-----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, IkcT/NMC4dMFYaiSHdFpeuPW8Jz57lqOnDudygYSKUDeOfdQSO4BMxFtOgObYA63 /wAeHGRyGRbCwaAtTzdktQ== 0000950123-99-001453.txt : 19990223 0000950123-99-001453.hdr.sgml : 19990223 ACCESSION NUMBER: 0000950123-99-001453 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19990222 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/A SEC ACT: SEC FILE NUMBER: 000-25490 FILM NUMBER: 99546661 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/A 1 KTI, INC.: AMENDMENT TO JUNE 30, 1998 Q/E 10-Q 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/A (x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 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 9,761,773 Shares as of August 7, 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 15 Item 2. Changes in Securities 15 Item 3. Defaults Upon Senior Securities 15 Item 4. Submission of Matters to a Vote of Security Holders 15 Item 5. Other Information 15 Item 6. Exhibits and Reports on Form 8K 16
1 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS KTI, INC. CONSOLIDATED BALANCE SHEET (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
JUNE 30, DECEMBER 31, 1998 1997 ------------------- --------------------- (UNAUDITED) ASSETS Current Assets Cash and cash equivalents $ 10,027 $ 11,181 Restricted funds 16,367 13,103 Accounts receivable, net of allowances of $670 and $294 21,974 22,126 Consumables and spare parts 4,156 4,041 Inventory 2,044 1,219 Notes receivable--officers/shareholders and affiliates 516 29 Other receivables 795 461 Deferred taxes - 2,751 Other current assets 1,286 793 ------------------- --------------------- Total current assets 57,165 55,704 Restricted funds 4,851 6,527 Notes receivable - officers/shareholders and affiliates 86 81 Other receivables 204 271 Deferred costs, net of accumulated amortization of $885 and $676 4,690 2,916 Goodwill and other intangibles, net of accumulated amortization of $1,610 and $778 23,319 17,483 Other assets 9,192 1,768 Deferred project development costs 932 932 Property, equipment and leasehold improvements, net of accumulated depreciation of $21,693 and $17,837 168,590 156,801 ------------------- --------------------- Total assets $ 269,029 $ 242,483 =================== ===================== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable $ 7,842 $ 8,779 Accrued expenses 2,272 3,825 Debt, current portion 6,524 19,794 Income taxes payable 797 165 Other current liabilities 2,019 1,184 ------------------- --------------------- Total current liabilities 19,454 33,747 Other liabilities 5,434 1,918 Debt, less current portion 103,667 74,473 Minority interest 24,176 22,105 Deferred revenue 34,474 37,500 Deferred taxes 899 - 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 40,000,000 and 20,000,000 in 1998 and 1997, respectively; issued and outstanding: 9,683,158 in 1998, 8,912,630 in 1997 96 89 Additional paid-in capital 58,889 52,762 Retained earnings (deficit) 540 (5,243) ------------------------------------------- Total stockholders' equity 80,925 72,740 ------------------------------------------- Total liabilities and stockholders' equity $ 269,029 $ 242,483 ===========================================
See accompanying notes. 2 4 KTI, INC. CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 1998 1997 1998 1997 -------------- ------------- -------------- ------------------ Revenues: Waste-to-energy: Electric power and steam $23,699 $10,704 $34,112 $20,212 Waste processing 8,951 7,906 17,032 15,723 Recycling 16,808 1,871 35,946 3,144 ------------------------------ ------------------------------------ Total revenues 49,458 20,481 87,090 39,079 Costs and expenses: Electric power, steam and waste processing 15,891 11,256 26,645 21,751 Recycling 16,300 1,730 33,722 2,951 General and administrative 2,031 1,118 3,113 2,163 Depreciation and amortization 2,608 2,254 5,065 4,474 Interest, net 1,550 1,325 3,060 2,325 -------------- ------------- -------------- ------------------- Total costs and expenses 38,380 17,683 71,605 33,664 Income before minority interest, income tax provision and extraordinary item 11,078 2,798 15,485 5,415 Minority interest 2,509 26 3,578 381 Pre-acquisition earnings of PERC - 1,996 - 2,899 ----------------------------------------------------------------------- Income before income tax provision and extraordinary item 8,569 776 11,907 2,135 Income tax provision 3,347 - 4,693 - -------------- ------------- -------------- ------------------- Income before extraordinary item 5,222 776 7,214 2,135 Extraordinary item- Loss on early extinguishment of debt, net of minority interest and income taxes 495 - 495 - -------------- ------------- -------------- ------------------- Net income 4,727 776 6,719 2,135 Accretion and accrued and paid dividends on preferred stock 469 499 978 499 -------------- ------------- -------------- ------------------- Net income available to common shareholders $4,258 $277 $5,741 $1,636 ============== ============= ============== =================== Earnings per common share: Basic: Income before extraordinary item $0.49 $0.04 $0.66 $0.24 Extraordinary item $0.05 -- $0.05 -- ------------- ------------- -------------- ------------------- Net income $0.44 $0.04 $0.61 $0.24 Weighted average number of shares used in calculation 9,614,163 6,984,926 9,424,451 6,868,993 Diluted: Income before extraordinary item $0.42 $0.04 $0.59 $0.23 Extraordinary item $0.04 -- $0.04 -- -------------- ------------- -------------- ------------------- Net income $0.38 $0.04 $0.55 $0.23 Weighted average number of shares used in calculation 12,344,172 7,260,467 12,275,785 7,219,758
3 See accompanying notes. 5 KTI, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
Six months ended June 30, 1998 1997 ---------------- ----------------- OPERATING ACTIVITIES Net income $ 6,719 $ 2,135 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 5,065 2,052 Minority interest, net of distributions 2,071 381 Deferred revenue (3,026) (3,102) Deferred taxes 3,650 - Provision for losses on accounts receivable 570 47 Interest accrued and capitalized on debt 701 833 Gain on sale of assets (30) (1) Loss on early extinguishment of debt 495 - Securitiy received for sale of power (3,814) - Changes in operating assets and liabilities: Accounts receivable 1,095 (1,743) Management fees receivable - 370 Consumables, spare parts and inventories (712) (633) Other assets (4,032) (227) Notes and other receivables (263) 440 Accounts payable and accrued expenses (3,620) (297) Income taxes payable 382 - Other liabilities 3,075 (652) ---------------- ----------------- Net cash provided by (used in) operating activities 8,326 (397) INVESTING ACTIVITIES Additions to property, equipment and leasehold improvements (4,443) (729) Proceeds from sale of assets 33 2 Net changes in restricted funds (1,483) (995) Purchase of businesses, net of cash acquired (16,468) - Notes receivable--affiliates (492) (421) ---------------- ----------------- Net cash used in investing activities (22,853) (2,143) FINANCING ACTIVITIES Deferred financing costs (2,995) (998) Proceeds from issuance of debt 46,995 9,133 Net borrowings on lines of credit 19,267 5,000 Proceeds from exercise of warrants 995 - Proceeds from exercise of stock options 1,365 - Proceeds from sale of common stock - 370 Proceeds from sale of preferred stock - 3,855 Dividends paid on preferred stock (936) - Principal payments on debt (51,318) (16,868) ---------------- ----------------- Net cash provided by financing activities 13,373 492 Decrease in cash and cash equivalents (1,154) (2,048) Cash and cash equivalents at beginning of period 11,181 5,227 ---------------- ----------------- Cash and cash equivalents at end of period $ 10,027 $ 3,179 ================ =================
-Continued- 4 6 KTI, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED) (IN THOUSANDS) (UNAUDITED) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest paid $ 2,563 $ - =================== ================= NON CASH INVESTING AND FINANCE ACTIVITIES Accretion on Class A Preferred Stock $ 42 $ 499 =================== =================
See accompanying notes. 5 7 KTI, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
SERIES A SERIES B PREFERRED STOCK PREFERRED STOCK SHARES AMOUNT SHARES AMOUNT ------ ------ ------ ------ Balance at December 31, 1996 - $ - - $ - Net income - - - - Issuance of Series A Preferred Stock and common stock purchase warrants 487,500 3,376 - - Accretion of Series A Preferred Stock - 700 - - Issuance of Series B Preferred Stock and common stock purchase warrants - - 856,000 21,400 Issuance of common stock and common stock purchase warrants for: Exercise of options - - - - Exercise of warrants - - - - Conversion of debt - - - - Conversion of preferred stock (40,000) (344) - - Employee savings plan contribution - - - - Business combinations - - - - Dividends paid on Series B Preferred Stock - - - - ----------------------------------------- Balance at December 31, 1997 447,500 3,732 856,000 21,400 Net income - - - - Accretion of Series A Preferred Stock - 42 - - Issuance of common stock and common stock purchase warrants for: Exercise of options - - - - Exercise of warrants - - - - Conversion of debt - - - - Conversion of preferred stock (447,500) (3,774) - - Employee savings plan contribution - - - - Dividends paid on Series B Preferred Stock - - - - ----------------------------------------- Balance at June 30, 1998 - $ - 856,000 $ 21,400 ========================================= ADDITIONAL COMMON STOCK PAID IN SHARES AMOUNT CAPITAL ------ ------ ------- Balance at December 31, 1996 6,836,766 $ 68 $ 38,576 Net income - - - Issuance of Series A Preferred Stock and common stock purchase warrants - - 422 Accretion of Series A Preferred Stock - - (700) Issuance of Series B Preferred Stock and common stock purchase warrants - - (1,416) Issuance of common stock and common stock purchase warrants for: Exercise of options 85,353 1 502 Exercise of warrants 692,771 7 3,611 Conversion of debt 618,609 6 4,901 Conversion of preferred stock 40,000 1 343 Employee savings plan contribution 4,117 - 35 Business combinations 635,014 6 6,488 Dividends paid on Series B Preferred Stock - - - ---------------------------------------------- Balance at December 31, 1997 8,912,630 89 52,762 Net income - - - Accretion of Series A Preferred Stock - - (42) Issuance of common stock and common stock purchase warrants for: Exercise of options 180,688 2 1,362 Exercise of warrants 138,125 1 994 Conversion of debt - - - Conversion of preferred stock 447,500 4 3,772 Employee savings plan contribution 4,215 - 41 Dividends paid on Series B Preferred Stock - - - ---------------------------------------------- Balance at June 30, 1998 9,683,158 $ 96 $ 58,889 ============================================== RETAINED EARNINGS (DEFICIT) TOTAL --------- ----- Balance at December 31, 1996 $ (12,940) $ 25,704 Net income 8,092 8,092 Issuance of Series A Preferred Stock and common stock purchase warrants - 3,798 Accretion of Series A Preferred Stock - - Issuance of Series B Preferred Stock and common stock purchase warrants - 19,984 Issuance of common stock and common stock purchase warrants for: Exercise of options - 503 Exercise of warrants - 3,618 Conversion of debt - 4,907 Conversion of preferred stock - - Employee savings plan contribution - 35 Business combinations - 6,494 Dividends paid on Series B Preferred Stock (395) (395) ------------------------------- Balance at December 31, 1997 (5,243) 72,740 Net income 6,719 6,719 Accretion of Series A Preferred Stock - - Issuance of common stock and common stock purchase warrants for: Exercise of options - 1,364 Exercise of warrants - 995 Conversion of debt - - Conversion of preferred stock - 2 Employee savings plan contribution - 41 Dividends paid on Series B Preferred Stock (936) (936) ------------------------------- Balance at June 30, 1998 $ 540 $ 80,925 ===============================
See accompanying notes 6 8 KTI, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS) JUNE 30, 1998 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 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 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:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 1998 1997 1998 1997 --------------------------------------------------------------- Numerator: Net income $ 4,727 $ 776 $ 6,719 $ 2,135 Preferred stock dividends 469 - 936 - Accretion of preferred stock - 499 42 499 --------------------------------------------------------------- Numerator for basic earnings per share-net income available to common stockholders 4,258 277 5,741 1,636 Effective of dilutive securities 469 - 936 - Accretion of Preferred Stock - - 42 - --------------------------------------------------------------- Numerator for diluted earnings per share-net income available to common stockholders after assumed conversions $ 4,727 $ 277 $ 6,719 $ 1,636 =============================================================== Denominator: Denominator for basic earnings per share-weighted average shares 9,614,163 6,894,926 9,424,451 6,868,993 Effect of dilutive securities: Employee stock options 559,010 103,432 498,330 97,147 Warrants 349,722 262,109 432,574 253,618 Convertible preferred stock 1,821,277 - 1,920,430 - --------------------------------------------------------------- Dilutive potential common shares Denominator for diluted earnings per share-adjusted weighted-average shares and assumed conversions 12,344,172 7,260,467 12,275,785 7,219,758 =============================================================== Net income per share-Basic $0.44 $0.04 $0.61 $0.24 =============================================================== Net income per share-Diluted $0.38 $0.04 $0.55 $0.23 ===============================================================
7 9 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 and six months ended June 30, 1998, compared with the same periods in 1997, increased $28,977 or 141.5% and $48,011 or 122.9%, respectively. Of these increases approximately $14,937 for the three months and $32,802 for the six months is attributable to the recycling division and $14,040 for the three months and $15,209 for the six months is attributable to the waste to energy division. KTI's waste to energy division showed increases in electric power and steam revenues of $12,995 and $13,900 or 121.4% and 68.8% for the quarter and six months ended June 30, 1998 as compared to the same periods in 1997. The increase in revenue is due primarily to the restructuring of the Power Purchase Agreement ("PPA") with Bangor Hydro-Electric. In connection with this restructuring, the Company received $6,000 in cash and an agreement from Bangor Hydro-Electric to pay $250 per quarter over the next four years (total of $4,000). PERC recorded the present value of these payments of approximately $3,600, plus the $6,000, as revenue in the quarter. In addition, Bangor Hydro-Electric issued warrants to purchase one million shares of Bangor Hydro-Electric Common Stock. The Company's share, based upon its ownership percentage at PERC, was approximately 713 thousand warrants. The estimated fair market value of these warrants as of the date of issuance was $5.35 per warrant and the Company recorded revenue of $3,814 in the quarter. Exclusive of this restructuring, PERC posted a decrease in revenues of $161 or 3.3% for the quarter because it also experienced operational problems from the heavy rains in the area. Maine Energy posted an overall decrease in revenue for the quarter ended June 30, 1998 as compared to the same period in 1997 of $622 or 13.4%; principally from a decrease of $912 in the amortization of deferred revenue. This was offset by both a 2.0% increase in the contract rate for power at the facility and an increase resulting from the scheduled plant outage in April being less extensive than the prior year, net of the reduced output due to flooding caused by heavy rains. The rains also caused wet fuel issues. Timber Energy posted an increase in electric power revenue over 1997 of $192 or 16.3% because of an increase in the capacity payment from Florida Power and from a 66.0% increase in electrical generation. Timber Energy had its first major overhaul in the second quarter of 1997 and its electrical generator was off-line for 6 weeks during that quarter. This increase was offset by a $.004 per kilowatt hour reduction in the energy rate paid by Florida Power. On June 16, 1998 KTI acquired Multitrade Group, Inc., a Virginia corporation which currently owns and operates two facilities which incinerate biomass waste and coal to produce steam for sale to major users under long-term contracts. Revenue from Multitrade for the period was $217. Maine Energy has generated 2.5% fewer kilowatt hours for the six month period than the prior year while receiving 2.3% higher revenues per kilowatt hour; resulting in $11 or 0.7% higher revenues. PERC has generated 1.3% higher kilowatt hours, but has received 0.4% less revenue per kilowatt hour for the same period; resulting in $78 or 0.9% higher revenues. Timber Energy has generated 20.4% higher kilowatt hours for the period but has received 10.4% less per kilowatt hour; resulting in a $154 increase for the six months or 6.1%. Each of the facilities have experienced operational problems because of abnormal weather throughout the six months. Timber also experienced lower generation because of reduced steam flow to the turbine during the first quarter of 1998, which was attributable to superheater failures in the boiler. This problem was repaired during the facility's scheduled outage in April, 1998. Revenues from waste processing increased $1,045 or 13.2% for the quarter ended June 30, 1998 and $1,309 or 8.3% for the six months ended June 30, 1998 as compared to the same periods in 1997. 9 11 Maine Energy received approximately 7.9% more tons of MSW in this quarter than the same period in 1997, and tipping fees averaged approximately $8.74 or 29.1% per ton more than 1997. PERC received nearly the same tonnage in the quarter as in 1997, but tipping fees averaged $2.15 or 4.7% higher than 1997. Timber Energy's wood chip processing revenues decreased by $22 or 6.7% principally because pulp mill customers required less tonnage during the quarter. Timber's plastics division was sold on July 1, 1997; resulting in a reduction of $525 in revenue for the quarter. Revenues at AAR Tennessee decreased $124 or 26.6% because less tonnage was processed. Effective June 1, 1998 all KTI Specialty Waste tonnage was transferred to Total Waste Management, which was acquired January 27, 1998. This transfer was part of KTI's long range plan to integrate the two waste streams into a company that can provide more complete disposal services over a wider array of waste streams which would command higher tipping fees. Total Waste Management posted increased revenues of $860 for the quarter over KTI Specialty Waste and SEMCO for the same period last year. Through June 30, 1998, the combined waste processing revenue at Maine Energy and PERC was $9,887 or 10.0% higher than the same period in 1997 because tonnage received was 5.1% higher and average tipping fees were higher. The success in moving tipping fees higher during the second quarter has resulted in tipping fees for the six months ending June 30, 1998 being 4.8% higher than the same period in 1997. Recycling revenue increased $14,937 in the second quarter and $32,802 for six months of 1998, as compared to the same periods 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 $4,635 or 41.2% for the quarter ended June 30, 1998 and $4,894 or 22.5% for the six months ended June 30, 1998 as compared to the same periods in 1997. PERC's operating costs were $3,907 higher as a result of additional contractual payments to municipalities and its electric power customer generated by the income from the restructuring of the PPA. Exclusive of this item, the costs of operating PERC were higher by $306 or 8.0% for the quarter because of scheduled maintenance costs. Operating costs of the new divisions of Total Waste Management and Power Ship were $948 and $904 for the quarter and $1,440 and $1,322 for the six months respectively. Maine Energy's operating costs were lower by $142 or 3.5% for the quarter and $248 or 3.7% for the six months principally because of reduced maintenance costs at the facility. Operating costs at Timber Energy are lower by $490 or 36.8% and $944 or 34.2% for the quarter and six months due to the sale of the plastics division and overall lower maintenance costs. Operating costs at Multitrade were $63 since its acquisition on June 16, 1998. General and administrative expenses increased by $913 or 81.7% for the three months and $950 or 43.9% for the six months ended June 30, 1998 as compared to 1997. During the second quarter of 1998 the Company added administrative staff to develop and install Company wide computer networks; to support Company wide credit and collection efforts; to identify and pursue potential mergers and acquisitions; and to develop internal analytical systems to identify revenue enhancement and cost savings programs in newly acquired entities. INTEREST Interest expense increased $225 or 17.0% for the three months and $735 or 31.6% for the six months ended June 30, 1998 as compared to the same periods in 1997. Interest expense at Timber Energy increased $128 or 53.9% due to the restructuring of the variable rate bonds to fixed coupon rates during the second quarter of 1997. Reductions in interest expense of $335 were realized through debt reductions at most of KTI's operating facilities, which were offset by increases related to increased borrowings on the Company's line of credit to fund acquisitions beginning in the third quarter of 1997. 10 12 INCOME TAX PROVISION The income tax provision was $3,347 in the quarter and $4,693 for the six months. The primary difference in the income tax provision at the federal statutory rate and the recorded amounts for the periods indicated is due to state income tax provision and the impact of nondeductible goodwill from stock acquisitions. EXTRAORDINARY LOSS ON EARLY RETIREMENT OF DEBT The Company recorded an extraordinary loss on early retirement of the PERC bonds for the quarter and six months of $495. This amount is net of minority interest and income tax benefits. LIQUIDITY AND CAPITAL RESOURCES The Company is a holding company and receives cash flow from its subsidiaries. Receipt of cash flow from 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 $14,105 of subordinated notes payable as of June 30, 1998 (approximately $2,495 of which notes are owned by the Company) 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 and allowed distributions from contractually restricted subsidiaries, collateralized equipment financing, proceeds from the sale of the Company's common and preferred stock and drawings under its lines of credit. 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 $3,900 and net proceeds of $3,798. 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. On June 5, 1998 the Company exercised its option to exchange all of the outstanding shares of the Series B Preferred Stock for KTI's 8.75% Convertible Subordinated Notes. The exchange will be effective August 3, 1998. The holders of outstanding shares of Series B Preferred are entitled to receive a $1 principal amount exchange note for each 40 shares of Series B Preferred held. KTI will pay $25.00 per share for the portion of any holder's position that is less than 40 shares. Dividends on Series B Preferred will cease August 3, 1998 whether or not the certificates for shares have been surrendered. The Company and its subsidiaries, other than Maine Energy, PERC and Timber Energy at June 30, 1998 had indebtedness maturing in the next year of $4,759. During the first six months of 1998, the Company, other than Maine Energy, PERC and Timber Energy incurred additional debt (including net borrowings on lines of credit) of approximately $20,599, primarily as a result of drawings under its lines of credit for acquisitions; and retired approximately $2,558 of debt. As of June 30, 1998, the Company had cash on hand without regard to Maine Energy, PERC and Timber Energy of approximately $897, plus $5,878 available in lines of credit from a bank. On May 28, 11 13 1998, KeyBank increased its credit line from $22 million to $30 million as part of its commitment to provide KTI with an increase in the overall acquisition credit line to $150 million. On July 13, 1998 KeyBank and KTI closed on the $150 million acquisition credit line. 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 (used in) operations was $1,170 and ($544) for the six months ended June 30, 1998 and 1997, respectively. As of June 30, 1998, Maine Energy had total indebtedness of $14,105. Maine Energy's capital expenditures for property, plant, and equipment were $1,678 and $522 for the six months ended June 30, 1998 and 1997, respectively. As of June 30, 1998, in addition to Maine Energy's operating cash of $1,807, Maine Energy, as required under the terms of the credit agreement with its letter of credit, has on account an additional $6,081 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 operations and capital expenditures primarily from cash flows from operations. Cash provided by operations was $9,882 and $5,515 for the six months ended June 30, 1998 and 1997, respectively. PERC's capital expenditures were $164 and $93 for additions to property, plant and equipment during the six months ended June 30, 1998 and 1997, respectively. On June 26, 1998 KTI completed a major overhaul of the various contracts and obligations of PERC, which included refinancing PERC's tax exempt bonds. The refinancing was made possible through the sale of $45,000 in Electric Rate Stabilization Revenue Refunding Bonds issued by the Finance Authority of Maine ("FAME"). The interest rate on the bonds ranges from 3.75% for one-year bonds to 5.20% for 20-year term bonds. This transaction will reduce PERC's debt service costs while extending its payment obligation over 20 years. As of June 30, 1998, in addition to PERC's operating cash of $6,816, PERC, as required under the terms of the trust indenture governing the FAME Bonds, had on account an additional $11,700 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 As of June 30, 1998, Timber Energy had outstanding tax exempt bonds, together with accrued interest, in the aggregate amount of $13,400. The bonds are payable pursuant to a mandatory redemption schedule through December 1, 2002. 12 14 As of June 30, 1998, in addition to Timber Energy's operating cash of $507, Timber Energy, as required by the terms of the refinancing, had an additional $3,314 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 June 29, 1998, the Company announced that it signed letters of intent to acquire Gaccione Bros. of Clifton, New Jersey and Atlantic Coast Fibers of Passaic, New Jersey. The two companies will be brought together to create one of the largest high-grade paper processing facilities in the country. The annual combined revenue of the two companies is approximately $20 million. On August 5, 1998, the Company announced that it has reached a definitive agreement 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 cash and 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 merger is contingent upon compliance with the Hart Scott Rodino Antitrust Improvement Act and other customary conditions. 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. 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. 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. In August 1998, substantially all of the warrants issued in conjunction with Series A Convertible Preferred Stock were exercised in exchange for 160,677 shares of the Company's common stock. On August 5, 1998 the Company acquired First State Recycling, Inc., a Delaware corporation headquartered in Wilmington, Delaware, for $1.9 million in cash and KTI common stock. As a processor of plastics for resale, First State generated gross revenues of $2 million in 1997 and is expected to reach $4 million in 1998. 13 15 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. 14 16 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 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. 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 15 17 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 second quarter of 1998. The following is a list of the Forms 8-K filed and the dates thereof. (i) A Form 8-K was filed on May 7, 1998 reporting that the Company signed a letter of intent to acquire FCR, Inc., a Delaware corporation. (ii) A Form 8-K was field on June 17, 1998 announcing the conversion of the Company's Series B Preferred Stock to 8.75% Convertible Subordinated Debt effective August 3, 1998. (iii) A Form 8-K was filed on June 25, 1998 announcing the acquisition of Multitrade Group, Inc., a Virginia corporation. (iv) A Form 8-K was filed on July 8, 1998 reporting that the Company completed the refinancing of the existing tax exempt bonds issued by the Town of Orrington, Maine to finance the construction of the facility owned by PERC. (v) A Form 8-K was filed on July 15, 1998 announcing the signing of a $150 million acquisition line of credit with KeyBank. (vi) A Form 8-K was filed on August 5, 1998 announcing the purchase of substantially all of the assets of First State Recycling, Inc. for cash and stock in the amount of $1.85 million. The Company is purchasing First State Recycling subject to existing funded debt of $445,000. 16 18 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: August 13, 1998 17 -----END PRIVACY-ENHANCED MESSAGE-----