDARD INDUSTRIAL CLASSIFICATION: COGENERATION SERVICES & SMALL POWER PRODUCERS [4991] IRS NUMBER: 222665282 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 000-25490 FILM NUMBER: 98515657 BUSINESS ADDRESS: STREET 1: 7000 BLVD E CITY: GUTTENBERG STATE: NJ ZIP: 07093 BUSINESS PHONE: 2018547777 MAIL ADDRESS: STREET 1: 7000 BOULEVARD EAST CITY: GUTTENBERG STATE: NJ ZIP: 07093 8-K/A 1 KTI, INC. 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------------------------- FORM 8-KA CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): November 14, 1997 KTI, INC. (Exact name of Registrant as specified in Charter) New Jersey 33-85234 22-2665282 - -------------------------------------------------------------------------------- (State or other juris- (Commission (IRS Employer diction of incorporation) File Number) Identification Number) 7000 Boulevard East, Guttenberg, New Jersey 07093 - -------------------------------------------------------------------------------- (Address of principal executive office) (Zip Code) Registrant's telephone number including area code- (201) 854-7777 ------------------------------- Not Applicable - -------------------------------------------------------------------------------- (Former name and former address, as changed since last report) 2 Item 2. Acquisition or Disposition of Assets. On November 14, 1997, the Company completed the acquisition of three recycling facilities located in Franklin Park, Illinois, a suburb of Chicago, Charlestown, Massachusetts, a suburb of Boston, and in Newark, New Jersey. The facilities will be operated by wholly owned subsidiaries of the Company under the name of KTI Recycling. The three facilities are capable of processing approximately 50,000 tons of post consumer and commercial recyclables per month. The facilities were purchased as part of an asset purchase from Prins Recycling Corp. and its subsidiaries ("Prins") pursuant to an order of the Bankruptcy Court for the District of New Jersey entered on November 6, 1997. In addition to the facilities, the Company purchased substantially all of the remaining assets of Prins, principally property, plant, and equipment and accounts receivable, and assumed certain post-petition liabilities. The purchase price was approximately $14.4 million, including $14.2 million in cash and the assumption of $200,000 of trade payables. The purchase was financed in part by a term loan of $7.5 million provided by Key Bank, National Association, bearing interest at said Bank's base rate plus 1.25% per annum, amortized with level monthly principal payments amortized over 60 months. The term loan is secured by a mortgage on the Franklin Park, Illinois facilities, all property and equipment at the three facilities not pledged to third parties and accounts receivable of the three facilities. The balance of the purchase price was paid using cash on hand and by a temporary draw of $3,000,000 on the Company's revolving line of credit provided by Key Bank, National Association. A subsidiary of the Company had operated Prins from May 1, 1997 until the closing of the purchase. Pursuant to an agreement with Prins' principal secured lender, the Company received a one-time management fee of $700,000, paid by said lender. Item 5. Other Events The Company completed an amendment to its Amended and Restated Revolving and Term Loan Agreement with Key Bank, National Association, adding the Term Loan provision referred to above, effective as of November 14, 1997. Item 7. Financial Statements and Exhibits (a) Financial Statements of the business acquired. The audited balance sheets of Prins Recycling Corp. (Debtor-in-possession) and its subsidiaries as of December 31, 1996 and 1995 and the related statements of operations, changes in shareholders' equity (deficit), and cash flows for the years then ended are included on pages F-1 through F-19. In addition, the interim unaudited financial statements for the periods ending September 30, 1997 and 1996 are included on pages F-19 through F-23. F-20 3 (b) Pro Forma Financial information. The following pro forma condensed combined financial statements are based on the historical financial statements of the Company, of PERC, and of Prins. The pro forma condensed combined statement of operations assumes that the Company purchased the increased interest in PERC and the Prins assets at the beginning of the respective periods. The Company's financial statements on Form 10-Q for the quarterly period ended September 30, 1997 consolidate PERC for balance sheet purposes. Accordingly, the adjustments shown here are for the consolidation of Prins, and for the increase in ownership of PERC to 71.3%. The pro forma condensed combined statements of operations are not necessarily indicative of operating results which would have been achieved had this transaction been completed at the beginning of the respective periods and should not be construed as representative of future operations. 4 KTI, Inc. December 30, 1996 and September 30, 1997 Notes to Pro Forma Condensed Combined Financial Statements (Unaudited) 1. Description of Transactions On September 30 and November 12, 1997, the Company purchased 49.5% and 14.8% limited partnership interests in Penobscot Energy Recovery Company, Limited Partnership, a Maine limited partnership ("PERC"), respectively, from The Prudential Insurance Company of America ("Prudential") for approximately $12 million and $2.1 million, respectively. Prior to September 30, 1997, the Company held a 7% general partnership interest in PERC. The September purchase price included a $300,000 option to purchase an additional percentage of PERC, which was exercised as part of the November 12 transaction. On November 14, 1997, the Company completed the acquisition of three recycling facilities located in Franklin Park, Illinois, a suburb of Chicago, Charlestown, Massachusetts, a suburb of Boston, and in Newark, New Jersey. The facilities will be operated by wholly owned subsidiaries of the Company under the name of KTI Recycling. The three facilities are capable of processing approximately 50,000 tons of post consumer and commercial recyclables per month. The facilities were purchased as part of an asset purchase from Prins Recycling Corp. and its subsidiaries ("Prins") pursuant to an order of the Bankruptcy Court for the District of New Jersey entered on November 6, 1997. In addition to the facilities, the Company purchased substantially all of the remaining assets of Prins, principally property, plant, and equipment and accounts receivable, and assumed certain post-petition liabilities. The purchase price was approximately $14.4 million, including $14.2 million in cash and the assumption of $200,000 of trade payables. The purchase was financed in part by a term loan of $7.5 million provided by Key Bank, National Association, bearing interest at said Bank's base rate plus 1.25% per annum, amortized with level monthly principal payments amortized over 60 months. The term loan is secured by a mortgage on the Franklin Park, Illinois facilities, all property and equipment at the three facilities not pledged to third parties and accounts receivable of the three facilities. The balance of the purchase price was paid using cash on hand and by a temporary draw of $3,000,000 on the Company's revolving line of credit provided by Key Bank, National Association. 2. Pro Forma Adjustments Balance Sheet as of September 30, 1997 (i) Payment of $14.2 million of cash for the acquisition of Prins assets. (ii) Purchase of additional interest of 14.8% in PERC for $2,100,000 in cash, exercise of the $300,000 option to purchase, and the resulting adjustment of property, plant and equipment and minority interest of PERC. 5 (iii) Recording of goodwill resulting from acquisition of Prins assets. (iv) Elimination of liabilities paid at closing. (v) Eliminate Prins liabilities subject to compromise not assumed as part of purchase price. (vi) Record term loan of $7,500,000 payable used to finance a portion of the Prins asset purchase. (vii) Elimination of Prins' equity accounts. Results of Operations, year ended December 31, 1996 (1) Elimination of Management fees charged by the Company to PERC. (2) Reduction in depreciation of property, plant, and equipment as a result of the adjustment of PERC asset values in connection with the purchase of the additional PERC partnership interests. (3) Elimination of the Company's 7% equity earnings in PERC. (4) Recording of additional minority interest in earnings of PERC. (5) Dividends on $21,400,000 of 8.75% Preferred Stock. Net proceeds were used to complete the PERC transactions and the Prins acquisition. (6) Elimination of antidilutive common stock equivalents. (7) Amortization of goodwill resulting from Prins acquisition. (8) Elimination of asset impairment which would not arise based on fair values assigned to the assets acquired in the Prins acquisition. (9) Elimination of bankruptcy and reorganization costs incurred by Prins. (10) Elimination of interest on Prins' debt at default rate and recording of interest expense on $7,500,000 term loan. Results of Operations, nine months ended September 30, 1997. (a) Reduction in depreciation of property, plant, and equipment, as a result of the adjustment of PERC asset values for the purchase of the additional PERC partnership interests. (b) Elimination of pre-acquisition earnings of PERC. (c) Recording of additional minority interest in earnings of PERC. (d) Dividends on $21,400,000 of 8.75% Preferred Stock. Net proceeds were used to complete the PERC transactions and the Prins acquisition. (e) Additional common shares assumed outstanding based on the dilutive effect of the Preferred Stock issue at $11.75 per share. (f) Elimination of fees paid by Prins' principal secured lender to KTI for management services which the Company provided between April 1997 and the completion of the asset purchase. (g) Amortization of goodwill resulting from Prins acquisition. (h) Elimination of bankruptcy and reorganization costs incurred by Prins. (i) Elimination of interest on Prins debt at default rate and recording of interest expense on $7,500,000 term loan. 6 KTI Inc. Pro Forma Combined Balance Sheet September 30, 1997
Prins Recycling Pro Forma Pro Forma KTI, Inc. Corp. Adjustments KTI, Inc. --------- --------- ----------- --------- Assets Current Assets Cash and cash equivalents $ 15,866,847 $ - $ (8,300,000)(i),(ii)(iv) $ 7,566,847 Restricted Funds, current portion 15,397,651 (500,000)(i) 14,897,651 Accounts receivable, net 19,274,847 2,739,093 22,013,940 Consumables and Spare Parts 5,669,746 120,494 5,790,240 Notes Receivable, current portion 441,151 18,012 459,163 Other Receivables 552,474 552,474 Prepaid expenses and other current assets 1,631,759 75,500 (300,000) (ii) 1,407,259 ------------ ------------ ------------- ------------ Total current assets 58,834,475 2,953,099 (9,100,000) 52,687,574 Restricted Funds, net of current portion 4,828,519 4,828,519 Deferred Costs, net 4,354,847 4,354,847 Goodwill and other intangibles, net 12,192,534 4,189,204 (iii) 16,381,738 Other assets 1,374,135 465,751 1,839,886 Property, plant, and equipment, net 152,232,501 6,836,975 (2,733,898) (ii) 156,335,578 ------------ ------------ ------------- ------------ $233,817,011 $ 10,255,825 $ (7,644,694) $236,428,142 ============ ============ ============= ============ Liabilities and stockholders' (deficiency) equity Current liabilities Accounts payable $ 7,820,304 $ 4,338,412 $ (4,138,412) (iv) $ 8,020,304 Accrued expenses 2,143,435 33,286 (33,286) (iv) 2,143,435 Liabilities subject to compromise 26,266,710 (26,266,710) (v) - Capital leases, current portion 45,029 45,029 Short-term and current portion of long-term debt 12,258,403 1,500,000 (vi) 13,758,403 Other current liabilities 1,739,718 1,739,718 ----------- ------------ ------------- ------------ Total current liabilities 23,961,860 30,683,437 (28,938,408) 25,706,889 Other Liabilities 2,513,741 2,513,741 Amounts payable to banks, less current portion 75,361,922 6,000,000 (vi) 81,361,922 Minority Interest 26,795,520 (5,133,898) (ii) 21,661,622 Deferred income 37,500,000 37,500,000 Stockholders' (deficiency) equity Preferred stock, 10,000,000 shares authorized: Series A 3,707,744 3,707,744 Series B 19,984,240 19,984,240 Common Stock 82,709 16,604 (16,604) (vii) 82,709 Additional paid-in capital 52,318,330 42,177,202 (42,177,202) (vii) 52,318,330 Accumulated deficit (8,409,055) (62,621,418) 62,621,418 (vii) (8,409,055) ----------- ------------ ------------- ------------ Total stockholders' (deficiency) equity 67,683,968 (20,427,612) 20,427,612 67,683,968 ----------- ------------ ------------- ------------ $ 233,817,011 $ 10,255,825 $ (7,644,694) $236,428,142 ============= ============ ============= ============
7 KTI, Inc. Pro Forma Condensed Combined Statement of Operations (Unaudited) Year ended December 31, 1996
Pro forma Pro forma KTI, Inc. PERC Prins Adjustments KTI, Inc. --------- ---- ----- ----------- --------- Revenues Electric Power Revenues $ 20,820,860 $ 18,478,405 $ 39,299,265 Gain on Sale of Capacity 33,203,252 33,203,252 Waste Processing Revenues 11,024,265 11,807,454 $ (530,786) (1) 22,300,933 Other Waste Handling Revenues 3,459,546 $ 24,997,168 28,456,714 ------------ ------------ ------------- ------------ ------------- Total Revenues 68,507,923 30,285,859 24,997,168 (530,786) 123,260,164 Costs and Expenses Electric power and waste processing and handling operating costs 26,453,290 15,660,582 19,235,108 (319,685) (2) 60,498,509 (530,786) (1) Selling, general, and administrative expenses 2,389,008 5,353,385 22,488,360 837,841 (7) 31,068,594 Impairment of Long-lived Assets 26,678,000 (26,678,000) (8) - Reorganization Costs 800,000 (800,000) (9) - Interest, net 4,463,873 3,170,785 3,480,822 (2,749,572) (10) 8,365,908 ------------ ------------ ------------- ------------ ------------- Total Costs and Expenses 33,306,171 24,184,752 72,682,290 (30,240,202) 99,933,011 Equity in net income of PERC 332,655 (332,655) (3) - Loss on Sale and abandonment of Assets (2,718,530) (2,718,530) Loss of Sale of Investments (296,459) (296,459) ------------ ------------ ------------- ------------ ------------- Income (loss) from continuing operations before minority interest 35,237,948 6,101,107 (50,403,652) 29,376,761 20,312,164 Minority Interest 18,609,797 1,751,018 (4) 20,360,815 ------------ ------------ ------------- ------------ ------------- Income (loss) from continuing operations available for Shareholders 16,628,151 6,101,107 (50,403,652) 27,625,743 (48,651) Preferred Dividends 1,872,500 (5) 1,872,500 ------------ ------------ ------------- ------------ ------------- Income (loss) from continuing operations for common shareholders $ 16,628,151 $ 6,101,107 $ (50,403,652) $ 25,753,243 $ (1,921,151) ============ ============ ============= ============ ============= Income (loss) from continuing operations per common share and common share equivalent: Primary: ------------ ------------- Income from continuing operations $2.61 ($.33) ============ ============= Weighted average number of common shares and common 6,359,593 (567,685) (6) 5,791,908 share equivalents outstanding Fully Diluted: ------------ ------------- Income from continuing operations $2.40 ($.33) ============ ============= Weighted average number of common shares and common 6,925,976 (1,134,068) (6) 5,791,908 share equivalents outstanding
8 KTI, Inc. Pro Forma Combined Statement of Operations (Unaudited) Nine months ended September 30, 1997
Pro forma Pro Forma KTI, Inc. Prins Adjustments KTI, Inc. --------- ----- ----------- --------- Revenues Electric Power Revenues $ 30,389,250 $ 30,389,250 Waste Processing Revenues 19,513,711 19,513,711 Other Waste Handling Revenues 16,096,812 13,529,223 (700,000) (f) 28,926,035 ------------ ------------- ----------- ------------ Total Revenues 65,999,773 13,529,223 78,828,996 Costs and Expenses Electric Power and Waste Processing Operating Costs 50,180,577 12,793,456 $ (239,764) (a) 62,734,269 Selling, General, and Administrative expenses 2,375,680 1,945,608 628,381 (g) 4,949,669 Reorganization Costs 1,205,803 (1,205,803) (h) - Interest, Net 3,699,876 732,894 (184,457) (i) 4,248,314 ------------ ------------- ----------- ------------ Total Costs and Expenses 56,256,133 16,677,761 (1,001,642) 71,932,252 ------------ ------------- ----------- ------------ Income from Continuing Operations before Minority Interest 9,743,640 (3,148,538) 1,001,642 6,896,744 Pre-acquisition Earnings Minority Interest (3,983,766) 3,983,766 (b) - Minority Interest in Subsidiaries (1,229,287) (1,229,399) (c) (2,458,686) ------------ ------------- ----------- ------------ Income from Continuing Operations before Minority Interest 4,530,587 (3,148,538) 3,756,010 4,438,059 Preferred Dividends 1,400,527 (d) 1,400,527 ------------ ------------- ----------- ------------ Income from continuing operations available to Common Shareholders $ 4,530,587 $ (3,148,538) $ 2,355,483 $ 3,037,532 ============ ============ ============ ============= Income (loss) from continuing operations per common share and common share equivalent Primary: ------------ ------------ Income from continuing operations $0.59 $0.39 ============ ============ Weighted Average number of common shares and common 7,726,900 7,726,900 share equivalents outstanding Diluted: ------------ ------------ Income from continuing operations $0.59 $0.46 ============ ============ Weighted Average number of common shares and common 8,040,449 1,507,728 (e) 9,548,177 share equivalents outstanding
9 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 hereunto duly authorized. KTI, Inc. (the Registrant) Dated: January 26, 1998 By: /s/ Martin J. Sergi ---------------------------- Name: Martin J. Sergi Title: President 10 EXHIBIT INDEX ------------- Exhibit Number Description -------------- ----------- 4.1 * News release dated November 13, 1997 4.2 * Release dated November 14, 1997 4.3 Financial Statements of Prins Recycling 23.1 Consent of Ernst and Young LLP ------- * As previously filed EX-99.4.3 2 FINANCIAL STATEMENTS OF PRINS RECYCLING 1 REPORT OF INDENDENT AUDITORS Board of Directors Prins Recycling Corp. We have audited the accompanying consolidated balance sheets of Prins Recycling Corp. and subsidiaries (debtor-in-possession) as of December 31, 1996 and 1995 and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 1 to the consolidated financial statements, Prins Recycling Corp. and its subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the Federal Bankruptcy Code in the United States Bankruptcy Court on July 12, 1996. Subsequent thereto, the Company and its subsidiaries continued to operate their businesses as debtors-in-possession. On November 12, 1997, the United States Bankruptcy Court approved a Plan of Reorganization under which the Company was permitted to sell substantially all of its remaining operating assets. Such sale occurred on November 14, 1997. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of reported asset amounts or adjustments relating to the establishment, settlement and classification of liabilities that may ultimately be required in connection with the proceedings under Chapter 11 of the United States Bankruptcy Code. The Company adopted the liquidation basis of accounting commencing November 14, 1997. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Prins Recycling Corp. and subsidiaries (debtor-in-possession) at December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the years then ended in conformity with generally accepted accounting principles. Ernst & Young LLP Hackensack, New Jersey January 16, 1998 1 2 Prins Recycling Corp. and Subsidiaries (Debtor-in-Possession) Consolidated Balance Sheets
December 31 1996 1995 --------------------------- Assets Current assets: Cash and cash equivalents $ 118,217 $ 1,097,352 Accounts receivable, net of allowance for doubtful accounts of $3,495,000 and $1,189,000 2,852,983 7,015,666 Inventories 865,952 Equipment lease receivable - current portion 49,032 292,574 Recoverable income taxes 1,480,326 Due from officer stockholder 219,498 Prepaid expenses and other current assets 96,234 3,013,536 --------------------------- Total current assets 3,116,466 13,984,904 Property, plant and equipment, net of accumulated depreciation 7,018,452 20,405,791 Equipment loans receivable, net of current portion 127,835 523,033 Intangibles and goodwill, net of accumulated amortization of $927,000 18,538,441 Other assets 258,044 1,201,337 --------------------------- $ 10,520,797 $54,653,506 =========================== Liabilities and stockholders' equity (deficit) Current liabilities: Accounts payable - post petition $ 1,703,826 $ 9,620,536 Accrued liabilities - post petition 1,498,353 2,645,399 Liabilities subject to compromise 24,597,692 Amounts payable to banks - current portion 10,245,121 Obligations under capital leases - current portion 760,764 Notes and advances payable - current portion: Related parties 3,761,374 Others 295,990 --------------------------- Total current liabilities 27,799,871 27,329,184 Long-term debt: Amounts payable to banks - less current portion 5,571,574 Obligations under capital lease - less current portion 1,080,516 Notes and advances payable - less current portion: Related parties 2,460,707 Others 267,019 Deferred taxes 50,500 Commitments and contingencies Stockholders' (deficiency) equity: Preferred stock, $.001 par value; authorized 5,000,000 shares, none issued Common stock, $.001 par value; authorized 20,000,000 shares, issued and outstanding 16,604,460 and 10,475,057, respectively 16,604 10,475 Additional paid-in capital 42,177,202 26,952,759 Retained earnings (deficit) (59,472,880) (9,069,228) --------------------------- Total stockholders' equity (deficit) (17,279,074) 17,894,006 --------------------------- Total liabilities and stockholders' equity (deficit) $ 10,520,797 $54,653,506 ===========================
See accompanying notes. 1 3 Prins Recycling Corp. and Subsidiaries (Debtor-in-Possession) Consolidated Statements of Operations Year ended December 31 1996 1995 ----------------------------- Net sales $ 24,997,168 $76,692,200 Cost of goods sold 19,235,108 59,484,277 ----------------------------- Gross profit 5,762,060 17,207,923 Selling, general and administrative expenses 20,048,826 17,200,844 Depreciation and amortization 2,489,034 2,346,811 Impairment of long-lived assets 26,678,000 Loss on sale and abandonment of assets 2,718,530 ----------------------------- Total operating expenses 51,935,390 19,547,655 ----------------------------- Loss before reorganization costs, interest expense and income taxes (46,173,330) (2,339,732) Reorganization costs 800,000 Interest expense, net 3,480,822 1,010,708 ----------------------------- Loss before income tax benefit (50,454,152) (3,350,440) Income tax benefit (50,500) (117,600) ----------------------------- Net loss $(50,403,652) $(3,232,840) ============================= Net loss per share $ (3.45) $ (0.32) ============================= Weighted average common shares outstanding 14,612,040 9,949,876 ============================= See accompanying notes. 2 4 Prins Recycling Corp. and Subsidiaries (Debtor-in-Possession) Consolidated Statements of Stockholders' Equity (Deficit)
Common Stock Additional Retained -------------------------- Paid-in Earnings Shares Amount Capital (Deficit) Total ---------------------------------------------------------------------- Balance at January 1, 1995 9,785,085 $ 9,785 $19,617,325 $ (5,836,388) $ 13,790,722 Capital contributions 900,000 900,000 Issuance of common stock 9,438 9 28,115 28,124 Issuance of shares in connection with business acquisitions 430,534 431 5,907,569 5,908,000 Exercise of stock purchase warrants 250,000 250 499,750 500,000 Net loss (3,232,840) (3,232,840) ---------------------------------------------------------------------- Balance at December 31,1995 10,475,057 10,475 26,952,759 (9,069,228) 17,894,006 Issuance of common stock 332,000 332 1,679,456 1,679,788 Issuance of shares in connection with business acquisitions 172,619 173 345,065 345,238 Discount on convertible subordinated debt issuance 2,400,000 2,400,000 Issuance of common stock upon conversion of debt 5,624,784 5,624 10,799,922 10,805,546 Net loss (50,403,652) (50,403,652) ---------------------------------------------------------------------- Balance at December 31, 1996 16,604,460 $16,604 $42,177,202 $(59,472,880) $(17,279,074) ======================================================================
See accompanying notes. 3 5 Prins Recycling Corp. and Subsidiaries (Debtor-in-Possession) Consolidated Statements of Cash Flows
Year ended December 31 1996 1995 ------------------------------ Operating activities Net loss $(50,403,652) $ (3,232,840) Adjustments to reconcile net loss to cash provided by operations: Depreciation and amortization 2,489,034 2,346,811 Impairment of long-lived assets 26,678,000 Non-cash interest on subordinated debt issuance 2,400,000 Provision for bad debts 3,414,596 1,683,381 Deferred taxes (50,500) (481,600) Loss (gain) on sale and abandonment of assets 2,718,530 (15,027) Changes in operating assets and liabilities (net of effects of acquired companies): Decrease in accounts receivable 1,472,017 249,828 Decrease in equipment lease receivables 134,308 407,219 Decrease (increase) in inventories 865,952 (348,966) Decrease (increase) in recoverable income taxes 1,480,326 (1,480,326) Decrease in prepaid expenses and other current assets 2,917,302 (2,094,696) (Increase) decrease in other assets 943,293 (585,645) Increase in accounts payable and accrued liabilities 1,041,657 4,206,793 Decrease in taxes payable (531,064) ------------------------------ Net cash (used in) provided by operations (3,899,137) 123,868 Investing activities Purchases of property, plant and equipment (557,638) (12,058,683) Cash paid for acquired businesses, net of cash acquired (4,690,575) Proceeds from sale of assets 1,067,235 32,522 ------------------------------ Net cash provided by (used in) investing activities 509,597 (16,716,736) Financing activities (Decrease) increase in borrowings under bank line of credit (2,245,396) 3,284,475 Repayment of debt principal and capital lease obligations (9,179,081) (3,915,505) Proceeds from other borrowings 875,094 13,087,830 Proceeds from sale of subordinated notes 11,280,000 Proceeds from issuance of common stock 1,679,788 328,124 Capital contribution 900,000 ------------------------------ Net cash provided by financing activities 2,410,405 13,684,924 ------------------------------ Net decrease in cash and cash equivalents (979,135) (2,907,944) Cash and cash equivalents, beginning of year 1,097,352 4,005,296 ------------------------------ Cash and cash equivalents, end of year $ 118,217 $ 1,097,352 ==============================
See accompanying notes. 4 6 Prins Recycling Corp. and Subsidiaries (Debtor-in-Possession) Consolidated Statements of Cash Flows (continued) Year ended December 31 1996 1995 ------------------------- Supplemental information Cash paid for interest $ 960,775 $ 987,432 Cash paid for (recovered from) taxes (1,480,326) 1,981,142 Non-cash investing and financing activities Common stock issued for: Business combinations 345,238 3,908,000 Settlement of debt 500,000 Conversion of subordinated notes 10,805,546 Exercise of stock purchase warrant 200,000 Debt issued in connection with business combinations 4,485,781 Liabilities assumed in business combinations 3,765,871 Debt transferred with sale of assets 135,784 Debt issued in settlement of contract liability 1,136,207 See accompanying notes. 5 7 PRINS RECYCLING CORP. AND SUBSIDIARIES (Debtor-in-Possession) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and 1995 1. PROCEEDINGS UNDER CHAPTER 11 On July 12, 1996, Prins Recycling Corp., (the "Company") and its subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the Federal Bankruptcy Code in the United States Bankruptcy Court for District of New Jersey. Under Chapter 11, enforcement of certain claims in existence prior to the filing of the petitions was stayed, while the debtor continued to operate in the ordinary course of business as Debtor-in-Possession. The stayed claims are reflected in the December 31, 1996 consolidated balance sheet as "liabilities subject to compromise," as discussed in Note 9. Significant additional claims have arisen subsequent to the petition date resulting from the rejection of executory contracts and/or leases, and from the allowance by the Bankruptcy Court of contingent or disputed claims. The Bankruptcy Court established November 26, 1996 (January 8, 1997 for governmental entities) as the claims bar date. Enforcement of claims secured by the debtor's assets ("secured claims") was also stayed, although the holders of such claims have the right to petition the Bankruptcy Court for relief from the claim. Secured claims are secured by liens on substantially all of the Company's assets. For financial statement presentation, secured debt is also reported as "liabilities subject to compromise." At various dates subsequent to the petition dates, the Company and certain of its subsidiaries have received permission from the Bankruptcy Court to sell certain of their assets. On November 12, 1997, the creditors committee and the Bankruptcy Court approved the Company's First Amended Joint Plan of Reorganization (the "Reorganization Plan"). Among other things, the Reorganization Plan allowed the Company to sell substantially all of its remaining operating assets and certain causes of action. In addition, the buyer agreed to assume certain claims and other administrative obligations of the Company. As a result of this transaction, the Company's indebtedness to its principal lender was settled which resulted in a compromise of $800,000. The creditors committee received approximately $850,000 of cash and retained certain causes of actions against third parties. A formal plan of liquidation of the Company has not been adopted. The accompanying consolidated financial statements have been prepared under the going concern basis of accounting, which contemplates continuity of operations, realization of assets and the liquidation of liabilities in the ordinary course of business. The use of the going concern basis remains appropriate until the date a formal plan of liquidation is adopted or other such events occur which will result in the liquidation of the Company. The Company has accounted for all transactions related to the reorganization proceedings in accordance with Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code," issued by the American Institute of Certified Public Accountants. The Company adopted the liquidation basis of accounting effective November 14, 1997. F-6 8 PRINS RECYCLING CORP. AND SUBSIDIARIES (Debtor-in-Possession) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and 1995 2. ORGANIZATION AND DESCRIPTION OF BUSINESS The Company operated material recovery facilities located principally in the northeast and midwest United States and was a supplier of recyclable materials, primarily wastepaper and secondary fibers, to paper and building products mills throughout the world. On April 24, 1995, the Company completed a merger with Paper Chase Exchange, Inc. in a transaction accounted for using the pooling of interest method. The accompanying consolidated financial statements give retroactive effect to this business combination. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cash and cash equivalents - Cash equivalents consist of highly-liquid investments with maturities of three months or less. Principles of consolidation - The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated. Credit risk - The Company performs periodic credit evaluations of its customers but generally does not require collateral. Inventories - Inventories, consisting of secondary fibers and other recyclables, are stated at the lower of cost (first-in, first-out) or market. Property, plant and equipment - Property, plant and equipment, including assets under capitalized leases, are stated at cost. Depreciation is provided on the straight-line method over the estimated useful lives of the assets, ranging from five to thirty years (See Note 4). Income taxes - Deferred income taxes are determined using the liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Intangibles and Goodwill - Intangible assets include values assigned to a recyclables and disposal agreement and certain non-competition agreements. The recyclables and disposal agreement were being amortized over the ten-year term of the agreement. The non-competition agreements were being amortized over the five-year term of the agreements. Goodwill represents the cost in excess of fair value of the net assets of businesses acquired and was being amortized over 15 years (See Note 4). F-7 9 PRINS RECYCLING CORP. AND SUBSIDIARIES (Debtor-in-Possession) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and 1995 Evaluation of Long-Lived Assets - The Company continually assesses long-lived assets, including goodwill and other intangibles, for recoverability from estimated future operating results. (See Note 4). Earnings per share - Earnings per share is based on the weighted average number of shares outstanding. Common stock equivalents consisting of stock options and warrants are included in the computation of earnings per share to the extent dilutive. During 1996 and 1995 such common stock equivalents were antidilutive. Use of estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Stock-Based Compensation - In October 1995, the FASB issued Statement No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 encourages but does not require entities to adopt the fair value based method of accounting for all employee stock compensation plans, under which compensation cost is measured based on the fair value of the award at the grant date and recognized over the service period. Entities may continue to account for these plans using the intrinsic value based method of accounting, under which compensation cost is measured as the excess, if any, of the quoted market price of the stock at the grant date over the amount an employee must pay to acquire the stock. The Company has elected to use the intrinsic value based method to measure compensation costs for these plans. Fair Value of Financial Instruments - The carrying value of cash equivalents and accounts receivable approximate their fair value. It is not practicable to estimate the fair value of the Company's debt instruments because of the Company's status as a Debtor-in-Possession. 4. ASSET IMPAIRMENT LOSS During 1996, market prices of recyclable fibers remained at levels significantly below those needed to generate cash flows required to recover the carrying amounts of certain of the Company's long-lived assets. Accordingly, the Company evaluated the ongoing value of certain plant and equipment along with the related goodwill and other intangibles resulting from previous business combinations. Based on this evaluation, the Company recorded an impairment loss of approximately $26,678,000. The fair value of these assets was determined through appraisal. F-8 10 PRINS RECYCLING CORP. AND SUBSIDIARIES (Debtor-in-Possession) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and 1995 5. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following: December 31, December 31, 1996 1995 ------------ ------------ Land and building $ 890,000 $ 890,000 Machinery and equipment 6,546,911 15,457,929 Furniture, fixtures and office equipment -- 987,364 Leasehold improvements -- 2,613,707 Construction in progress -- 2,929,244 ------------ ------------ 7,436,911 22,878,244 Less: accumulated depreciation (418,459) (2,472,453) ------------ ------------ $ 7,018,452 $ 20,405,791 ============ ============ The Company capitalized interest of $266,954 in 1995. 6. OTHER CURRENT ASSETS Included in other current assets at December 31, 1995 is $1,800,000 representing a deposit on equipment which was refunded to the Company in 1996. 7. EQUIPMENT LEASE RECEIVABLES The Company provided several direct financing type leases for equipment utilized by certain of its vendors. These leases had original terms ranging from three to five years. During 1996, certain of the lessees ceased making payments. The Company has valued these leases at their net realizable value based on the estimated payments to be received or the value of the underlying asset at December 31, 1996. 8. DUE FROM OFFICER-STOCKHOLDER The balance due from officers at December 31, 1995 carried interest at 8%. During 1996, the Company provided an allowance for this balance. 9. LIABILITIES SUBJECT TO COMPROMISE Liabilities recorded by the Company as of the petition date that are expected to be compromised under a plan of reorganization are separately classified in the Consolidated Balance Sheet at December 31, 1996 and include the following: F-9 11 PRINS RECYCLING CORP. AND SUBSIDIARIES (Debtor-in-Possession) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and 1995 Accounts payable $ 7,750,870 Accrued liabilities 1,452,717 Debt 15,394,105 At the Company's request, the Bankruptcy Court established a bar date of November 26, 1996 (January 8, 1997 for governmental agencies) for all pre-petition claims against the Company other than those arising from rejection of unexpired leases. A bar date is the date by which claims against the Company must be filed if the claimants wish to receive any distribution in the bankruptcy cases. Approximately 600 proofs of claims have been filed in connection with the November 26, 1996 and January 8, 1997 bar dates. Certain creditors have filed claims substantially in excess of amounts reflected in the Company's records. Consequently, the amount included in the consolidated balance sheet at December 31, 1996 as liabilities subject to compromise is subject to adjustment. 10. DUE TO BANK At December 31, 1996 the Company had a Bankruptcy Court approved debtor-in-possession financing agreement which provided a $9.5 million revolving credit facility (the "Facility") with a bank. Borrowings under the Facility were secured by liens on substantially all of the Company's assets and were afforded administrative priority under the Bankruptcy Code. Interest on borrowings under the Facility was charged at 11.25% which represented the banks default rate under the previous debt agreement with the Company. Through various orders of the Bankruptcy Court, the Facility was maintained in effect until the date the Reorganization Plan was approved. As a result of the sale of substantially all of the Company's operating assets the Facility was repaid and the outstanding balance was compromised by $800,000. The outstanding balance under the Facility is included in liabilities subject to compromise at December 31, 1996. The balances reflected in amounts due to banks at December 31, 1995 represent borrowings under the Company's Revolving and Term Loan and Security Agreement with a bank (the "Bank Agreement"). The revolving line of credit and term loans carried interest at the banks prime rate and prime rate plus 1/2%, respectively. The outstanding balances under the Bank Agreement were converted into the Facility subsequent to the date of the bankruptcy filing. F-10 12 PRINS RECYCLING CORP. AND SUBSIDIARIES (Debtor-in-Possession) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and 1995 11. NOTES AND ADVANCES PAYABLE - RELATED PARTIES Notes and advances payable-related parties at December 31, 1995 consist of: 10% Note payable to employee-stockholder (a) $4,250,000 10% Demand note payable to investment fund (b) 615,000 6.5% notes payable to employee-stockholders due in monthly installments beginning July 1996 through December 1999. (c) 975,000 7% notes payable to employee stockholders (d) 170,000 Note payable to employee stockholder (e) 145,000 6% demand note payable to employee-stockholders 67,081 ---------- 6,222,081 Less: current portion: 3,761,374 ---------- $2,460,707 ========== (a) The note was issued in connection with the acquisition of Vic Barick Paper Co., Inc. and according to its terms was due February 1, 1996. On February 27, 1996 the Company and the stockholder-employee agreed to exchange the note for $2,125,000 in cash and 100,000 shares of the Company's common stock and a term note in the amount of $1,625,000 that bears interest at 6% and matures on the earlier of a change in control of the Company or February, 1999. The outstanding balance of the term note is $1,625,000 and is included in liabilities subject to compromise at December 31, 1996. (b) The investment fund includes certain stockholders and several members of the Company's management and was repaid in February, 1996. (c) The note carried interest at 6.5% payable monthly. The outstanding principal balance of $975,000 is included in liabilities subject to compromise at December 31, 1996. (d) The note carried interest at 7% payable monthly. The outstanding principal of $170,000 was due December 31, 1996. The balance of this obligation is included in liabilities subject to compromise at December 31, 1996. (e) The note was issued in connection with the acquisition of Basic Waste Systems, Inc. and was repaid in February, 1996. During 1995, the Company's President made a $750,000 loan to the Company. The loan carried interest at 10% and was repaid in full prior to December 31, 1995. F-11 13 PRINS RECYCLING CORP. AND SUBSIDIARIES (Debtor-in-Possession) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and 1995 12. NOTES AND ADVANCES PAYABLE - OTHERS Notes payable - others at December 31, 1995 consists of: Term notes payable (a) $ 222,129 8% notes payable in aggregate monthly installments of $2,062 through March 2002 125,839 Other 215,041 --------- 563,009 Less: Current portion 295,990 --------- $ 267,019 ========= (a) The term notes of a subsidiary carried interest at prime rate (8.5% at December 31, 1995) and were payable in varying monthly installments plus interest through 1999. These notes are secured by lease receivables and equipment leased to others. The aggregate outstanding balances of these obligations of $423,508, including the secured term notes, which may be under secured, are included in liabilities subject to compromise at December 31, 1996. 13. OBLIGATIONS UNDER CAPITALIZED LEASES The Company acquired equipment and certain other assets under capital lease agreements. The equipment had an aggregate carrying value of approximately $534,000 and $2,026,000 at December 31, 1996 and 1995, respectively. In connection with the bankruptcy proceedings the Company rejected certain of these leases. The balances of these obligations are included in liabilities subject to compromise at December 31, 1996. 14. STOCKHOLDERS' EQUITY During 1996, the Company sold 332,000 shares of its common stock in a private placement for net proceeds of $1,679,788. During 1996, the Company issued $12,000,000 of 8% convertible subordinated debentures and received net proceeds of $11,280,000. The convertible subordinated debentures were convertible into shares of the Company's common stock at the option of the holders at a variable percentage of the market price, as defined, of the Company's common stock. Based on the beneficial conversion terms of the convertible subordinated debentures, the Company recorded a discount of $2.4 million F-12 14 PRINS RECYCLING CORP. AND SUBSIDIARIES (Debtor-in-Possession) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and 1995 which was charged to interest expense and credited to additional paid in capital. During 1996 an aggregate principal amount of $11,000,000, and accrued interest of $92,900, of these convertible subordinated debentures were converted into 5,524,784 shares of the Company's common stock. The remaining outstanding principal balance of $1,000,000 is included in liabilities subject to compromise at December 31, 1996. The Company's 1992 Stock Option Plan (the "Plan") was approved by the Company's Board of Directors and stockholders in September 1992. Options granted under the Plan may include those qualified as incentive stock options under Section 422A of the Internal Revenue Code of 1986, as amended, as well as non-qualified stock options. In July 1995, the Company's Board of Directors increased the number of shares of common stock for which options may be granted under the Plan to 850,000. Options expired five years from the date of grant. Changes in outstanding options are as follows: December 31, 1995 ---------------------------------- Price Options Range ---------------------------------- Options outstanding at January 1 233,340 $2.50-$3.00 Granted 207,500 $9.00 Exercised (2,625) $2.50 Canceled (39,425) $2.50-$9.00 --------- Options outstanding at December 31 398,790 $2.50-$9.00 ========= Options exercisable at December 31 214,753 $2.50-$3.00 Options available for grant 448,585 Total shares reserved for issuance under options 850,000 No options were granted under the Plan during 1996. The Company rejected all outstanding stock options in the bankruptcy proceedings and related Plan of Reorganization. The Company has determined that options granted in 1995 would not have had a material effect on the determination of proforma net income calculated in accordance with the provisions of Statement of Financial Accounting Standards No. 123, "Accounting For Stock-Based Compensation." F-13 15 PRINS RECYCLING CORP. AND SUBSIDIARIES (Debtor-in-Possession) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and 1995 15. INCOME TAXES The provision (benefit) for income taxes consists of the following: 1996 1995 ------------ ------------- Current - Federal - $134,000 - State - 230,000 ------------- 364,000 Deferred - Federal - (434,000) - State $(50,500) (47,600) ------------ ------------- (50,500) (481,600) ------------ ------------- $(50,500) $(117,600) ============ ============= A reconciliation of the recorded income tax provision to that computed utilizing the federal statutory income tax rate is as follows: 1996 1995 -------------------------- Tax (benefit) at federal statutory income tax rate $(17,697,000) $(1,099,000) Goodwill amortization/write-downs 4,864,000 154,000 Change in federal and state tax asset valuation allowance 15,119,000 2,560,000 Pooling expenses 272,000 State recycling tax credits (2,200,000) State income taxes (net of federal tax benefit) (2,256,000) 62,000 Other (net) (80,500) 133,400 -------------------------- $ (50,500) $ (117,600) ========================== F-14 16 PRINS RECYCLING CORP. AND SUBSIDIARIES (Debtor-in-Possession) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and 1995 The deferred income tax accounts reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts utilized for income tax purposes. The significant components of the deferred assets and liabilities are as follows: December 31, ------------------------------ 1996 1995 ------------------------------ Deferred tax liability: Property, plant and equipment - $685,000 ------------------------------ Deferred tax assets: Property, plant and equipment $2,345,000 - Net operating loss carryforward 8,938,000 627,000 Restructuring reserves 3,170,000 320,000 State recycling tax credits 2,200,000 2,200,000 Other 1,026,000 47,500 Less: Valuation allowance (17,679,000) (2,560,000) ------------------------------ - 634,500 Net deferred tax liability - $50,500 ============================== At December 31, 1996, the Company has available net operating loss carryforwards of approximately $22,300,000 expiring in the years 2010 to 2011, and available state recycling tax credits of approximately $2,200,000 which are not subject to expiration. A reduction of the Company's liabilities which may result from the proceedings under Chapter 11 of the Bankruptcy Code may result in utilization of its available net operating loss carryforwards. The Tax Reform Act of 1986 enacted a complex set of rules limiting the potential utilization of net operating loss and tax credit carryforwards in periods following a corporate "ownership change". In general, for federal income tax purposes, an ownership change is deemed to occur if the percentage of stock of a loss corporation owned (actually, constructively and, in some cases, deemed) by one or more "5% shareholders" has increased by more than 50 percentage points over the lowest percentage ownership of such stock owned during a three-year testing period. The Company has not determined if such an ownership change occurred as of December 31, 1996. However, if such an ownership change is determined to have occurred the Company's ability to utilize its net operating loss carryforwards could be significantly limited. 16. BUSINESS TRANSACTIONS During the third quarter of 1995, the Company acquired all of the outstanding common stock of Basic Waste Systems, Inc. and Vic Barick Paper Co., Inc. and substantially all of the assets of P. Pepe Sons, Inc. all F-15 17 PRINS RECYCLING CORP. AND SUBSIDIARIES (Debtor-in-Possession) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and 1995 engaged in the recycling industry (collectively, the "1995 Acquisitions"). The aggregate purchase price for these businesses, including all direct costs, was approximately $15,997,000 and was partially financed through additional debt aggregating approximately $9,645,000 and the issuance of 377,534 shares of the Company's common stock. These acquisitions were accounted for under the purchase method of accounting. The purchase price was allocated to the assets and liabilities of the 1995 Acquisitions based on their estimated respective fair values. During 1996, an additional 172,619 shares of the Company's common stock were issued in connection with one of the 1995 acquisitions due to a guarantee of value provision contained in the applicable acquisition agreement. The cost of the acquisitions exceeded the fair value of the assets acquired by approximately $14,202,000 which was recorded as goodwill. The results of operations of the 1995 Acquisitions are included in the Company's consolidated statement of operations beginning on the respective closing date of each of the acquisitions. On April 24, 1995, the Company issued 1,106,667 shares of its common stock in exchange for all of the outstanding common stock of Paper Chase Exchange, Inc. ("Paper Chase"). Paper Chase collects, markets and sells waste paper and other secondary fibers to paper mills. The merger was accounted for as a pooling of interests and, accordingly, the accompanying consolidated financial statements include Paper Chase as if the combination had occurred at the beginning of 1995. Also, during 1994 the then sole stockholder of Paper Chase formed an affiliate and acquired certain property used in connection with the business. This transaction resulted in the issuance of 606,667 shares of the Company's common stock. There were no intercompany transactions between Prins Recycling Corp. and Paper Chase prior to the merger. Expenses relating to the pooling totaling approximately $900,000 were paid directly by the former stockholder of Paper Chase and have been reflected in the Company's operations and in stockholders' equity as a capital contribution. The following unaudited pro-forma summary presents the consolidated results of operations as if the 1995 Acquisitions had occurred at the beginning of the year. These results do not purport to be indicative of what would have occurred had the acquisitions been made as of that date or of results which may occur in the future. Net sales $93,181,000 =========== Net income $ 24,000 =========== 17. COMMITMENTS The Company leases certain property and equipment, including property related to its material recovery facilities and administrative offices, under non-cancelable operating leases. In addition to the fixed rentals, certain of the property leases require the Company to pay real estate taxes. F-16 18 PRINS RECYCLING CORP. AND SUBSIDIARIES (Debtor-in-Possession) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and 1995 utilities and insurance. Certain of the leases provide for renewal options of up to ten years. In connection with the bankruptcy proceedings, the Company rejected certain other lease agreements for property and equipment. Total rent expense for all operating leases amounted to $2,670,916 and $1,427,908 for 1996 and 1995, respectively. Total minimum annual lease payments for operating leases which were not rejected in bankruptcy having initial or remaining terms in excess of one year are as follows: 1997 1,193,000 1998 1,200,000 1999 1,191,000 2000 1,190,000 Thereafter 5,632,000 The Company entered into long-term employment agreements with several employees. The agreements have terms of three to five years and provide fixed annual compensation plus bonuses, based on certain earnings, as defined. The Company rejected all such agreements in connection with the bankruptcy proceedings. Certain of these employees have filed proofs of claims In connection with the operation of its material recovery facilities, the Company entered into long-term supply agreements with certain third parties to accept recyclable materials delivered to its facilities. Certain of these agreements required the Company to pay specified fixed fees . The Company rejected substantially all such contracts in connection with the bankruptcy proceedings. Certain of these parties have filed proofs of claims regarding these agreements. 18. EMPLOYEE SAVINGS PLANS The Company has two defined contribution employee savings plans pursuant to Internal Revenue Code Section 401(k) covering all eligible employees. Under one plan the Company at its discretion may match a portion of eligible contributions. The other plan requires the Company to contribute an amount equal to 25 percent of each employee's contributions. In connection with the bankruptcy proceedings the Company ceased making contributions to the Plan which required contributions. Total contributions to these employee benefit plans by the Company were $27,023 and $200,933 for 1996 and 1995, respectively. F-17 19 PRINS RECYCLING CORP. AND SUBSIDIARIES (Debtor-in-Possession) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and 1995 19. MARKET CONCENTRATIONS Export sales consist of sales made directly to foreign customers, and sales made to export brokers, who in-turn resell the wastepaper to foreign customers. Export sales totaled approximately 48% and 52% of consolidated net sales in 1996 and 1995, respectively. Geographically, these sales were distributed as follows: 1996 1995 ---------------------------- Export brokers 42% 45% Mexico 5 6 Canada 1 1 ---------------------------- 48% 52% ============================ 20. CONTINGENCIES The Company is also involved in litigation arising in the normal course of its business. Certain of the parties have filed claims with the Bankruptcy Court. 21. SUBSEQUENT EVENT On November 14, 1997 the Company sold substantially all of its operating assets and certain liabilities to KTI for an aggregate purchase price of $14.4 million. F-18 20 Prins Recycling Corp. (Debtor-in-Possession) Consolidated Balance Sheets (unaudited)
September 30, December 31, ------------ ------------ 1997 1996 ---- ---- Assets Current Assets Cash and cash equivalents $ - $ 118,217 Accounts receivable, net 2,739,093 2,852,983 Other Receivables 18,012 49,032 Prepaid expenses and other current assets 195,994 96,234 ------------ ------------ Total current assets 2,953,099 3,116,466 Equipment loans receivable, net of current portion 127,835 Other assets 465,751 258,044 Property, plant, and equipment, net 6,836,975 7,018,452 ------------ ------------ $ 10,255,825 $ 10,520,797 ============ ============ Liabilities and stockholders' deficiency Current liabilities Accounts payable $ 4,338,412 $ 1,703,826 Accrued expenses 33,286 1,498,353 Liabilities subject to compromise 26,266,710 24,597,692 Capital leases, current portion 45,029 ------------ ------------ Total current liabilities 30,683,437 27,799,871 Stockholders' deficiency Common Stock 16,604 16,604 Additional paid-in capital 42,177,202 42,177,202 Retained earnings (deficit) (62,621,418) (59,472,880) ------------ ------------ Total stockholders' (deficiency) equity (20,427,612) (17,279,074) ------------ ------------ $ 10,255,825 $ 10,520,797 ============ ============
See notes to condensed consolidated financial statements. F-19 21 Prins Recycling Corp. (Debtor-in-Possession) Consolidated Statements of Operations (unaudited) Nine months ending September 30, 1997 1996 ---- ---- Net Sales $ 13,529,223 $ 20,411,823 Cost of Goods Sold 12,793,456 25,230,483 ------------ ------------- Gross Profit 735,767 (4,818,660) Selling, General, and Administrative Expenses 1,737,561 16,761,821 Depreciation and Amortization 181,477 2,664,706 ------------ ------------- Total Operating Expenses 1,919,038 19,426,527 Income (loss) before reorganization items and interest expense (1,183,271) (24,245,187) Reorganization Costs and Other Expense (Income) 1,205,803 1,556,149 Other Expense (Income) 26,570 (64,998) Interest Expense, net 732,894 1,297,999 ------------ ------------- Net Loss $ (3,148,538) $ (27,034,337) ============ ============= Net Loss per Share ($0.19) ($1.93) Weighted average common shares outstanding 16,604,460 14,018,855 See notes to condensed consolidated financial statements. F-20 22 Prins Recycling Corp. (Debtor-in-Possession) Condensed Consolidated Statements of Cash Flows (unaudited) Nine months ended September 30, 1997 1996 ---- ---- Operating Activities Net Cash provided by (used in) operations $(1,645,964) $(2,667,783) Investing Activities Purchases of property, plant, and equipment - (557,638) ---------- ----------- Net cash provided by (used in) investing activities - (557,638) Financing Activites (Decrease) increase in borrowings under bank line of credit 1,714,047 (2,178,094) Repayment of debt principal and capital lease obligations (186,300) (9,355,943) Proceeds from other borrowings 980,000 Proceeds from sale of subordinated notes - 11,280,000 Proceeds from issuance of common stock - 1,679,788 ---------- ----------- Net cash provided by financing activities 1,527,747 2,405,751 Net decrease in cash and cash equivalents (118,217) (819,670) Cash and cash equivalents, beginning of period 118,217 1,097,352 ---------- ----------- Cash and cash equivalents, end of period $ - $ 277,682 ========== =========== See notes to condensed consolidated financial statements. F-21 23 Prins Recycling Corp. Notes to Interim Consolidated Financial Statements September 30, 1997 and 1996 1. Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months or nine months ended September 30, 1997 are not necessarily indicative of the results that may be expected for the year ending December 31, 1997. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1996. Certain 1996 financial information contained herein has been reclassified to conform with the 1997 presentation. 2. Proceedings Under Chapter 11 On July 13, Prins Recycling Corp. (the "Company") and its subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the Federal Bankruptcy Code in the United States Bankruptcy Court for District of New Jersey. Under Chapter 11, enforcement of certain claims in existence prior to the filing of the petitions was stayed, while the debtor continues to operate in the ordinary course of business as debtor in possession. The stayed claims are reflected in the December 31, 1996 consolidated balance sheet as "liabilities subject to compromise," Significant additional claims have arisen subsequent to the petition date resulting from the rejection of executory contracts and/or leases, and from the allowance by the Bankruptcy Court of contingent or dispute claims. The Bankruptcy Court established November 26, 1996 (January 8, 1997 for governmental entities) as the claims bar date. Enforcement of claims secured by the debtor's assets ("secured claims") was also stayed, although the holders of such claims have the right to petition the Bankruptcy Court for relief from the claim. Secured claims are secured by liens on substantially all of the Company's assets. For financial statement presentation, secured debt is also being reported as "liabilities subject to compromise." At various dates subsequent to the petition dates the Company and certain of its subsidiaries have received permission from the Bankruptcy Court to sell certain of its assets. On November 12, 1997, the creditors committee and the Bankruptcy Court approved the Company's First Amended Joint Plan of Reorganization (the "Reorgnization Plan"). Among other things, the Reorganization Plan allowed the Company to sell substantially all of its remaining operating assets. In addition, the buyer agreed to assume certain claims and other administrative obligations of the Company. The creditors committee received approximately $850,000 of cash and retained certain causes of actions against third parties. A formal plan of liquidation of the Company has not been adopted. The accompanying consolidated financial statements have been prepared under the going concern basis of accounting, which contemplates continuity of operations, realization of assets and the liquidation of liabilities in the ordinary course of business. The use of the going on concern basis remains appropriate until the date a formal lplan of liqidation is adopted or other such events occur which will result in the liquidation of the Company. The Company has accounted for all transactions related to the rorganization proceedings in accordance with Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code," issued by the American Institute of Certified Public Accountants. The Company adopted the liquidation basis of accounting effective November 14, 1997. F-22 EX-23.1 3 CONSENT OF ERNST & YOUNG LLP 1 Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 333-34327, Form S-3 No. 333-30813, Form S-3 No. 333-28067, Form S-8 No. 333-26757, Form S-3 No. 333-80089 and Form S-3 No. 333-44507) and in the related Prospectus of our report dated January 16, 1998 with respect to the consolidated financial statements of Prins Recycling Corp. and subsidiaries (debtor-in-possession) included in this Current Report (Form 8-K/A) of KTI, Inc. dated January 28, 1998. Ernst & Young LLP Hackensack, New Jersey January 27, 1998 -----END PRIVACY-ENHANCED MESSAGE-----