-----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, D9PrAXSIf0gnuanUqpYf8OtDk9YiFNwde/AmkV4Aql3vaqFMKB7qmQ1s22f14sGe mmIEw8D89XWSHx07XW9OaQ== 0000950123-99-007700.txt : 19990817 0000950123-99-007700.hdr.sgml : 19990817 ACCESSION NUMBER: 0000950123-99-007700 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KTI INC CENTRAL INDEX KEY: 0000931581 STANDARD INDUSTRIAL CLASSIFICATION: COGENERATION SERVICES & SMALL POWER PRODUCERS [4991] IRS NUMBER: 222665282 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-25490 FILM NUMBER: 99690767 BUSINESS ADDRESS: STREET 1: 7000 BLVD E CITY: GUTTENBERG STATE: NJ ZIP: 07093 BUSINESS PHONE: 2018547777 MAIL ADDRESS: STREET 1: 7000 BOULEVARD EAST CITY: GUTTENBERG STATE: NJ ZIP: 07093 10-Q 1 QUARTERLY REPORT 1 FORM 10-Q. - QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q (x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 Commission File No. 0-25490 KTI, INC. (Exact name of registrant as specified in its charter) New Jersey 22-2665282 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 7000 Boulevard East Guttenberg, New Jersey 07093 (Address of principal executive offices) (Zip code) (201) 854-7777 (Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: Common Stock, No Par Value 13,916,238 Shares as of August 13, 1999 2 TABLE OF CONTENTS
Item Number and Caption Page Number - ----------------------- ----------- PART I Item 1. Consolidated Financial Statements Consolidated Balance Sheets at June 30, 1999 (unaudited) and December 31, 1998 3 Consolidated Statements of Operations (unaudited) for the three and six months ended June 30, 1999 and 1998 4 Consolidated Statements of Changes in Stockholders' Equity for the six months ended June 30, 1999 (unaudited) and the year ended December 31, 1998 5 Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 1999 and 1998 6 Notes to Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 3. Qualitative and Quantitative Disclosure about Market Risk 22 PART II Item 1. Legal Proceedings 23 Item 2. Changes in Securities 24 Item 3. Defaults Upon Senior Securities 24 Item 4. Submission of Matters to a Vote of Security Holders 24 Item 5. Other Information 24 Item 6. Exhibits and Reports on Form 8-K 24
2 3 PART I - FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS KTI, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
JUNE 30, DECEMBER 31, 1999 1998 --------- ------------ (UNAUDITED) ASSETS Current Assets Cash and cash equivalents $ 5,391 $ 9,426 Restricted funds 21,053 19,088 Accounts receivable, net of allowances of $1,343 and $1,313 38,754 29,272 Consumables and spare parts 5,012 4,483 Inventory 8,011 4,866 Notes receivable - officers/shareholders and affiliates 115 1,858 Other receivables 2,836 4,158 Deferred taxes 3,483 4,832 Other current assets 4,011 3,370 --------- -------- Total current assets 88,666 81,353 Restricted funds 4,177 4,350 Notes receivable - officers/shareholders and affiliates 6,469 1,534 Other receivables 2,476 3,025 Deferred costs, net of accumulated amortization of $1,623 and $1,610 5,452 5,268 Goodwill and other intangibles, net of accumulated amortization of $6,056 and $3,492 124,695 117,878 Other assets 7,275 6,167 Deferred taxes 1,366 Property, equipment and leasehold improvements, net of accumulated depreciation and amortization of $34,588 and $26,873 206,715 203,391 --------- -------- Total assets $ 447,291 $422,966 ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable $ 19,109 $ 14,940 Accrued expenses 16,389 9,313 Debt, current portion 161,436 9,775 Other current liabilities 224 4,499 --------- -------- Total current liabilities 197,158 38,527 Other liabilities 1,382 4,227 Debt, less current portion 69,869 202,153 Minority interest 20,940 19,526 Deferred revenue 30,830 33,871 Deferred taxes 2,662 Convertible subordinated notes 6,770 6,770 Commitments and contingencies Stockholders' equity Preferred stock; 10,000,000 shares authorized; none outstanding Common stock, no par value (stated value $.01 per share); authorized 40,000,000 in 1999 and 1998, respectively; issued and outstanding: 13,916,238 in 1999, 13,266,204 in 1998 139 133 Additional paid-in capital 126,396 115,026 Retained earnings (deficit) (6,193) 71 --------- -------- Total stockholders' equity 120,342 115,230 --------- -------- Total liabilities and stockholders' equity $ 447,291 $422,966 ========= ========
See accompanying notes. 3 4 KTI, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ------------------------------- ------------------------------- 1999 1998 1999 1998 ------------ ----------- ------------ ----------- Revenues $ 66,218 $ 49,458 $ 133,195 $ 87,090 Cost of operations 58,036 34,799 112,253 65,432 ------------ ----------- ------------ ----------- Gross Profit 8,182 14,659 20,942 21,658 Selling, general and administrative 6,230 2,031 12,072 3,113 Restructuring charge 2,971 3,719 Asset impairment charge 3,000 3,000 ------------ ----------- ------------ ----------- Income (loss) from operations (4,019) 12,628 2,151 18,545 Interest expense, net 5,319 1,550 9,053 3,060 Loss on sale of business 444 444 Equity loss in subsidiary 214 294 Other charges 131 131 Other expense, net 72 123 ------------ ----------- ------------ ----------- Income (loss) before minority interest, provision (benefit) for income taxes, extraordinary item and cumulative effect of change in accounting principle (10,199) 11,078 (7,894) 15,485 Minority interest 398 2,509 990 3,578 ------------ ----------- ------------ ----------- Income (loss) before provision (benefit) for income taxes, extraordinary item and cumulative effect of change in accounting principle (10,597) 8,569 (8,884) 11,907 Provision (benefit) for income taxes (3,466) 3,347 (2,678) 4,693 ------------ ----------- ------------ ----------- Income (loss) before extraordinary item and cumulative effect of change in accounting principle (7,131) 5,222 (6,206) 7,214 Extraordinary item 495 495 ------------ ----------- ------------ ----------- Income (loss) before cumulative effect in change in accounting principle (7,131) 4,727 (6,206) 6,719 Cumulative effect of change in accounting principle 58 ------------ ----------- ------------ ----------- Net income (loss) (7,131) 4,727 (6,264) 6,719 Accretion and accrued and paid dividends on preferred stock 469 978 ------------ ----------- ------------ ----------- Net income (loss) available to common shareholders $ (7,131) $ 4,258 $ (6,264) $ 5,741 ============ =========== ============ =========== Earnings per common share: Basic: Income (loss) before extraordinary item and cumulative effect of change in accounting principle $ (0.51) $ 0.49 $ (0.45) $ 0.66 Extraordinary item 0.05 0.05 Cumulative effect of change in accounting principle 0.01 ------------ ----------- ------------ ----------- Net income (loss) $ (0.51) $ 0.44 $ (0.46) $ 0.61 ============ =========== ============ =========== Weighted average number of shares used in computation 13,916,238 9,614,163 13,818,290 9,424,451 ============ =========== ============ =========== Diluted: Income (loss) before extraordinary item and cumulative effect of change in accounting principle $ (0.51) $ 0.42 $ (0.45) $ 0.55 Extraordinary item 0.04 0.04 Cumulative effect of change in accounting principle 0.01 ------------ ----------- ------------ ----------- Net income (loss) $ (0.51) $ 0.38 $ (0.46) $ 0.51 ============ =========== ============ =========== Weighted average number of shares used in computation 13,916,238 12,344,172 13,818,290 12,275,785 ============ =========== ============ ===========
See accompanying notes. 4 5 KTI, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
SERIES A SERIES B PREFERRED STOCK PREFERRED STOCK --------------------------- ----------------------- SHARES AMOUNT SHARES AMOUNT ----------- -------- -------- -------- Balance at December 31, 1997 447,500 $ 3,732 856,000 $ 21,400 Net income Accretion of preferred stock 42 Issuance of common stock and common stock purchase warrants for: Exercise of options Exercise of warrants Non-employee director's compensation Conversion of preferred stock: Series A (447,500) (3,774) Series B (856,000) (21,400) Conversion of debt Employee savings plan contribution Business combinations Tax benefit realized from stock option transactions Dividends paid on Series B Preferred Stock Additional costs related to preferred stock issuances ----------- -------- -------- -------- Balance at December 31, 1998 Net loss Issuance of common stock for: Exercise of options Exercise of warrants Business combinations ----------- -------- -------- -------- Balance at June 30, 1999 (unaudited) =========== ======== ======== ========
ADDITIONAL COMMON STOCK ADDITIONAL RETAINED ------------------------- PAID-IN EARNINGS SHARES AMOUNT CAPITAL (DEFICIT) TOTAL ---------- -------- -------- ------- -------- Balance at December 31, 1997 8,912,630 $ 89 $52,762 $(5,243) $72,740 Net income 6,718 6,718 Accretion of preferred stock (42) Issuance of common stock and common stock purchase warrants for: Exercise of options 235,682 2 1,894 1,896 Exercise of warrants 411,894 4 1,648 1,652 Non-employee director's compensation 205 205 Conversion of preferred stock: Series A 447,500 4 3,770 Series B 25,531 1 300 (21,099) Conversion of debt 1,283,399 13 15,686 15,699 Employee savings plan contribution 4,215 41 41 Business combinations 1,945,353 20 38,122 38,142 Tax benefit realized from stock option transactions 738 738 Dividends paid on Series B Preferred Stock (1,404) (1,404) Additional costs related to preferred stock issuances (98) (98) ---------- -------- -------- ------- -------- Balance at December 31, 1998 13,266,204 133 115,026 71 115,230 Net loss (6,264) (6,264) Issuance of common stock for: Exercise of options 20,552 161 161 Exercise of warrants 19,482 193 193 Business combinations 610,000 6 11,016 11,022 ---------- -------- -------- ------- -------- Balance at June 30, 1999 (unaudited) 13,916,238 $ 139 $126,396 $(6,193) $120,342 ========== ======== ======== ======= ========
See accompanying notes. 5 6 KTI, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
Six Months ended June 30, ------------------------- 1999 1998 -------- -------- OPERATING ACTIVITIES Net income (loss) $ (6,264) $ 6,719 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Asset impairment charge 3,000 Extraordinary item 495 Cumulative effect of change in accounting principle 58 Depreciation and amortization 10,443 5,065 Minority interest, net of distributions 1,414 2,071 Loss on sale of business 444 Equity loss in subsidiary 294 Deferred revenue (3,041) (3,026) Deferred income taxes (2,890) 2,615 Provision for losses on accounts receivable 45 570 Interest accrued and capitalized on debt 114 701 Security received for sale of power (7,386) Other non-cash charges 910 11 Changes in operating assets and liabilities: Accounts receivable (8,828) 879 Consumables, spare parts and inventory (1,508) (712) Other receivables 914 (320) Other assets (4,600) 258 Accounts payable and accrued expenses 8,563 (3,854) Other liabilities (5,620) 4,078 -------- -------- Net cash provided by (used in) operating activities (6,552) 8,164 INVESTING ACTIVITIES Additions to property, equipment and leasehold improvements (6,379) (4,183) Proceeds from sale of assets 27 33 Net change in restricted funds (1,792) (1,031) Proceeds from sale of business 1,757 Purchase of businesses, net of cash acquired (150) (15,289) Notes receivable--officers/shareholders and affiliates (2,936) (492) -------- -------- Net cash used in investing activities (9,473) (20,962) FINANCING ACTIVITIES Deferred financing costs (2,995) Proceeds from issuance of debt 46,995 Net borrowings on lines of credit 12,414 19,267 Proceeds from other borrowings 3,259 Proceeds from sale of common stock 354 2,359 Dividends paid (936) Principal payments on debt (4,037) (53,046) -------- -------- Net cash provided by financing activities 11,990 11,644 -------- -------- Decrease in cash and cash equivalents (4,035) (1,154) Cash and cash equivalents at beginning of period 9,426 11,181 ======== ======== Cash and cash equivalents at end of period $ 5,391 $ 10,027 ======== ========
-Continued- 6 7 KTI, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
Six Months ended June 30, ------------------------- 1999 1998 -------- ------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest paid $ 10,909 $ 2,563 Taxes paid 1,128 NON CASH INVESTING AND FINANCING ACTIVITIES Capital lease obligation entered into for lease of equipment 241 Purchase of businesses and additional partnership interest, net of cash acquired: Working capital, net of cash acquired 111 101 Property, equipment and leasehold improvements 8,621 11,528 Purchase price in excess of net assets acquired 7,863 6,873 Other assets 104 Non-current liabilities 5,423 3,317 Common stock issued 11,022
See accompanying notes 7 8 KTI, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS) (UNAUDITED) JUNE 30, 1999 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. The municipal solid waste ("MSW") market in Maine, which provides material to the waste-to-energy segment, is seasonal, with one-third more MSW generated in the summer months than is generated during the rest of the year. The Residential and Commercial Recycling segments experience increased volumes of newspaper in November and December due to increased newspaper advertising and retail activity during the holiday season. Additionally, the Residential Recycling segment operates facilities in Florida which experience increased volumes of recyclable materials during the winter months followed by decreases in the summer months in connection with seasonal changes in population. Operating results for the three and six month periods ended June 30, 1999 and 1998 are not necessarily indicative of the results that may be expected for the full year. For further information, refer to the consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1998. Certain 1998 financial information contained herein has been reclassified to conform with the 1999 presentation. 2. MERGER AND ACQUISITIONS On May 12, 1999, KTI, Inc. (the "Company") entered into an Agreement and Plan of Merger (the "Merger Agreement") with Casella Waste Systems, Inc., ("Casella") a publicly-owned company engaged in the waste services industry. The merger will be completed through the exchange of all of the shares of the Company's common stock for shares of Casella's Class A common stock based on an exchange ratio specified in the Amended Merger Agreement. In addition, all of the Company's outstanding and unexercised stock options and stock purchase warrants will be converted into similar rights to acquire Casella's Class A common stock under the same terms and conditions and the same exchange ratio. Subsequent to the completion of the merger the current Casella stockholders will own a majority of the combined company. Under the terms of the Merger Agreement, Casella is required to file a registration statement with the Securities and Exchange Commission to register the shares of its Class A common stock to be issued in the merger. The merger is subject to, among other things, approval of the Company's and Casella's stockholders. No assurance can be given that the conditions of the merger will be satisfied or that the merger will be consummated. Upon consummation of the merger, the Company will pay fees to its investment bankers and recognize certain other merger related costs which have been deferred. On March 31, 1999 and May 19, 1999, pursuant to the Second Amended, Restated and Extended Waste Disposal Agreement among PERC and the municipalities named therein, the municipalities made capital contributions to Penobscot Energy Recovery Company, Limited Partnership ("PERC"), which were recorded as additional minority interest, totaling $730 and $240, respectively, in exchange for 1.31% and 0.43%, respectively, of limited partnership interest in PERC. On January 27, 1999 the Company completed its acquisition of AFA Group, Inc. and subsidiaries ("AFA"), an integrated wood waste processing and hauling business located in Newark, New Jersey. Payment of the aggregate purchase price, including all direct costs, of $9,682 consisted of (i) 460,000 shares of the Company's common stock valued at $20.70 per share (based on the closing price of the common stock on the date of announcement) and (ii) $150 in cash. This acquisition was accounted for as a purchase, and accordingly, the assets and liabilities have been recorded at their estimated fair value at the date of acquisition. The excess of the purchase price over the fair value of the acquired net assets of $6,363 has been recorded as goodwill and is being amortized on a straight-line basis over 30 years. 8 9 3. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 1999 1998 1999 1998 ------------ ------------ ------------ ----------- Numerator: Net income (loss) $ (7,131) $ 4,727 $ (6,264) $ 6,719 Preferred stock dividends 469 936 Accretion of preferred stock 42 ------------ ------------ ------------ ----------- Numerator for basic earnings per share-net income (loss) available to common stockholders (7,131) 4,258 (6,264) 5,741 Effective of dilutive securities: Preferred stock dividends 469 936 Accretion of preferred stock 42 ------------ ------------ ------------ ----------- Numerator for diluted earnings per share-net income (loss) available to common stockholders after assumed conversions $ (7,131) $ 4,727 $ (6,264) $ 6,719 ============ ============ ============ =========== Denominator: Denominator for basic earnings per share-weighted average shares 13,916,238 9,614,163 13,818,290 9,424,451 Effect of dilutive securities: Employee stock options(1) 559,010 498,330 Warrants(1) 349,722 432,574 Convertible preferred stock(1) 1,821,277 1,920,430 ------------ ------------ ------------ ----------- Dilutive potential common shares Denominator for diluted earnings per share-adjusted weighted-average shares and assumed conversions 13,916,238 12,344,172 13,818,290 12,275,785 ============ ============ ============ =========== Net income (loss) per share-Basic $ (0.51) $ 0.44 $ (0.46) $ 0.61 ============ ============ ============ =========== Net income (loss) per share-Diluted $ (0.51) $ 0.38 $ (0.46) $ 0.51 ============ ============ ============ =========== (1) The employee stock options and warrants outstanding during the year and the convertible subordinated notes payable are anti-dilutive in 1999.
4. CONTINGENCIES The Company is a defendant in a consolidated purported class action, which alleges violations of certain sections of the federal securities laws. The Company believes the allegations are without merit and intends to defend the litigation vigorously. Two lawsuits have been filed against a subsidiary of the Company alleging fraud and tortious interference. The actions are based on two contracts between the plaintiff and the subsidiary, which contracts require all disputes to be resolved by arbitration. Arbitration proceedings have commenced. The Company believes it has meritorious defenses to the allegations. The majority shareholder of a company acquired by a subsidiary of the Company instigated arbitration proceedings against the Company and two of its subsidiaries, alleging the subsidiaries acted to frustrate the "earn-out" provisions of the acquisition agreement and thereby precluding him from receiving, or alternatively, reducing the sum to which he was entitled to receive. He also alleges his employment agreement was wrongfully terminated. The claim for arbitration alleges direct charges in excess of $5,000 and requests punitive damages, treble damages and attorneys fees. The Company and its subsidiaries have responded to the demand, denying liability and filed a counterclaim for $1,000 for misrepresentations. The Company believes it has meritorious defenses to the claims. The Company is a defendant in certain lawsuits alleging various claims incurred in the ordinary course of business. Management of the Company does not believe that the outcome of these matters, 9 10 individually or in the aggregate, will have a material effect on the Company's financial condition, cash flows or results of operations. 5. SEGMENT REPORTING The Company operated in the business segments as indicated below.
THREE MONTHS ENDED JUNE 30, 1999 WASTE-TO-ENERGY COMMERCIAL FINISHED PRODUCTS RESIDENTIAL RECYCLING RECYCLING --------------- ---------- ----------------- ----------- Revenues Unaffiliated customers $ 26,840 $ 19,290 $ 14,061 $ 5,994 Intersegment revenues 56 52 3,888 Segment Profit (Loss) 4,277 (3,937) (1,049) (325) Depreciation and Amortization 2,663 502 876 1,066 Capital Expenditures 1,615 347 982 168
SIX MONTHS ENDED JUNE 30, 1999 WASTE-TO-ENERGY COMMERCIAL FINISHED PRODUCTS RESIDENTIAL RECYCLING RECYCLING --------------- ---------- ----------------- ----------- Revenues Unaffiliated customers $ 51,232 $ 40,428 $ 26,406 $ 15,081 Intersegment revenues 89 83 4,636 Segment Profit (Loss) 10,588 (3,622) (263) 234 Depreciation and Amortization 5,154 1,110 1,697 1,978 Identifiable Assets 247,956 48,070 62,827 70,729 Capital Expenditures 2,744 662 2,385 552
THREE MONTHS ENDED JUNE 30, 1998 WASTE-TO-ENERGY COMMERCIAL FINISHED PRODUCTS RESIDENTIAL RECYCLING RECYCLING --------------- ---------- ----------------- ----------- Revenues Unaffiliated customers $ 28,126 $ 13,461 $ 2,546 $ 1,496 Intersegment revenues 2,603 24 136 1,135 Segment Profit (Loss) 9,857 (667) (36) 232 Depreciation and Amortization 2,085 255 25 224 Capital Expenditures 789 526
SIX MONTHS ENDED JUNE 30, 1998 WASTE-TO-ENERGY COMMERCIAL FINISHED PRODUCTS RESIDENTIAL RECYCLING RECYCLING --------------- ---------- ----------------- ----------- Revenues Unaffiliated customers $46,419 $ 29,493 $ 4,172 $ 3,162 Intersegment revenues 5,187 24 244 2,102 Segment Profit (Loss) 15,498 (348) 223 628 Depreciation and Amortization 4,039 506 50 431 Identifiable Assets 219,934 30,785 1,883 10,783 Capital Expenditures 2,415 1,751 2
10 11 The segment reporting detailed above reconciles to consolidated revenues and income before provision (benefit) for income taxes, extraordinary item and cumulative effect of a change in accounting principal as follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- ------------------------- 1999 1998 1999 1998 -------- -------- --------- -------- REVENUES Total unaffiliated customers revenue for reportable segments $ 66,185 $ 45,629 $ 133,147 $ 83,246 Holding company revenues 33 3,829 48 3,844 Intersegment revenues for reportable segments 3,996 3,898 4,808 7,557 Elimination of intersegment revenues (3,996) (3,898) (4,808) (7,557) -------- -------- --------- -------- Total consolidated revenues 66,218 49,458 133,195 87,090 ======== ======== ========= ======== PROFIT AND LOSS Total segment profit (loss) for reportable segments (1,034) 9,386 6,937 16,001 Holding company segment profit (loss) (2,985) 3,242 (4,786) 2,544 -------- -------- --------- -------- Total segment profit (loss) (4,019) 12,628 2,151 18,545 Unallocated amounts: Interest expense, net 5,319 1,550 9,053 3,060 Other expenses, net 861 992 Minority interest 398 2,509 990 3,578 ======== ======== ========= ======== Income (loss) before provision (benefit) for income taxes, extraordinary item and cumulative effect of change in accounting principle $(10,597) $ 8,569 $ (8,884) $ 11,907 ======== ======== ========= ========
JUNE 30, 1999 --------- ASSETS Total identifiable assets for reportable segments $ 429,582 Holding company assets 17,709 --------- Total consolidated assets $ 447,291 =========
6. IMPAIRMENT OF COMMERCIAL RECYCLING LONG-LIVED ASSETS On June 1, 1999, the Company completed the sale of its commercial recycling facility located in Franklin Park, Illinois and recorded a loss of approximately $444. As a result of this loss and the continued poor operating performance of this segment, the Company initiated an impairment review of the long-lived assets, including goodwill, in the Commercial Recycling segment. A revised operating plan for each of the remaining facilities in the Commercial Recycling segment was developed. While revenues are stable, the Commercial Recycling segment continues to operate at levels of profitability, which are significantly below the levels anticipated when the acquisitions were completed. In addition, with the continued consolidation of the solid waste industry and the continued focus on the disposal aspects of this industry, the possibility of selling these facilities for amounts approximating their carrying value is remote. The Company determined that the estimated future undiscounted cash flows for the KTI Recycling of New Jersey ("Newark Plant") facility were below the carrying value of the related equipment and leasehold improvements. The Company adjusted the carrying value of the related equipment and leasehold improvements of the Newark Plant by approximately $3,000 to their estimated fair value of approximately $1,142. The fair value of the long-lived assets was based on the expected cash flows discounted at a rate commensurate with the risk involved. 7. PLANT CONSOLIDATION, RESTRUCTURING AND OTHER UNUSUAL ITEMS 11 12 In April 1999, FCR, Inc., a subsidiary of the Company, signed a new agreement with a municipality to operate a material recovery facility in Charlotte, North Carolina. As part of this agreement, the Company committed to relocate the cellulose insulation plant located in Ronda, North Carolina to the material recovery facility in Charlotte. This secures the supply of raw material for the cellulose insulation plant and provides additional cost savings from the integration of recycling and the manufacturing of cellulose insulation into one facility. As a result, the Company developed an exit plan for the closing of the plant in Ronda, North Carolina and began the construction of the new cellulose insulation plant during the second quarter. The Company recorded a restructuring charge of approximately $1,205, which consisted primarily of the write-down of equipment and leasehold improvements and an accrual for the remaining payments under the noncancelable lease of the Ronda facility, in the second quarter. During the second quarter, the Company reached agreement with an employee to restructure the amounts paid under an employment contract. The Company recorded a restructuring charge of approximately $320 relating to amounts due under the revised contract. In June 1999, the Company initiated a plan to close the Residential Recycling Segment's material recovery facility located in Howes Cave, New York and process the materials from this facility at another Residential Recycling Segment facility. The Company recorded a restructuring charge of $514, which consisted primarily of the remaining payments under noncancelable leases of the building and equipment, in the second quarter. Included in restructuring charges is $433 of deferred acquisition costs related to acquisitions that were terminated during the second quarter. In April 1998, a subsidiary of the Company, FCR, Inc. ("FCR"), entered into an amended agreement to operate a material recovery facility in Stratford, Connecticut. This agreement requires FCR to add additional processing equipment to this facility within a certain period of time as defined in the amended agreement or pay the municipality $100 per year over the next five years. In April 1999, FCR determined that this processing equipment was not cost effective due to other alternative methods of processing and, thus, will not install the equipment. As a result, the Company recorded the penalty included in the agreement of $500 for the payments to be made to the municipality. The amount is accrued and classified as other liabilities as of June 30, 1999. Other charges of $131 represents an accrual for penalties assessed by the Florida Department of Environmental Protection related to the temperature of the discharge water at the TERI Telogia Facility. In the first quarter of 1999, the Company recorded a $748 restructuring charge. The restructuring initiatives primarily involve the Company's Commercial Recycling segment and represent primarily severance and other costs related to employee reductions. In connection with the restructuring, the Company terminated ten employees. The restructuring charges relate to integration of the brokerage operation acquired as part of the New Jersey Fibers acquisition and elimination of costs as a result of streamlining the operations of acquisitions completed in 1998. The Company recorded $374 against this reserve during 1999. 8. INCOME TAXES The income tax benefit was approximately $2,678 for the six months ended June 30, 1999 compared to an income tax provision of approximately $4,693 during the same period in 1998. During 1999, the effective tax rate utilized by the Company of 30.1% represents the estimated annual effective rate based on the total estimated pretax income of the Company for the year ended December 31, 1999. The effective rate in 1998 was 39.4% and the decrease in the effective rate in 1999 is primarily due to an increase in nondeductible goodwill. 9. REVOLVING LINE OF CREDIT AGREEMENT On May 12, 1999, the Company's Revolving Line of Credit Agreement with a bank (the "Credit Agreement") was amended (the "Amended Agreement") modifying certain financial covenants and requiring bank approval for all acquisitions. The Amended Agreement requires that the Company and certain subsidiaries, as defined, maintain certain specified financial covenants, including, a minimum interest coverage ratio, a maximum funded debt to EBITDA ratio, a minimum fixed charge coverage ratio, and a maximum debt to capitalization ratio, each as defined in the Amended Agreement. The Company recorded a charge of $835 in connection with the amendment. This charge was recorded in interest expense during the second quarter. As of June 30, 1999, the Company was in default of the financial covenants of its $150.0 million line of credit. The Company's lender has waived the violation of the financial covenants through September 30, 1999. As a result, the outstanding amount under the line of credit has been classified as a current liability. Upon the consummation of the merger, this line of credit will be replaced by the credit facility of the merged company. However, no assurances can be given that the conditions of the merger will be satisfied or that the merger will be consummated. 12 13 The Company will continue to select interest rates on the outstanding borrowings based on the bank's prime rate or LIBOR rates, however, the interest rates range from the bank's prime rate to the bank's prime rate plus 1.50% or LIBOR plus 1.88% to LIBOR plus 3.25% depending on the attainment of a financial covenant, as defined, in the Amended Agreement. 10. OTHER MATTERS In connection with the review of the Proxy Statement for the merger with Casella, the Securities and Exchange Commission ("SEC") has informed the Company that it does not concur with the accounting treatment regarding the restructuring of the Power Purchase Agreements at Maine Energy Recovery Company, Limited Partnership and PERC in 1996 and 1998, respectively. The Company believes that the accounting is correct and continues to have dialogue with the SEC regarding these matters. If there were to be any changes to the accounting treatment for these transactions, the amounts reported in the accompanying Form 10-Q would be revised. In addition, the amounts in the financial statements for the three years ended December 31, 1998 would be revised. The Company's estimate is that the decrease in pretax income could be in excess of $14.0 million and $7.0 million for the years ended December 31, 1996 and 1998, respectively. In addition, pretax income in the future would be increased as the impacts noted above are amortized over the life of the respective agreements. 13 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The Company reports the results of operations by the following four segments: waste-to-energy, residential recycling, commercial recycling and finished products. REVENUES Waste-to-Energy Segment The Waste-to-Energy segment consists of the operations of Maine Energy Recovery Company, Limited Partnership ("Maine Energy"), Penobscot Energy Recovery Company, Limited Partnership ("PERC"), Timber Energy Resources, Inc. ("TERI"), KTI Specialty Waste Services, Inc., American Ash Recycling of Tennessee, Ltd. ("AAR"), KTI BioFuels, Inc. ("BioFuels"), Total Waste Management Corporation ("TWM"), Multitrade Group, Inc. ("Multitrade"), Russell Stull Companies ("Russell Stull"), KTI Recycling of Canada ("KTI Tire"), and AFA Group, Inc. ("AFA"). Total revenues for this business unit were approximately $26.8 and $51.2 million for the three and six months ended June 30, 1999, respectively, compared to approximately $28.1 and $46.4 million, respectively, for the same periods in 1998. This represents a decrease of approximately $1.3 million or 4.6% for the three months ended June 30, 1999 and an increase of approximately $4.8 million or 10.3% for the six months ended June 30, 1999 compared to the same periods in 1998. Revenues in the Waste-to-Energy segment are primarily derived from waste processing and electric power sales. Total tons received by the waste-to-energy facilities increased by 5.0% and 4.2% for the three and six months ended June 30, 1999, respectively, compared to the same periods in 1998. The tons received at PERC increased approximately 3.3% and 0.2% for the three and six months ended June 30, 1999, respectively, compared to the same periods in 1998. These variances were a result of the scheduled plant outage occurring during the first quarter in 1999 versus the second quarter in 1998. The tons received by AAR increased approximately 79.9% and 81.3% for the three and six months ended June 30, 1999, respectively compared to the same periods in 1998. The increases at the AAR facility were partially offset by a 3.8% and 4.4% decrease at Maine Energy for the three and six months ended June 30, 1999, respectively, compared to the same periods in 1998. These decreases were due to lower production as a result of repairs to the primary processing equipment. Waste processing revenues increased by approximately $2.8 million or 31.1% and approximately $5.2 million or 30.7% for the three and six months ended June 30, 1999, respectively, compared to the same periods in 1998. This increase is a result of net increase in tonnage discussed above, increased prices charged per ton during 1999 versus 1998 of approximately 7.2% and additional revenues from the Multitrade, Russell Stull, AFA and KTI Tire acquisitions. The increases from the acquisitions were offset by reductions at BioFuels due to the elimination of brokerage operations on March 31, 1998. Electric power revenues for the three and six months ended June 30, 1999 decreased approximately $12.3 million or 52.2% and approximately $11.1 million or 32.4%, respectively, compared to the same periods in 1998. The decrease in revenues is due to the 1998 payments received from the restructuring of the Power Purchase Agreement ("PPA") at PERC partially offset by 8.9% higher output at the facilities. Residential Recycling Segment This segment includes the residential recycling plants of FCR, Inc. ("FCR") and the Boston recycling plant. This segment posted revenues of approximately $6.0 million and $15.1 million for the three and six months ended June 30, 1999, respectively, compared to approximately $1.5 and $3.2 million, respectively, for the same periods in 1998. This represents an increase of approximately $4.5 and $11.9 million, respectively, primarily as a result of the acquisition of FCR, which was completed in the third quarter of 1998. Commercial Recycling Segment The Commercial Recycling segment consists of the operations of I. Zaitlin and Sons, Inc. ("Zaitlin"), K-C International, Inc. ("K-C"), Data Destruction, Inc., the commercial recycling plants in Chicago and Newark acquired from Prins, and KTI New Jersey Fibers, Inc. ("NJ Fibers"), which consists of the operations of Gaccione Bros., Inc. & Co. and PGC Corporation (collectively, "Gaccione") and Atlantic Coast Fibers, Inc. ("Atlantic Coast"). Total revenue for this segment for the three and six months ended June 30, 1999 was approximately $19.3 and $40.4 million, respectively, compared to $13.5 and $29.5 million, respectively, for the same periods in 1998. This represents an increase of approximately $5.8 and $10.9 million, respectively. These increases are primarily as a result of the acquisition of NJ Fibers which was completed in the third quarter of 1998 and higher commodity prices for paper fibers in the second quarter of 1999 versus the second quarter of 1998. These increases were partially offset by lower volumes at the commercial processing plants due to the sale of the Chicago Facility. Finished Products Segment The Finished Products segment consists of the operations of Power Ship Transport, Inc., Manner Resins, Inc. ("Manner"), the cellulose insulation plants and the plastic reprocessing plants of FCR, the plastic reprocessing operations of First State Recycling, Inc. and the glass pellet processor Seaglass, Inc. Total revenue for this segment for the three and six months ended June 30, 1999 were approximately $14.1 and $26.4 million, respectively, compared to approximately $2.5 and $4.2 million for the same periods in 1998. This represents an increase of approximately $11.6 and $22.2 million, respectively. The increase in revenues is primarily the result of acquisitions discussed above and higher volumes at Manner. These volumes were partially offset by decreases in plastic prices in the second quarter of 1999 versus the same period in 1998. 14 15 COSTS AND EXPENSES Waste-to-Energy Segment Cost of operations in this segment consist primarily of electric power and waste handling operating costs which were approximately $22.6 and $40.6 million, during the three and six months ended June 30, 1999, respectively, compared to approximately $18.3 and $30.9 million, respectively, for the same periods in 1998. This represents an increase of approximately $4.3 million or 23.5% and $9.7 million or 31.4%, respectively. The increase was primarily a result of the TWM, Multitrade, Russell Stull, AFA and KTI Tire acquisitions discussed above which had total costs of operations of approximately $5.4 million. In addition, PERC's operating costs decreased 5.3% due to lower costs associated with the planned outage being completed in the first quarter of 1999 versus the second quarter of 1998 which were offset by an increase in performance credits as a result of the amended PPA and Waste Disposal agreements. TERI's costs decreased by 12.5% as a result of an increase in tipping fee based material which reduced fuel costs. In addition the costs associated with the BioFuels brokerage discussed above were eliminated. Residential Recycling Segment Cost of operations in this segment for the three and six months ended June 30, 1999 were approximately $6.3 and $14.8 million, respectively, compared to approximately $1.3 and $2.5 million, respectively, for the same periods in 1998. This represents an increase of approximately $5.0 and $12.3 million, respectively, primarily as a result of the acquisition of FCR, which was completed in the third quarter of 1998. Commercial Recycling Segment Cost of operations in this segment for the three and six months ended June 30, 1999 were approximately $23.2 and $44.1 million, respectively, compared to approximately $14.1 and $29.8 million, respectively, during the same periods in 1998. This represents an increase of approximately $9.1 and $14.3 million, respectively. This increase is due primarily to the acquisition of NJ Fibers in August 1998 and higher commodity purchase prices which were partially offset by lower volumes at the commercial processing plants during 1999 versus 1998. Finished Products Cost of operations in this segment for the three and six months ended June 30, 1999 were approximately $15.1 and $26.7 million, respectively, compared to approximately $2.6 and $3.9 million, respectively, during the same periods in 1998. This represents an increase of approximately $12.5 and $22.8 million, respectively. The increase was primarily a result of the acquisitions discussed above and increased volumes at Manner. The increased volumes at Manner were partially offset by decreased plastic prices in 1999 versus the same period in 1998. OTHER ITEMS Selling, general and administrative expenses increased by approximately $4.2 and $9.0 million for the three and six months ended June 30, 1999, respectively, compared to the same periods in 1998. The increase is a result of 15 16 selling, general and administrative costs added through acquisitions throughout 1998 and the addition of administrative staff to develop and install corporate-wide information systems; to develop and support a formal strategic planning and budgeting process; to support Company wide credit and collection efforts; to identify and pursue potential mergers and acquisitions; and to develop internal information systems to identify revenue enhancement and cost savings programs in newly acquired entities. On June 1, 1999, the Company completed the sale of its commercial recycling facility located in Franklin Park, Illinois and recorded a loss of approximately $0.4 million. As a result of this loss, the Company initiated an impairment review of the long-lived assets, including goodwill, in the Commercial Recycling segment. A revised operating plan for each of the remaining facilities in the Commercial Recycling segment was developed. While revenues are stable, the Commercial Recycling segment continues to operate at levels of profitability, which are significantly below the levels anticipated when the acquisitions were completed. In addition, with the continued consolidation of the solid waste industry and the continued focus on the disposal aspects of this industry, the possibility of selling these facilities for amounts approximating their carrying value is remote. The Company continued to experience low operating results in the Commercial Recycling Segment and determined that the estimated future undiscounted cash flows for the KTI Recycling of New Jersey ("Newark Plant") facility were below the carrying value of the long-lived assets. The Company adjusted the carrying value of the equipment and leasehold improvements of the Newark Plant by approximately $3.0 million to their estimated fair value of approximately $1.2 million. The fair value of the long-lived assets was based on the expected cash flows discounted at a rate commensurate with the risk involved. Interest expense increased approximately $3.8 and $6.0 million during the three and six months ended June 30, 1999, respectively, compared to the same periods in 1998. These increases are related principally to increased borrowings on the Company's line of credit to fund several acquisitions, incremental interest expense on debt assumed as part of these acquisitions, higher interest rates on the Company's line of credit, fees associated with the amendment of financial covenants, and the conversion of the Series B Preferred Stock to convertible debt. These increases were partially offset by lower interest rates at PERC as a result of the refinancing of the bonds payable and lower debt levels at Maine Energy. LIQUIDITY AND CAPITAL RESOURCES The Company is a holding company and receives certain of its cash flows from its subsidiaries. Receipt of cash flow from PERC is currently restricted by covenants under loan agreements, distribution restrictions under partnership agreements with PERC's equity investors, and put-or-pay agreements with municipalities. Maine Energy's cash flow is required to retire the remaining outstanding subordinated debt balance of approximately $11.5 million as of June 30, 1999 before partners' cash distributions can begin (approximately $7.6 million of these notes are owned by the Company). TERI's cash flow is restricted by covenants under its bond agreements. As a result, the following discussion is organized to present liquidity and capital resources of the Company separate from Maine Energy, PERC and TERI and liquidity and capital resources of each of Maine Energy, PERC and TERI independently. THE COMPANY The Company operates in industries that require a high level of capital investment. The Company's capital requirements basically stem from (i) its working capital for ongoing operations, (ii) capital expenditures for new plants and equipment and (iii) business acquisitions. The Company's strategy is to meet these capital needs from internally generated funds which are not contractually restricted, drawings under its lines of credit, collateralized equipment financing and proceeds from the sale of the Company's common stock. As of June 30, 1999, the Company was in default of the financial covenants of its $150.0 million line of credit. The Company's lender has waived the violation of the financial covenants through September 30, 1999. As a result, the outstanding amount under the line of credit has been classified as a current liability. Upon the consummation of the merger, this line of credit will be replaced by the credit facility of the merged company. However, no assurances can be given that the conditions of the merger will be satisfied or that the merger will be consummated. If the merger is not consummated, the Company will be required to modify the financial covenants or obtain a waiver from the lender. The lender is under no obligation to amend the financial covenants or provide such a waiver. Management believes that the Company will either obtain a waiver or an amendment to the financial covenants; however, there can be no assurances that this can be accomplished. As of June 30, 1999, the Company had no availability under the revolving credit agreement. Though management of the Company believes that cash flows from its subsidiaries will meet its current needs for working capital and capital expenditures, the ability of the Company to expand its current operations is dependent on cash flow from its subsidiaries. 16 17 As of June 30, 1999, the Company had a working capital deficit of approximately $108.5 million (a ratio of current assets to current liabilities of 0.45:1) and a cash balance of approximately $5.4 million which compared to working capital of approximately $42.8 million (a ratio of current assets to current liabilities of 2.11:1) and a cash balance of approximately $9.4 million at December 31, 1998. As of June 30, 1999, the Company had a working capital deficit and cash on hand without regard to Maine Energy, PERC and TERI of approximately $137.7 million (a ratio of current assets to current liabilities of 0.28:1) and approximately $1.6 million, respectively, which compared to working capital of approximately $12.9 million (a ratio of current assets to current liabilities of 1.41:1) and a cash balance of approximately $3.9 million at December 31, 1998. The Company's ability to make future acquisitions is dependent on its ability to increase its line of credit. The ability to increase the line of credit is dependent on the Company's ability to raise additional equity or raise capital from financial instruments which are subordinated to the line of credit. Management believes that the Company has the ability to raise additional capital if needed; however, there can be no assurances that this can be accomplished at terms and conditions that would be acceptable to the Company. The Company and its subsidiaries, other than Maine Energy, PERC and TERI, at June 30, 1999 had current maturities of indebtedness of approximately $155.3 million, including borrowings under existing revolving credit facilities. During the six months ended June 30, 1999, the Company had net borrowings of approximately $12.4 million on the Company's line of credit facilities. In general, the Company's capital expenditures and working capital requirements have increased as a result of the Company's business strategy of growth through acquisitions. Management of the Company believes that cash flow from operations will meet its current needs for liquidity. MAINE ENERGY Maine Energy has financed its operations and capital expenditures from cash flows from operations. Cash provided by operations was approximately $0.1 million for the six months ended June 30, 1999 compared to approximately $1.2 million during the same period in 1998. Maine Energy's capital expenditures were approximately $1.0 and $1.7 million during the six months ended June 30, 1999 and 1998, respectively. As of June 30, 1999 and December 31, 1998, Maine Energy had operating cash of approximately $0.3 million and $2.4 million, respectively, and as required under the terms of the credit agreement underlying its letter of credit, Maine Energy had on account an additional approximately $5.5 million and $6.0 million, respectively, of cash reserves to be used under certain circumstances for capital improvements, debt service, operating shortfalls and working capital requirements. As of June 30, 1999, Maine Energy had total indebtedness of approximately $11.5 million. Management of the Company believes Maine Energy's cash flows from operations and cash resources available will be sufficient to fund anticipated capital expenditures and debt service requirements. Capital expenditures for Maine Energy for the remainder of 1999 are not expected to be significant. PERC PERC has financed its operations and capital expenditures primarily by cash flow from operations. Cash provided by operations was approximately $2.7 million for the six months ended June 30, 1999 compared to approximately $5.9 million during the same period in 1998. PERC's capital expenditures were approximately $1.3 and $0.2 million during the six months ended June 30, 1999 and 1998, respectively. On June 26, 1998 KTI completed a major restructuring of the various contracts and obligations of PERC, which included refinancing PERC's tax exempt bonds. The refinancing was made possible through the sale of approximately $45.0 million in Electric Rate Stabilization Revenue Refunding Bonds issued by the Finance Authority of Maine ("FAME") ("Revenue Bonds"). The proceeds, plus certain funds from operations were utilized to repay the outstanding bonds. The interest rate on the Revenue Bonds ranges from 3.75% for one-year bonds to 5.20% for 20-year term bonds. The refinancing reduced PERC's debt service costs while extending its payment obligation over 20 years. As of June 30, 1999, in addition to PERC's operating cash of approximately $2.8 million, PERC, as required under the terms of the trust indenture governing the Revenue Bonds, had on account an additional approximately $15.4 million of cash reserves to be used for capital improvements, debt service, operating shortfalls and working capital requirements. 17 18 Company management believes PERC's cash flows from operations and cash resources available will be sufficient to fund anticipated capital expenditures and debt service requirements. PERC plans capital expenditures for the remainder of 1999 of approximately $0.4 million which principally has been set aside in the above-mentioned reserve accounts. TERI TERI has two 1997 Industrial Development Revenue Bond issues (the "1997 Bonds") outstanding that carry interest at a fixed rate of 7% and have annual sinking fund payments due each December 1 with a final payment due December 1, 2002. As of June 30, 1999, TERI had approximately $11.6 million outstanding in 1997 Bonds. As of June 30, 1999 and December 31, 1998, in addition to TERI's operating cash of approximately $0.7 million and $0.8 million, respectively, TERI, as required under the terms of it's the 1997 Bonds, had on account approximately $1.8 and $2.1 million, respectively, of cash reserves to be used under certain circumstances for capital improvements, debt service, operating shortfalls and working capital requirements. Management believes TERI's cash flows from operations and cash resources available will be sufficient to fund anticipated capital expenditures and debt service requirements. Capital expenditures for TERI for the remainder of 1999 are expected to be approximately $0.2 million. TERI intends to finance the requirements through cash flow from operations. TAX LOSS CARRYFORWARDS At June 30, 1999, the Company had net operating loss carryforwards of approximately $55.4 million for income tax purposes that expire in years 2002 through 2018 and are subject to the limitations as described below. In addition, the Company has general business credit carryforwards of approximately $0.5 million that expire in the years 1999 through 2006 and alternative minimum tax credit carryforwards of approximately $0.9 million that are not subject to limitation. The Tax Reform Act of 1986 enacted a complex set of rules limiting the potential utilization of net operating loss and tax credit carryforwards in periods following a corporate "ownership change." In general, for federal income tax purposes, an ownership change is deemed to occur if the percentage of stock of a loss corporation owned (actually, constructively and, in some cases, deemed) by one or more "5% shareholders" has increased by more than fifty (50) percentage points over the lowest percentage of such stock owned during a three-year testing period. During 1994, such a change in ownership of the Company occurred. As a result of the change, the Company's ability to utilize its net operating loss carryforwards and general business credits will be limited to approximately $1.2 million of taxable income, or approximately $0.4 million of equivalent credit per year. This limitation may be increased if the Company recognizes a gain on the disposition of an asset which had a fair market value greater than its tax basis on the date of the ownership change. In conjunction with the acquisition of TERI, FCR and TWM, the Company recorded additional net operating loss carryforwards of approximately $25.6 million, $12.5 million and $0.5 million respectively, which are also subject to a corporate "ownership change". As a result of the change, the Company's ability to utilize the net operating loss carryforwards related to these entities is limited to approximately $1.0 million, $3.2 million and $0.1 million, respectively, per year. 18 19 ENVIRONMENTAL CONTINGENCIES While increasing environmental regulation often presents new business opportunities to the Company, Maine Energy, PERC and TERI, it likewise often results in increased operating costs as well. The Company, Maine Energy, PERC and TERI strive to conduct their operations in compliance with applicable laws and regulations, including environmental rules and regulations, and have as their goal 100% compliance with such laws and regulations. This effort requires programs to promote compliance, such as training employees and customers, purchasing health and safety equipment, and in some cases hiring outside consultants and lawyers. Even with these programs, management of the Company believes that in the ordinary course of doing business, companies in the environmental services and waste disposal industry are faced with governmental enforcement proceedings resulting in fines or other sanctions and will likely be required to pay civil penalties or to expend funds for remedial work on waste management facilities. The TERI Telogia facility was in violation of its Waste Water Discharge Permit (the "Permit"). This violation involves the temperature of the water used in the cooling process and in the opinion of management, does not involve a significant environmental issue. The Company has requested a modification to the Permit from the Florida Department of Environmental Protection to change the monitoring procedures and enable the Company to operate in compliance with the permit. On July 28, 1999, the Company signed a consent order with the Florida Department of Environmental Protection which included a penalty of approximately $0.1 million to settle this matter. At June 30, 1999, there were no pending governmental environmental enforcement proceedings where the Company, Maine Energy, PERC or TERI believe potential monetary sanctions will exceed $0.1 million. The possibility always exists that substantial expenditures could result from governmental proceedings, which would have a negative impact on earnings for a particular reporting period. More importantly, federal, state and local regulators have the power to suspend or revoke permits or licenses needed for operation of the plants, equipment, and vehicles of the Company, Maine Energy, PERC or any other operating subsidiary of the Company based on the applicable company's compliance record, and customers may decide not to use a particular disposal facility or do business with a company because of concerns about its compliance record. Suspension or revocation of permits or licenses would have a negative impact on the Company's business and operations and could have a material adverse impact on the Company's financial results. INFLATION The effect of inflation on operating costs has been minimal in the past three (3) years. Most of the Company's operating expenses are inflation sensitive, with increases in inflation generally resulting in increased costs of operation. The effect of inflation-driven cost increases on each of the Company's project's overall operating costs is not expected to be greater for such project than for its respective competitor's projects. In addition, each of Maine Energy and PERC and the majority of the Residential Recycling contracts can contractually increase its waste processing fees to municipal customers annually based on inflation. YEAR 2000 ISSUE Year 2000 compliance is the ability of computer hardware and software to respond to the problems posed by the fact that computer programs have traditionally been written using two digits rather than four to define the applicable year. As a consequence, unless modified, computer systems will not be able to differentiate between the year 2000 and 1900. Systems must also recognize the Year 2000 as a leap year. Failure to address this problem could result in system failures and the generation of erroneous data. This could potentially impact the Company's ability to perform its obligations under long-term contracts which could result in legal and other liabilities which would have a material adverse effect on the Company. The Company has contacted its customers and vendors and has received letters from each of its applications vendors stating that the majority of the Company's information technology systems, such as accounting, data processing, plant operations systems and telephone/PBX systems, are Year 2000 19 20 compliant. Several insignificant software applications representing 20% of the Company's applications are not Year 2000 compliant. They are scheduled to be replaced or upgraded by Year 2000 compliant versions of the applications from the vendor by the end of the third quarter of 1999. The Company has also begun an assessment of its non-information technology systems, such as its security systems and telephones, to determine if they are Year 2000 compliant. The Company has initiated formal communications with the vendors of its remaining non-information technology systems. Based on its assessment to date, the Company is not aware that any of its non-information technology systems will not be Year 2000 compliant prior to the Year 2000. The Company has also begun an assessment of its significant vendors, suppliers, and service providers to determine the extent to which the Company is vulnerable to those third parties' failure to remediate their own Year 2000 compliance issues. To date, the Company has determined, based on information published or otherwise provided by such third parties, that all of such parties' systems are or will be Year 2000 compliant. The Company plans to initiate formal communications with the remaining third parties with whom the Company has a significant relationship. Based on its assessment to date, the Company is not aware that any of its significant vendors, suppliers and service providers will not be Year 2000 compliant prior to the Year 2000. The following table summarizes the status of the Company's Year 2000 compliance program:
ASSESSMENT REMEDIATION TESTING IMPLEMENTATION ---------- ----------- ------- -------------- Information 100% Complete 80% Complete 80% Complete 80% Complete Technology Expected completion Expected completion Expected completion date, September 1999 date, September 1999 date, September 1999 Operating 100% Complete 90% Complete 90% Complete 90% Complete Equipment with Embedded Chips or Expected completion Expected completion Expected completion Software date, September 1999 date, September 1999 date, September 1999 3rd Party 90% Complete 90% Complete for 90% Complete for 90% Complete for system for system system interface. system interface. interface. interface. 80% Complete for Develop contingency Expected completion Expected completion all other plans as appropriate, date for system date for system material September 1999. interface work, interface work, exposures. September 1999 September 1999. 100% Complete Implement contingency Expected plans or other completion date alternatives as for surveying necessary, September 1999. all remaining third parties, September 1999.
In addition to the assessments and investigations described above, the Company has conducted tests of all of its internal information and non-information technology systems and all of its system interfaces with significant vendors, suppliers and service providers to ensure Year 2000 compliance. All of the Company's accounting and data processing equipment is based on microcomputer hardware and related software, of which 80% has been certified as Year 2000 compliant by the applicable manufacturer or developer. However, the Company has determined that the plant control systems may contain embedded 20 21 technology which is not Year 2000 compliant. The Company has ordered the hardware containing the embedded logic to replace the hardware that is not Year 2000 compliant with hardware which is Year 2000 compliant. In addition, these systems will be tested during scheduled outage periods at the plants during the second and third quarters of 1999. However, despite the Company's efforts to ensure that its internal systems and the systems of its significant vendors, suppliers and service providers are Year 2000 compliant, there can be no guarantee that the failure of certain systems will not have a material adverse effect on the Company. To date, the Company has utilized internal resources to reprogram, or replace, test, and implement the software and hardware modifications for Year 2000. The only costs incurred by the Company have been the salary costs of its internal staff of four. To date, the Company has incurred approximately $0.1 million (30% expensed and 70% capitalized for new systems and equipment), related to all phases of the Year 2000 project. The Company estimates that the remaining project costs will be less than $0.1 million for the purchase of new software and hardware and approximately $0.1 million of internal resources. Although at the current time, the Company expects that it will be able to complete its Year 2000 compliance program using only internal resources, there can be no assurance that the Company will not require external resources to complete its Year 2000 compliance program. The most significant risk identified by the Company is the inability of the power plants to generate electric power. The Company has received assurances that the process control systems will be Year 2000 compliant with the installation of new hardware components. The Company will perform a complete test of the systems during the planned outage periods that are to be completed by the end of the third quarter of 1999. In addition, the Company has developed contingency plans for this risk as well as other internal and external applications which involve, among other actions, manual workarounds, increasing inventories and adjusting staffing strategies. The impact of this risk could include default under the respective PPA with customers and a loss of electric power revenue. The Company is unable to reasonably estimate the impact of this risk; however, there can be no guarantee that this risk will not have a material adverse effect on the Company. There is also no guarantee that the Company has identified all the significant risks associates with Year 2000 compliance. RECENT ACCOUNTING PRONOUNCEMENTS Recent accounting pronouncements which are not required to be adopted at June 30, 1999, include the following Statement of Financial Accounting Standards ("SFAS") and the American Institute of Certified Public Accountants Statements of Position ("SOP"): SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which will be required to be adopted by the Company as of January 1, 2001, establishes standards for derivative instruments including those embedded in other contracts and for hedging activities. The new standard requires the Company to recognize all derivatives as either assets or liabilities and measure those instruments at fair value. Management believes that the adoption of SFAS No. 133 will not have a material impact on the Company's financial statements. SOP 98-1, Accounting for Costs of Computer Software Developed or Obtained for Internal Use is required to be adopted by the Company as of January 1, 2000. The Company's current policy falls within the guidelines of SOP 98-1. 21 22 ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK The Company currently utilizes no material derivative financial instruments which expose it to significant market risk. The Company is exposed to cash flow and fair value risk due to changes in interest rates with respect to its debt. The table below presents principal cash flows and related weighted average interest rates of the Company's debt at June 30, 1999 by expected maturity dates. Weighted average variable rates are based on forward rates in United States Government Treasury Constant Maturities at June 30, 1999. Forward rates should not be considered a predictor of actual future interest rates. INTEREST RATE SENSITIVITY PRINCIPAL AMOUNT BY EXPECTED MATURITY (IN THOUSANDS)
1999 2000 2001 2002 2003 THEREAFTER FAIR VALUE ----------- ----------- ----------- ----------- ----------- ----------- ----------- Fixed Rate Debt $ 5,696 $ 8,071 $ 7,509 $ 8,153 $ 3,088 $ 50,466 $ 83,115 Average Interest Rate 6.60% 6.50% 7.30% 6.30% 6.27% 5.04% Variable Rate Debt $ 155,092 $ 155,092 Average Interest Rate 8.53%
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. 22 23 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Maine Energy is the plaintiff in a suit filed on May 11, 1994 in a Maine state court against United Steel Structures, Inc. under a warranty to recover the costs which were, or will be incurred to replace the roof and walls of the Maine Energy tipping and processing building. The judge in the case entered an order awarding Maine Energy approximately $3.3 million plus interest from May 10, 1994, to the date of the filing of the lawsuit, and court costs. The defendant filed an appeal on December 19, 1997. In February 1999, the appellate court reversed the trial court's verdict in favor of KTI and returned the case to the trial court, which ordered a new trial. Two lawsuits have been filed on September 30, 1997 and March 6, 1998 by Capital Recycling of Connecticut in a Connecticut state court against K-C International, certain officers of K-C International and other parties. The suits allege fraud, tortious interference with business expectancy and violations of the Connecticut Unfair Trade Practices Act. The actions are based on two contracts between Capital and K-C International. The contracts require all disputes to be resolved by arbitration in Portland, Oregon. Pursuant to this requirement, K-C International has initiated the arbitration process on November 6, 1997 in Portland, Oregon. Subsequently, the parties agreed to arbitrate the dispute in Hartford, Connecticut. Discovery is now in process and the parties are currently attempting to mediate the dispute before going to arbitration. The plaintiffs are seeking approximately $1.9 million in damages. KTI believe it has meritorious defenses to these claims. If, however, the damages claimed by the plaintiffs are awarded, KTI's business, financial condition and results of operations could be materially adversely affected. The Equal Employment Opportunity Commission filed a lawsuit on September 30, 1998 against FCR Tennessee, Inc. in the U.S. District Court for the Western District of Tennessee, Western Division, alleging sexual harassment by two managers and a sexually hostile work environment. The complainants seek compensation for past and future pecuniary and non-pecuniary losses as well as punitive damages and potential reinstatement of employment for Valerie L. Jacobs. FCR has retained counsel to defend this suit and has reported the lawsuit to FCR's Directors and Officers insurance carrier. Management is currently reviewing the lawsuit. The plaintiffs have demanded $105,000 and the Company has offered $30,000 in settlement. No agreement on settlement has been reached. KTI's insurance carrier has agreed to defend the case. On April 1, 1999, William F. Kaiser, a former Executive Vice President and Treasurer of KTI, filed a lawsuit against the Company in the U.S. District Court for the District of New Jersey. The suit alleges breach of contract, wrongful termination, breach of the implied covenant of good faith and fair dealing, misrepresentation of employment terms and failure to pay wages, all arising out of Mr. Kaiser's employment agreement with the Company. The suit also alleges that the Company inaccurately reported its financial results for the first quarter of 1998 and failed to properly disclose the change of control provision in Mr. Kaiser's employment agreement. Mr. Kaiser is seeking a declaratory judgment that, upon closing of the merger, the change of control provision entitles him to receive a severance payment of two years' salary, in the amount of $320,000 and to exercise 132,000 unvested options for KTI common stock. Mr. Kaiser is also seeking damages in the amount of $40,000 for an additional severance payment, as well as undisclosed damages for outstanding salary, bonus and other payments and from his sale of approximately 50,000 shares of KTI common stock resulting from KTI's allegedly inaccurate financial reports. C.H. Lee, a former employee of FCR and a former majority shareholder of Resource Recycling, Inc., instigated arbitration proceedings on April 15, 1999 in Charlotte, North Carolina against KTI, FCR and FCR Plastics, Inc. in connection with the acquisition of Resource Recycling by FCR. Mr. Lee alleges that FCR and FCR Plastics acted to frustrate the "earn-out" provisions of the acquisition agreement and thereby precluded Mr. Lee from receiving, or alternatively, reduced, the sums to which he was entitled under the agreement. He also alleges that FCR and FCR Plastics wrongfully terminated his employment agreement. The claim for arbitration alleges direct charges in excess of $5.0 million and requests punitive damages, treble damages and attorneys fees. KTI, FCR and FCR Plastics responded to the demand, 23 24 denying liability, and filed a counterclaim for $1.0 million for misrepresentations. KTI believes it has meritorious defenses to these claims. If, however, the damages and charges claimed by Mr. lee are awarded, KTI's business, financial condition and results of operation could be materially adversely affected. On or about April 26, 1999, Salvatore Russo filed an action in the U.S. District Court, District of New Jersey against KTI and two of its principal officers, Ross Pirasteh and Martin J. Sergi, purportedly on behalf of all stockholders who purchased common stock of KTI from May 4, 1998 through and including August 14, 1998. Melanie Miller filed an identical complaint on May 14, 1999. The complaints allege that the defendants made material misrepresentations in KTI's Form 10-Q for the period ended March 31, 1998 in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, concerning KTI's allowance for doubtful accounts and net income. The plaintiffs are seeking undisclosed damages. KTI believes it has meritorious defenses to the complaint. On June 15, 1999, Mr. Russo and Ms. Miller, together with Fransisco Muncro, Timothy Ryan and Steven Storch, moved to consolidate the two complaints. This motion is currently pending in the District Court of New Jersey. Dennis McDonnell filed a lawsuit dated April 6, 1999 in a Florida state court against U.S. Fiber, Inc., a subsidiary of FCR. Mr. McDonnell, a former employee of U.S. Fiber, seeks a declaratory judgment regarding his rights and obligations under an Employment Non-Competition Agreement and an Employment Agreement that he previously had signed with two corporations that subsequently were merged with and into U.S. Fiber. KTI is defending the suit and believes it has meritorious defenses. On July 1, 1999, Michael P. Kuruc filed a demand for arbitration in Charlotte, North Carolina, seeking approximately $1.0 million for compensation due under an employment agreement that he alleges he has with KTI and losses allegedly suffered in connection with his sale of KTI common stock. KTI believe that it has meritorious defenses and has retained counsel to defend this suit. If, however, the damages claimed by Mr. Kuruc are awarded, KTI's business, financial condition and results of operation could be materially adversely affected. KTI is a defendant in certain other lawsuits alleging various claims incurred in the ordinary course of business, none of which, either individually or in the aggregate, the Company believes are material to its financial condition, results of operations or cash flows. ITEM 2. CHANGES IN SECURITIES Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable ITEM 5. OTHER INFORMATION Not applicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None (b) Reports on Form 8-K 24 25 Two reports on Form 8-K were filed in the second quarter of 1999. The following is a list of the Forms 8-K filed and the dates thereof. (ii) A Form 8-K was filed on April 16, 1999 reporting that the Company had received notice from Casella Waste Systems, Inc. ("Casella") stating its intention to terminate the Agreement and Plan of Merger with the Company. (i) A Form 8-K was filed on May 12, 1999 reporting that the Company entered into an Amendment to the Agreement and Plan of Merger with Casella in which the KTI shareholders would receive .59 shares of Casella common stock for each share of KTI common stock. The closing is subject to approval by the stockholders of the companies, antitrust clearance and qualifications of the merger as a tax-free pooling of interest. 25 26 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. KTI, Inc. (Registrant) By: /s/ Martin J. Sergi ---------------------------------------- Name: Martin J. Sergi Title: President By: /s/ Brian J. Noonan ---------------------------------------- Name: Brian J. Noonan Title: Chief Financial Officer (Principal Accounting Officer) Date: August 16, 1999 26 EX-27 2 FINANCIAL DATA SCHEDULE
5 1 U.S. DOLLAR 3-MOS DEC-31-1999 APR-01-1999 JUN-30-1999 1 26,444 0 40,097 1,343 8,011 88,666 241,503 34,788 447,291 197,158 238,075 0 0 139 126,396 447,291 133,195 133,195 112,253 131,044 17,754 45 9,053 (8,884) (2,678) (6,206) 0 0 58 (6,264) (0.51) (0.51)
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