-----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, GmPXOuhlkDVM61JniGIk+ZTg5+xCrmw/g2CIut42weLBypy6ymcVmjanpz0W7iP0 +KOaW2/kWOlB094z8LBBnA== 0000950123-99-004875.txt : 19990518 0000950123-99-004875.hdr.sgml : 19990518 ACCESSION NUMBER: 0000950123-99-004875 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 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: 10-Q SEC ACT: SEC FILE NUMBER: 000-25490 FILM NUMBER: 99628716 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 10-Q 1 KTI, INC. 1 FORM 10-Q. - QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q (x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 Commission File No. 0-25490 KTI, INC. (Exact name of registrant as specified in its charter) New Jersey 22-2665282 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 7000 Boulevard East Guttenberg, New Jersey 07093 (Address of principal executive offices) (Zip code) (201) 854-7777 (Registrants telephone number including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: Common Stock, No Par Value 13,916,238 Shares as of May 14, 1999 1 2 TABLE OF CONTENTS Item Number and Caption Page Number PART I - Financial Information Item 1. Consolidated Financial Statements 3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3. Qualitative and Quantitative Disclosure about Market Risk 20 PART II - Other Information Item 1. Legal Proceedings 21 Item 2. Changes in Securities 22 Item 3. Defaults Upon Senior Securities 22 Item 4. Submission of Matters to a Vote of Security Holders 22 Item 5. Other Information 22 Item 6. Exhibits and Reports on Form 8-K 22 2 3 PART I - FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS KTI, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) (UNAUDITED)
MARCH 31 DECEMBER 31, 1999 1998 --------- --------- (RESTATED) ASSETS Current Assets Cash and cash equivalents $ 7,782 $ 9,444 Restricted funds 21,343 19,088 Accounts receivable, net of allowances of $1,481 and $1,466 37,177 30,162 Consumables and spare parts 5,074 4,483 Inventory 7,795 7,026 Notes receivable -- officers/shareholders and affiliates 1,402 1,858 Other receivables 3,309 4,158 Deferred taxes 5,449 4,832 Other current assets 6,325 3,540 --------- --------- Total current assets 95,656 84,591 Restricted funds 4,207 4,350 Notes receivable - officers/shareholders and affiliates 5,341 1,534 Other receivables 2,207 3,025 Other assets 6,307 6,195 Deferred costs, net of accumulated amortization of $1,899 and $1,620 4,907 5,275 Goodwill and other intangibles, net of accumulated amortization of $4,599 and $3,387 117,372 117,878 Property, equipment and leasehold improvements, net of accumulated depreciation of $36,197 and $32,731 208,335 209,113 --------- --------- Total assets $ 444,332 $ 431,961 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable $ 19,361 $ 15,328 Accrued expenses 13,883 11,335 Debt, current portion 11,014 12,065 Other current liabilities 1,006 2,999 --------- --------- Total current liabilities 45,264 41,727 Other liabilities 3,393 4,720 Debt, less current portion 215,845 207,544 Minority interest 20,679 19,526 Deferred taxes 2,459 2,877 Deferred revenue 32,294 33,871 Convertible subordinated notes 6,770 6,770 Commitments and contingencies Stockholders' equity Common stock; no par value (stated value $.01 per share); authorized 40,000,000 in 1999 and 1998, issued and outstanding 13,916,237 and 13,726,204 shares in 1999 and 1998, respectively 139 138 Additional paid-in capital 117,211 115,358 Retained earnings (deficit) 278 (570) --------- --------- Total stockholders' equity 117,628 114,926 --------- --------- Total liabilities and stockholders' equity $ 444,332 $ 431,961 ========= =========
See accompanying notes. 3 4 KTI, INC. CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, -------------------------------- 1999 1998 ------------ ------------ (RESTATED) Revenues $ 67,449 $ 40,013 Cost of operations 56,875 32,501 ------------ ------------ Gross Profit 10,574 7,512 Selling, general and administrative 3,575 1,571 Restructuring charge 748 Merger-related costs 133 ------------ ------------ Income from operations 6,118 5,941 Interest expense, net 3,796 1,631 Other expense 51 ------------ ------------ Income before minority interest, provision for income taxes and cumulative effect of change in accounting principal 2,271 4,310 Minority interest 592 1,069 ------------ ------------ Income before provision for income taxes and cumulative effect of change in accounting principle 1,679 3,241 Provision for income taxes 773 1,335 ------------ ------------ Income before cumulative effect of change in accounting principal 906 1,906 Cumulative effect of change in accounting principle 58 ------------ ------------ Net income 848 1,906 Accretion and accrued and paid dividends on preferred stock 509 ------------ ------------ Net income available to common shareholders $ 848 $ 1,397 ============ ============ Earnings per common share: Basic: Income before cumulative effect of change in accounting principle $ 0.07 $ 0.14 Cumulative effect of change in accounting principle (0.01) ------------ ------------ Net income $ 0.06 $ 0.14 ============ ============ Weighted average number of shares used in computation 13,757,588 9,696,588 ============ ============ Diluted: Income before cumulative effect of change in accounting principle $ 0.06 $ 0.13 Cumulative effect of change in accounting principle ------------ ------------ Net income $ 0.06 $ 0.13 ============ ============ Weighted average number of shares used in computation 14,428,676 10,503,025 ============ ============
See accompanying notes. 4 5 KTI, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS) (UNAUDITED, RESTATED)
SERIES A SERIES B PREFERRED STOCK PREFERRED STOCK COMMON STOCK SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT -------- -------- -------- -------- ---------- ---------- Balance at December 31, 1997 447,500 $ 3,732 856,000 $ 21,400 9,372,630 $ 94 Net income Accretion of preferred stock 42 Issuance of common stock and common stock purchase warrants for: Exercise of options 235,682 2 Exercise of warrants 411,894 4 Non-employee director's compensation Conversion of preferred stock: Series A (447,500) (3,774) 447,500 4 Series B (856,000) (21,400) 25,531 1 Conversion of debt 1,283,399 13 Employee savings plan contribution 4,215 Business combinations 1,945,353 20 Tax benefit realized from stock option transactions Dividends paid on Series B Preferred Stock Other distributions Additional costs related to preferred stock issuances -------- -------- -------- -------- ---------- ---------- Balance at December 31, 1998 13,726,204 138 Net income Issuance of common stock for: Exercise of options 20,551 Exercise of warrants 19,482 Business combination 150,000 1 -------- -------- -------- -------- ---------- ---------- Balance at March 31, 1999 13,916,237 $ 139 ======== ======== ======== ======== ========== ========== ADDITIONAL RETAINED PAID-IN EARNINGS CAPITAL (DEFICIT) TOTAL ---------- ------- ---------- Balance at December 31, 1997 $ 53,094 $(5,050) $ 73,270 Net income 6,577 6,577 Accretion of preferred stock (42) Issuance of common stock and common stock purchase warrants for: Exercise of options 1,894 1,896 Exercise of warrants 1,648 1,652 Non-employee director's compensation 205 205 Conversion of preferred stock: Series A 3,770 -- Series B 300 (21,099) Conversion of debt 15,686 15,699 Employee savings plan contribution 41 41 Business combinations 38,122 38,142 Tax benefit realized from stock option transactions 738 738 Dividends paid on Series B Preferred Stock (1,404) (1,404) Other distributions (693) (693) Additional costs related to preferred stock issuances (98) (98) ---------- ------- ---------- Balance at December 31, 1998 115,358 (570) 114,926 Net income 848 848 Issuance of common stock for: Exercise of options 161 161 Exercise of warrants 193 193 Business combination 1,499 1,500 ---------- ------- ---------- Balance at March 31, 1999 $ 117,211 $ 278 $ 117,628 ========== ======= ==========
See accompanying notes. 5 6 KTI, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
Three Months ended March 31, --------------------- 1999 1998 -------- -------- (restated) OPERATING ACTIVITIES Net income $ 848 $ 1,906 Adjustments to reconcile net income to net cash provided (used in) by operating activities: Cumulative effect of change in accounting principle 58 Depreciation and amortization 4,949 2,700 Minority interest, net of distributions 1,153 1,069 Deferred revenue (1,577) (1,576) Deferred income taxes (1,035) 1,204 Provision for losses on accounts receivable 15 54 Interest accrued and capitalized on debt 417 Other non-cash charges 42 41 Changes in operating assets and liabilities: Accounts receivable (7,030) (2,338) Consumables, spare parts and inventory (1,360) (850) Other receivables 849 42 Other assets (2,012) 619 Accounts payable and accrued expenses 6,581 470 Other liabilities (1,930) 308 -------- -------- Net cash provided by (used in) operating activities (449) 4,066 INVESTING ACTIVITIES Additions to property, equipment and leasehold improvements (3,261) (3,202) Proceeds from sale of assets 22 18 Net change in restricted funds (2,112) (756) Purchase of businesses, net of cash acquired (2,443) Notes receivable--officers/shareholders and affiliates (3,351) (22) -------- -------- Net cash used in investing activities (8,702) (6,405) FINANCING ACTIVITIES Deferred financing costs (398) Net borrowings on lines of credit 9,847 5,508 Proceeds from sale of common stock 354 850 Dividends paid (468) Principal payments on debt (2,712) (2,809) -------- -------- Net cash provided by financing activities 7,489 (2,683) -------- -------- Increase (decrease) in cash and cash equivalents (1,662) 344 Cash and cash equivalents at beginning of period 9,444 11,515 -------- -------- Cash and cash equivalents at end of period $ 7,782 $ 11,859 ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest paid $ 5,358 $ 1,023 Taxes paid 797
-Continued- 6 7 KTI, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
Three Months ended March 31, ---------------------- 1999 1998 ------- ------- (unaudited) (restated) NON CASH INVESTING AND FINANCING ACTIVITIES Capital lease obligation entered into for lease of equipment $ 115 Purchase of businesses and additional partnership interest, net of cash acquired: Working capital deficit, net of cash acquired $ (158) Property, equipment and leasehold improvements 933 Purchase price in excess of net assets acquired 2,834 Other assets 104 Non-current liabilities 1,270 Common stock and common stock purchase warrants issued
See accompanying notes 7 8 KTI, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS) (UNAUDITED) MARCH 31, 1999 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. The MSW market in Maine is seasonal, with one-third more MSW generated in the summer months than is generated during the rest of the year. The Residential and Commercial Recycling segments experience increased volumes of ONP in November and December due to increased newspaper advertising and retail activity during the holiday season. Additionally, the Residential Recycling segment operates facilities in Florida which experience increased volumes of recyclable materials during the winter months followed by decreases in the summer months in connection with seasonal changes in population. Operating results for the three months ended March 31, 1999 and 1998 are not necessarily indicative of the results that may be expected for the full year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1998. KTI, Inc. (the "Company" or "KTI") has restated the previously issued consolidated balance sheet as of December 31, 1998 and the previously issued statements of income, stockholders' equity and cash flows for the three months ended March 31, 1998 to reflect an acquisition accounted for using the pooling of interests method of accounting. In addition, certain 1998 financial information contained herein has been reclassified to conform with the 1999 presentation. 2. MERGER AND ACQUISITION On May 12, 1999, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Casella Waste Systems, Inc., ("Casella") a publicly-owned company engaged in the waste services industry. This Merger Agreement was an amendment to the original agreement dated January 12, 1999. The merger will be completed through the exchange of all of the shares of the Company's common stock for shares of Casella's Class A common stock based on an exchange ratio specified in the Amended Merger Agreement. In addition, all of the Company's outstanding and unexercised stock options and stock purchase warrants will be converted into similar rights to acquire Casella's Class A common stock under the same terms and conditions and the same exchange ratio. Subsequent to the completion of the merger the current Casella stockholders will own a majority of the combined company. Under the terms of the Merger Agreement, Casella is required to file a registration statement with the Securities and Exchange Commission to register the shares of its Class A common stock to be issued in the merger. The merger is subject to, among other things, approval of the Company's and Casella's stockholders. No assurance can be given that the conditions of the merger will be satisfied or that the merger will be consummated. Upon consummation of the merger, the Company will pay fees to its investment bankers and recognize certain other merger related costs which have been deferred. On January 27, 1999 the Company completed its acquisition of AFA Group, Inc. and subsidiaries ("AFA") in a business combination recorded as a pooling of interests and accordingly, the accompanying unaudited financial statements have been restated to include the accounts and operations of AFA for all periods presented. AFA is an integrated wood waste processing and hauling business located in Newark, New Jersey. The Company issued 460,000 shares of common stock in exchange for all of the outstanding shares of AFA. In connection with this acquisition, the Company expensed approximately $133 of merger-related costs which consisted of external costs incurred to complete the transaction. Revenues and net income (loss) for the individual companies for the three months ended March 31, 1998 were as follows:
KTI AFA TOTAL ------- ------- ------- Revenues $37,632 $ 2,381 $40,013 Net income (loss) 1,992 (86) 1,906
8 9 On March 24, 1999, pursuant to the Second Amended, Restated and Extended Waste Disposal Agreement among PERC and the municipalities named therein, the municipalities made a capital contribution to PERC totaling $720 in exchange for a 1.30% limited partnership interest in PERC. 3. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
THREE MONTHS ENDED MARCH 31, ------------------------------ 1999 1998 ------------ ------------ (restated) Numerator: Net income $ 848 $ 1,906 Preferred stock dividends (467) Accretion of preferred stock (42) ------------ ------------ Numerator for basic earnings per share-net income available to common stockholders 848 1,397 Numerator for diluted earnings per share-net income available to common stockholders after assumed conversions(1) $ 848 $ 1,397 ============ ============ Denominator: Denominator for basic earnings per share-weighted average shares 13,757,588 9,696,588 Effect of dilutive securities: Employee stock options 486,768 418,861 Warrants 184,320 387,576 ------------ ------------ Dilutive potential common shares 671,088 806,437 ------------ ------------ Denominator for diluted earnings per share-adjusted weighted- average shares and assumed conversions 14,428,676 10,503,025 ============ ============ Net income per share-Basic $ 0.06 $ 0.14 ============ ============ Net income per share-Diluted $ 0.06 $ 0.13 ============ ============
________ (1) The Convertible Subordinated notes payable were anti-dilutive in 1999 and 1998 and the preferred shares were anti-dilutive in 1998. 4. CONTINGENCIES The Company is a defendant in a consolidated purported class action, which alleges violations of certain sections of the federal securities laws. The Company believes the allegations are without merit and intends to defend the litigation vigorously. Two lawsuits have been filed against a subsidiary of the Company and certain of its officers, alleging fraud and tortious interference. The actions are based on two contracts between the plaintiff and the subsidiary, which contracts require all disputes to be resolved by arbitration. Arbitration proceedings have commenced. The Company believes it has meritorious defenses to the allegations. The majority shareholder of a company acquired by a subsidiary of the Company instigated arbitration proceedings against the Company and two of its subsidiaries, alleging the subsidiaries acted to frustrate the "earn-out" provisions of the acquisition agreement and thereby precluding him from receiving, or alternatively, reducing the sum to which he was entitled to receive. He also alleges his employment agreement was wrongfully terminated. The claim for arbitration alleges direct charges in excess of $5,000 and requests punitive damages, treble damages and attorneys fees. The Company and its subsidiaries have responded to the demand, denying liability and filed a counterclaim for $1,000 for misrepresentations. The Company believes it has meritorious defenses to the claims. The Company is a defendant in certain law suits alleging various claims incurred in the ordinary course of business. Management of the Company does not believe that the outcome of these matters, individually or in the aggregate, will have a material effect on the Company's financial condition, cash flows or results of operations. 5. SEGMENT REPORTING During the three months ended March 31, 1999, the Company operated in the business segment as indicated below. 9 10
WASTE-TO-ENERGY COMMERCIAL FINISHED PRODUCTS RESIDENTIAL RECYCLING RECYCLING -------- -------- -------- -------- Revenues Unaffiliated customers $ 24,864 $ 21,138 $ 12,345 $ 9,087 Intersegment revenues 33 31 748 Segment Profit 6,392 315 786 559 Depreciation and Amortization 2,406 607 821 914 Identifiable Assets 232,069 65,728 58,868 58,640 Capital Expenditures 1,129 315 1,403 384
During the three months ended March 31, 1998 the Company operated in the business segments indicated below.
WASTE-TO-ENERGY COMMERCIAL FINISHED RECYCLING PRODUCTS -------- -------- -------- Revenues Unaffiliated customers $ 19,614 $ 18,665 $ 1,719 Intersegment revenues 3,644 15 Segment Profit 5,665 674 259 Depreciation and Amortization 2,197 458 25 Identifiable Assets 212,925 42,533 1,635 Capital Expenditures 2,149 1,225 2
The segment reporting detailed above reconciles to consolidated revenues and income before provision for income taxes and cumulative effect of a change in accounting principal as follows:
THREE MONTHS ENDED MARCH 31, ------------------------ 1999 1998 -------- -------- REVENUES Total unaffiliated customers revenue for reportable segments $ 67,434 $ 39,998 Holding company revenues 15 15 Intersegment revenues for reportable segments 4,591 3,659 Elimination of intersegment revenues (4,591) (3,659) -------- -------- Total consolidated revenues $ 67,449 $ 40,013 ======== ======== PROFIT AND LOSS Total segment profit for reportable segments $ 8,052 $ 6,598 Holding company segment loss (1,934) (657) -------- -------- Total segment profit 6,118 5,941 Unallocated amounts: Interest expense, net 3,796 1,631 Other expenses 51 Minority interest 592 1,069 -------- -------- Income before provision for income taxes and cumulative effect of change in accounting principal $ 1,679 $ 3,241 ======== ========
MARCH 31, 1999 -------- ASSETS Total identifiable assets for reportable segments $415,305 Holding company assets 29,027 -------- Total consolidated assets $444,332 ========
6. ACCOUNTING CHANGE 10 11 During the first quarter of 1999, the Company adopted the provisions of the American Institute of Certified Public Accountants Statement of Position (SOP) 98-5, Reporting on the Costs of Start-up Activities. The SOP requires costs of start-up activities and organization costs to be expensed as incurred. Upon adoption of the SOP, the Company recorded a charge of $58 (net of income taxes of $50). This amount has been reflected as a cumulative effect of change in accounting principle in the income statement for the quarter ended March 31, 1999. 7. RESTRUCTURING CHARGE In the first quarter of 1999, the Company recorded a $738 restructuring charge. The restructuring initiatives primarily involve the Company's Commercial Recycling segment and represent primarily severance and other costs related to employee reductions. In Connection with the restructuring the Company terminated ten employees. All amounts accrued as part of the restructuring charge remain in accrued liabilities as of March 31, 1999. The restructuring charges relate to integration of the brokerage operation acquired as part of the New Jersey Fibers acquisition and elimination of costs as a result of streamlining the operations of acquisitions completed in 1998. 8. INCOME TAXES The income tax provision was approximately $0.8 million for the three months ended March 31, 1999 compared to approximately $1.3 million during the same period in 1998. During the first quarter of 1999, the effective tax rate utilized by the Company of 46.0% represents the estimated annual effective rate based on the total estimated pretax income of the Company for the year ended December 31, 1999. The effective rate in the first quarter of 1998 was 41.2% and the increase in the effective rate in 1999 is primarily due to an increase in nondeductible goodwill. 9. SUBSEQUENT EVENTS On May 12, 1999, the Company's Revolving Line of Credit Agreement with a bank (the "Credit Agreement") was amended (the "Amended Agreement") modifying certain financial covenants and requiring bank approval for all acquisitions. The Amended Agreement requires that the Company and certain subsidiaries, as defined, maintain certain specified financial covenants, including, a minimum interest coverage ratio, a maximum funded debt to EBITDA ratio, a minimum fixed charge coverage ratio, and a maximum debt to capitalization ratio, each as defined in the Amended Agreement. The Company expects to be in compliance with these covenants. However, the Company's ability to satisfy these covenants is dependent on its ability to substantially achieve its operating plan. The Company will continue to select interest rates on the outstanding borrowings based on the bank's prime rate or LIBOR rates, however, the interest rates range from the bank's prime rate to the bank's prime rate plus 1.50% or LIBOR plus 1.88% to LIBOR plus 3.25% depending on the attainment of a financial covenant, as defined, in the Amended Agreement. 11 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The Company reports the results of operations by the following four segments: waste-to-energy, residential recycling, commercial recycling and finished products. REVENUES Consolidated revenue for the three months ended March 31, 1999, compared with the same period in 1998, increased approximately $27.4 million or 68.6%. Waste-to-Energy Segment The Waste-to-Energy segment consists of the operations of Maine Energy Recovery Company, Limited Partnership ("Maine Energy"), Penobscot Energy Recovery Company, Limited Partnership ("PERC"), Timber Energy Resources, Inc. ("TERI"), KTI Specialty Waste Services, Inc., American Ash Recycling of Tennessee, Ltd. , KTI BioFuels, Inc. ("BioFuels"), Total Waste Management Corporation ("TWM"), Multitrade Group, Inc. ("Multitrade"), Russell Stull Companies ("Russell Stull"), KTI Recycling of Canada ("KTI Tire"), and AFA Group, Inc. ("AFA"). Total revenues for this business unit were approximately $24.9 million for the three months ended March 31, 1999, compared to approximately $19.6 million for the same period in 1998. This represents an increase of approximately $5.3 million or 27.0% for the three months ended March 31, 1999 as compared to the same period in 1998. Revenues in the Waste-to-Energy segment are primarily derived from waste processing and electric power sales. Total tons received by Maine Energy and PERC decreased 8.4% and 3.0%, respectively, in 1999, compared to 1998. The decrease at Maine Energy was due to lower production as a result of repairs to the primary processing equipment. The decrease at PERC was the result of the scheduled plant outage in January 1999. In 1998, PERC's scheduled outage occurred in the second quarter. Waste processing revenues increased by approximately $2.0 million or 27.3% for the year. This increase is a result of increased prices charged per ton during 1999 versus 1998 of approximately 26.4% and additional revenues from the TWM, Multitrade, Russell Stull and KTI Tire acquisitions. The increases from the acquisitions was offset by reductions at BioFuels due to the elimination of brokerage operations on March 31, 1998. Electric power revenues for the three months ended March 31, 1999 increased approximately $1.3 million or 12.5% over the same period in 1998. The increase in revenues is a combination of the acquisition of Multitrade offset by lower kilowatt hours at Maine Energy due to lower production discussed above. Residential Recycling Segment This segment includes the residential recycling plants of FCR, Inc. ("FCR"). This segment posted revenues of approximately $9.1 million for 1999 and there were no revenues from this segment for the same period in 1998 because the acquisition was completed in the third quarter of 1998. Commercial Recycling Segment The Commercial Recycling segment consists of the operations of I. Zaitlin and Sons, Inc. ("Zaitlin"), K-C International, Inc. ("K-C"), the commercial recycling plants acquired from Prins, and KTI New Jersey Fibers, Inc. ("NJ Fibers"), which consists of the operations of Gaccione Bros., Inc. & Co. and PGC Corporation (collectively, "Gaccione") and Atlantic Coast Fibers, Inc. ("Atlantic Coast"). Total revenue for this segment for the three months ended March 31, 1999 was approximately $21.1 million compared to $18.7 million for the same period in 1998. This represents an increase in sales of approximately $2.4 million as compared to the same period in 1998 primarily as a result of the acquisition 12 13 of NJ Fibers which was completed in the third quarter of 1998. These increases were partially offset by lower commodity prices for paper fibers in the first quarter of 1999 versus the first quarter of 1998 and lower volumes at the commercial processing plants. Finished Products Segment The Finished Products segment consists of the operations of Power Ship Transport, Inc., Manner Resins, Inc. ("Manner"), the cellulose insulation plants and the plastic reprocessing plants of FCR, the plastic reprocessing operations of First State Recycling, Inc. and the glass pellet processor Seaglass, Inc. Total revenue for this segment for the three months ended March 31, 1999 was approximately $12.3 million compared to approximately $1.7 million for the same period in 1998. This represents an increase of approximately $10.6 million. The increase in revenues is primarily the result of acquisitions discussed above which were partially offset by lower revenues at Manner due to decreases in plastic prices in the first quarter of 1999 versus the first quarter of 1998. COSTS AND EXPENSES Waste-to-Energy Segment Cost of operations in this segment consist primarily of electric power and waste handling operating costs which were approximately $18.5 million during the three months ended March 31, 1999, compared to approximately $14.0 million for the same period in 1998. This represents an increase of approximately $43.5 million or 32.1%. The increase was primarily a result of the TWM, Multitrade, Russell Stull, and KTI Tire acquisitions discussed above which had total costs of operations of approximately $2.8 million. In addition, PERC's operating costs increased $1.8 million due to the costs associated with the planned outage and an increase in performance credits as a result of the amended Power Purchase Agreement ("PPA")and Waste Disposal agreements. These increases were offset by decreases at Timber as a result of an increase in tipping fee based material which reduces fuel costs and the elimination of costs associated with the brokerage sales discussed above at BioFuels. Residential Recycling Segment Cost of operations in this segment was approximately $8.5 million for 1999 and there was no cost of operations for the same period in 1998 since the acquisition of FCR was completed in the third quarter of 1998. Commercial Recycling Segment Cost of operations in this segment for the three months ended March 31, 1999 were approximately $20.8 million compared to approximately $18.0 million during the same period in 1998. This represents an increase of approximately $2.8 million. This increase is due primarily to the acquisition of NJ Fibers in August 1998 and was offset by lower purchase prices due to lower commodity prices and lower volumes at the commercial processing plants, during the first quarter of 199 versus the first quarter of 1998. Finished Products Cost of operations in this segment for the three months ended March 31, 1999 were approximately $11.6 million compared to approximately $1.5 million in 1998. The increase was primarily a result of the acquisitions discussed above and was partially offset by lower purchase prices at Manner due to decreases in plastics price in 1999. OTHER ITEMS Selling, general and administrative expenses increased by approximately $2.0 million or 127.6% for the three months ended March 31,1999 compared to the same period in 1998. The increase is a result of selling, general and administrative costs added through acquisitions throughout 1998 and the addition of administrative staff to develop and install corporate-wide information systems; to develop and support a formal strategic planning and budgeting process; to support Company wide credit and collection efforts; to identify and pursue potential mergers 13 14 and acquisitions; and to develop internal information systems to identify revenue enhancement and cost savings programs in newly acquired entities. Interest expense increased approximately $2.2 million or 132.7% during 1999 compared to the same periods in 1998. These increases are related principally to increased borrowings on the Company's line of credit to fund several acquisitions, incremental interest expense on debt assumed as part of these acquisitions and the conversion of the Series B Preferred Stock to convertible debt. These increases were partially offset by lower interest rates at PERC as a result of the refinancing of the bonds payable and lower debt levels at Maine Energy. The cumulative effect of a change in accounting principle represents a change in the Company's method of accounting for start-up costs. The change involved expensing these costs as incurred, rather than capitalizing and subsequently amortizing such costs. LIQUIDITY AND CAPITAL RESOURCES The Company is a holding company and receives certain of its cash flows from its subsidiaries. Receipt of cash flow from PERC is currently restricted by covenants under loan agreements, distribution restrictions under partnership agreements with PERC's equity investors, and put-or-pay agreements with municipalities. Maine Energy's cash flow is required to retire the remaining outstanding subordinated debt balance of approximately $11.5 million as of March 31, 1999 before partners' cash distributions can begin (approximately $7.6 million of these notes are owned by the Company). TERI's cash flow is restricted by covenants under its bond agreements. As a result, the following discussion is organized to present liquidity and capital resources of the Company separate from Maine Energy, PERC and TERI and liquidity and capital resources of each of Maine Energy, PERC and TERI independently. THE COMPANY The Company operates in industries that require a high level of capital investment. The Company's capital requirements basically stem from (i) its working capital for ongoing operations, (ii) capital expenditures for new plants and equipment and (iii) business acquisitions. The Company's strategy is to meet these capital needs from internally generated funds which are not contractually restricted, drawings under its lines of credit and collateralized equipment financing and proceeds from the sale of the Company's common stock. On July 10, 1998 KTI closed on a $150.0 million acquisition credit line. This line of credit can be utilized to fund acquisitions, capital expenditures and working capital. As of March 31, 1999, the Company was in default of a debt covenants. On May 12, 1999, the Company signed an amended agreement with KeyBank in which the covenants were amended. Management of the Company believes that the Company will remain in compliance with the amended agreement; although no assurances can be given in this regard. As of March 31, 1999, the Company had working capital of approximately $50.4 million (ratio of current assets to current liabilities of 2.11:1) and a cash balance of approximately $7.8 million which compared to working capital of approximately $42.9 million (a ratio of current assets to current liabilities of 2.03:1) and a cash balance of approximately $9.4 million at December 31, 1998. As of March 31,1999, the Company had working capital and cash on hand without regard to Maine Energy, PERC and TERI of approximately $19.9 million (ratio of current assets to current liabilities of 1.55:1) and approximately $3.2 14 15 million, respectively, which compared to working capital of approximately $13.9 million (a ratio of current assets to current liabilities of 1.41:1) and a cash balance of approximately $3.9 million at December 31, 1998. As of March 31, 1999, the Company had approximately $22,000 available under the revolving credit agreement. Though management of the Company believes that cash flows from its subsidiaries will meet its current needs for working capital and capital expenditures, the ability of the Company to expand its current operations is dependent on cash flow from its subsidiaries. Management believes that the Company has the ability to access additional facilities to fund capital expenditures if needed; although no assurance can be given in this regard. The Company's ability to make future acquisitions is dependent on its ability to increase its line of credit. The ability to increase the line of credit is dependent on the Company's ability to raise additional equity or raise capital from financial instruments which are subordinated to the KeyBank credit line. Management believes that the Company has the ability to raise additional capital if needed; however, there can be no assurances that this can be accomplished at terms and conditions that would be acceptable to the Company. The Company and its subsidiaries, other than Maine Energy, PERC and TERI, at March 31, 1999 had current maturities of indebtedness of approximately $7.7 million, including borrowings under existing revolving credit facilities. During the three months ended March 31, 1999, the Company, other than Maine Energy, PERC and Timber Energy increased net borrowings on the Company's line of credit facilities by approximately $9.8 million, primarily for the refinancing of debt assumed from certain acquisitions, the funding of business operations and capital expenditures. In general, the Company's capital expenditures and working capital requirements have increased as a result of the Company's business strategy of growth through acquisitions. Management of the Company believes that cash flow from operations will meet its current needs for liquidity. MAINE ENERGY Maine Energy has financed its operations and capital expenditures from cash flows from operations. Cash provided by operations was approximately $1.1 million for the three months ended March 31, 1999 compared to approximately $1.5 million during the same period in 1998. Maine Energy's capital expenditures were approximately $0.3 million and $0.5 million during the three months ended March 31, 1999 and 1998, respectively. As of March 31, 1999 and December 31, 1998, Maine Energy had operating cash of approximately $1.4 million and $2.4 million, respectively, and as required under the terms of the credit agreement underlying its letter of credit, Maine Energy had on account an additional approximately $6.0 million and $6.0 million, respectively, of cash reserves to be used under certain circumstances for capital improvements, debt service, operating shortfalls and working capital requirements. As of March 31, 1999, Maine Energy had total indebtedness of approximately $11.5 million. Management of the Company believes Maine Energy's cash flows from operations and cash resources available will be sufficient to fund anticipated capital expenditures and debt service requirements. Capital expenditures for Maine Energy for the remainder of 1999 are expected to be approximately $0.7 million. PERC PERC has financed its operations and capital expenditures primarily by cash flow from operations. Cash provided by operations was approximately $1.3 million for the three months ended March 31, 1999 compared to approximately $2.0 million in the same period in 1998. PERC's capital expenditures were approximately $0.6 million and $0.1 million during the three months ended March 31, 1999 and 1998, respectively. 15 16 On June 26, 1998 KTI completed a major restructuring of the various contracts and obligations of PERC, which included refinancing PERC's tax exempt bonds. The refinancing was made possible through the sale of approximately $45.0 million in Electric Rate Stabilization Revenue Refunding Bonds issued by the Finance Authority of Maine ("FAME") ("Revenue Bonds"). The proceeds, plus certain funds from operations were utilized to repay the outstanding bonds. The interest rate on the Revenue Bonds ranges from 3.75% for one-year bonds to 5.20% for 20-year term bonds. The refinancing reduced PERC's debt service costs while extending its payment obligation over 20 years. As of March 31, 1999, in addition to PERC's operating cash of approximately $2.6 million, PERC, as required under the terms of the trust indenture governing the Revenue Bonds, had on account an additional approximately $15.4 million of cash reserves to be used for capital improvements, debt service, operating shortfalls and working capital requirements. Company management believes PERC's cash flows from operations and cash resources available will be sufficient to fund anticipated capital expenditures and debt service requirements. PERC plans capital expenditures for the remainder of 1999 of approximately $1.1 million which principally has been set aside in the above-mentioned reserve accounts. TERI TERI has financed its operations and capital expenditures primarily by cash flows from operations. Cash provided by operations was approximately $0.9 million for the three months ended March 31, 1999 compared to approximately $0.8 million during the same period in 1998. TERI's capital expenditures were approximately $132,000 for the three months ended March 31, 1999 compared to approximately $67,000 during the same period in 1998. TERI has two 1997 Industrial Development Revenue Bond issues (the "1997 Bonds") outstanding that carry interest at a fixed rate of 7% and have annual sinking fund payments due each December 1 with a final payment due December 1, 2002. As of March 31, 1999, TERI had approximately $11.6 million outstanding in 1997 Bonds. As of March 31, 1999 and December 31, 1998, in addition to TERI's operating cash of approximately $0.7 million and $0.8 million, respectively, TERI, as required under the terms of its the 1997 Bonds, had on account approximately $2.9 and $2.1 million, respectively, of cash reserves to be used under certain circumstances for capital improvements, debt service, operating shortfalls and working capital requirements. Management believes TERI's cash flows from operations and cash resources available will be sufficient to fund anticipated capital expenditures and debt service requirements. Capital expenditures for TERI for the remainder of 1999 are expected to be approximately $0.3 million. TERI intends to finance the requirements through cash flow from operations. TAX LOSS CARRYFORWARDS At March 31, 1999, the Company had net operating loss carryforwards of approximately $51.0 million for income tax purposes that expire in years 2002 through 2018 and are subject to the limitations as described below. In addition, the Company has general business credit carryforwards of approximately $0.5 million that expire in the years 1999 through 2006 and alternative minimum tax credit carryforwards of approximately $0.9 million that are not subject to limitation. The Tax Reform Act of 1986 enacted a complex set of rules limiting the potential utilization of net operating loss and tax credit carryforwards in periods following a corporate "ownership change." In general, for federal income tax purposes, an ownership change is deemed to occur if the percentage of stock of a loss corporation owned (actually, constructively and, in some cases, deemed) by one or more "5% shareholders" has increased by more than fifty (50) percentage points over the lowest percentage of such stock owned during a three-year testing period. 16 17 During 1994, such a change in ownership of the Company occurred. As a result of the change, the Company's ability to utilize its net operating loss carryforwards and general business credits will be limited to approximately $1.2 million of taxable income, or approximately $0.4 million of equivalent credit per year. This limitation may be increased if the Company recognizes a gain on the disposition of an asset which had a fair market value greater than its tax basis on the date of the ownership change. In conjunction with the acquisition of TERI, FCR and TWM, the Company recorded additional net operating loss carryforwards of approximately $25.6 million, $12.5 million and $0.5 million respectively, which are also subject to a corporate "ownership change". As a result of the change, the Company's ability to utilize the net operating loss carryforwards related to these entities is limited to approximately $1.0 million, $3.2 million and $0.1 million, respectively, per year. ENVIRONMENTAL CONTINGENCIES While increasing environmental regulation often presents new business opportunities to the Company, Maine Energy, PERC and TERI, it likewise often results in increased operating costs as well. The Company, Maine Energy, PERC and TERI strive to conduct their operations in compliance with applicable laws and regulations, including environmental rules and regulations, and have as their goal 100% compliance with such laws and regulations. This effort requires programs to promote compliance, such as training employees and customers, purchasing health and safety equipment, and in some cases hiring outside consultants and lawyers. Even with these programs, management of the Company believes that in the ordinary course of doing business, companies in the environmental services and waste disposal industry are faced with governmental enforcement proceedings resulting in fines or other sanctions and will likely be required to pay civil penalties or to expend funds for remedial work on waste management facilities. The TERI Telogia facility is currently in violation of its Waste Water Discharge Permit (the "Permit"). This violation involves the temperature of the water used in the cooling process and in the opinion of management, does not involve a significant environmental issue. The Company has requested a modification to the Permit from the Florida Department of Environmental Protection to change the monitoring procedures and enable the Company to operate in compliance with the permit. At March 31, 1999, there were no pending governmental environmental enforcement proceedings where the Company, Maine Energy, PERC or TERI believe potential monetary sanctions will exceed $0.1 million. The possibility always exists that substantial expenditures could result from governmental proceedings, which would have a negative impact on earnings for a particular reporting period. More importantly, federal, state and local regulators have the power to suspend or revoke permits or licenses needed for operation of the plants, equipment, and vehicles of the Company, Maine Energy, PERC or any other operating subsidiary of the Company based on the applicable company's compliance record, and customers may decide not to use a particular disposal facility or do business with a company because of concerns about its compliance record. Suspension or revocation of permits or licenses would have a negative impact on the Company's business and operations and could have a material adverse impact on the Company's financial results. INFLATION The effect of inflation on operating costs has been minimal in the past three (3) years. Most of the Company's operating expenses are inflation sensitive, with increases in inflation generally resulting in increased costs of operation. The effect of inflation-driven cost increases on each of the Company's project's overall operating costs is not expected to be greater for such project than for its respective competitor's projects. In addition, each of Maine Energy and PERC and the majority of the Residential Recycling contracts can contractually increase its waste processing fees to municipal customers annually based on inflation. YEAR 2000 ISSUE Year 2000 compliance is the ability of computer hardware and software to respond to the problems posed by the fact that computer programs have traditionally been written using two digits rather 17 18 than four to define the applicable year. As a consequence, unless modified, computer systems will not be able to differentiate between the year 2000 and 1900. Systems must also recognize the Year 2000 as a leap year. Failure to address this problem could result in system failures and the generation of erroneous data. This could potentially impact the Company's ability to perform its obligations under long-term contracts which could result in legal and other liabilities which would have a material adverse effect on the Company. The Company has contacted its customers and vendors and has received letters from each of its applications vendors stating that the majority of the Company's information technology systems, such as accounting, data processing, plant operations systems and telephone/PBX systems, are Year 2000 compliant. Several insignificant software applications representing 20% of the Company's applications are not Year 2000 compliant. They are scheduled to be replaced or upgraded by Year 2000 compliant versions of the applications from the vendor by the end of the third quarter of 1999. The Company has also begun an assessment of its non-information technology systems, such as its security systems and telephones, to determine if they are Year 2000 compliant. The Company has initiated formal communications with the vendors of its remaining non-information technology systems. Based on its assessment to date, the Company is not aware that any of its non-information technology systems will not be Year 2000 compliant prior to the Year 2000. The Company has also begun an assessment of its significant vendors, suppliers, and service providers to determine the extent to which the Company is vulnerable to those third parties' failure to remediate their own Year 2000 compliance issues. To date, the Company has determined, based on information published or otherwise provided by such third parties, that all of such parties' systems are or will be Year 2000 compliant. The Company plans to initiate formal communications with the remaining third parties with whom the Company has a significant relationship. Based on its assessment to date, the Company is not aware that any of its significant vendors, suppliers and service providers will not be Year 2000 compliant prior to the Year 2000. The following table summarizes the status of the Company's Year 2000 compliance program:
ASSESSMENT REMEDIATION TESTING IMPLEMENTATION ---------- ----------- ------- -------------- Information 95% Complete 75% Complete 75% Complete 75% Complete Technology Expected completion Expected completion Expected completion date, September 1999 date, September 1999 date, September 1999 Operating 90% Complete 85% Complete 85% Complete 85% Complete Equipment with Embedded Chips or Expected completion Expected completion Expected completion Software date, June 1999 date, June 1999 date, June 1999 3rd Party 80% Complete 80% Complete for 80% Complete for 80% Complete for system for system system interface. system interface. interface. interface. 66% Complete for Develop contingency Expected completion Expected completion all other plans as appropriate, date for system date for system material June 1999. interface work, June interface work, June exposures. 1999 1999 60% Complete Implement contingency Expected plans or other completion date alternatives as for surveying necessary, August 1999. all remaining third parties, June 1999
18 19 In addition to the assessments and investigations described above, the Company has conducted tests of all of its internal information and non-information technology systems and all of its system interfaces with significant vendors, suppliers and service providers to ensure Year 2000 compliance. All of the Company's accounting and data processing equipment is based on microcomputer hardware and related software, of which 80% has been certified as Year 2000 compliant by the applicable manufacturer or developer. However, the Company has determined that the plant control systems may contain embedded technology which is not Year 2000 compliant. The Company has ordered the hardware containing the embedded logic to replace the hardware that is not Year 2000 compliant with hardware which is Year 2000 compliant. In addition, these systems will be tested during scheduled outage periods at the plants during the second and third quarters of 1999. However, despite the Company's efforts to ensure that its internal systems and the systems of its significant vendors, suppliers and service providers are Year 2000 compliant, there can be no guarantee that the failure of certain systems will not have a material adverse effect on the Company. To date, the Company has utilized internal resources to reprogram, or replace, test, and implement the software and hardware modifications for Year 2000. The only costs incurred by the Company have been the salary costs of its internal staff of four. To date, the Company has incurred approximately $0.1 million (30% expensed and 70% capitalized for new systems and equipment), related to all phases of the Year 2000 project. The Company estimates that the remaining project costs will be less than $0.1 million for the purchase of new software and hardware and approximately $0.1 million of internal resources. Although at the current time, the Company expects that it will be able to complete its Year 2000 compliance program using only internal resources, there can be no assurance that the Company will not require external resources to complete its Year 2000 compliance program. The most significant risk identified by the Company is the inability of the power plants to generate electric power. The Company has received assurances that the process control systems will be Year 2000 compliant with the installation of new hardware components. The Company will perform a complete test of the systems during the planned outage periods that are to be completed by the end of the third quarter of 1999. In addition, the Company has developed contingency plans for this risk as well as other internal and external applications which involve, among other actions, manual workarounds, increasing inventories and adjusting staffing strategies. The impact of this risk could include default under the respective PPA with customers and a loss of electric power revenue. The Company is unable to reasonably estimate the impact of this risk; however, there can be no guarantee that this risk will not have a material adverse effect on the Company. There is also no guarantee that the Company has identified all the significant risks associates with Year 2000 compliance. RECENT ACCOUNTING PRONOUNCEMENTS Recent accounting pronouncements which are not required to be adopted at March 31, 1999, include the following Statement of Financial Accounting Standards ("SFAS") and the American Institute of Certified Public Accountants Statements of Position ("SOP"): SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which will be required to be adopted by the Company as of January 1, 2000, establishes standards for derivative instruments including those embedded in other contracts and for hedging activities. The new standard requires the Company to recognize all derivatives as either assets or liabilities and measure those instruments at fair value. Management believes that the adoption of SFAS No. 133 will not have a material impact on the Company's financial statements. SOP 98-1, Accounting for Costs of Computer Software Developed or Obtained for Internal Use is required to be adopted by the Company as of January 1, 2000. The Company's current policy falls within the guidelines of SOP 98-1. 19 20 ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK The Company currently utilizes no material derivative financial instruments which expose it to significant market risk. The Company is exposed to cash flow and fair value risk due to changes in interest rates with respect to its debt. The table below presents principal cash flows and related weighted average interest rates of the Company's debt at March 31, 1999 by expected maturity dates. Weighted average variable rates are based on forward rates in United States Government Treasury Constant Maturities at March 31, 1999. Forward rates should not be considered a predictor of actual future interest rates. INTEREST RATE SENSITIVITY PRINCIPAL AMOUNT BY EXPECTED MATURITY (IN THOUSANDS)
1999 2000 2001 2002 2003 THEREAFTER FAIR VALUE -------- -------- -------- -------- -------- --------- -------- Fixed Rate Debt $ 3,943 $ 5,979 $ 5,128 $ 6,772 $ 2,091 $ 49,950 $ 74,436 Average Interest Rate 6.42% 6.36% 6.92% 6.27% 6.29% 5.06% Variable Rate Debt $ 4,000 $155,762 $159,762 Average Interest Rate 8.86% 8.91%
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. 20 21 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Maine Energy is the plaintiff in a suit in the State of Maine against United Steel Structures, Inc. under a warranty to recover the costs which were, or will be incurred to replace the roof and walls of the Maine Energy tipping and processing building. The judge in the case entered an order awarding Maine Energy approximately $3.3 million plus interest from May 10, 1994, to the date of the filing of the lawsuit, and court costs. The defendant filed an appeal on December 19, 1997. In February 1999, the Appellate Court reversed the trial court's verdict in favor of the Company and returned the case to the Trial Court. Two lawsuits have been filed on September 30, 1997 and March 6, 1998 by Capital Recycling of Connecticut ("Capital") in a Connecticut State Court against K-C, certain officers of K-C and other parties. The suits allege fraud, tortious interference with business expectancy and violations of the Connecticut Unfair Trade Practices Act. The actions are based on two contracts between Capital and K-C. The contracts require all disputes to be resolved by arbitration in Portland, Oregon. Pursuant to this requirement, K-C has initiated the arbitration process in Portland, Oregon. Subsequently, the parties agreed to arbitrate the dispute in Hartford, Connecticut. Discovery is now in process and the arbitration is expected to be held in June 1999. The Equal Employment Opportunity Commission has filed a lawsuit against FCR Tennessee, Inc., a subsidiary of FCR, in the District Court for the Western District of Tennessee, Western Division, alleging sexual harassment by two managers and a sexually hostile work environment. The complaintants seek compensation for past and future pecuniary and non-pecuniary losses as well as punitive damages and potential reinstatement of employment for Valerie L. Jacobs. FCR has retained counsel to defend this suit and has reported the lawsuit to FCR's Directors & Officers insurance carrier. Management is currently reviewing the lawsuit. The plaintiffs have demanded $105,000 and the Company has offered $30,000 in settlement. No agreement on settlement has been reached. On April 1, 1999, William F. Kaiser, a former Executive Vice President and Treasurer of the Company, filed a lawsuit against the Company in the U.S. District Court for the District of New Jersey. The suit alleges breach of contract, wrongful termination, breach of the implied covenant of good faith and fair dealing, misrepresentation of employment terms and failure to pay wages, all arising out of Mr. Kaiser's employment agreement with the Company. The suit also alleges that the Company inaccurately reported its financial results for the first quarter of 1998 and failed to properly disclose the change of control provision in Mr. Kaiser's employment agreement. Mr. Kaiser is seeking damages for salary, bonus and other payments, including severance, and damages from his sale of approximately 50,000 shares of Common Stock resulting from the Company's allegedly inaccurate financial reports. Mr. Kaiser is also seeking a declaratory judgment that, upon closing of the Company's proposed merger with Casella, the change of control provision entitles him to receive two years' salary and to exercise 132,000 unvested options for the Company's Common Stock. C.H. Lee, a former employee of FCR and a former majority shareholder of Resource Recycling, Inc. ("RRI"), instigated arbitration proceedings in Charlotte, North Carolina against the Company, FCR and FCR Plastics, Inc. ("FCR Plastics") in connection with the acquisition of RRI by FCR. Mr. Lee alleges that FCR and FCR Plastics acted to frustrate the "earn-out" provisions of the acquisition agreement and thereby precluded Mr. Lee from receiving or alternatively, reduced the sums to which he was entitled to receive. He also alleges that FCR and FCR Plastics wrongfully terminated his employment agreement. The claim for arbitration alleges direct charges in excess of $5.0 million and request punitive damages, treble damages and attorneys fees. The Company, FCR and FCR Plastics have responded to the demand, denying liability and filed a counterclaim for $1.0 million for misrepresentations. The Company believes it has meritorious defenses to these claims On or about April 26, 1999, Salvatore Russo purported to have filed an action in the U.S. District Court, District of New Jersey against the Company and two of its principal officers, Ross Pirasteh and 21 22 Martin J. Sergi, on behalf of all stockholders who purchased common stock of the Company from May 4, 1998 through and including August 14, 1998. The complaint alleges that the defendants made material misrepresentations in the Company's Form 10-Q for the period ended March 31, 1998 in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, concerning its allowance for doubtful accounts and net income. The plaintiff is seeking undisclosed damages. The Company believes it has meritorious defenses to the complaint. Dennis McDonnell filed a lawsuit dated April 6, 1999 against U.S. Fiber, Inc., a subsidiary of FCR. Mr. McDonnell, a former employee of U.S. Fiber, Inc. seeks a declaratory judgment regarding his rights and obligations under an Employment Non-Competition Agreement and an Employment Agreement that he previously had signed with two corporations that subsequently were merged with and into U.S. Fiber, Inc. The Company is defending the suit and believes it has meritorious defenses. The Company is a defendant in certain other lawsuits alleging various claims incurred in the ordinary course of business, none of which, either individually or in the aggregate, the Company believes are material to its financial condition, results of operations or cash flows. Management of the Company does not believe that the outcome of the foregoing matters, individually or in the aggregate, will have a materially adverse effect on the Company's financial condition, cash flows or results of operations. ITEM 2. CHANGES IN SECURITIES Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable ITEM 5. OTHER INFORMATION Not applicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None (b) Reports on Form 8-K Five reports on Form 8-K were filed in the first quarter of 1999. The following is a list of the Forms 8-K filed and the dates thereof. (i) A Form 8-K was filed on January 6, 1999 reporting that the Company purchased a 9.6% limited partnership interest in Maine Energy from CNA Realty Corp. for $2.4 million in cash on December 30, 1998. The Company also purchased approximately $6.34 million par amount Maine Energy 12% subordinated note from CNA Realty Corp. The total purchase price was approximately $6.5 million which included the par amount plus accrued and unpaid interest. (ii) A Form 8-K was filed on January 13, 1999 reporting that the Company entered into an Agreement and Plan of Merger with Casella Waste Systems, Inc. ("Casella") in which the KTI shareholders would receive .91 shares of Casella common stock for each share of KTI common stock. The 22 23 closing is subject to approval by the stockholders of the companies, antitrust clearance, and qualification of the merger as a tax-free pooling of interest. (iii) A Form 8-K was filed on January 15, 1999 reporting that the Company purchased 1,730,056 shares of common stock in Oakhurst Company, Inc. ("OCI") for $865,000 in cash. In connection with this transaction, the Company transferred its ownership interest in New Heights Recovery & Power, LLC ("New Heights") to a subsidiary of OCI. The Company also agreed to loan New Heights up to $1.8 million to fund operating expenses. (iv) A Form 8-K was field on January 21, 1999 which included the Agreement and Plan of Merger among the Company, Casella and Rutland Acquisition Sub, Inc. (v) A Form 8-K was filed on February 10, 1999 reporting that on January 27, 1999 the Company purchased all the stock of eight of the AFA Group, Inc. companies (collectively, the "AFA Group"). As consideration for the stock of the AFA Group, the Company issued 460,000 shares of its common stock. 23 24 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. KTI, Inc. (Registrant) By: /s/ Martin J. Sergi ---------------------------------- Name: Martin J. Sergi Title: President By: /s/ Brian J. Noonan ---------------------------------- Name: Brian J. Noonan Title: Chief Financial Officer (Principal Accounting Officer) Date: May 17, 1999 24 EX-27 2 FINANCIAL DATA SCHEDULE
5 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 29,125 0 37,177 1,481 12,869 95,656 208,335 36,197 444,332 45,264 233,629 0 0 139 117,489 444,332 67,449 67,449 56,875 61,923 51 15 3,796 1,679 773 906 0 0 58 848 .06 .06
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