-----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, Eq76t/MrxwmoTPkr/cYXVsRmnOxqG7x1xgVgs4bSljuG2Trjdhu4fL1MVzoylZiM 9iXRH3eDlB87e6pc/0VerA== 0000950123-98-008809.txt : 19981008 0000950123-98-008809.hdr.sgml : 19981008 ACCESSION NUMBER: 0000950123-98-008809 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980828 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19981007 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: KTI INC CENTRAL INDEX KEY: 0000931581 STANDARD INDUSTRIAL CLASSIFICATION: COGENERATION SERVICES & SMALL POWER PRODUCERS [4991] IRS NUMBER: 222665282 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 000-25490 FILM NUMBER: 98722112 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 AMENDMENT NO. 1 ON FORM 8-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K/A CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): August 28, 1998 KTI, INC. (Exact name of Registrant as specified in Charter) New Jersey 33-85234 22-2665282 - ------------------------------------------------------------------------------ (State or other juris- (Commission (IRS Employer diction of incorporation) File Number) Identification Number) 7000 Boulevard East, Guttenberg, New Jersey 07093 - ------------------------------------------------------------------------------ (Address of principal executive office) (Zip Code) Registrant's telephone number including area code- (201) 854-7777 --------------------------- Not Applicable - ------------------------------------------------------------------------------ (Former name and former address, as changed since last report) 2 Item 2. Acquisition or Disposition of Assets. On August 28, 1998, FCR, Inc., a Delaware corporation ("FCR"), was merged (the "Merger") with and into KTI Acquisition Sub, Inc., a Delaware Corporation and a wholly owned subsidiary of the Registrant ("Merger Sub"), pursuant to an Agreement and Plan of Merger, dated July 22, 1998 (the "Merger Agreement"), by and among the Registrant, Merger Sub, FCR and the securityholders of FCR (the "Holders"). Pursuant to the Merger Agreement, at the closing of the Merger, the securities of FCR held by the Holders were converted into the right to receive an aggregate of (i) $30.0 million in cash (the "Initial Cash Consideration"), (ii) 1,714,285 shares of common stock, no par value (the "Common Stock"), of the Registrant (the "Initial Stock Consideration"), and (iii) an additional payment of up to $30.0 million (the "Earnout"), based upon the earnings from the operations of FCR for the period from July 1, 1998 through December 31, 1998, payable in a combination of cash and Common Stock, which Common Stock shall be valued at the greater of the market value of the Common Stock on the date the Earnout is determined and $23 per share; provided, that if the market value of the Common Stock on the date the Earnout is determined is less than $18 per share, the FCR Holders shall be entitled to an additional payment equal to the difference between $18 and such market value (the "Makeup Payment," and together with the Earnout, the Initial Cash Consideration and the Initial Stock Consideration, the "Merger Consideration"). The Merger Consideration is payable in a combination of cash and Common Stock, and the value of the Common Stock portion of the Merger Consideration shall be equal to at least 40% of the aggregate Merger Consideration. As a result of the Merger, FCR became a whollyowned subsidiary of the Registrant. FCR is a diversified recycling company that provides residential and commercial recycling processing and marketing services and manufactures products, in particular, cellulose insulation, using recycled materials. FCR owns or operates eighteen material recovery facilities, six cellulose insulation manufacturing facilities and three plastic reprocessing facilities in twelve states. 3 The Registrant utilized its $150.0 million line of credit with KeyBank National Association to fund the $30.0 million Initial Cash Consideration. Effective as of the closing of the Merger, Mr. Paul A. Garrett, Chief Executive Officer of FCR, was named the Vice-Chairman of the Board of Directors of the Registrant and was elected to the Board of Directors of the Registrant. Mr. Brian J. Noonan, Chief Financial Officer of FCR, was named Chief Financial Officer of the Registrant. Each of Messrs. Garrett, Noonan and Michael Kuruc, the Chief Operating Officer of FCR, entered into three year Employment Agreements with the Registrant, pursuant to which each one receives a base salary of $250,000, $140,000 and $148,000, respectively. The Employment Agreements provide for severance benefits in the event the employee is terminated, except if the employee is terminated for cause. Also effective with the closing of the Merger, two former directors of FCR, W. Chris Hegele and Carlos Aguero, were elected to the Board of Directors of the Registrant. On July 2, 1998, FCR acquired all the outstanding shares of stock of Resource Recovery Systems, Inc. ("RRS"). RRS provides residential and commercial recycling processing and marketing services with plants located in Berlin, Connecticut, Howes Cave, New York, Claverack, New York, Saginaw, Michigan, Ann Arbor, Michigan, Athens, Georgia, and Sarasota, Florida. The aggregate purchase price for the stock of approximately $4.41 million was paid in cash. In connection with this transaction, certain debt of RRS totaling approximately $3.96 million was refinanced under FCR's existing credit agreement and approximately $2.13 million of debt of RRS remained outstanding. In addition, FCR paid a total of $500,000 in a covenant-not-to-compete to two former shareholders of RRS. The acquisition was financed with a $10.0 million term note with LaSalle National Bank. Item 7. Financial Statements and Exhibits (a) (1) Financial Statements of the business acquired. The audited balance sheet of FCR, Inc. and its subsidiaries as of December 31, 1997 and 1996 and the related consolidated statement of operations, stockholders' equity and cash flows for each of the years then ended are included on pages F-1 through F-21. In addition, the interim unaudited financial statements for the six months ended June 30, 1998 and 1997 are included on pages F-22 through F-25. 4 FCR, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997 AND 1996 TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-1 5 [ARTHUR ANDERSEN LLP LETTERHEAD] REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of FCR, Inc. and Subsidiaries: We have audited the accompanying consolidated balance sheets of FCR, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity 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. These 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of FCR, Inc. and subsidiaries at December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP - --------------------------------------- Charlotte, North Carolina, February 27, 1998 (except with respect to the matters discussed in Note 13, as to which the date is September 30, 1998). F-2 6 FCR, Inc. and Subsidiaries Consolidated Balance Sheet December 31, 1997 and 1996
ASSETS 1997 1996 ------------ ------------ CURRENT ASSETS: Cash and cash equivalents $ 2,777,365 $ 25,028 Accounts receivable, net 5,002,418 2,576,079 Inventory 1,768,274 179,089 Receivable from shareholder 1,294,280 0 Other assets 1,312,754 278,547 Deferred tax assets 101,000 286,000 Net assets of discontinued operations 0 1,043,472 ------------ ------------ Total current assets 12,256,091 4,388,215 ------------ ------------ PROPERTY, PLANT AND EQUIPMENT: Machinery and equipment 19,118,367 9,485,933 Building and leasehold improvements 2,872,029 2,021,377 Office furniture and fixtures 535,456 281,834 Construction in progress 2,287,689 763,916 ------------ ------------ 24,813,541 12,553,060 Less - Accumulated depreciation (4,834,186) (3,103,076) ------------ ------------ 19,979,355 9,449,984 ------------ ------------ OTHER ASSETS 1,224,621 377,440 GOODWILL, net 8,120,898 0 ------------ ------------ 9,345,519 377,440 ------------ ------------ $ 41,580,965 $ 14,215,639 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996 ------------ ------------ CURRENT LIABILITIES: Line of credit $ 1,801,666 $ 0 Current portion of obligations under capital leases 291,982 508,561 Current portion of long-term debt 1,894,169 789,784 Note payable to shareholder 2,500,000 0 Accounts payable 4,582,891 1,910,589 Accrued liabilities 1,744,269 730,742 ------------ ------------ Total current liabilities 12,814,977 3,939,676 ------------ ------------ OTHER LONG-TERM OBLIGATIONS 683,720 967,093 LONG-TERM DEBT 11,431,346 3,559,140 SUBORDINATED DEBT 5,910,000 0 DEFERRED TAX LIABILITIES 1,251,000 869,000 ------------ ------------ 32,091,043 9,334,909 ------------ ------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Series A convertible preferred stock, $.01 par value; 1,500,000 shares authorized, 1,149,842 and 1,008,000 shares issued and outstanding at December 31, 1997 and 1996, respectively 2,230,648 5,877,631 Series B convertible preferred stock, $.01 par value; 75,000 shares authorized, issued and outstanding 300,000 300,000 Series C convertible preferred stock, $.01 par value; 600,000 shares authorized, 488,625 shares issued and outstanding 1,817,784 1,817,784 Common stock, $.01 par value, 3,262,500 shares authorized, 1,540,562 and 949,245 shares issued and outstanding at December 31, 1997 and 1996, respectively 15,405 9,492 Additional paid-in capital 4,243,314 67,682 Retained earnings (deficit) 882,771 (3,191,859) ------------ ------------ Total stockholders' equity 9,489,922 4,880,730 ------------ ------------ $ 41,580,965 $ 14,215,639 ============ ============
The accompanying notes to financial statements are an integral part of these balance sheets. F-3 7 FCR, Inc. and Subsidiaries Consolidated Statement of Operations For the Years ended December 31, 1997 and 1996
1997 1996 ------------ ------------ NET REVENUES $ 36,654,254 $ 15,023,535 PROCESSING AND MANUFACTURING COSTS 28,484,273 12,498,895 ------------ ------------ Gross margin 8,169,981 2,524,640 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 4,164,186 1,968,460 ------------ ------------ Operating income 4,005,795 556,180 INTEREST AND OTHER EXPENSE (1,369,241) (455,611) ------------ ------------ Income before provision for income taxes 2,636,554 100,569 PROVISION FOR INCOME TAXES 1,099,000 22,000 ------------ ------------ INCOME FROM CONTINUING OPERATIONS 1,537,554 78,569 DISCONTINUED OPERATIONS: Loss from operations of discontinued commercial office recycling (less applicable credit for income taxes of $272,000) 0 (762,834) Loss on disposal of commercial office recycling including a provision of $118,000 for operating losses during the phaseout period 0 (133,000) ------------ ------------ Net income (loss) $ 1,537,554 $ (817,265) ============ ============
The accompanying notes to financial statements are an integral part of these statements. F-4 8 FCR, Inc. and Subsidiaries Consolidated Statement of Cash Flows For the Years ended December 31, 1997 and 1996
1997 1996 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 1,537,554 $ (817,265) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities- Depreciation and amortization 2,150,381 1,059,087 Accretion of common stock warrants 25,980 0 Gain (loss) on disposal of fixed assets 2,896 (25,973) Deferred income taxes 567,000 (68,000) Loss on disposal of discontinued operations 0 (133,000) Loss from discontinued operations 0 (762,834) Changes in operating assets and liabilities- Increase in accounts receivable, net (773,163) (800,254) Increase in inventory (641,754) (3,521) Increase in other assets (1,301,290) (123,989) Increase (decrease) in accounts payable (805,697) 668,702 Decrease in other liabilities (202,991) (1,128,410) ------------ ------------ Net cash provided by (used in) continuing operations 558,916 (2,135,457) ------------ ------------ Decrease in net assets of discontinued operations 1,043,472 917,763 ------------ ------------ Net cash provided by (used in) operating activities 1,602,388 (1,217,694) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions of businesses, net of cash acquired (9,253,480) 0 Purchases of property and equipment (4,682,468) (2,625,677) Capital expenditures of discontinued operations 0 (12,313) Proceeds from sale of fixed assets 4,500 48,437 ------------ ------------ Net cash used in investing activities (13,931,448) (2,589,553) ------------ ------------
1997 1996 ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt $ 16,603,334 $ 3,631,937 Proceeds from issuance of subordinated debt 6,000,000 0 Net borrowings under line of credit 1,589,728 0 Principal payments under capital lease obligations (583,797) (439,792) Principal payments under long-term debt (7,626,743) (644,654) Principal payments of discontinued operations 0 (100,165) Increase in receivable from shareholder (1,294,280) 0 Proceeds from exercise of stock options 0 7,500 Proceeds from exercise of common stock warrants 140,011 0 Issuance of common stock 300,644 0 Dividends paid - Series C preferred stock (47,500) (190,000) ------------ ------------ Net cash provided by financing activities 15,081,397 2,264,826 ------------ ------------ NET INCREASE IN CASH AND CASH EQUIVALENTS 2,752,337 (1,542,421) CASH AND CASH EQUIVALENTS, beginning of year 25,028 1,567,449 ------------ ------------ CASH AND CASH EQUIVALENTS, end of year $ 2,777,365 $ 25,028 ============ ============ SUPPLEMENT DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year- Interest $ 1,160,369 $ 449,999 Taxes on income 709,157 0 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Capital lease obligation entered into for lease of new equipment 0 439,733 Issuance of common stock with acquisitions 2,562,503 0 Issuance of Series A preferred stock 1,063,825 0 ACQUISITIONS OF BUSINESSES, net of cash acquired: Working capital, other than cash 1,041,578 0 Property, plant and equipment (8,136,793) 0 Costs in excess of net assets of companies acquired (8,231,547) 0 Other noncurrent assets (54,123) 0 Long-term debt 2,711,938 0 Noncurrent liabilities 852,964 0 Issuance of common stock 2,562,503 0 ============ ============
The accompanying notes to financial statements are an integral part of these statements. F-5 9 FCR, Inc. and Subsidiaries Consolidated Statement of Stockholders' Equity For the Years ended December 31, 1997 and 1996
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK SERIES A SERIES B SERIES C SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT --------- ----------- ------ -------- ------- ---------- BALANCE, December 31, 1995 1,008,000 $ 5,060,751 75,000 $300,000 488,625 $1,817,784 Reflect 15 for 1 stock split 0 0 0 0 0 0 Exercise of common stock options 0 0 0 0 0 0 Accretion to redemption value of preferred stock 0 816,880 0 0 0 0 Dividends paid 0 0 0 0 0 0 Net loss 0 0 0 0 0 0 --------- ----------- ------ -------- ------- ---------- BALANCE, December 31, 1996 1,008,000 5,877,631 75,000 300,000 488,625 1,817,784 Accretion to redemption value of preferred stock 0 217,269 0 0 0 0 Elimination of mandatory redemption provision of preferred stock 0 (3,865,670) 0 0 0 0 Issuance of preferred stock 141,842 1,418 0 0 0 0 Issuance of common stock 0 0 0 0 0 0 Exercise of common stock warrants 0 0 0 0 0 0 Exercise of common stock options 0 0 0 0 0 0 Issuance and accretion to redemption value of common stock warrants 0 0 0 0 0 0 Dividends paid 0 0 0 0 0 0 Net income 0 0 0 0 0 0 --------- ----------- ------ -------- ------- ---------- BALANCE, December 31, 1997 1,149,842 $ 2,230,648 75,000 $300,000 488,625 $1,817,784 ========= =========== ====== ======== ======= ========== ADDITIONAL RETAINED TOTAL COMMON STOCK PAID-IN EARNINGS STOCKHOLDERS' SHARES AMOUNT CAPITAL (DEFICIT) EQUITY --------- ------- ----------- ----------- ----------- BALANCE, December 31, 1995 820,245 $ 546 $ 69,128 $(1,367,714) $ 5,880,495 Reflect 15 for 1 stock split 0 7,656 (7,656) 0 0 Exercise of common stock options 129,000 1,290 6,210 0 7,500 Accretion to redemption value of preferred stock 0 0 0 (816,880) 0 Dividends paid 0 0 0 (190,000) (190,000) Net loss 0 0 0 (817,265) (817,265) --------- ------- ----------- ----------- ----------- BALANCE, December 31, 1996 949,245 9,492 67,682 (3,191,859) 4,880,730 Accretion to redemption value of preferred stock 0 0 0 (217,269) 0 Elimination of mandatory redemption provision of preferred stock 0 0 0 3,865,670 0 Issuance of preferred stock 0 0 1,062,407 (1,063,825) 0 Issuance of common stock 421,207 4,212 2,858,936 0 2,863,148 Exercise of common stock warrants 140,110 1,401 138,610 0 140,011 Exercise of common stock options 30,000 300 (300) 0 0 Issuance and accretion to redemption value of common stock warrants 0 0 115,979 0 115,979 Dividends paid 0 0 0 (47,500) (47,500) Net income 0 0 0 1,537,554 1,537,554 --------- ------- ----------- ----------- ----------- BALANCE, December 31, 1997 1,540,562 $15,405 $ 4,243,314 $ 882,771 $ 9,489,922 ========= ======= =========== =========== ===========
The accompanying notes to financial statements are an integral part of these statements. F-6 10 FCR, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 1997 and 1996 1. DESCRIPTION OF THE BUSINESS AND ACCOUNTING POLICIES: DESCRIPTION OF BUSINESS FCR, Inc. (the Company), through its subsidiaries, is a diversified recycling company engaged in residential recycling and the manufacturing of products using recycled materials. The Company consists of three business segments: Recycling Division, Insulation Division and Plastics Division. The Recycling Division is engaged in the design and operations of facilities which sort, process, and market recyclable materials delivered to the facilities either by municipalities under long-term contracts as part of their overall recycling programs or contract haulers under various commercial recycling programs. The Recycling Division operates facilities in Connecticut, New Jersey, Virginia, North Carolina, South Carolina, Florida and Tennessee. The Recycling Division sells primarily recyclable material to entities who manufacture recycled-paper or containers, constructed from newspaper, corrugated cardboard, aluminum, plastic or glass. Recyclable materials are considered commodities and are subject to fluctuations beyond contractual price agreements. The Recycling Division represented 61% of the Company's 1997 consolidated net revenues. The Insulation Division began in May 1997 with the purchase of Suncoast (Note 2). The Insulation Division produces cellulose insulation which is primarily used in the construction of manufactured and single family residential homes. The primary raw material for cellulose insulation is newspaper collected from residential recycling programs. The cellulose insulation is sold to the manufacturers of manufactured homes and insulation contractors throughout the United States and thus the results of the Insulation Division are impacted by the sales of new homes which is cyclical in nature. The Insulation Division operates facilities in North Carolina, Florida, Arizona, Oregon and Ohio. Sales of cellulose insulation represented 31% of the Company's 1997 consolidated net revenues. The Plastics Division began in September 1997 with the purchase of Resource Recycling, Inc. (Note 2). The Plastics Division is a reprocessor of high density polyethylene (HDPE) plastics collected from residential recycling programs and industrial customers. The plastics are ground, washed and repellatized. The recycled plastics are sold primarily to manufacturers of nursery supplies and packaging materials for household and automotive products. The Plastics Division operates three facilities in North Carolina. Sales of recycled plastics represented 8% of the Company's 1997 consolidated net revenues. The majority of the Plastics Division's raw materials are obtained from the Recycling Division. In November 1996, the Company discontinued the operations of the commercial office recycling line of business (Note 12). F-7 11 ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. REVENUE RECOGNITION Revenue from tipping fees is recognized upon delivery of the recyclable materials to the Company. Revenue from the sale of recyclable materials, insulation and plastic is recognized upon shipment. The Recycling Division shares a portion of its revenue from the sale of recyclable materials with certain of those municipalities it serves. COMMODITY CONTRACTS The Company engages in long-term contracts with various customers to sell recyclable materials at a negotiated price in relationship to market price with a contractual floor. These contracts range in term from one to nine years and expire at various dates through 2006. CASH EQUIVALENTS The Company considers unrestricted interest-bearing deposits with financial institutions with original maturities of three months or less to be cash equivalents. ACCOUNTS RECEIVABLE AND CONCENTRATION OF CREDIT RISK The Company extends credit based on an evaluation of customers' financial condition, generally without requiring collateral. Exposure to losses on receivables is principally dependent on each customer's financial condition. The Company monitors its exposure for credit losses by providing allowances for anticipated losses. At December 31, 1997 and 1996, the Company's accounts receivable balance represents amounts due primarily from purchasers of recyclable materials, insulation, plastic and fees from municipalities, net of an allowance for doubtful accounts of approximately $253,000 and $30,000 at December 31, 1997 and 1996, respectively. F-8 12 INVENTORIES Inventories are valued at the lower of cost or market, with cost being determined on the basis of the first-in, first-out (FIFO) method. Inventories consist of the following at December 31, 1997 and 1996:
1997 1996 ---------- ---------- Raw materials $ 568,646 $ 0 Finished goods 1,199,628 179,089 ---------- ---------- $1,768,274 $ 179,089 ========== ==========
PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Depreciation has been computed using the straight-line method over the estimated lives of the various asset groups as follows: building - 10 years; machinery and equipment - 3 to 10 years; and office furniture and fixtures - 3 to 7 years. Leasehold improvements are amortized over the lesser of the life of the lease or the estimated useful life of the improvement. GOODWILL Goodwill is the excess of the cost of net assets acquired in business combinations over their fair value. Goodwill of $8,232,000 is being amortized on a straight-line basis over 40 years. The accumulated amortization of intangible assets is approximately $111,000 as of December 31, 1997. The Company continually evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of goodwill may warrant revision or that the remaining balance of goodwill may not be recoverable. When factors indicate that goodwill should be evaluated for possible impairment, the Company uses an estimate of the undiscounted net cash flows of the related businesses over the remaining life of the goodwill in measuring whether the goodwill is recoverable. LOAN ACQUISITION COSTS The Company amortizes loan acquisition costs over the term of the related loan agreements. As of December 31, 1997 and 1996, loan acquisition costs of $541,000 and $38,000, respectively, were included in other assets. DEFERRED INCOME TAXES Deferred tax assets and liabilities reflect the impact of temporary differences between the financial reporting basis and the tax basis of assets and liabilities. Such amounts are recorded using presently enacted tax rates and regulations. F-9 13 LONG-TERM CONTRACT COSTS The Company defers certain direct incremental costs to secure successful long-term contracts with municipalities for the design and operation of materials recovery facilities. These costs for successful efforts are amortized over the life of the contract which range from three to ten years. During 1997 and 1996, the Company incurred approximately $60,000 and $57,000, respectively, of direct incremental long-term contract costs and approximately $286,000 and $288,000, respectively, are deferred at December 31, 1997 and 1996. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities are reflected in approximate fair value because of the short-term maturity of these financial instruments. The carrying amount of long-term debt approximates fair value at December 31, 1997 and 1996. MANAGEMENT ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions. These affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATIONS Certain balances in the accompanying prior years consolidated financial statements have been reclassified to conform with current year presentation. 2. ACQUISITIONS: SUNCOAST MFG. CO. On May 7, 1997, the Company acquired all of the outstanding shares of common stock of Suncoast Insulation MFG. Co., N.C. and Suncoast MFG. Co., N.C. (collectively, Suncoast). Suncoast is a manufacturer of cellulose insulation and other related products. The acquisition has been accounted for as a purchase and the results of the operations of Suncoast have been included in the consolidated financial statements since the date of acquisition. The excess of the purchase price over the fair value of the net assets acquired was approximately $6,708,000 and has been recorded as goodwill, which will be amortized on a straight-line basis over 40 years. The aggregate purchase price for the stock acquired was approximately $10,013,000 which is comprised of cash and shares of the Company's common stock. F-10 14 During the next two years, the former shareholder of Suncoast may receive up to $2,000,000 of additional consideration. The amount of the additional consideration will be based on the earnings of Suncoast for the 12 months ended April 30, 1998 and 1999, as defined in the purchase agreement. Of this amount, $924,000 was advanced at closing and is recorded as a note receivable from the former shareholder. Upon reaching the earnings targets discussed above, this amount will be reclassified to goodwill. If earned, the remaining additional consideration will be in the form of cash, note payable to the former shareholder, or the Company's common stock and the form of the additional consideration is at the election of both the Company and the former shareholder. Any additional consideration will be recorded as an addition to goodwill. In conjunction with the purchase of Suncoast, the Company and the former shareholder of Suncoast entered into an employment agreement through April 2004. In addition, the former shareholder signed a noncompete agreement commencing on the date of acquisition and continuing for five years after the former shareholder's termination from the Company. The Company has an additional $370,000 note receivable from this shareholder. RESOURCE RECYCLING, INC. On September 2, 1997, the Company acquired substantially all the assets of Resource Recycling, Inc. (Resource). Resource is a reprocessor of post-consumer and post-industrial plastics. The acquisition has been accounted for as a purchase and the results of the operations of Resource have been included in the consolidated financial statements since the date of acquisition. The aggregate purchase price for the assets acquired was $4,100,000 which is comprised of cash and the assumption of certain liabilities. On March 31, 1999, the former shareholders of Resource may receive additional consideration. The amount of the additional consideration will be based on the earnings of Resource for the 12 months ending March 31, 1999, as defined in the purchase agreement. If earned, the remaining additional consideration will be in the form of stock and will be recorded as goodwill. In conjunction with the purchase of Resource, the Company and the former majority shareholder of Resource entered into an employment agreement through August 2000. In addition, the former majority shareholder signed a noncompete agreement commencing on the date of acquisition and continuing for two years after the former majority shareholder's termination from the Company. F-11 15 USF INSULATION On December 1, 1997, the Company acquired all of the outstanding shares of stock of USF Insulation, Inc. and T.J. Miller Research and Technology, Inc. (collectively, USF). USF is a manufacturer of cellulose insulation and other related products. The acquisition has been accounted for as a purchase and the results of the operations of USF have been included in the consolidated financial statements since the date of acquisition. The excess of the purchase paid price over the fair value of the net assets acquired was approximately $1,524,000 and has been recorded as goodwill, which will be amortized on a straight-line basis over 40 years. The aggregate purchase price for the stock acquired was approximately $2,700,000 which is comprised of a note payable to the former owner and shares of the Company's common stock. The note payable to shareholder owner was paid in full on January 5, 1998, and has been included in current liabilities as of December 31, 1997. In conjunction with the acquisition of USF, the Company and former shareholder of USF entered into a consulting agreement through November 1999. In addition, the former shareholder of USF signed a noncompete agreement commencing on the date of acquisition and continuing for five years after termination of the consulting agreement. The Company's consolidated results of operations will incorporate the acquisitions discussed above commencing on the acquisition date. The unaudited pro forma combined information below presents combined results of operations as if the acquisitions had occurred at the beginning of each year presented, after giving effect to certain adjustments, including the amortization of intangible assets, increased interest expense on the acquisition debt and related income tax effects. The following unaudited pro forma information is not necessarily indicative of the results of operations of the combined company had the acquisitions occurred at the beginning of each year presented, nor is it indicative of future results.
YEAR ENDED DECEMBER 31, ----------------------------- 1997 1996 ----------- ----------- Net revenues $48,897,000 $41,662,000 Operating income 5,382,000 3,185,000 Income from continuing operations 2,198,000 979,000 =========== ===========
F-12 16 3. LONG-TERM DEBT AND LINES OF CREDIT: LONG-TERM DEBT Long-term debt consists of the following at December 31, 1997 and 1996:
1997 1996 ----------- ---------- Term loan A $12,000,000 $ 0 Revolving loan B 1,000,000 0 Various equipment notes payable 325,515 412,554 Various notes payable repaid during 1997 0 3,936,370 ----------- ---------- 13,325,515 4,348,924 Current portion of long-term debt 1,894,169 789,784 ----------- ---------- $11,431,346 $3,559,140 =========== ==========
In 1997, the Company entered into two new term loan agreements with a bank. Under the term loan A agreement, the Company borrowed $12,000,000 to refinance its existing term debt and finance the acquisition of Suncoast, Resource and USF. The term loan A agreement requires quarterly payments of $400,000 to $700,000, plus interest, through December 31, 2000, with the remaining outstanding principal due at maturity on March 31, 2001. The term loan B commences on December 31, 1998, with the conversion of all outstanding borrowings under the B revolving credit agreement (see discussion below). Under the term loan B agreement, principal payments which begin on March 31, 1999, will be based on a six-year amortization with quarterly payments of principal and interest through December 31, 2000, with the remaining outstanding principal due on March 31, 2001. The interest rates for both term loans are based on prime rates that range from prime to prime plus 1.50% depending on the performance of the Company. Subsequent to year-end, approximately $1,000,000 of borrowings under the A revolving line of credit that related to the purchase of new equipment was refinanced and is classified as long-term debt in the accompanying consolidated balance sheet and as borrowings under revolving loan B in the table above. These borrowings will convert to the term loan B at December 31, 1998. Maturities of long-term debt with banks are as follows: 1998 $ 1,894,169 1999 2,668,551 2000 3,076,898 2001 5,685,897 ----------- $13,325,515 ===========
F-13 17 LINES OF CREDIT In 1997, the Company entered into two new revolving line-of-credit agreements with a bank. The A revolving line of credit (A Revolver) agreement provides the Company loans or letters of credit of up to $5,000,000. Amounts may be borrowed on a revolving basis and are limited to 85% of eligible receivables, as defined. The A Revolver expires on March 31, 2001. At December 31, 1997, the Company had approximately $1,802,000 outstanding on the A Revolver. In addition, the Company had $535,000 in outstanding letters of credit as security for performance on long-term contracts with municipalities which reduced the availability under the A Revolver. Under the B revolving line-of-credit (B Revolver) agreement the Company may borrow up to $3,000,000. Borrowings under this agreement are limited to 80% of the cost of new equipment, as defined. On December 31, 1998, the outstanding portion of the B revolving credit agreement converts to the term loan B. There were no borrowings on the B Revolver at December 31, 1997. The Company may select interest rates for both revolving line-of-credit agreements based on prime or LIBOR rates. The interest rates range from prime to prime plus 1.25% or LIBOR plus 125 basis points to LIBOR plus 300 basis points depending on the performance of the Company. The interest rate on the line of credit outstanding at December 31, 1997, was 8.75%. A fee of .25% per annum is charged on the unused portions of these revolving credit agreements. The revolving line-of-credit agreements and the term loan agreements contain covenants, which among other things, require the maintenance of certain financial ratios. The credit agreements also limit the maximum amount of indebtedness and requires lender approval for certain significant mergers and acquisitions, dividends and asset sales, as defined in the loan agreement. Borrowings under the revolving credit and term loan agreements are secured by substantially all assets of the Company. 4. SUBORDINATED DEBENTURES: Concurrent with the Suncoast acquisition discussed above, the Company completed a private placement of $6,000,000 in subordinated debentures which were used to finance the acquisition of Suncoast. The subordinated debentures have a maturity date of April 1, 2001, and interest at 14.25% is paid quarterly. The purchasers of the subordinated debentures were also issued warrants to purchase 227,044 shares of the Company's common stock at $.01 per share. These warrants were valued at $90,000 at May 7, 1997, and are included as a part of additional paid-in capital as of December 31, 1997. Beginning on May 7, 2005, at the election of the purchasers of the subordinated debentures, the Company is required to repurchase the warrants (Put Agreement) at a price determined by a formula that is defined in the subordinated debenture agreements. This formula is based on the results of operations in the year ending December 31, 2004. The Company has accreted approximately $26,000 of interest expense in relation to the Put Agreement with a corresponding increase in additional paid-in capital. F-14 18 The subordinated debenture agreements contain covenants, which among other things, require the maintenance of certain financial ratios similar to the Company's senior debt agreements. These agreements also limit the maximum amount of indebtedness and requires lender approval for certain significant mergers and acquisitions, dividends and asset sales, as defined in the debenture agreement. 5. CAPITAL AND OPERATING LEASES: The Company leases certain facilities under operating leases with various terms expiring through 2003. Certain of these facilities are leased from certain shareholders of the Company's common stock. The Company leases certain machinery, office furniture, and equipment under operating leases expiring through 2000. The Company also leases certain machinery, office furniture and equipment under capital leases expiring through 2001. In 1997 and 1996, $0 and $439,733, respectively, of property or equipment was acquired under capital leases. The net book value of all equipment under capital leases was approximately $838,000 at December 31, 1997. The following is a schedule of future minimum lease payments for capital and operating leases as of December 31, 1997:
RELATED-PARTY CAPITAL OPERATING OPERATING YEAR ENDING DECEMBER 31 LEASES LEASES LEASES - ---------------------------------- ----------- ----------- ------------- 1998 $ 346,187 $ 2,457,000 $ 301,000 1999 78,572 2,231,000 301,000 2000 69,365 1,926,000 301,000 2001 26,162 1,857,000 301,000 2002 0 1,393,000 251,000 Thereafter 0 4,039,000 0 ----------- ----------- ---------- Total minimum lease payments 520,286 13,903,000 1,455,000 Less - Amount representing interest 69,797 0 0 ----------- ----------- ---------- $ 450,489 $13,903,000 $1,455,000 =========== =========== ==========
Rental expense relating to operating leases amounted to approximately $2,172,000 and $1,905,000 for 1997 and 1996, respectively. Rental expense relating to operating leases with shareholders of common stock was approximately $201,000 for the year ending December 31, 1997. F-15 19 6. RELATED-PARTY SALES TRANSACTIONS: The Company has engaged in sales transactions with the Series B preferred stockholder. During 1996, the Company had sales to this stockholder of approximately $1,247,000. At December 31, 1996, the Company had outstanding accounts receivable of $223,000 with this stockholder. This stockholder sold the Series B preferred stock during 1997. 7. STOCKHOLDERS' EQUITY AND STOCK BASED COMPENSATION: STOCKHOLDERS' EQUITY During 1997, 376,667 shares of the Company's common stock were issued in conjunction with the acquisitions discussed in Note 2. In addition, 44,540 shares of the Company's common stock were sold to certain key management personnel for $6.75 per share. Concurrent with the Suncoast acquisition discussed in Note 2, the Stockholders of the series A, series B and series C preferred stock agreed to eliminate the dividend provisions. The Company issued 141,842 shares of series A preferred stock to the existing holders of series A preferred stock in satisfaction of accrued cumulative dividends of approximately $1,064,000 at May 7, 1997. The mandatory redemption provision for all series of preferred stock were eliminated and the cumulative return provisions for series A and C were also eliminated. As a result, the cumulative accretion to redemption value for the series A preferred stock of approximately $3,866,000 ($3,649,000 at December 31, 1996) was eliminated and added back to retained earnings. On September 30, 1996, the board of directors approved a 15-to-1 stock split. All per share amounts in this report have been restated to reflect this stock split. STOCK-BASED COMPENSATION In 1997, the Company granted non-qualified stock options to employees to purchase 395,000 shares of common stock at prices ranging from $6.75 to $13.00. Options representing 155,000 shares permit the holder to purchase one-third of the number of shares of common stock subject to the option, each year beginning on the anniversary date of grant. Options representing 240,000 shares permit the holder to purchase one-fourth of the number of shares of common stock subject to the option each year beginning on the anniversary date of grant. Nonvested shares are subject to forfeiture if the employee ceases to be employed by the Company. F-16 20 In 1996, the Company granted to a business advisor of the board of directors an option to purchase 2,500 shares of common stock. These options have a five-year term and may be exercised at any time during such term. Information with respect to stock options is as follows:
STOCK OPTIONS -------- Outstanding at December 31, 1995 264,000 Granted 2,500 Exercised (129,000) -------- Outstanding at December 31, 1996 137,500 Granted 395,000 Exercised (30,000) -------- Outstanding at December 31, 1997 502,500 ========
The following table summarizes information about stock options outstanding at December 31, 1997:
EXERCISABLE WEIGHTED --------------------- AVERAGE WEIGHTED WEIGHTED RANGE OF NUMBER OF REMAINING AVERAGE NUMBER AVERAGE EXERCISE OPTIONS CONTRACTUAL EXERCISE OF EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE OPTIONS PRICE - -------- ----------- ------------ -------- ------- --------- $ 4.33 90,000 3.0 $ 4.33 90,000 $ 4.33 $ 5.00 17,500 3.1 $ 5.00 17,500 $ 5.00 $ 6.75 145,000 4.4 $ 6.75 0 $ 6.75 $10.00 220,000 9.6 $10.00 0 $10.00 $12.50 20,000 9.8 $12.50 0 $12.50 $13.00 10,000 9.8 $13.00 0 $13.00
During 1997, 30,000 options were exercised at a price of $.667 per share and 129,000 options were exercised at a price of $1 per share in 1996. Of this amount, $141,500 of the exercise value represented notes receivable from stockholders and was recorded as a reduction to additional paid-in capital. At December 31, 1997, 107,500 options were exercisable. The Company has stock purchase agreements with certain employees which restrict the transfer of certain of the Company's common stock subject thereto. Under the agreements, in the event a stockholder desires to sell, assign, transfer, pledge, hypothecate or otherwise dispose of any such shares, the Company shall have the right of first refusal to acquire the shares at a price determined in accordance with the agreements. In the event the Company does not exercise this right, the stockholder has the right to transfer the shares. F-17 21 8. PENSION PLAN: The Company sponsors a 401(K) plan that provides all employees of the Company an opportunity to accumulate funds for their retirement. The Company matches contributions of participation employees on the basis of the percentages specified in the plan. Company matching contributions to the plan were approximately $16,000 and $4,000 in 1997 and 1996, respectively. 9. INCOME TAXES: The total provision (credit) for income taxes for the years ended December 31, 1997 and 1996, consists of the following:
1997 1996 ----------- --------- Current taxes (refundable) payable- Federal $ 392,000 $(242,000) State 140,000 60,000 ----------- --------- 532,000 (182,000) ----------- --------- Deferred taxes- Federal 620,000 (70,000) State (benefit) (53,000) 2,000 ----------- --------- 567,000 (68,000) ----------- --------- Total provision (credit) for income taxes $ 1,099,000 $(250,000) =========== =========
The components of the net deferred tax asset (liability) as of December 31, 1997 and 1996, are as follows:
1997 1996 ----------- --------- Deferred tax assets- State NOL carryforwards $ 143,000 $ 64,000 AMT credit carryforwards 0 168,000 Other 16,000 54,000 ----------- --------- Total deferred tax assets 159,000 286,000 Deferred tax liabilities- Depreciation (1,201,000) (778,000) Long-term contract costs (66,000) (91,000) Other (42,000) 0 ----------- --------- Total deferred tax liabilities (1,309,000) (869,000) ----------- --------- Net deferred tax liability $(1,150,000) $(583,000) =========== =========
F-18 22 The classification of the net deferred tax liability as of December 31, 1997 and 1996, are as follows:
1997 1996 ----------- --------- Current deferred tax asset $ 101,000 $ 286,000 Long-term deferred tax liability (1,251,000) (869,000) ----------- --------- Net deferred tax liability $(1,150,000) $(583,000) =========== =========
The provision for income taxes differs from the amounts computed by applying the federal statutory rate to income before provision for income taxes on income for the years ended December 31, 1997 and 1996, as follows:
1997 1996 ----------- --------- Federal provision at statutory rate $ 896,000 $(318,000) Increase in provision resulting from- State income taxes, net of federal tax benefit 154,000 31,000 Goodwill 45,000 0 Items not deductible for tax purposes 4,000 27,000 Other 0 10,000 ----------- --------- $ 1,099,000 $(250,000) =========== =========
10. COMMITMENTS AND CONTINGENCIES: The Company may be subject to lawsuits, tax examinations or other claims arising out of the normal course of business. While the ultimate result of any unasserted claim cannot be determined, management does not expect that the disposition of any such matters would have a material adverse effect on the financial position or results of operations of the Company. On October 1, 1997, the Company was engaged to procure the design of and be responsible for the construction of a recycling facility. The Company has subcontracted most of the construction of the facility which is estimated to be completed during 1998. The total contract price is approximately $2,800,000. Income from this contract is recognized using the percentage of completion method. As of December 31, 1997, the contract is approximately 7% complete. When current estimates indicate that a loss will result from a contract, provision is made for the entire amount of the estimated loss. Revisions to estimates are reflected in the period in which the events giving rise to the revision become known. F-19 23 11. BUSINESS SEGMENTS AND MAJOR CUSTOMERS: BUSINESS SEGMENTS During 1997, the Company operated in three divisions as indicated below. Corporate administrative expenses are allocated to segments based on the net revenues for each division.
RECYCLING INSULATION PLASTICS ELIMINATIONS CONSOLIDATED ----------- ----------- ---------- ----------- ----------- Net revenues- Unaffiliated customers $22,258,000 $11,373,000 $3,023,000 $ 0 $36,654,000 Intersegment revenues 1,206,000 0 0 (1,206,000) 0 ----------- ----------- ---------- ----------- ----------- Total net revenues 23,464,000 11,373,000 3,023,000 (1,206,000) 36,654,000 ----------- ----------- ---------- ----------- ----------- Operating income 2,637,000 1,334,000 34,000 0 4,005,000 Depreciation and amortization 1,620,000 410,000 120,000 0 2,150,000 Capital expenditures 1,533,000 2,846,000 303,000 0 4,682,000 Identifiable assets 16,353,000 19,742,000 5,486,000 0 41,581,000 =========== =========== ========== =========== ===========
12. DISCONTINUED OPERATIONS: In November 1996, the Company developed a plan to discontinue the operations of the commercial office recycling line of business as a result of the decline in demand for high grade scrap paper during 1996 and a refocusing of the Company's resources on its residential recycling operations. The operations of this line of business consisted of three facilities located in Atlanta, Georgia; Alexandria, Virginia; and Stratford, Connecticut. The operations of the commercial office recycling line of business have been accounted for as discontinued operations. In 1996, the Company provided for estimated losses on disposal of the discontinued operations of approximately $118,000 which included a provision for anticipated operating losses prior to disposal and an estimated loss on the disposal. The actual losses incurred during the phase-out period and the actual cost of disposal approximated the estimates established during 1996. No additional amounts relating to discontinued operations were recorded in 1997. 13. SUBSEQUENT EVENTS: ACQUISITION OF RESOURCE RECOVERY SYSTEMS, INC. On July 1, 1998, FCR acquired all the outstanding shares of stock of Resource Recovery System, Inc. (RRS). RRS provides residential and commercial recycling processing and marketing services with plants located in Berlin, Connecticut, Howes Cave, New York, Claverack, New York, Saginaw, Michigan, Ann Arbor, Michigan, Athens, Georgia and Sarasota, Florida. The aggregate purchase price for the stock of approximately $4,409,000 was paid in cash. In connection with this transaction, certain debt of RRS totaling approximately $3,960,000 was refinanced under FCR's existing credit agreement and approximately $2,131,000 of debt of RRS remained outstanding. In addition, two former shareholders of RRS signed a five year covenant-not-to-compete for $500,000. The acquisition was financed with a $10,000,000 term note with LaSalle National Bank. F-20 24 MERGER WITH KTI, INC. On August 28, 1998, the Company was merged (the Merger) with and into KTI Acquisition Sub, Inc. (Merger Sub), a wholly owned subsidiary of KTI, Inc. (KTI), pursuant to an agreement and Plan of Merger, dated July 22, 1998, (the Merger Agreement), by and among KTI, Merger Sub, the Company and the securityholders of the Company. Pursuant to the Merger Agreement, at the closing of the Merger, the securities of the Company held by the securityholders of the Company were converted into the right to receive an aggregate of (i) $30,000,000 in cash, (ii) 1,714,285 shares of no par value common stock of KTI and (iii) an additional payment of up to $30,000,000 based upon the earnings from the operation of the Company for the period from July 1, 1998, through December 31, 1998, payable in a combination of cash and common stock of KTI. As a result of the Merger, the Company became a wholly owned subsidiary of KTI. F-21 25 FCR, Inc. and Subsidiaries Consolidated Balance Sheets (unaudited)
June 30, June 30, ----------- ------------ 1998 1997 ----------- ------------ Assets Current assets Cash and cash equivalents $ 222,583 $ 261,988 Accounts receivable, net 5,104,723 3,787,105 Other receivables 2,613,666 1,603,711 Inventory 1,820,279 885,776 Prepaid Expenses and other current assets 667,407 970,519 ----------- ------------ Total current assets 10,428,658 7,509,099 Property, plant & equipment, net 22,492,068 12,334,026 Goodwill 7,977,360 7,651,448 Other assets 1,084,438 1,267,828 ----------- ------------ $41,982,524 $ 28,762,401 =========== ============ Liabilities and stockholders' equity Current liabilities Line of Credit $ 4,300,000 $ 550,000 Current portion of long-term debt 2,297,951 1,216,855 Accounts payable 3,582,225 2,270,459 Accrued expenses 3,131,610 1,734,189 Other current liabilities 59,846 537,313 ----------- ------------ Total current liabilities 13,371,632 6,308,816 Other long-term obligations 564,925 740,864 Long-term debt 11,306,406 5,946,022 Subordinated debt 5,910,000 5,910,000 Deferred taxes 1,251,000 869,000 Stockholders' equity Series A preferred stock 2,230,648 2,230,648 Series B preferred stock 300,000 300,000 Series C preferred stock 1,817,784 1,817,784 Common Stock 16,477 14,693 Additional paid-in capital 4,403,056 4,854,899 Retained earnings (deficit) 810,596 (230,325) ----------- ------------ Total stockholder's equity 9,578,561 8,987,699 ----------- ------------ $41,982,524 $ 28,762,401 =========== ============
See notes to condensed consolidated financial statements. F-22 26 FCR, Inc. and Subsidiaries Condensed Consolidated Statement of Operations (unaudited)
Six months ended June 30, 1998 1997 ------------ ----------- Net sales $ 29,431,272 $12,302,772 Processing and manufacturing costs 21,995,662 9,038,498 ------------ ----------- Gross Margin 7,435,610 3,264,274 Selling, general and administrative expenses 4,303,841 1,165,649 Depreciation and amortization 1,677,221 940,637 ------------ ----------- Total operating expenses 27,976,724 11,144,784 Operating income 1,454,548 1,157,988 Interest and other expenses, net 1,382,110 451,162 ------------ ----------- Income before income taxes 72,438 706,826 Provision for income taxes 151,110 282,371 ------------ ----------- Net income (loss) $ (78,672) $ 424,455 ============ =========== Basic net income (loss) per share $ (0.02) $ 0.14 Diluted net income (loss) per share $ (0.02) $ 0.13 Basic weighted average common shares outstanding 3,359,930 3,005,387 Diluted weighted average common shares outstanding 3,986,974 3,345,500
See notes to condensed consolidated financial statements. F-23 27 FCR, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (unaudited)
Six months ended June 30, 1998 1997 ----------- ------------ Operating Activities Net Income (loss) $ (78,672) $ 424,455 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities - Depreciation and amortization 1,677,221 940,637 Accretion of common stock warrants 133,813 0 Gain on disposal of fixed assets 0 2,896 Changes in operating assets and liabilities - Increase in accounts receivable, net (102,305) (39,100) (Increase) decrease in inventory (52,005) 40,324 Increase in other current assets (523,897) (1,922,198) Decrease in accounts payable (1,000,666) (1,049,016) Increase in other current liabilities 1,353,800 378,013 ----------- ------------ Net cash provided by (used in) operating activities 1,407,289 (1,223,989) Investing Activities Purchases of property and equipment and other (3,955,355) (436,453) Acquisitions of businesses, net of cash acquired 0 (7,077,844) ----------- ------------ Net cash used in investing activities (3,955,355) (7,514,297) Financing Activities Net borrowings under line of credit 1,498,334 (887,938) Proceeds from issuance of long-term debt 2,125,000 13,000,000 Principal payments under capital lease obligations (310,892) (259,073) Principal payments under long-term debt (846,158) (2,970,253) Payment of shareholder note payable (2,500,000) 0 Payment of dividends 0 (47,500) Issuance of common stock 27,000 140,010 ----------- ------------ Net cash provided by (used in) financing activities (6,716) 8,975,246 Net increase (decrease) in cash and cash equivalents (2,554,782) 236,960 Cash and cash equivalents, beginning of period 2,777,365 25,028 ----------- ------------ Cash and cash equivalents, end of period $ 222,583 $ 261,988 =========== ============
See notes to condensed consolidated financial statements. F-24 28 FCR, Inc. and Subsidiaries Notes to Interim Consolidated Financial Statements 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 fair presentation have been included. Operating results for the six months ended June 30, 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 financial statements for the year ended December 31, 1997. F-25 29 (a)(2) Consent of Arthur Andersen LLP. As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 8-K/A into KTI, Inc.'s previously filed registration statements File No. 33-80505, No. 333-56435, No. 333-56433, No. 333-46057, No. 333-44507, No. 333-34327, No. 333-30813, No. 333-28067, No. 333-26757, No. 33-80087. /s/ Arthur Andersen LLP Charlotte, North Carolina, September 30, 1998. F-26 30 (b) Unaudited Pro Forma Financial Information. The following unaudited pro forma condensed combined financial statements have been prepared based on the historical financial statements of the Registrant and of FCR. FCR made acquisitions of certain entities in 1997 that are included in the unaudited pro forma financial information as described in note 2 below. The Registrant believes that including these entities in the unaudited pro forma financial statements provides for a better understanding of the Registrant's acquisition of FCR. The unaudited pro forma condensed combined statement of operations assumes that the Registrant purchased FCR and FCR purchased all acquired entities at January 1, 1997. The unaudited 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 January 1, 1997 and should not be construed as representative of future operations. F-27 31 KTI, Inc. Pro Forma Condensed Combined Results from Operations, unaudited Six months ended June 30, 1998 All figures in $ 000's except per share figures and share counts
Completed Acquisitions ---------------------------- FCR Acquisitions KTI, Inc. FCR, Inc. (2) ----------- -------- ------- Revenues Waste-to-Energy Electric power and steam $ 25,897 $ -- $ -- Waste Processing Revenues 17,032 -- -- Recycling 35,946 29,431 4,183 ----------- -------- ------- Total Revenues 78,875 29,431 4,183 Costs and Expenses Electric power, steam and waste processing 23,904 Recycling 33,723 21,731 3,682 Selling, general, and administrative expenses 3,113 4,569 595 Depreciation and Amortization 5,065 1,677 500 Interest, net 3,060 1,382 355 ----------- -------- ------- Total Costs and Expenses 68,865 29,359 5,132 ----------- -------- ------- Income (loss) before minority interest, taxes, and extraordinary item 10,010 72 (949) Minority Interest 2,989 ----------- -------- ------- Income (loss) before taxes and extraordinary item 7,021 72 (949) Income taxes (Tax benefit) 517 151 ----------- -------- ------- Income (loss) before extraordinary item 6,504 (79) (949) Loss on early extinguishment of debt, net of minority interest and taxes 495 ----------- -------- ------- Net Income (loss) 6,009 (79) (949) Accretion and paid and accrued dividends on preferred stock 977 ----------- -------- ------- Net income (loss) available for common shareholders $ 5,032 $ (79) $ (949) =========== ======== ======= Pro forma earnings per common share and common share equivalent: Basic: ----------- Net income $0.53 =========== Pro forma weighted average number of common shares and common share equivalents outstanding 9,424,451 Diluted: ----------- Net income $0.49 =========== Pro forma weighted average number of common shares and common share equivalents outstanding 12,275,785 Completed Transactions ------------ FCR Pro forma KTI Adjustments Notes Adjustments Notes ------ ----- ----------- ----- Revenues Waste-to-Energy Electric power and steam $ -- $ -- Waste Processing Revenues -- -- Recycling -- -- ------ ---------- Total Revenues -- -- Costs and Expenses Electric power, steam and waste processing Recycling -- Selling, general, and administrative expenses -- (591) (M) Depreciation and Amortization 115 (E),(F) 1,133 (J) Interest, net (7) (G) 1,052 (K) ------ ---------- Total Costs and Expenses 108 1,594 ------ ---------- Income (loss) before minority interest, taxes, and extraordinary item (108) (1,594) Minority Interest ------ ---------- Income (loss) before taxes and extraordinary item (108) (1,594) Income taxes (Tax benefit) 3 (I) (182) (I) ------ ---------- Income (loss) before extraordinary item (111) (1,412) Loss on early extinguishment of debt, net of minority interest and taxes ------ ---------- Net Income (Loss) (111) (1,412) Accretion and paid and accrued dividends on preferred stock ------ ---------- Net income (loss) available for common shareholders $ (111) $ (1,412) ====== ========== Pro forma earnings per common share and common share equivalent: Basic: Net income Pro forma weighted average number of common shares and common share equivalents outstanding 1,714,285 (L) Diluted: Net income F-28 Pro forma weighted average number of common shares and common share equivalents outstanding (206,145) (L) Pro forma KTI, Inc. ----------- Revenues Waste-to-Energy Electric power and steam $ 25,897 Waste Processing Revenues 17,032 Recycling 69,560 ----------- Total Revenues 112,489 Costs and Expenses Electric power, steam and waste processing 23,904 Recycling 59,136 Selling, general, and administrative expenses 7,686 Depreciation and Amortization 8,490 Interest, net 5,842 ----------- Total Costs and Expenses 105,058 ----------- Income (loss) before minority interest, taxes, and extraordinary item 7,431 Minority Interest 2,989 ----------- Income (loss) before taxes and extraordinary item 4,442 Income taxes (Tax benefit) 489 ----------- Income (loss) before extraordinary item 3,953 Loss on early extinguishment of debt, net of minority interest and taxes 495 ----------- Net Income (Loss) 3,458 Accretion and paid and accrued dividends on preferred stock 977 ----------- Net income (loss) available for common shareholders $ 2,481 =========== Pro forma earnings per common share and common share equivalent: Basic: ----------- Net income $ 0.22 =========== Pro forma weighted average number of common shares and common share equivalents outstanding 11,138,736 Diluted: ----------- Net income $ 0.21 =========== Pro forma weighted average number of common shares and common share equivalents outstanding 12,069,640
F-29 32 KTI, Inc. Pro Forma Condensed Combined Results from Operations, unaudited Year ended December 31, 1997 All figures in $ 000's except per share figures and share counts
Completed Acquisitions -------------------------------------------- FCR Acquisitions KTI, Inc. FCR Inc. (2) FCR Adjustments ---------- ------- -------- ------- Revenues Waste-to-Energy Electric power and steam $ 38,968 $ -- $ -- $ -- Waste Processing Revenues 31,545 -- -- -- Recycling 25,644 36,654 24,371 -- ---------- ------- -------- ------- Total Revenues 96,157 36,654 24,371 -- Costs and Expenses Electric power, steam and waste processing 47,654 Recycling 20,099 26,444 18,582 -- Selling, general, and administrative expenses 2,978 4,054 3,624 (1,329) Depreciation and Amortization 8,893 2,150 1,720 450 Interest, net 5,086 1,369 1,412 78 ---------- ------- -------- ------- Total Costs and Expenses 84,710 34,017 25,338 (801) Other income 390 ---------- ------- -------- ------- Income (loss) before minority interest 11,837 2,637 (967) 801 Minority Interest 1,609 Pre-acquisition earnings 4,722 ---------- ------- -------- ------- Income (loss) before taxes 5,506 2,637 (967) 801 Income taxes (Tax benefit) (2,586) 1,099 227 494 ---------- ------- -------- ------- Net income (loss) 8,092 1,538 (1,194) 307 Accretion and paid and accrued dividends on preferred stock (1,408) ---------- ------- -------- ------- Net income (loss) available for common shareholders $ 6,684 $ 1,538 $ (1,194) $ 307 ========== ======= ======== ======= Pro forma earnings per common share and common share equivalent: Basic: ---------- Net income $0.90 ========== Pro forma weighted average number of common shares and common share equivalents outstanding 7,403,681 Diluted: ---------- Net income $ 0.83 ========== Pro forma weighted average number of common shares and common share equivalents outstanding 8,426,190 Pro forma Notes KTI Adjustments Notes KTI, Inc. ----- ---------- ----- ---------- Revenues Waste-to-Energy Electric power and steam $ -- $ 38,968 Waste Processing Revenues 31,545 Recycling 86,669 ---------- ---------- Total Revenues -- 157,182 Costs and Expenses Electric power, steam and waste processing 47,654 Recycling 65,125 Selling, general, and administrative expenses (H) 9,327 Depreciation and Amortization (E),(F) 2,281 (J) 15,494 Interest, net (G) 2,705 (K) 10,650 ---------- ---------- Total Costs and Expenses 4,986 148,250 Other income 390 ---------- ---------- Income (loss) before minority interest (4,986) 9,322 Minority Interest 1,609 Pre-acquisition earnings 4,722 ---------- ---------- Income (loss) before taxes (4,986) 2,991 Income taxes (Tax benefit) (I) (1,068) (I) (1,834) ---------- ---------- Net income (loss) (3,918) 4,825 Accretion and paid and accrued dividends on preferred stock (1,408) ---------- ---------- Net income (loss) available for common shareholders $ (3,918) $ 3,417 ========== ========== Pro forma earnings per common share and common share equivalent: Basic: ---------- Net income $ 0.37 ========== Pro forma weighted average number of common shares and common share equivalents outstanding 1,714,285 (L) 9,117,966 Diluted: ---------- Net income $ 0.35 ========== Pro forma weighted average number of common shares and common share equivalents outstanding 1,238,041 (L) 9,664,231
F-30 33 KTI, Inc. Pro Forma Condensed Balance Sheet, unaudited June 30, 1998 All figures in $ 000's
Completed Acquisitions ---------------------------- FCR Acquisitions and Adjustments KTI, Inc. FCR, Inc. (A) --------- -------- -------- ASSETS Current assets Cash and cash equivalents $ 10,027 $ 223 $ 20 Restricted funds, current portion 16,367 Accounts receivable, net 21,974 5,105 888 Inventory 2,044 1,820 Spare parts 4,156 Receivable from shareholders 515 1,294 Notes and other receivables, current portion 795 1,319 Deferred tax assets 2,731 101 Other current assets 1,286 567 77 --------- -------- -------- Total current assets 59,895 10,429 985 Restricted funds, net of current portion 4,851 Notes receivable, affiliates 87 Notes and other receivables 204 Deferred project development costs 932 Deferred costs 4,690 Property, plant,and equipment, net 168,440 22,492 8,511 Goodwill, net 23,319 7,978 3,576 Other assets 2,777 1,084 61 --------- -------- -------- Total Assets $ 265,195 $ 41,983 $ 13,133 ========= ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable $ 7,841 $ 3,582 $ 1,272 Accrued expenses 3,087 3,132 850 Current portion of long-term debt and capital leases 2,524 2,358 80 Line of credit 4,000 4,300 Income taxes payable 251 Other current liabilities 2,020 --------- -------- -------- Total current liabilities 19,723 13,372 2,202 Other long-term obligations 3,327 565 821 Long-term debt, net of current portion 103,667 11,306 10,110 Subordinated debt 5,910 Deferred tax liabilities 1,251 Deferred revenue 34,474 Minority interest 23,788 Shareholders' equity, total 80,216 9,579 --------- -------- -------- Total Liabilities and Shareholders' Equity $ 265,195 $ 41,983 $ 13,133 ========= ======== ======== KTI, Inc. pro KTI Adjustments Notes forma --------------- ----- --------- ASSETS Current assets Cash and cash equivalents $ -- $ 10,270 Restricted funds, current portion 16,367 Accounts receivable, net 27,967 Inventory 3,864 Spare parts 4,156 Receivable from shareholders 1,809 Notes and other receivables, current portion 2,114 Deferred tax assets 4,400 (C) 7,232 Other current assets 1,930 --------- --------- Total current assets 4,400 75,709 Restricted funds, net of current portion 4,851 Notes receivable, affiliates 87 Notes and other receivables 204 Deferred project development costs 932 Deferred costs 4,690 Property, plant,and equipment, net 9,453 (B) 208,896 Goodwill, net 34,318 (D) 69,191 Other assets 3,922 --------- --------- Total Assets $ 48,171 $ 368,482 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities $ -- Accounts payable $ 12,695 Accrued expenses 7,069 Current portion of long-term debt and capital leases 4,962 Line of credit 8,300 Income taxes payable 251 Other current liabilities 2,020 --------- --------- Total current liabilities -- 35,297 Other long-term obligations 4,713 Long-term debt, net of current portion 30,000 (B) 155,083 Subordinated debt 5,910 Deferred tax liabilities 1,251 Deferred revenue 34,474 Minority interest 23,788 Shareholders' equity, total 18,171 (B) 107,966 --------- --------- Total Liabilities and Shareholders' Equity $ 48,171 $ 368,482 ========= =========
F-31 34 KTI, Inc. December 31, 1997 and June 30, 1998 Notes to Pro forma Condensed Combined financial Statements (Unaudited) 1. Description of Transactions On August 28, 1998, FCR, Inc., a Delaware corporation ("FCR"), was merged (the "Merger") with and into KTI Acquisition Sub, Inc., a Delaware Corporation and a wholly owned subsidiary of the Registrant ("Merger Sub"), pursuant to an Agreement and Plan of Merger, dated July 22, 1998 (the "Merger Agreement"), by and among the Registrant, Merger Sub, FCR and the securityholders of FCR (the "Holders"). Pursuant to the Merger Agreement, at the closing of the Merger, the securities of FCR held by the Holders were converted into the right to receive an aggregate of (i) $30.0 million in cash (the "Initial Cash Consideration"),(ii) 1,714,285 shares of common stock, no par value (the "Common Stock"), of the Registrant (the "Initial Stock Consideration"), and (iii) an additional payment of up to $30.0 million (the "Earnout"), based upon the earnings from the operations of FCR for the period from July 1, 1998 through December 31, 1998, payable in a combination of cash and Common Stock, which Common Stock shall be valued at the greater of the market value of the Common Stock on the date the Earnout is determined and $23 F-32 35 per share; provided, that if the market value of the Common Stock on the date the Earnout is determined is less than $18 per share, the FCR Holders shall be entitled to an additional payment equal to the difference between $18 and such market value (the "Makeup Payment," and together with the Earnout, the Initial Cash Consideration and the Initial Stock Consideration, the "Merger Consideration"). The Merger Consideration is payable in a combination of Cash and Common Stock, and the value of the Common Stock portion of the Merger Consideration shall be equal to at least 40% of the aggregate Merger Consideration. As a result of the Merger, FCR became a whollyowned subsidiary of the Registrant. FCR is a diversified recycling company that provides residential and commercial recycling processing and marketing services and manufactures products, in particular, cellulose insulation, using recycled materials. FCR owns or operates eighteen material recovery facilities, six cellulose insulation manufacturing facilities and three plastic reprocessing facilities in twelve states. The Registrant utilized its $150.0 million line of credit with KeyBank National Association to fund the $30.0 million Initial Cash Consideration. Effective as of the closing of the Merger, Mr. Paul A. Garrett, Chief Executive Officer of FCR, was named the Vice-Chairman of the Board of Directors of the Registrant and was elected to the Board of Directors of the Registrant. Mr. Brian J. Noonan, Chief Financial Officer of FCR, was named Chief Financial Officer of the Registrant. In connection with the acquisition, certain officers of FCR entered into three year employment agreements. On July 2, 1998, FCR acquired all the outstanding shares of stock of Resource Recovery Systems, Inc. (RRS). RRS provides residential and commercial recycling processing and marketing services with plants located in Berlin, Connecticut, Howes Cave, New York, Claverack, New York, Saginaw, Michigan, Ann Arbor, Michigan, Athens, Georgia, and Sarasota, Florida. The aggregate purchase price for the stock was $4.41 million. In connection with this transaction, certain debt of RRS totaling approximately $3.96 million was refinanced under FCR's existing credit agreement and approximately $2.13 million remained outstanding. In addition, two F-33 36 former shareholders of RRS signed a five year covenant-not-to-compete for $500,000. F-34 37 2. Historical Statements of Operations for Acquisitions The historical statements of operations for acquisitions consist of the combined historical statement of operations for the acquisitions completed in 1997 and 1998 for the period from January 1, 1997 through their respective dates of acquisition as follows:
COMPLETED ACQUISITIONS SIX MONTHS YEAR ENDED 12/31/97 ENDED ---------------------------------------------------------------------------- JUNE 30,1998 RESOURCE USF RESOURCE TOTAL RESOURCE SUNCOAST(a) RECYCLING(b) INSULATION(c) RECOVERY(d) ACQUISITIONS RECOVERY(d) ----------- ------------ ------------- ----------- ------------ -------- Net revenues $ 5,320,079 $ 6,785,503 $ 1,959,512 $ 10,305,445 $ 24,370,539 $ 4,183,073 Processing and Manufacturing Costs 2,714,528 7,269,259 1,966,788 8,351,361 20,301,936 4,181,588 Gross Margin 2,605,551 (483,756) (7,276) 1,954,084 4,068,603 1,485 Selling General and Administrative Expenses 2,325,357 649,620 44,299 604,268 3,623,544 594,264 -------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------- Operating Income (Loss) 280,194 (1,133,376) (51,575) 1,349,816 445,059 (592,779) Interest & Other Expenses (38,585) (103,454) (4,704) (1,265,015) (1,411,758) (354,598) -------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------- Income (Loss) Before Income Taxes 241,609 (1,236,830) (56,279) 84,801 (966,699) (947,377) Income Taxes 95,400 0 (30,582) 162,227 227,045 0 -------------------------------------------------------------------------------------------- Net Income (Loss) $ 146,209 $ (1,236,830) $ (25,697) $ (77,426) $ (1,193,744) (947,377) --------------------------------------------------------------------------------------------
a) Acquisition completed on May 7, 1997 b) Acquisition completed on September 2, 1997 c) Acquisition completed on December 1, 1997 d) Acquisition completed on July 1, 1998 See the footnotes to the FCR 1997 audited Financial statement located in F-7 to F-21 for a description of these transactions. F-35 38 All of the completed acquisitions were accounted for using the purchase method of accounting for business combinations. 3. Pro Forma Adjustments (all amounts in thousands unless indicated otherwise) Balance Sheet as of June 30, 1998. (A) Reflects the acquisition by FCR of all the outstanding common shares of Resource Recovery, Inc. (RRS) which has been accounted for using the purchase method. The total purchase price was $4,409. In connection with this transaction certain debt of RRS totaling approximately $3,960 was refinanced under FCR's existing credit agreement and approximately $2,131 of debt of RRS remained outstanding. In addition, two former shareholders of RRS signed a five year covenant-not-to-compete for $500. (B) Reflects the acquisition by KTI of the outstanding stock of FCR which has been accounted for using the purchase method of accounting. The initial aggregate purchase price was approximately $57,800 which included the issuance of 1,714,285 shares of Company's common stock valued at $16.19 per share and a cash payment of $30,000. In addition, debt totaling $2,000 of FCR remained outstanding. The Company utilized it's line of credit with KeyBank National Associates to finance the acquisition of FCR. The Merger Agreement provides for an additional payment of up to $30,000. The pro forma financial statements were prepared with the assumption that no additional payment will be made. (C) Reflects the recording of a current deferred tax asset resulting from FCR's net operating loss carryforward of approximately $11,000. (D) Reflects the recording of goodwill resulting from the acquisition of FCR. Results of Operations, year ended December 31, 1997 and the six month period ended June 30, 1998. (E) Reflects additional depreciation of $180, and $25, for the year ended December 31, 1997 and the six months ended June 30, 1998, respectively. F-36 39 Depreciation is recorded over the estimated remaining lives of the fixed assets. (F) Reflects additional goodwill amortization expense of $270, and $90, for the year ended December 31, 1997 and the six months ended June 30, 1998, respectively. Goodwill is amortized over 20 years. (G) Reflects the additional interest expense on the incremental debt outstanding assuming an interest rate of 9.25%. (H) Reflects elimination of selling, general and administrative expenses for the year ended December 31, 1997 for reductions of officer's salaries and other compensation items per employment agreements. (I) The provision for income taxes on the pro forma adjustments at a 39.5% rate before nondeductible depreciation and goodwill amortization. (J) Reflects additional depreciation of FCR assets of $946 for the year ended December 31, 1997 and $473 for the six months ended June 30, 1998 using a useful life of 10 years. Reflects additional goodwill amortization of $1,335, for the year ended December 31, 1997 and $660 for the six months ended June 30, 1998 using a useful life of 20 years. (K) Reflects the additional interest expense on the incremental debt outstanding assuming an interest rate of 7.75%. (L) Reflects the effect of the additional shares issued in connection with the acquisition of FCR net of the impact of securities which become antidilutive based on pro forma operating results. (M) Reflects elimination of legal, investment banking, and search fees incurred by FCR in connection with the acquisition of FCR by KTI. F-37 40 (c) Exhibits.
Exhibit Number Description - -------------- ----------- *4.1 Agreement and Plan of Merger, dated July 22, 1998, between KTI, Inc., KTI Acquisition Sub, Inc., FCR, Inc. and certain securityholders of FCR, Inc. (Incorporated by reference to Exhibit 4.1 to the Registant's Current Report on Form 8-K, dated July 22, 1998.) *4.3 Employment Agreement, dated August 28, 1998, between the Registrant and Paul A. Garrett. *4.4 Employment Agreement, dated August 28, 1998, between the Registrant and Brian J. Noonan. *4.5 Employment Agreement, dated August 28, 1998, between the Registrant and Michael P. Kuruc. *99.1 Press Release dated August 31, 1998. +99.2 Fairness Opinion of Donaldson, Lufkin & Jenrette dated July 7, 1998.
* Previously Filed. + Filed Herewith. 41 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. Dated: October 7, 1998 By: /s/ Martin J. Sergi --------------------------- Name: Martin J. Sergi Title: President 42 EXHIBIT INDEX 99.2 Fairness Opinion of Donaldson, Lufkin & Jenrette EX-99.2 2 FAIRNESS OPINION OF DONALDSON, LUFKIN & JENRETTE 1 Exhibit 99.2 [DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION LETTERHEAD] July 7, 1998 Board of Directors KTI, Inc. 7000 Boulevard East Guttenberg, NJ 07093 Dear Sirs: You have requested our opinion as to the fairness from a financial point of view to KTI, Inc. (the "Company") of the consideration to be paid by the Company pursuant to the terms of the Agreement and Plan of Merger (the "Agreement"), by and among the Company, KTI Acquisition Sub, Inc. ("Merger Sub") a wholly owned subsidiary of the Company, FCR, Inc. ("FCR") and all of the security holders of FCR, pursuant to which FCR will be merged (the "Merger") with and into the Merger Sub. Pursuant to the Agreement, the shares of common stock and each class of preferred stock of FCR will be converted into the right to receive, in the aggregate, $30 million in cash, 1,714,285 shares of common stock, no par value ("Company Common Stock") of the Company and Earn-Out Consideration (as defined in the Agreement) of up to $30 million of a combination of Company Common Stock and cash. In arriving at our opinion, we have reviewed the draft dated June 30, 1998 of the Agreement. We also have reviewed financial and other information that was publicly available or furnished to us by the Company and FCR, including information provided during discussions with their respective managements. Included in the information provided during discussions with the respective managements were certain financial projections of FCR pro forma for the RRS acquisition for the period beginning 1998 and ending 2002 prepared by the management of FCR and certain financial projections of the Company for the period beginning 1998 and ending 2002 prepared by the management of the Company. In addition, we have compared certain financial and securities data of the Company and FCR with various other companies whose securities are traded in public markets, reviewed the historical stock prices and trading volumes of Company Common Stock, reviewed prices paid in certain other business combinations, and conducted such other financial studies, analyses and investigations as we deemed appropriate for purposes of this opinion. We were not provided an opportunity to discuss with management of Applegate Fibers Insulation ("Applegate") the historical and future operating and financial performance of Applegate. In rendering our opinion, we have relied upon and assumed the accuracy and completeness of all of the financial and other information that was available to us from public sources, that was provided to us by the Company and FCR or their respective representatives, or that was otherwise reviewed by us. In particular, we have relied upon the estimates of the management of the Company of the operating synergies achievable as a result of the Merger and upon our discussion of such synergies with the management of FCR. With respect to the financial projections supplied to us 2 related to the Company and FCR, we have assumed that they have been reasonably prepared on the basis reflecting the best currently available estimates and judgments of the management of the Company and FCR as to the future operating and financial performance of the Company and FCR. We have assumed that the consummation of the acquisition of Applegate prior to December 31, 1998 will not result in FCR assuming directly or indirectly any material liabilities other than outstanding indebtedness reflected on the consolidated balance sheet of KTI/FCR as of December 31, 1998. In addition, we have assumed that the cash flow for the period from July 1, 1998 through December 31, 1998 of Applegate is consistent with its long term cash flow generating capacity and is consistent with the cash flow generating capacity of FCR. We have not assumed any responsibility for making any independent evaluation of any assets or liabilities or for making any independent verification of any of the information reviewed by us. Our opinion is necessarily based on economic, market, financial and other conditions as they exist on, and on the information made available to us as of, the date of this letter. It should be understood that, although subsequent developments may affect this opinion, we do not have any obligation to update, revise or reaffirm this opinion. We are expressing no opinion herein as to the prices at which Company Common Stock will actually trade at any time. Our opinion does not address the relative merits of the Merger and the other business strategies being considered by the Company's Board of Directors, nor does it address the Board's decision to proceed with the Merger. Our opinion does not constitute a recommendation to any stockholder as to how such stockholder should vote on the proposed transaction. Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), as part of its investment banking services, is regularly engaged in the valuation of businesses and securities in connection with mergers, acquisitions, underwritings, sales and distributions of listed and unlisted securities, private placements and valuations for corporate and other purposes. Based upon the foregoing and such other factors as we deem relevant, we are of the opinion that the consideration to be paid by the Company pursuant to the Agreement is fair to the Company from a financial point of view. Very truly yours, DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION By: /s/ Sam C. Pina ------------------------ Sam C. Pina Vice President -----END PRIVACY-ENHANCED MESSAGE-----