-----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, QFGWSNzTZOvZQUbUuDGsjFDQExa5UPiWLlLMH1V97JSdLE/jIu9PnU1iu3AMiA/8 AsuOD+cZYwXwZHdmEsMO2A== 0000950123-97-000624.txt : 19970203 0000950123-97-000624.hdr.sgml : 19970203 ACCESSION NUMBER: 0000950123-97-000624 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19961122 ITEM INFORMATION: Other events ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19970131 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: 1934 Act SEC FILE NUMBER: 000-25490 FILM NUMBER: 97515437 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 FORM 8-K/A DATED 11-22-96 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 22, 1996 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 5. OTHER EVENTS On November 22, 1996 a wholly owned subsidiary of KTI, Inc. (the "Company" or the "Registrant"), executed an agreement with Continental Casualty Company and two of Continental Casualty Company's subsidiaries (collectively "CCC") and purchased certain investments of CCC in Timber Energy Investment, Inc., a Delaware corporation ("Timber Energy"), including debt having a par amount of approximately $11.8 million, preferred stock having a liquidation value of approximately $50 million and a 49% common stock ownership for $1,850,000 in cash. The assets of Timber Energy have a market value of $15.4 million and are subject to other debt of $13.4 million which is senior to approximately $7 million of the debt purchased by the Company. The Company has also acquired the remaining 51% of common stock for $172,000. Timber Energy's subsidiaries own a 14 megawatt power plant in Telogia, Florida which sells electric power to Florida Power Company under a long term contract, a 400,000 ton per year wood chipmill in Cairo, Georgia, with a long term take or pay contract with Stone Container to process a minimum of 250,000 tons of wood chips per year and a 15 million pound per year plastic recycling plant in Tuscaloosa, Alabama. Timber Energy has annual revenue of $8 million. As a condition of sale, the Company must obtain a release for CCC of that company's reimbursement obligation to a bank which supports $13.4 million of tax exempt debt. The Company must obtain such release not later than August 22, 1997. If the Company is unable to obtain such release, the purchase may be canceled by CCC. Upon cancellation, CCC must return the $1,850,000 purchase price to the Company, less $250,000 as liquidated damages. The Company intends to operate Timber Energy and its subsidiaries as subsidiaries of the Company. ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS (a) Financial Statements of the business acquired. The audited financial statements of Timber Energy Investment, Inc. for the year ended September 30, 1996 together with the independent auditors report thereon are included on pages F-1 through F-18 hereof. (b) Pro forma Financial information. The following pro forma condensed combined financial statements are based on the historical financial statements of the Company at September 30, 1996. The pro forma condensed combined balance sheet assumes that the Company purchased Timber Energy prior to the end of the stated period. The pro forma condensed combined statement of operations assumes that the Company purchased Timber Energy at the beginning of the stated period. 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. 3 (c) Exhibits. Exhibit Number Description 1 Securities Purchase Agreement by and among KTI Plastic Recycling, Inc., Continental Casualty Company, CNA Realty Corp., CLE, Inc. and Timber Energy Investment, Inc. dated as of November 22, 1996. The schedules to this Exhibit do not contain information which is material to an investment decision and which is not otherwise disclosed in the Securities Purchase Agreement. The schedules include a Pledge and Security Agreement, descriptions of the Securities purchased, descriptions of the other outstanding debt of Timber Energy, a list of leases in which Timber Energy is a lessee, descriptions of Timber Energy's Welfare Benefit Plans and a description of a car being sold by Timber Energy to a third party. The Company hereby agrees to furnish a copy of any omitted schedule to the Commission upon request. (Filed as an exhibit to registrant's current report on Form 8-K dated November 22, 1996.) 4 KTI, INC. PROJECTED CONDENSED COMBINED BALANCE SHEET (UNAUDITED) SEPTEMBER 30, 1996
TIMBER PRO FORMA PRO FORMA KTI, INC. ENERGY ADJUSTMENTS KTI, INC. ----------------------------------------------------- --------------- Assets Current Assets Cash and cash equivalents $ 2,168,609 $ 1,028,514 $ 5,000,000 (1) $ 6,175,123 (2,022,000)(3) Restricted funds - current portion 7,653,612 1,370,403 9,024,015 Accounts receivable 2,678,724 713,765 3,392,489 Notes receivable--officers/shareholders and affiliates - current 220,855 220,855 Other receivables - current portion 338,364 338,364 Other current assets 719,504 594,213 1,313,717 -------------------------------------------------------------------- Total current assets 13,779,668 3,706,895 2,978,000 20,464,563 Restricted funds 133,016 133,016 Management fees receivable--affiliates 2,672,519 2,672,519 Notes receivable - officers/shareholders and affiliates 99,930 99,930 Other receivables 275,609 275,609 Investment in PERC 3,698,820 3,698,820 Deferred costs 183,663 183,663 Goodwill and other intangibles 0 0 Other assets 1,714,823 40,813 1,755,636 Property, equipment and leasehold improvements 80,226,770 12,767,520 315,182 (4) 93,309,472 -------------------------------------------------------------------- $102,784,818 $16,515,228 $ 3,293,182 $122,593,228 ==================================================================== Liabilities and stockholders' equity Current Liabilities Accounts payable $ 2,587,781 $ 286,414 $ 2,874,195 Accrued expenses 1,961,264 2,940,434 (2,699,810) (5) 2,201,888 Current portion of long-term debt 6,518,380 1,741,254 (871,254) (6) 7,388,380 Income taxes payable - - Other current liabilities 125,517 11,372 136,889 -------------------------------------------------------------------- Total current liabilities 11,192,942 4,979,474 (3,571,064) 12,601,352 Other liabilities 598,941 598,941 Long-term debt, less current portion 17,063,667 21,663,913 (8,263,913) (7) 35,463,667 5,000,000 (2) Minority interest - Maine Energy 11,052,363 11,052,363 Deferred gain 42,187,500 42,187,500 Commitments and contingencies Stockholders' equity Preferred stock; 10,000,000 shares authorized, no shares issued or outstanding Common stock, no par value (stated value $.01 per share); authorized 13,333,333; issued and outstanding 5,795,021 57,951 50,177,820 (50,177,820) (8) 57,951 Additional paid-in capital 34,369,646 34,369,646 - - Accumulated (deficit) (13,738,192) (60,305,979) 60,305,979 (9) (13,738,192) -------------------------------------------------------------------- Total stockholders' equity 20,689,405 (10,128,159) 10,128,159 20,689,405 -------------------------------------------------------------------- $102,784,818 $16,515,228 $ 3,293,182 $122,593,228 ====================================================================
5 KTI, INC. PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30, 1996
TIMBER PRO FORMA PRO FORMA KTI, INC. ENERGY ADJUSTMENTS KTI, INC. Revenues: Electric power revenues $ 17,213,875 $ 4,196,356 -- $ 21,410,231 Sale of capacity, net 32,057,359 -- -- 32,057,359 Waste processing revenues 6,225,475 -- -- 6,225,475 Other waste handling revenues 3,636,292 2,069,030 -- 5,705,322 ------------ ----------- ----------- ------------ Total revenues 59,133,001 6,265,386 -- 65,398,387 ------------ Costs and expenses: Electric power and waste processing operating costs 20,660,503 5,471,799 (1,041,520)(a) 25,090,782 Selling, general and administrative 1,487,135 846,202 (173,550)(e) 2,159,787 Interest - net 3,868,878 1,095,295 (705,933)(b) 4,445,740 -- 300,000 (c) -- -- (112,500)(d) -- ------------ ----------- ----------- ------------ Total costs and expenses 26,016,516 7,413,296 (1,733,503) 31,696,309 Equity in net income of PERC 292,027 -- -- 292,027 ------------ ----------- ----------- ------------ Income from continuing operations before minority interest and extraordinary item 33,408,512 (1,147,910) 1,733,503 33,994,105 Minority interest 17,889,970 -- -- 17,889,970 ------------ ----------- ----------- ------------ Income from continuing operations before extraordinary item 15,518,542 (1,147,910) 1,733,503 16,104,135 Discontinued operations (254,009) -- -- (254,009) ------------ ----------- ----------- ------------ Income before extraordinary item 15,264,533 (1,147,910) 1,733,503 15,850,126 Extraordinary item - loss on early extinguishment of debt, net of minority interest (2,396,731) -- -- (2,396,731) ------------ ----------- ----------- ------------ Net income $ 12,867,802 $(1,147,910) $ 1,733,503 $ 13,453,395 ============ =========== =========== ============ Pro forma earnings (loss) per common share and common share equivalent: Extraordinary item ($ 0.39) -- -- ($ 0.39) Net income $ 2.11 -- -- $ 2.21 ============ ============ Pro forma weighted average number of common shares and common share equivalents outstanding 6,097,517 -- -- 6,097,517 ============ ============
6 KTI, INC. SEPTEMBER 30, 1996 NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (UNAUDITED) 1. DESCRIPTION OF TRANSACTION On November 22, 1996 a wholly owned subsidiary of KTI, Inc. (the "Company" or the "Registrant"), executed an agreement with Continental Casualty Company and two of Continental Casualty Company's subsidiaries (collectively "CCC") and purchased certain investments of CCC in Timber Energy Investment, Inc., a Delaware corporation ("Timber Energy"), including debt having a par amount of approximately $11.8 million, preferred stock having a liquidation value of approximately $50 million and a 49% common stock ownership. The assets of Timber Energy have a market value of $15.4 million and are subject to other debt of $13.4 million which is senior to approximately $7 million of the debt purchased by the Company. The purchase price for the investments purchased from CCC is $1,850,000 in cash. The Company has also acquired the remaining 51% of common stock for $172,000. 2. PRO FORMA ADJUSTMENTS BALANCE SHEET (1) Proceeds from the sale of 8% Convertible Debt from Wexford KTI LLC, of which a portion of such proceeds were used to purchase Timber Energy. (2) Record the 8% Convertible Debt from Wexford KTI LLC. (3) Cash portion of purchase price to CCC and other unrelated shareholders. (4) Step-up of certain assets at Timber Energy. (5) Elimination of accrued interest relating to the notes payable purchased by the Company from CCC. (6) Elimination of current portion of notes payable at Timber Energy which were purchased by the Company from CCC. (7) Elimination of long term portion of notes payable at Timber Energy which were purchased by the Company from CCC. (8) Elimination of Timber Energy's common and preferred stock. (9) Elimination of Timber Energy's accumulated deficit. STATEMENT OF OPERATIONS (a) Reduction in depreciation of assets to reflect the current estimated useful life of Timber Energy's assets. (b) Adjustment to interest expense to reflect the notes payable which were purchased by the Company. (c) Adjustment to interest expense to reflect the 8% Convertible Debt to Wexford KTI LLC. (d) Adjustment to interest expense to reflect interest income from the remaining proceeds of the 8% Convertible Debt to Wexford KTI LLC. (e) Adjustment to selling, genenal & administrative expenses which will be absorbed by the Company. 7 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. ------------------- (Registrant) Dated: January 30, 1997 By: /s/ Martin J. Sergi ------------------- Name: Martin J. Sergi Title: President 8 Timber Energy Investment, Inc. Consolidated Financial Statements and Other Financial Information Years ended September 30, 1996 and 1995 CONTENTS Report of Independent Auditors........................................ 1 Audited Consolidated Financial Statements Consolidated Balance Sheets .......................................... 3 Consolidated Statements of Operations and Accumulated Deficit......... 4 Consolidated Statements of Cash Flows................................. 5 Notes to Consolidated Financial Statements............................ 6 Other Financial Information Schedule of Operations by Division ...................................16
F-1 9 Report of Independent Auditors The Board of Directors and Shareholders Timber Energy Investment, Inc. We have audited the consolidated balance sheets of Timber Energy Investment, Inc. and subsidiaries as of September 30, 1996 and 1995, and the related consolidated statements of operations and accumulated 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. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Timber Energy Investment, Inc. and subsidiaries as of September 30, 1996 and 1995, and the consolidated results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 2, the Company has suffered recurring losses from operations and has an accumulated deficit of $60,305,979 and a shareholders' deficit of $10,128,159 as of September 30, 1996. Those conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. 10 Page Two Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The Schedule of Operations by Division is presented for the purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied to our audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. Thomas Howell Ferguson P.A. December 19, 1996 F-3 11 Timber Energy Investment, Inc. Consolidated Balance Sheets
SEPTEMBER 30 1996 1995 ---------------------------- ASSETS Current assets: Cash $ 1,028,514 $ 538,440 Accounts receivable, trade 713,765 1,041,535 Inventory 459,013 290,164 Prepaid expenses 135,200 121,233 Funds held by the trustee (Note 8) 1,370,403 978,675 ------------ ------------ Total current assets 3,706,895 2,970,047 Property, plant and equipment, net (Note 4) 12,767,520 14,453,792 Other non-current assets 40,813 93,019 ------------ ------------ Total assets $ 16,515,228 $ 17,516,858 ============ ============ LIABILITIES AND SHAREHOLDERS' DEFICIT Current liabilities: Notes payable and current portion of long-term debt (Note 5) $ 1,741,254 $ 1,577,764 Accounts payable 286,414 231,771 Accrued interest 572,971 192,959 Other accrued expenses 202,624 177,733 Deferred revenues 11,372 60,834 ------------ ------------ Total current liabilities 2,814,635 2,241,061 Accrued interest (Note 10) 2,164,839 1,963,037 Long-term debt (Note 5) 21,663,913 21,863,311 Minority interest (Note 1) -- -- Shareholders' deficit: Common stock, no par value - 150,000 shares authorized, issued and outstanding 2,750 2,750 Preferred Class A 29,270,726 29,270,726 Preferred Class B 20,904,344 20,904,344 Accumulated deficit (60,305,979) (58,728,371) ------------ ------------ Total shareholders' deficit (10,128,159) (8,550,551) ------------ ------------ Total liabilities and shareholders' deficit $ 16,515,228 $ 17,516,858 ============ ============
See accompanying notes F-4 12 Timber Energy Investment, Inc. Consolidated Statements of Operations and Accumulated Deficit
YEAR ENDED SEPTEMBER 30 1996 1995 ---------------------------- Revenues $ 8,184,889 $ 6,968,202 Operating costs and expenses: Fuel cost 722,728 776,559 Production costs 4,421,267 2,812,425 Depreciation expense 1,996,128 1,723,482 ------------ ------------ 7,140,123 5,312,466 ------------ ------------ Gross profit 1,044,766 1,655,736 General and administrative 1,207,306 817,613 ------------ ------------ Operating (loss) profit (162,540) 838,123 Other income (expense): Other income 69,415 62,284 Interest expense (1,484,483) (1,189,471) Minority interest (Note 1) -- -- Write down of idle facilities (Note 4) -- (100,000) ------------ ------------ (1,415,068) (1,227,187) ------------ ------------ Net loss (1,577,608) (389,064) Accumulated deficit at beginning of year (58,728,371) (58,339,307) ------------ ------------ Accumulated deficit at end of year $(60,305,979) $(58,728,371) ------------ ------------
See accompanying notes. F-5 13 Timber Energy Investment, Inc. Consolidated Statements of Cash Flows
YEAR ENDED SEPTEMBER 30 1996 1995 ----------------------------- OPERATING ACTIVITIES Net loss $(1,577,608) $ (389,064) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 2,003,332 1,724,586 Loss on sale of fixed assets 36,620 -- Write down of idle facility -- 100,000 Changes in operating assets and liabilities: Accounts receivable 327,770 (549,889) Inventory (168,849) (39,267) Prepaid expenses (13,967) (5,255) Funds held by the trustee (391,728) (73,490) Other non-current assets 45,002 (93,019) Accounts payable and accrued expenses 661,348 483,642 Deferred revenues (49,462) (55,487) ----------- ----------- Net cash provided by operating activities 872,458 1,102,757 INVESTING ACTIVITIES Proceeds from sale of property, plant and equipment 29,041 130,000 Purchases of property, plant and equipment (375,517) (3,684,503) Construction-in-process -- 37,348 ----------- ----------- Net cash used in investing activities (346,476) (3,517,155) FINANCING ACTIVITIES Proceeds from long-term borrowings 1,100,000 3,838,825 Principal payments on long-term debt and notes payable (1,135,908) (1,167,532) ----------- ----------- Net cash (used in) provided by financing activities (35,908) 2,671,293 ----------- ----------- Net increase in cash 490,074 256,895 Cash at beginning of year 538,440 281,545 ----------- ----------- Cash at end of year $ 1,028,514 $ 538,440 ----------- ----------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the years ended September 30 for: Interest $ 897,162 $ 896,076
See accompanying notes. F-6 14 Timber Energy Investment, Inc. Notes to Consolidated Financial Statements September 30, 1996 and 1995 1. SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Timber Energy Resources, Inc. (TER) was incorporated on July 18, 1984 to construct, own and operate a biomass waste-fuel power plant for the production of electricity from wood and wood products. Substantially all sales are to Florida Power Corporation, an unaffiliated entity. In December 1989, TER began operating a chip mill in South Georgia that converts wood logs to chip products. Substantially all revenues generated from this operation are from Stone Container, Inc., an unaffiliated entity. On June 28, 1992, Timber Energy Investment, Inc. (the Company) was formed and remained dormant until 1995. In 1994, shareholders of 95,000 shares of TER common stock exchanged their shares for 133,800 shares of the Company's common stock. Subsequently, the Company issued 16,200 shares of common stock. Timber Energy Investment, Inc. was created primarily to be a holding company. This ownership change of TER and the formation of the Company is considered a change in legal organization and not a business combination. The exchange of TER shares for shares of the Company's common stock is accounted for at historical cost in a manner similar to that in a pooling of interests. The minority interest is presented at no value because of the accumulated deficit of TER. In July 1994, the Company formed a wholly owned subsidiary, Timber Energy Trucking, Inc., (TET) to conduct a contract hauling operation for Timber Energy Resources, Inc. The Company discontinued these operations in July 1995. In June 1995, Timber Energy Plastics Recycling, Inc. (TEPRI), a wholly-owned subsidiary of the Company, purchased certain assets and discharged certain obligations of Seri, Inc., a debtor-in-possession. Previously, on May 24, 1995, the United States Bankruptcy Court approved the sale of assets free and clear to Continental Casualty Company or its designee. Continental Casualty Company, an affiliated entity of a shareholder of the Company, designated TEPRI as the purchaser. TEPRI recycles plastic waste into products that are sold to manufacturers of plastic products. Prior to this acquisition, Timber Energy Chipping, Inc., which amended its name to Timber Energy Plastics Recycling, Inc. in May 1995, was a dormant entity that had no assets nor liabilities. F-7 15 Timber Energy Investment, Inc. Notes to Consolidated Financial Statements (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, Timber Energy Plastics Recycling, Inc. and its majority owned subsidiary, Timber Energy Resources, Inc. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of depreciable assets, which range from 3 to 32 years. Additions, betterments and replacements are capitalized, whereas costs of maintenance and repairs are charged to expense as incurred. INCOME TAXES The Company has adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109). The liability method is used in accounting for income taxes under SFAS No. 109. 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. Deferred income taxes are provided principally for temporary differences in reporting start-up costs and depreciation expense for financial statements and for tax purposes. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or market. CASH For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash. F-8 16 Timber Energy Investment, Inc. Notes to Consolidated Financial Statements (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. 2. GOING CONCERN The financial statements have been prepared on a going concern basis, which contemplates continuity of operations and realization of assets and liquidation of liabilities in the ordinary course of business. The Company incurred a net loss of $1,577,608 and $389,064 in 1996 and 1995, respectively and has an accumulated deficit of $60,305,979 at September 30, 1996. In June 1995, Timber Energy Plastics Recycling, Inc. purchased certain assets to recycle plastic waste into products that are sold to manufacturers of plastic products (Note 1). Since commencement of operations, TEPRI has operated at a deficit and has borrowed from a shareholder to meet current obligations. The Company's management anticipates that renovation of the TEPRI facility to be complete and the facility fully operational at September 30,1996. Management anticipates that TEPRI will operate at a profit, due to the renovations and affiliation with related entities of KTI Plastics Recycling, Inc. (Note 3). Realization of the carrying value of assets and satisfaction of liabilities is dependent upon the Company's ability to generate adequate revenues and sustain profitable operations. 3. SUBSEQUENT EVENT CNA Realty Corp. (CNA), a 49% shareholder of the Company's outstanding common shares at September 30, 1996, sold its interest in the Company to KTI Plastics Recycling, Inc. on November 22, 1996 for $1,850,000. CNA's interest consist of 73,500 shares of common stock, 29,271 shares of Preferred Class A, 20,904 shares of Preferred Class B and debt instruments described in Note 5. F-9 17 Timber Energy Investment, Inc. Notes to Consolidated Financial Statements (continued) 3. SUBSEQUENT EVENT (CONTINUED) KTI has offered to purchase the remaining 76,500 shares of common stock of the Company for $0.25 per share ($19,125). As of December 19, 1996, management has represented that commitments have been made by numerous shareholders to sell their stock under these arrangements. As discussed in Note 7, these subsequent period transactions have resulted in an "ownership change" as defined in Section 382 of the Internal Revenue Code. 4. PROPERTY, PLANT AND EQUIPMENT The following is a summary of property, plant and equipment:
SEPTEMBER 30 1996 1995 ----------------------------- Buildings $ 730,621 $ 730,621 Leasehold improvements 96,982 37,326 Land improvements 640,440 636,380 Land 149,493 149,493 Chipping and other equipment 769,318 815,242 PPF plant and equipment 881,519 881,519 14-megawatt power plant 15,469,842 15,508,944 Fuel handling system 792,786 792,786 Transmission lines 649,920 649,920 Transportation equipment 157,047 160,781 Furniture and fixtures 109,412 89,599 Chip mill-Cairo 2,751,095 2,751,095 Plastic recycling production equipment 2,250,279 2,021,111 ----------- ----------- 25,448,754 25,224,817 Less allowance for depreciation 12,681,234 10,771,025 ----------- ----------- $12,767,520 $14,453,792 =========== ===========
Depreciation expense for the year ended September 30, 1996 and 1995 was $1,996,128 and $1,723,482 respectively. In 1995, the Telogia Chip Mill, an idle facility, was written off. F-10 18 Timber Energy Investment, Inc. Notes to Consolidated Financial Statements (continued) 5. NOTES PAYABLE AND LONG-TERM DEBT On April 20, 1994, TER completed a restructuring of certain debt obligations. TER issued $15,685,000 of demand bonds and used the proceeds to retire the 1985 bond issue. In addition, TER issued non-voting, non-cumulative preferred class A shares to a shareholder (Note 3) in full settlement of interest payable ($29,270,726) on the 1985 bonds. TER also issued non-voting, non-cumulative preferred class B shares to a shareholder (Note 3) in full settlement of notes payable ($7,633,430) and accrued interest (13,270,914). Both classes of preferred stock pay a 5% dividend from available cash flows after certain operating and debt priority payments are made. The bond indenture and intercompany agreements place various restrictions on TER's use of funds and require certain shareholder approval for issuance of any additional debt by TER. The following is a summary of notes payable and long-term debt:
SEPTEMBER 30 1996 1995 ---------------------------- Note payable to a shareholder (Note 3); interest at prime plus 1%; secured by a 14-megawatt power plant and generated revenues. See Note 10 for discussion of payment terms $ 2,300,000 $ 2,300,000 Note payable to a shareholder (Note 3); due November 1998; monthly payments of $38,597 including interest at 12% per annum; secured by real property and improvements (Cairo chip mill) with a book value of $1,491,671 at September 30, 1996 1,141,252 1,296,468 Construction loan payable to a shareholder (Note 3); due November 1998; monthly payments of $14,000 including interest at 12% per annum; secured by real property with a book value of $517,390 at September 30, 1996 422,778 483,534 Bonds payable due from October 1995 to January 2003; principal and interest payable annually; variable interest rate determined monthly and based on market conditions (3.9% at September 30, 1996) not to exceed 12% per annum; secured by a line of credit from a bank, which is guaranteed by a shareholder (Note 3), and generated 14,270,000 15,025,000 revenues.
F-11 19 Timber Energy Investment, Inc. Notes to Consolidated Financial Statements (continued) 5. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED) Unsecured notes payable to a shareholder (Note 3); due October 20, 1998 including interest at 9.5% per annum 475,291 475,291 Note payable to a shareholder (Note 3); due May 15, 2004; monthly payments of $18,980 including interest at 12% per annum; secured by an electrostatic precipitator with a book value of $1,115,598 at September 30, 1996 1,190,323 1,214,427 Note payable to a shareholder (Note 3); due May 31, 2005; monthly payments beginning June 1, 1996 of $34,297 including interest at 10% per annum; secured by generated revenues and real and personal property with a book value of $2,025,031 at September 30, 1996 3,550,000 2,450,000 Various notes payable with monthly payments of principal and interest, secured by property with a book value approximating the notes payable balance. The interest rate on the notes payable vary from 7% to 18% 55,523 196,355 ----------- ----------- 23,405,167 23,441,075 Less current portion 1,741,254 1,577,764 ----------- ----------- $21,663,913 $21,863,311 =========== ===========
After the payment of its ordinary operating expenses, the priority of debt service payments as specified in the trust indenture for the 1994 bond issue is as follows: 1) Insurance and taxes 2) Bond administrative expenses 3) Interest on bonds payable F-12 20 Timber Energy Investment, Inc. Notes to Consolidated Financial Statements (continued) 5. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED) 4) Monthly pro-rata amount of next principal payment on bonds payable Scheduled Due Date Amount ------------------ ------------ October 1, 1996 $ 870,000 October 1, 1997 $ 1,000,000 October 1, 1998 $ 1,150,000 October 1, 1999 $ 1,315,000 October 1, 2000 $ 1,510,000 October 1, 2001 $ 1,740,000 October 1, 2002 $ 1,995,000 October 1, 2003 $ 2,290,000 5) Interest on construction loans payable of $422,778 and $1,190,323 at September 30, 1996 6) Interest on the unsecured notes payable of $475,291 at September 30, 1996 7) Principal payment of construction loans payable of $422,778 and $1,190,323 at September 30, 1996 8) Principal payment of unsecured notes payable of $475,291 at September 30, 1996 9) Optional bond redemptions as follows:
Scheduled Due Date Amount ------------------ ------------- October 1, 1996 $ 430,185 October 1, 1997 $ 921,881 October 1, 1998 $ 580,932
Scheduled principal payments under notes payable and long-term debt agreements at September 30, 1996 are as follows:
Year ending September 30 1996 $ 1,741,254 1997 1,923,380 1998 2,168,881 1999 2,279,202 2000 2,052,947 Thereafter 13,239,503 ------------- $ 23,405,167
F-13 21 Timber Energy Investment, Inc. Notes to Consolidated Financial Statements (continued) 6. LEASES The Company leases land, right-of-way, and equipment under operating leases. Rental expense for the year ended September 30, 1996 and 1995 was $109,328 and $42,576, respectively. The future minimum rental commitments as of September 30, 1996 are as follows:
Year ending September 30 1997 $ 92,897 1998 $ 90,693 1999 $ 86,684 2000 $ 86,844
7. INCOME TAXES At September 30, 1996 and 1995, the Company had net operating loss carryforwards for federal income tax purposes of approximately $25,580,000 and $24,160,000, respectively. The net operating loss carryforwards expire in years 2005 through 2011. Cumulative taxable temporary differences were $5,800,000 at September 30, 1996 and 1995. The Company has recorded a deferred tax asset for the expected benefit of the net operating loss carryforwards, and investment tax credits net of the deferred liability related to the cumulative taxable temporary differences. In accordance with SFAS No. 109, management has evaluated the recoverability of the deferred tax asset and has recorded a valuation allowance to offset the deferred tax asset. The tax benefit of those items will be realized when offset against future taxable income. Significant components of the Company's deferred tax asset as of September 30, 1996 and 1995 are as follows:
1996 1995 ----------------------------- Tax effects of: Net operating loss carryforwards $ 9,625,000 $ 9,092,000 Taxable temporary differences: Depreciation (2,227,000) (2,227,000) Other 41,000 44,000 Investment tax credits 288,000 288,000 ----------- ----------- Deferred tax asset 7,727,000 7,197,000 Valuation allowance 7,727,000 (7,197,000) ----------- ----------- Net deferred tax asset $ -- $ -- =========== ===========
F-14 22 Timber Energy Investment, Inc. Notes to Consolidated Financial Statements (continued) 7. INCOME TAXES (CONTINUED) Under Section 382 of the Internal Revenue Code, as amended by the Tax Reform Act of 1986, a corporation's ability to carry forward its net operating loss and built-in losses following an "ownership change" is limited on an annual basis to an amount equal to the product of the fair market value of the corporation's outstanding stock immediately before the ownership change and the long-term tax-exempt interest rate, subject to certain adjustments for built-in gains of the corporation. The risk of change in a company's stock ownership is always present and may result from transactions that are beyond the control of the Company. As of September 30, 1996, no such ownership changes have occurred. As discussed in Note 3, CNA sold its 49% interest in the Company on November 22, 1996. The Company determined it has undergone an "ownership change" due to the stock sales occurring in the subsequent period. The future effect of the "ownership change" on the utilization of the net operating losses has not been determined. 8. FUNDS HELD BY TRUSTEE Funds held by the trustee represent the proceeds from fuel sales which can only be used to repay the bonds and related interest cost. The restricted funds are invested by the trustee in specified investments. The following is a description of the funds held by the trustee:
SEPTEMBER 30 1996 1995 ---------------------------- Funds restricted for the debt service $ 968,800 $775,239 Other restricted funds 401,603 203,436 ---------- -------- Total funds held by the trustee $1,370,403 $978,675 ========== ========
9. RELATED PARTY TRANSACTIONS CNA, a 49% shareholder of the Company and owner of Preferred Class A and B shares at September 30, 1996 is due approximately $9,080,000 under various long-term debt agreements and is guarantor for payment of a line of credit securing the bonds payable at September 30, 1996 (Note 3). During the year ended September 30, 1996, the Company recognized $944,369 in interest expense owed to CNA related to this long-term debt and made interest payments of $353,767. CNA also owns the rights to a royalty contract purchased in 1988 from the original holder of a $2,300,000 note payable (Note 10). F-15 23 Timber Energy Investment, Inc. Notes to Consolidated Financial Statements (continued) 10. COMMITMENTS Under a contract to construct the 14-megawatt power plant, the Company is committed to make quarterly payments to a shareholder (Note 3) in the amount of 50% of net project cash flow not to exceed 25% of the estimated annual project cash flow, until the deferred sum of $2,300,000 is paid, including interest accrued quarterly at a rate of prime plus 1 %. In addition, once the deferred portion plus interest is paid, quarterly payments of 25% of net project cash flow will be paid for a period of five years. Net project cash flow is defined under the contract as projected gross income less debt service, operations, maintenance and fuel expenses. The $2,300,000 note payable and related accrued interest payable of $2,164,839 and $1,963,037 is recorded in the financial statements at September 30, 1996 and 1995, respectively. The liability, if any, related to the commitment to pay 25% of net projected cash flow, is not recorded at September 30, 1996 or 1995. Such amounts will be recorded as royalty expense in the period in which the net projected cash flow is generated. 11. PENSION PLAN On July 31, 1990, TER adopted a deferred compensation plan 401(K) that covers substantially all of its employees. It is the Company's policy to fund its qualified pension plan in amounts equal to the pension cost incurred each year. The total pension expense for 1996 and 1995 was $27,672 and $25,219, respectively. At September 30, 1996 and 1995, there was no unpaid pension expense. Effective October 1, 1996, the 401(K) Plan was amended to include all employees of the Company and the name of the plan was changed to Timber Energy Investment, Inc. 401(K) Plan. F-16 24 OTHER FINANCIAL INFORMATION F-17 25 Timber Energy Investment, Inc. Schedule of Operations by Division Year ended September 30, 1996
POWER CHIP PLASTIC ELIMINATING PLANT MILL RECYCLING ENTRIES TOTAL ----------- ----------- ----------- ----------- ----------- Revenues $ 5,606,985 $ 1,451,837 $ 1,438,644 $ (312,577) $ 8,184,889 Operating costs and expenses: Fuel cost 1,035,305 -- -- (312,577) 722,728 Production costs 1,860,002 765,392 1,795,873 -- 4,421,267 Depreciation expense 1,414,769 250,074 331,285 -- 1,996,128 ----------- ----------- ----------- ----------- ----------- 4,310,076 1,015,466 2,127,158 (312,577) 7,140,123 ----------- ----------- ----------- ----------- ----------- Gross profit (loss) 1,296,909 436,371 (688,514) -- 1,044,766 General and administrative 483,655 58,525 665,126 -- 1,207,306 ----------- ----------- ----------- ----------- ----------- Operating profit (loss) 813,254 377,846 (1,353,640) -- (162,540) Other income (expense): Other income 9,564 787 59,064 -- 69,415 Interest expense (981,326) (150,799) (352,358) -- (1,484,483) Minority interest -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- Net(loss)income $ (158,508) $ 227,834 $(1,646,934) $ -- $(1,577,608) =========== =========== =========== =========== ===========
Year ended September 30, 1995 CHIP POWER CHIP PLASTIC ELIMINATING HAULING PLANT MILL RECYCLING ENTRIES TOTAL ----------- ----------- ----------- --------- ----------- ----------- Revenues $ 241,167 $ 5,312,059 $ 1,902,411 $ 119,105 $ (606,540) $ 6,968,202 Operating costs and expenses: Fuel cost -- 1,165,911 -- -- (389,352) 776,559 Production costs 224,741 1,862,944 783,443 149,210 (207,913) 2,812,425 Depreciation expense 13,500 1,417,948 244,430 47,604 -- 1,723,482 ----------- ----------- ----------- --------- ----------- ----------- 238,241 4,446,803 1,027,873 196,814 (597,265) 5,312,466 ----------- ----------- ----------- --------- ----------- ----------- Gross profit (loss) 2,926 865,256 874,538 (77,709) (9,275) 1,655,736 General and administrative 10,243 553,487 113,830 127,222 12,831 817,613 ----------- ----------- ----------- --------- ----------- ----------- Operating profit(loss) (7,317) 311,769 760,708 (204,931) (22,106) 838,123 Other income (expense): Other income 55,994 5,781 509 -- -- 62,284 Interest expense (8,273) (959,714) (184,102) (37,382) -- (1,189,471) Minority interest -- -- -- -- -- -- Write down of idle facilities -- (100,000) -- -- -- (100,000) ----------- ----------- ----------- --------- ----------- ----------- Net(loss)income $ 40,404 $ (742,164) $ 577,115 $(242,313) $ (22,106) $ (389,064) =========== =========== =========== ========= =========== ===========
F-18 26 Page Two Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The Schedule of Operations by Division is presented for the purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied to our audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. Thomas Howell Ferguson P.A. January 30, 1997 F-3 27 Accountant's Consent The Board of Directors Timber Energy Investment, Inc. We consent to the inclusion of our report dated December 19, 1996, with respect to the balance sheets of Timber Energy Investment, Inc. as of September 30, 1996 and 1995, and the related statements of operations, accumulated deficit, and cash flows for the years then ended, which report appears in the Form 8-KA of KTI, Inc. dated November 22, 1996. Thomas Howell Ferguson P.A. Tallahassee, Florida February 3, 1997 -----END PRIVACY-ENHANCED MESSAGE-----