-----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, BlPp8gbOXldvD8JcwjkkM6WZ5Tn4nUKJ50ucw/bV3HHo3UtQU/cV9FjEW3djZL8Y hbunzuzmDLC+vaBamq77Ag== 0000950123-98-005152.txt : 19980518 0000950123-98-005152.hdr.sgml : 19980518 ACCESSION NUMBER: 0000950123-98-005152 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 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: 10-Q SEC ACT: SEC FILE NUMBER: 000-25490 FILM NUMBER: 98623807 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 10Q (x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 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 9,499,848 Shares as of April 24, 1998 2 TABLE OF CONTENTS Item Number and Caption Page Number - ----------------------- ----------- PART I Item 1. Financial Statements 2 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II Item 1. Legal Proceedings 13 Item 2. Changes in Securities 13 Item 3. Defaults Upon Senior Securities 13 Item 4. Submission of Matters to a Vote of Security Holders 13 Item 5. Other Information 13 Item 6. Exhibits and Reports on Form 8K 14 1 3 PART I - FINANCIAL INFORMATION Item 1. Financial Statements KTI, Inc. Consolidated Balance Sheet (in thousands, except share and per share amounts)
March 31, December 31, 1998 1997 ------------- -------------- Assets Current Assets Cash and cash equivalents $ 11,412 $ 11,181 Restricted funds - current portion 14,567 13,103 Accounts receivable, net of allowances of $348 and $294 24,885 22,126 Consumables and spare parts 4,370 4,041 Inventory 1,966 1,219 Notes receivable--officers/shareholders and affiliates - current 29 29 Other receivables 409 461 Deferred taxes 2,751 2,751 Other current assets 1,508 793 ------------- -------------- Total current assets 61,897 55,704 Restricted funds 5,923 6,527 Notes receivable - officers/shareholders and affiliates 50 81 Other receivables 286 271 Deferred costs, net of accumulated amortization of $ 848 and $676 3,307 2,911 Goodwill and other intangibles, net of accumulated amortization of $ 1,140 and $778 20,235 17,483 Other assets 522 1,768 Deferred project development costs 937 937 Property, equipment and leasehold improvements, net of accumulated depreciation of $ 19,857 and $17,837 158,515 156,801 ------------- -------------- Total assets $ 251,672 $ 242,483 ============= ============== Liabilities and stockholders' equity Current Liabilities Accounts payable $ 11,236 $ 8,779 Accrued expenses 3,024 3,825 Debt, current portion 14,637 19,794 Income taxes payable 165 165 Other current liabilities 1,187 1,184 ------------- -------------- Total current liabilities 30,249 33,747 Other liabilities 2,515 1,918 Debt, less current portion 83,308 74,473 Minority interest 23,174 22,105 Deferred revenue 35,924 37,500 Commitments and contingencies Stockholders' equity Preferred stock; 10,000,000 shares authorized; Series A, par value $8 per share, 447,500 shares authorized, issued and outstanding in 1997 3,732 Series B, par value $25 per share, 8.75%, 880,000 shares authorized, 856,000 shares issued and outstanding in 1998 and 1997 21,400 21,400 Common stock, no par value (stated value $.01 per share); authorized 20,000,000 issued and outstanding; 9,477,953 in 1998 8,912,630 in 1997 94 89 Additional paid-in capital 57,381 52,762 Accumulated (deficit) (2,373) (5,243) ----------------------------- Total stockholders' equity 76,502 72,740 ----------------------------- Total liabilities and stockholders' equity $ 251,672 $ 242,483 =============================
See accompanying notes. 2 4 KTI, Inc. Consolidated Statement of Operations (in thousands, except share and per share amounts)
Three months ended March 31, 1998 1997 ------------ ------------ (Unaudited) Revenues: Waste to Energy: Electric power revenues $ 10,413 $ 9,507 Waste processing revenues 8,081 7,084 Recycling 19,138 1,840 ------------ ------------ 37,632 18,431 Costs and expenses: Electric power and waste processing costs 10,754 9,900 Recycling 17,422 1,659 Selling, general and administrative 1,082 1,045 Depreciation and amortization 2,457 2,213 Interest - net 1,510 1,000 ------------ ------------ 33,225 15,817 ------------ ------------ Income before minority interest 4,407 2,617 Minority interest 1,069 355 Preacquisition earnings of PERC -- 903 ------------ ------------ Net income 3,338 1,359 Accretion and paid and accrued dividends on preferred stock (509) -- ------------ ------------ Net income available to common shareholders $ 2,829 $ 1,359 ============ ============ Earnings per common share Basic $ .31 $ .19 ============ ============ Weighted average number of shares used in computation 9,236,588 7,088,233 ============ ============ Diluted $ .28 $ .19 ============ ============ Weighted average number of shares used in computation 11,983,345 7,796,000 ============ ============
See accompanying notes. 3 5 KTI, Inc. Consolidated Statements of Cash Flows (in thousands, except share and per share amounts)
Three months ended March 31, 1998 1997 -------- -------- (Unaudited) Operating activities Net income $ 3,337 $ 1,359 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization 2,457 1,202 Minority interest 1,069 355 Deferred Revenue (1,576) (938) Provision for losses on accounts receivable 54 4 Interest accrued and capitalized on debt 417 429 Non-cash contribution to 401K plan 41 Equity in net income of PERC, net of distributions -- (56) Gain on sale of assets (8) (1) Changes in operating assets and liabilities Increasing (decreasing) cash: Accounts receivable (1,759) (599) Management fees receivable -- (94) Other receivables 189 299 Consumables, spare parts and inventories (1,000) (710) Other assets 546 (757) Accounts payable 1,624 601 Accrued expenses (901) 31 Income taxes (11) Other liabilities 350 (49) -------- -------- Net cash provided by operating activities 4,829 1,076 Investing activities Additions to property, equipment and leasehold improvements (3,592) (1,049) Proceeds from sale of assets 18 8 Increase in restricted cash and cash equivalents (860) (996) Deferred project costs 0 (129) Purchase of business net of cash acquired (3,431) Notes receivable--officers/shareholders and affiliates 32 7 -------- -------- Net cash (used in) provided by investing activities (7,877) (2,159) Financing activities Proceeds from issuance of debt 5,548 424 Deferred financing costs (398) Proceeds from sale of common stock 850 246 Dividends paid (468) Principal payments on debt (2,253) (1,752) -------- -------- Net cash provided by (used in) financing activities 3,279 (1,230) -------- -------- Increase (decrease) in cash and cash equivalents 231 (2,313) Cash and cash equivalents at beginning of period 11,181 5,227 -------- -------- Cash and cash equivalents at end of period $ 11,412 $ 2,914 ======== ========
-Continued- 4 6 KTI, Inc. Consolidated Statements of Cash Flows--(continued) (in thousands, except share and per share amounts)
Supplemental disclosure of cash flow information Interest paid $ 902 $ 318 ====== ====== Non cash investing and financing activities -- Issuance of stock for employee savings plan contribution $ 41 Conversion of preferred stock 3,769
See accompanying notes. 5 7 KTI, Inc. Consolidated Statements of Stockholders' Equity (in thousands, except share and per share amounts)
Series A Series B Additional Preferred Stock Preferred Stock Common Stock Paid In Accumulated Shares Amount Shares Amount Shares Amount Capital Deficit Total Balance at January 1, 1996 5,946,973 $ 59 $33,427 $ (26,606) $ 6,881 Net income 13,666 13,666 Issuance of common stock and common stock purchase warrants for: Exercise of options 55,346 1 280 281 Exercise of warrants 41,183 0 225 226 Conversion of debt 725,015 7 4,045 4,052 Business combinations 68,249 1 455 456 Issuance of stock purchase warrants 144 144 -------------------------------------------------------------------------------------------------------- Balance at December 31, 1996 6,836,766 68 38,576 (12,940) 25,704 Net income 8,092 8,092 Issuance of Series A Preferred Stock and common stock purchase warrants 487,500 $ 3,376 422 3,799 Accretion of Series A Preferred Stock 700 (700) Issuance of Series B Preferred Stock and common stock purchase warrants 856,000 $21,400 (1,416) 19,984 Issuance of common stock and common stock purchase warrants for: Exercise of options 85,353 1 502 503 Exercise of warrants 692,771 7 3,611 3,618 Conversion of debt 618,609 6 4,901 4,908 Conversion of preferred stock (40,000) (344) 40,000 0 343 (1) Employee savings plan contribution 4,117 0 35 35 Business combinations 635,014 6 6,488 6,494 Dividends paid on Series B Preferred Stock (395) (395) -------------------------------------------------------------------------------------------------------- Balance at December 31, 1997 447,500 $3,732 856,000 $ 21,400 8,912,630 $89 $52,763 $ (5,243) $72,741 Net income 3,338 3,338 Accretion of Series A Preferred Stock 41 (41) -- Issuance of common stock and common stock purchase warrants for: Exercise of options 420 0 3 3 Exercise of warrants 113,188 1 846 847 Conversion of preferred stock (447,500) (3,773) 447,500 4 3,769 -- Employee savings plan contribution 4,215 0 41 41 Dividends paid on Series B Preferred Stock (468) (468) -------------------------------------------------------------------------------------------------------- Balance at March 31, 1998 -- -- 856,000 21,400 9,477,953 94 $57,381 $ (2,373) $ 76,502 ========================================================================================================
6 8 KTI, Inc. Notes to Consolidated Financial Statements (in thousands of dollars except share and per share amounts) March 31, 1996 1. Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of Management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. 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, 1997. Certain 1997 financial information contained herein has been reclassified to conform with the 1998 presentation. 2. Earnings Per Share In 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share. Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, the basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts have been presented, and where appropriate, restated to conform to the Statement 128 requirements. The following table sets forth the computation of basic and diluted earnings per share:
1998 1997 ------------------------------ Numerator: Income from continuing operations $ 3,338 $ 1,359 Preferred stock dividends (468) Accretion of preferred stock (41) ------------------------------ Numerator for basic earnings per share-income from continuing operations available to common stockholders 2,829 1,359 Effective of dilutive securities (1): Convertible subordinated notes payable 100 ------------------------------ Numerator for diluted earnings per share-income from continuing operations available to common stockholders after assumed conversions $ 2,829 $ 1,459 ============================== Denominator: Denominator for basic earnings per share-weighted average shares 9,236,588 6,844,350 Effect of dilutive securities: Employee stock options 412,350 90,102 Warrants 314,825 243,883 Convertible preferred stock 198,306 Convertible subordinated notes payable 1,821,277 617,665 ------------------------------ 2,746,758 951,650
7 9
1998 1997 ------------------------------ Dilutive potential common shares Denominator for diluted earnings per share-adjusted weighted-average shares and assumed conversions 11,983,345 7,796,000 ------------------------------ Income from continuing operations per share-Basic $ .31 $ .20 ============================== Income from continuing operations per share-Diluted $ .28 $ .19 ==============================
3. Contingencies 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. 8 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (in thousands, except share and per share amounts) Results of Operations Revenues Consolidated revenue for the three months ended March 31, 1998, compared with the same period in 1997, increased $19,201 or 104.2%. Approximately $17,298 of this increase is attributable to the recycling division and $1,903 is attributable to the waste to energy division. KTI's waste to energy division showed increases in electric power revenues of $906 or 9.5% for the quarter ended March 31, 1998 as compared to the same period in 1997. Approximately $248 of this increase is from PERC, principally as a result of a 5% increase in electric generation coupled with an inflationary increase in price per kilowatt received. The balance of the increase in electric power revenues was at Maine Energy, which primarily was due to a 2% rate increase and an additional capacity payment under its amended power purchase agreement. Timber Energy experienced a reduction in electrical generation due to problems with steam flow to the turbine generator which were repaired during its annual outage in April, 1998. This revenue decrease was offset by an increase in capacity payments. Revenues from waste processing increased $997 or 19.8% compared to the same period in 1997. PERC's and Maine Energy's waste processing revenues increased by $288 and $254; or 10.9% and 13.0%, respectively, principally from increases in tipping fees per ton at the facilities. Revenues at AAR Tennessee, KTI Specialty Waste and SEMCO were $163 or 15.5% lower for the quarter ended March 31, 1998 than the same period in 1997, principally because of lower tonnage processed during in the current quarter. These decreases were offset by increases in revenues at KTI Bio Fuels of $407 or 59%; which resulted from increase waste brokerage activity; from revenues at Total Waste Management of $529; and from revenues at Power Ship Transport of $184. Total Waste Management, whose principal business is processing and disposing of oily waste and contaminated water, was acquired January 27, 1998. Power Ship Transport is a trucking brokerage division started by KTI during the second quarter of 1997. Sales of recyclables increased $17,298 in the first quarter of 1998 as compared to the same period in 1997. This increase is principally a result of the acquisitions of Zaitlin, K-C International and the assets of the Prins facilities during the third and fourth quarter of 1997. Recycling revenues are generated from the sales of waste paper, ferrous and non-ferrous materials, and plastic materials. Costs and Expenses Electric power and waste handling operating costs increased by $854 for the quarter ended March 31, 1998 compared to the 1997 quarter. Operating costs of Total Waste Management and Power Ship were of $492 and $418 respectively. Maine Energy's operating expenses increased $212 or 6.7% while PERC's and Timber's operating expenses decreased $308 and $324 or 22.2% and 31.0% respectively. Bio Fuel's operating expenses increased $215 or 14.7%. The increase in 1998 principally results from marginally higher operating costs at the power plants, and from the new entities of Total Waste Management and Power Ship Transport. Increases were offset by net reductions in operating costs of other divisions during the quarter. Selling, general and administrative expenses increased by $37 or .1% for the quarter ended March 31, 1998 compared to the 1997 quarter. 9 11 Interest Interest expense increased $510 or 50% for the quarter ended March 31, 1998 as compared to the same quarter in 1997. Interest expense at Timber Energy increased $134 or 133.3% due to the restructuring of the variable rate bonds to fixed coupon rates during the second quarter of 1997. The balance of the increase of $376 is attributable to increased borrowings on the Company's line of credit and term notes to fund a portion of the acquisitions of the Prins assets, Total Waste Management, Vel-A-Tran and Zaitlin. Liquidity and Capital Resources The Company is a holding company and receives cash flow from its subsidiaries. Receipt of cash flow from its affiliate PERC is currently restricted by covenants under loan agreements, distribution restrictions under partnership agreements with its equity investors, and put-or-pay agreements with municipalities. Maine Energy's cash flow is required to retire the remaining outstanding balance of $12,298 of subordinated notes payable as of March 31, 1998 before cash distributions to partners can begin. Timber Energy'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 Timber and liquidity and capital resources of each of Maine Energy, PERC and Timber independently. The Company The Company has financed its operations and capital expenditures primarily from cash flow from its subsidiaries which are not contractually restricted from making distributions, management fees from contractually restricted subsidiaries, collateralized equipment financing, unsecured subordinated debt, drawings under its lines of credit and proceeds from the sale of the Company's common stock. On June 4, 1997, the Company consummated the private placement of 487,500 shares of its Series A Convertible Preferred Stock for gross proceeds of $3.9 million. The Series A Convertible Preferred Stock was convertible into shares of the Company's Common Stock, at a price of $8.00 per share, subject to adjustment. Purchasers of the shares of Series A Convertible Preferred Stock also received, in the aggregate, warrants to purchase 243,750 shares of Common Stock at $9.00 per share and warrants to purchase 32,500 shares of Common Stock at $10.00 per share. During 1997, 40,000 of the shares of Series A Convertible Preferred Stock were converted to 40,000 shares of Common Stock. The remaining shares of Series A Convertible Preferred Stock were converted into 447,500 shares of Common Stock in February 1998. During August 1997, the Company consummated the offering of 856,000 shares of its 8.75% Series B Preferred Stock. The gross proceeds of the offering were $21.4 million and the net proceeds to the Company were $19,984. The Series B Convertible Preferred is convertible into Common Stock at $11.75 of liquidation value per share and is redeemable, at the option of the Company: (a) on August 15, 1999 for $26.47 per share if the bid price of the Common Stock has averaged not less than 1.5 times the then conversion price during the preceding twenty (20) consecutive trading days; and (b) at $26.10 on August 15, 2000 and declining at approximately $0.37 per share as of August 15 on each subsequent year until August 15, 2003 when the Series B Preferred Stock may be called at $25.00 per share. The Series B Preferred Stock is subject to mandatory redemption at $25.00 per share on August 15, 2004. At the option of the Company, such mandatory redemption of the Series B Preferred Stock may be made in cash or in shares of Common Stock of the Company, valued at 95% of the average closing price of the Common Stock during the twenty (20) trading days prior to such redemption date. So long as any shares of the Series B Preferred Stock are outstanding, the Company may not issue any new securities in parity with, or senior to, the Series B Preferred Stock unless (a) the proforma ratios for the latest twelve months of net income available for preferred dividends is not less than 1:1; and (b) earnings before interest, taxes, depreciation and amortization, exclusive of non-recurring items, less capital expenditures, securities amortization and redemption, cash, taxes and changes in working capital to preferred dividends 10 12 is not less than 1.2:1, unless an affirmative vote or consent of the majority of the outstanding shares of Series B Preferred Stock has been received. The Company, at its option, may exchange all, but not less than all, of the then outstanding shares of Series B Preferred Stock into 8.75% Convertible Subordinated Notes due August 15, 2004 (the "8.75% Convertible Subordinated Notes") on the first business day of February, May, August or November of any year. If the 8.75% Convertible Subordinated Notes are issued, the Company is obligated to qualify the trust indenture for the 8.75% Convertible Subordinated Notes and the trustee appointed thereby under the Trust Indenture Act of 1939, as amended. The Company and its subsidiaries, other than Maine Energy, PERC and Timber Energy at March 31, 1998 had indebtedness maturing in the next year of $6,472. During the first quarter of 1998, the Company, other than Maine Energy, PERC and Timber Energy incurred additional debt of approximately $5,548, primarily as a result of drawings under its lines of credit; and retired approximately $803 of debt. As of March 31, 1998, the Company had cash on hand without regard to Maine Energy, PERC and Timber Energy of approximately $1,171 and $11,925 available in lines of credit from a bank. On March 23, 1998 the Company received a commitment from KeyBank to increase its credit line from $11 million to $22 million. This line of credit can be utilized to fund acquisitions, capital expenditures and for working capital. There can be no assurance such acquisitions or capital expenditures will take place, or that working capital will be increased. Management of the Company believes that cash flow from its subsidiaries and affiliates and unused lines of credit will meet its current needs for liquidity. Moreover, management believes that the Company has the ability to access additional borrowing facilities if needed, although no assurance can be given in this regard. Maine Energy Maine Energy has financed its operations and capital expenditures from cash flows from operations. Cash provided by operations was $3,175 in 1997, as compared to $89,280 in 1996. During 1996 Maine Energy sold its generating capacity to CL One for a period through May 31, 2007. In exchange CL One agreed to make a series of quarterly payments to Maine Energy including an initial payment of $85 million. Maine Energy retired the entire outstanding principal balance of $64.5 million of its tax exempt variable rate revenue bonds and $29.5 million of its subordinated loan accrued interest and principal from the proceeds from the sale of capacity. As of March 31, 1998 Maine Energy had total indebtedness of $12,298. Maine Energy capital expenditures were $2,559 and $2,939 for additions to property, plant and equipment during 1997 and 1996, respectively. As of March 31, 1998, in addition to Maine Energy's operating cash of $2,066, Maine Energy, as required under the terms of the credit agreement with its letter of credit, has on account an additional $4,696 of reserves to be used for capital improvements, debt service, operating shortfalls and working capital requirements. Management of the Company believes Maine Energy has adequate cash resources available to fund its future operations and anticipated capital expenditures. Capital expenditures for Maine Energy for the year ending December 31, 1998 are expected to be approximately $3,043, of which $1,850 has been set aside in the above mentioned reserve accounts. PERC PERC has financed its recent operations and capital expenditures primarily from cash flows from operations. Cash provided by operations was $11,313 in 1997 as compared to $8,493 in 1996. PERC's capital expenditures were $314 and $1,192 for additions to property, plant and equipment during 1997 and 1996, respectively. At March 31, 1998, PERC had outstanding tax-exempt, variable rate revenue bonds backed by bank letters of credit in the aggregate amounts of $46,350. The variable interest rate on the Orrington Bonds at March 31, 1998 was 3.37%. The bonds are payable pursuant to a schedule through May 2003. During the first quarter of 1998 PERC made principal payments to bondholders of $1,550. 11 13 As of March 31, 1998, in addition to PERC's operating cash of $7,365, PERC, as required under the terms of the credit agreement with its letter of credit banks and the trust indenture governing the Orrington Bonds, had on account an additional $8,132 of cash reserves to be used for capital improvements, debt service, operating shortfalls and working capital requirements. Company management believes PERC has adequate cash resources available to fund its current project operations and currently anticipated capital expenditures. PERC plans capital expenditures for the year ending December 31, 1998 of approximately $765. PERC intends to finance this amount through cash flow from operations. Timber Energy Timber Energy has financed its operations and capital expenditures primarily from cash flow from operations since it was acquired on November 22, 1996. Cash provided by operations was $1,807 in 1997. Timber Energy's capital expenditures were $1,329 during 1997, which were funded out of cash generated from operations. During 1997, Timber retired $13.4 million of variable rate revenues bonds and paid certain debt financing costs with $13,708 of proceeds from two 1997 Industrial Development Revenue Bond issued (the "1997 Bonds") and cash on hand. The outstanding 1997 Bonds carry interest at a fixed rate of 7% and have annual sinking fund payments due each December 1 ($1,765 due December 1, 1998) with a final payment of $4,620 due December 1, 2002. During 1997, Timber repaid $308 which represented the entire balance of one of the 1997 Bond issuances. As of March 31, 1998, Timber Energy had outstanding tax exempt bonds, together with accrued interest, in the aggregate amount of $13,713. The bonds are payable pursuant to a mandatory redemption schedule through December 1, 2002. As of March 31, 1998, in addition to Timber Energy's operating cash of $657, Timber Energy, as required by the terms of the refinancing, had an additional $1,705 of cash reserves to be used for debt service. Company management believes Timber Energy has adequate cash resources available and expects additional cash from operations to fund its current operations and debt obligations. Timber Energy plans capital expenditures in 1998 of approximately $526, which will be funded from cash provided by operations. Subsequent Events On May 6, 1998, the Company announced that it has signed a letter to acquire all of the outstanding stock of FCR, Inc, a Delaware corporation ("FCR"), having its headquarters in Charlotte, North Carolina. The purchase price consists of: (a) 1,714,285 shares of the Company's common stock; (b) $30.0 million in cash; and (c) an earnout of up to $30.0 million to be paid in stock. The number of shares earned will be calculated at the higher of $23 per share or the then market value of such shares, based on the average of closing sale price per share during the ten trading days preceding the payment date. The Company and FCR are currently preparing definitive documentation for the transaction. The merger is contingent upon execution and delivery of such documentation, compliance with the Hart Scott Rodino Antitrust Improvement Act, the completion of due diligence by both sides and approval of the Boards of Directors and Shareholders of both the Company and of FCR. FCR is a national waste processing company, owning 26 plants in 12 states. The plants operate in three businesses; material recovery facilities, cellulose insulation and plastic recycling. 12 14 Eighteen of the plants are material recovery facilities, based in 10 states. These plants currently process materials at the rate of 650,000 tons of recyclables per year. The Company's existing material recovery facilities currently process material at the rate of 500,000 tons of recyclables per year. Five of the plants are cellulose insulation plants, based in four states. A sixth cellulose insulation plant is under construction. The cellulose insulation plants operate under the name of U.S. Fiber, Inc. The plastic recycling business operates three plastic recycling plants. These plants currently process plastic at the rate of 50 million pounds per year. The Company has a subsidiary in the plastic trading and brokerage business, which presently trades plastic at the rate of 40 million pounds per year. Based on information provided by FCR, FCR had revenue of approximately $17.6 million, $3.2 million in EBITDA and $.9 million in net income in the quarter ended March 31, 1998. 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. 13 15 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 buildings. The judge in the case entered an order awarding Maine Energy $3,334 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. There can be no assurance that the Company will be able to collect any amount of this judgement. Lawsuits were 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, tortuous 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. Capital then filed a motion in the same Court to restrain the arbitration and added claims with respect to a company managed by the parent of an officer of K-C. This claim alleges that the officer aided and abetted the other company in defrauding the plaintiff. Company has retained counsel to defend the various legal actions and to participate in the arbitration proceedings. After several depositions, Capital and K-C agreed to dismiss the motion to restrain the arbitration and to transfer the arbitration proceedings to Hartford, Connecticut. The lawsuit was dismissed with prejudice as to the officers of K-C and all claims between the parties are to be resolved in the arbitration proceedings. The Company believes that it has meritorious defenses to the arbitration proceedings. Total Waste Management ("TWM") was a defendant in a lawsuit in the United State District Court for the District of New Hampshire filed by Kleen Laundry & Dry Cleaning Services. The plaintiff alleged that Total Waste Management caused an underground gasoline storage tank to leak during an attempted removal of the tank. The former shareholders of Total Waste Management have settled the claim with no cost to the Company, other than for legal fees. The Company is a defendant in certain other law suits alleging various claims incurred in the ordinary course of business, none of which, either individually or in the aggregate, the Company believes will have a material adverse effect on the Company. 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 14 16 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits None (b) Reports on Form 8-K Six reports on Form 8-K were filed in the first quarter of 1998, three of which were amended by Form 8-K/A also filed during the quarter. The following is a list of the Forms 8-K filed and the dates thereof. (i) A Form 8-K was filed on January 26, 1998 reporting that the Company purchased Vel-A-Tran Recycling, Inc. for cash in the amount of $1.1 million. (ii) A Form 8-KA was filed on January 28, 1998 in connection with a previously Form 8-K filed on December 8, 1997 reporting the acquisition of three recycling facilities as part of an asset purchase from Prins Recycling Corp. and its subsidiaries. (iii) A Form 8-KA was filed on January 29, 1998 in connection with a previously Form 8-K filed on December 12, 1997 reporting that the Company exercised its option to purchase an additional $14.8% limited partnership interest in PERC from the Prudential Insurance Company of America for $2.1 million. (iv) A Form 8-K was filed on February 4, 1998 reporting that the Company purchased Total Waste Management Corporation for cash in the amount of $1.35 million. (v) A Form 8-KA, Amendment No. 2 was filed on February 4, 1998 in connection with a previously Form 8-KA filed on January 28, 1998 reporting the acquisition of three recycling facilities as part of an asset purchase from Prins Recycling Corp. and its subsidiaries. (vi) A Form 8-K was filed on February 23, 1998 reporting that the Finance Authority of Maine executed and delivered a commitment to the Company to refinance existing tax exempt bonds issued by the Town of Orrington, Maine to finance the construction of the facility owned by PERC. 15 17 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/ Ross Pirasteh ----------------------------------------- Name: Ross Pirasteh Title: Chairman of the Board of Directors By: /s/ Martin J. Sergi ----------------------------------------- Name: Martin J. Sergi Title: President and Chief Financial Officer (Principal Accounting Officer) Date: May 4, 1998 16 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 31,902 0 25,233 348 6,336 61,897 178,372 19,857 251,672 30,249 83,308 0 21,400 94 55,008 251,672 37,632 37,632 28,176 28,176 5,049 54 1,510 2,829 0 2,829 0 0 0 2,829 .31 .28
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