1 FORM 10-Q. - QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10Q (x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1996 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 5,736,751 Shares as of May 8, 1996 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 10 PART II Item 1. Legal Proceedings 12 Item 2. Changes in Securities 12 Item 3. Defaults Upon Senior Securities 12 Item 4. Submission of Matters to a Vote of Security Holders 12 Item 5. Other Information 12 Item 6. Exhibits and Reports on Form 8K 12 1 3 PART I - FINANCIAL INFORMATION Item 1. Financial Statements KTI, Inc. Consolidated Balance Sheet March 31, December 31, 1996 1995 ------------- ------------- (Unaudited) Assets Current Assets: Cash and cash equivalents $ 6,413,875 $ 6,454,558 Restricted funds - current portion 3,143,683 7,042,404 Accounts receivable, net of allowances of $477,933 and $480,662 in 1996 and 1995 8,586,072 8,983,699 Notes receivable--officers/shareholders and affiliates - current 75,581 96,225 Other receivables - current portion 265,386 295,723 Other current assets 1,249,525 742,638 ------------- ------------- Total current assets 19,734,122 23,615,247 Restricted funds 11,142,567 6,502,227 Management fees receivable--affiliates 3,050,296 2,933,274 Notes receivable - officers/shareholders and affiliates 149,534 224,438 Other receivables 460,832 495,901 Investment in partnerships 3,620,210 3,594,638 Deferred costs, net of accumulated amortization of $550,085 and $524,236 4,146,451 3,818,732 Goodwill and other intangibles, net of accumulated amortization of $720,310 and $539,483 3,432,794 3,613,621 Other assets 2,099,217 486,778 Property, equipment and leasehold improvements, net of accumulated depreciation of $11,693,216 and $10,108,341 87,661,393 87,621,577 ------------- ------------- $ 135,497,416 $ 132,906,433 Total assets ============= ============= Liabilities and stockholders' equity Current Liabilities: Accounts payable $ 3,572,941 $ 2,512,109 Accrued expenses 5,018,213 5,322,013 Current portion of long-term debt 8,296,514 7,977,899 Income taxes payable 290,000 290,000 Other current liabilities 696,050 614,837 ------------- ------------- Total current liabilities 17,873,718 16,716,858 Other liabilities 76,633 70,368 Long-term debt, less current portion 107,465,090 107,398,263 Minority interest 2,671,631 1,840,377 Commitments and contingencies Stockholders' equity: Preferred stock; 10,000,000 shares authorized, no shares issued or outstanding Common stock, no par value (stated value $.01 per share); authorized 11,992,000; issued and outstanding 5,736,751 in 1996 and 5,663,784 in 1995 57,367 56,638 Additional paid-in capital 33,936,842 33,429,923 Accumulated (deficit) (26,583,864) (26,605,994) ------------- ------------- Total stockholders' equity 7,410,345 6,880,567 ------------- ------------- Total liabilities and stockholders' equity $ 135,497,416 $ 132,906,433 ============= ============= See accompanying notes. 2 4 KTI, Inc. Consolidated Statement of Operations Three months ended March 31, 1996 1995 ------------ ------------ (Unaudited) Revenues: Electric power revenues $7,401,470 $6,966,038 Waste processing revenues 2,090,460 2,041,399 Other waste handling revenues 715,787 839,702 Computer services revenues 2,856,164 1,803,775 ------------ ------------ Total revenues 13,063,881 11,650,914 ------------ ------------ Costs and expenses: Electric power and waste processing operating costs 6,487,045 5,903,178 Costs of software sales and contracts 1,303,391 808,390 Selling, general and administrative: Waste handling 859,386 678,907 Computer services 1,554,144 904,315 Interest - net 2,032,103 2,374,375 ------------ ------------ Total costs and expenses 12,236,069 10,669,165 Equity in net income of PERC 25,572 76,287 ------------ ------------ Income before minority interest 853,383 1,058,036 Minority interest (831,253) (699,670) ------------ ------------ $22,130 $358,366 Net income ============= ============= Earnings per common share and $0.00 $0.08 common share equivalent: ============ ============= Weighted average number of common shares and common share equivalents outstanding 5,938,682 4,231,414 ============ ============ See accompanying notes. 3 5 KTI, Inc. Consolidated Statements of Cash Flows Three months ended March 31, 1996 1995 ----------- ----------- (Unaudited) Operating activities Net income $ 22,130 $ 358,366 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation 1,601,307 1,565,531 Minority interest 831,253 699,670 Amortization 232,655 260,575 Provision for losses on accounts receivable 2,729 (3,817) Interest accrued and capitalized on debt 183,892 107,190 Equity in net income of PERC, net of distributions (25,572) (76,287) Loss on sale of assets 19,290 3,036 Changes in operating assets and liabilities Increasing (decreasing) cash: Accounts receivable 394,898 (41,510) Management fees receivable (117,022) (122,015) Other receivables 65,407 116,790 Deferred financing costs (372,011) (277,714) Other assets (2,119,326) 169,042 Accounts payable 1,060,832 (750,274) Accrued expenses (303,801) (728,683) Other liabilities 87,478 7,041 ----------- ----------- Net cash provided by operating activities 1,564,139 1,286,941 Investing activities Additions to property, equipment and leasehold improvements (1,702,912) (543,112) Proceeds from sale of assets 42,500 111,328 Decrease in restricted cash and cash equivalents (741,619) (654,105) Costs incurred in connection with merger -- (447,535) Cash acquired in merger with Convergent Solutions, Inc. -- 2,838,188 Notes receivable--officers/shareholders and affiliates 95,548 (3,966) ----------- ----------- Net cash (used in) provided by investing activities (2,306,483) 1,300,798 Financing activities Proceeds from issuance of debt 1,034,314 350,000 Proceeds from sale of common stock 7,648 -- Principal payments on debt (340,301) (5,067,250) ----------- ----------- Net cash provided by (used in) financing activities 701,661 (4,717,250) ----------- ----------- Increase (decrease) in cash and cash equivalents (40,683) (2,129,511) Cash and cash equivalents at beginning of period 6,454,558 7,386,214 ----------- ----------- Cash and cash equivalents at end of period $ 6,413,875 $ 5,256,703 =========== =========== -Continued- 4 6 KTI, Inc. Consolidated Statements of Cash Flows--(continued) Supplemental disclosure of cash flow information Interest paid $ 2,093,724 $2,528,639 =========== ========== Non cash investing and financing activities Common Stock issued in connection with the merger with Convergent Solutions, Inc. $ 9,001,718 Liquidation of debt payable to Convergent Solutions, Inc. (4,492,604) Conversion of debt to equity $ 500,000 See accompanying notes. 5 7 KTI, Inc. Consolidated Statements of Stockholders' Equity (Deficit) Common Stock Additional ---------------------- Paid-In Accumulated Shares Amount Capital Deficit Total ------ ------ ------- ------- ----- Balance at December 31,1994 3,215,826 $32,158 $21,331,679 ($25,274,500) ($3,910,663) Net loss (1,331,494) (1,331,494) Issuance of common stock from exercise of stock options 70,457 705 256,112 256,817 Issuance of common stock in connection with business combination 1,715,280 17,153 8,984,565 9,001,718 Issuance of common stock 662,221 6,622 2,857,567 2,864,189 --------- ------ ---------- ------------ ---------- Balance at December 31, 1995 5,663,784 56,638 33,429,923 (26,605,994) 6,880,567 Net income 22,130 22,130 Issuance of common stock from exercise of stock options 1,666 16 7,632 7,648 Issuance of common stock upon coversion of debt 71,301 713 499,287 500,000 --------- ------ ---------- ------------ ---------- Balance at March 31, 1996 5,736,751 $57,367 $33,936,842 ($26,583,864) $7,410,345 ========= ======= =========== ============ ========== See accompanying notes. 6 8 KTI, Inc. Notes to Consolidated Financial Statements March 31, 1996 1. Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of Management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 1996 are not necessarily indicative of the results that may be expected for the year ending December 31, 1996. 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, 1995. Certain 1995 financial information contained herein has been reclassified to conform with the 1996 presentation. 2. Earnings (Loss) Per Share Earnings (loss) per share have been computed based on the weighted average number of shares outstanding as well as the dilutive effect of outstanding options and warrants during the periods presented computed in accordance with a Staff Accounting Bulletin ("SAB") of the Securities and Exchange Commission. The SAB requires that all stock issued within a twelve month period prior to an initial public offering of common stock must be treated as outstanding for all periods presented whether dilutive or anti-dilutive. 3. Information Regarding Penobscot Energy Recovery Company The following financial information of Penobscot Energy Recovery Company is provided in accordance with Article 10.01(b)(1) of Regulation S-X: Three months ended March 31, 1996 1995 Revenues $6,877,317 $7,018,633 Operating expenses 4,100,031 3,659,753 Net income 581,902 1,305,818 7 9 4. Debt and Accrued Interest The Company's debt consists of the following: March 31, December 31, 1996 1995 ------------ ------------ 12% term note payable to a bank $ 2,507,448 $ 2,607,448 10% note payable to Energy National, Inc. 1,455,430 1,455,430 Subordinated note payable to Davstar Managed Investments Corporation, net of unamortized original issue discount of $55,911 and $73,818 994,390 1,426,182 Note payable to former shareholder 169,823 183,494 12% subordinated notes payable 2,428,590 2,295,000 9.9% secured term notes payable to GE Capital 335,719 382,699 10-13% secured term notes payable to Associates Commercial Corp. 352,014 428,193 9.11% secured term note payable to KDC Financial Limited 155,446 170,801 Notes payable to limited partners of Maine Energy 326,063 326,063 11% secured note payable to PENPAC, Inc. 497,756 530,128 8% term notes payable 984,314 Other 738,517 754,629 ------------ ------------ 10,945,510 10,560,067 Resource Recovery Revenue Bonds Payable 64,500,000 64,500,000 12% Subordinated Notes Payable to Maine Energy Limited Partners 40,316,094 40,316,095 ------------ ------------ 115,761,604 115,376,162 Less current portion 8,296,514 7,977,899 ------------ ------------ $107,465,090 $107,398,263 ============ ============ 5. 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. 6. Subsequent Event On April 11, 1996, the Company completed the acquisition of a 60% limited partnership interest in American Ash Recycling Co. Of Tennessee ("AART"), a limited partnership. The purchase price was $2,100,000, including a capital contribution of $500,000 to provide working capital to AART. The partnership agreement affords the Company preference in distributions until it has received a 15% return on its investment after which distributions are made on the basis of ownership. The assets of American Ash Recycling Corp. Of Tennessee were conveyed to AART on April 11, 1996. AART is located in Nashville, TN, and converts ash obtained from a municipal waste incinerator, through a proprietary process, to aggregate material which can be used for road bed underlayment and for similar purposes. AART also recycles ferrous and other metals recovered from the unprocessed ash stream. 8 10 On May 3, 1996, the Company's 50.38% owned subsidiary, Maine Energy Recovery Company LP ("Maine Energy") completed a restructuring of its Power Purchase Agreement (the "PPA") with Central Maine Power Company ("CMP") and the sale of its electrical generating capacity to CL Power Sales One, L.L.C. ("CL One"). At closing Maine Energy received a payment from CL One of $85,000,000 and the PPA was amended, retroactive to November 6, 1995, to reflect a reduction in CMP's purchase price per kWh from $0.16 to $0.0718. In addition the PPA was extended from the year 2007 to 2012. Under the terms of the agreements, Maine Energy will be liable to CMP for liquidated damages of $3,750,000 for any calendar year through the year 2006 and on a prorata basis for the period from January 1 to May 31, 2007 in which it does not deliver at least 100,000,000 kWh. Also, if during the same period, Maine Energy fails to deliver at least 15,000,000 kWh in any calendar year through the year 2006 and on a prorata basis for the period from January 1 to May 31, 2007 it will be liable to CMP for liquidated damages of $45,000,000 less the product of $3,750,000 times the number of completed calendar years from and including 1996 to the year of default. Both of the provisions for liquidated damages are subject to force majeure events. In order to secure CMP's right to liquidated damages, Maine Energy has provided an irrevocable letter of credit in the initial amount of $45,000,000 which will be reduced by $3,750,000 for each completed year in which no event requiring the payment of liquidated damages occurs. Based on of these contingencies, Maine Energy will defer $45,000,000 of the purchase price of its capacity and recognize revenue ratably in the future as the contingencies are eliminated. Maine Energy has used the proceeds from the sale of its capacity to repay the $64,500,000 Resource Recovery Bonds and to retire the bank letter of credit issued to enhance the credit of the bonds. The remaining proceeds were used together with unrestricted cash balances to repay $29,500,000 of the total of Subordinated Notes Payable to Limited Partners. Subordinated Notes payable after the repayment aggregate $13,459,367. Subsequent to the restructuring, the Company acquired additional Maine Energy partnership interests aggregating 23.77% from existing limited partners for $792,340 in cash and a note for $164,000 with interest of prime plus 1%. The note is payable at the earlier of December 31, 1996 or the time that the remaining subordinated debt is repaid. Subsequent to these transactions, the Company's ownership in Maine Energy is 74.15%. 9 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Revenues Electric power revenues increased $435,000 or 6.3% for the quarter compared to the same period in 1995. The increase results from a 2.2% increase in electric power generated and a 4.0% increase in the contract rate per kilowatt hour in 1996. Revenues from waste processing increased $49,000 or 2.4% compared to the 1995 quarter. The increase resulted from a 5.1% increase in tons of waste processed in the 1996 quarter offset by a 2.3% decrease in the average tipping fee for the quarter resulting from changes in mix of waste processed. Other waste handling revenues decreased $124,000 or 14.8% for the quarter ended March 31, 1996, compared to the 1995 quarter. The decrease in the quarter resulted principally from a decrease in revenues of KTI Bio Fuels of $296,000 or 52.2%. KTI Bio Fuels was shutdown for four weeks during the 1996 quarter as the result of deminished supply of woodwaste and severe weather conditions. Lease revenue from transportation equipment decreased by $46,000 in the 1996 quarter as the result of the sale of equipment. These decreases were partially offset by a $154,000 increase in specialty waste revenue in the 1996 quarter and revenue of $84,000 of American Ash Recycling of New England. Computer services revenue increased by $1,052,000 or 58.3% in the 1996 quarter principally because of the inclusion in the 1995 quarter of results beginning February 8, 1995, the date of the acquisition. Costs and Expenses Electric power and waste handling operating costs increased by $584,000 or 9.9% for the quarter ended March 31,1996 compared to the 1995 quarter. The increase in 1996 results principally from a $441,000 increase in maintenance expense and a $164,000 increase in payroll and related costs both at Maine Energy. Costs of software sales and services increased by $495,000 or 61.2% in the 1996 quarter principally because of the inclusion in the 1995 quarter of results beginning February 8, 1995, the date of the acquisition. Waste handling selling, general and administrative expenses increased by $180,000 or 26.6% for the quarter ended March 31, 1996 compared to the 1995 quarter principally as result of increases in consulting and payroll and related expenses. Selling, general and administrative expenses of computer services increased $650,000 or 71.9% because of the inclusion in the 1995 quarter of results beginning February 8, 1995, the date of the acquisition. Selling expenses of computer services increased $125,000 over the 1995 quarter to support products released in the second half of 1995. Interest Interest expense decreased principally because of lower interest rates on bonds, a decrease in letter of credit fees and an increase of interest income all at Maine Energy. 10 12 Liquidity and Capital Resources Since December 31, 1995, the Company has made private placements of $2,003,314 of 8% notes together with 333,882 warrants to purchase shares of the Company's Common Stock at $6.00 per share. The notes are due July 31, 1996. The warrants expire on March 31, 2001. $984,314 of the notes and 164,052 of the warrants were issued during the quarter ended March 31, 1996. The Company plans to use the proceeds of the offerings to fund its AART obligation. As mentioned in the notes to financial statements, Maine Energy has used the proceeds from the sale of its capacity to repay the $64,500,000 Resource Recovery Bonds and to retire the bank letter of credit issued to enhance the credit of the bonds. The remaining proceeds were used together with unrestricted cash balances to repay $29,500,000 of the total of Subordinated Notes Payable to Limited Partners. Subordinated Notes payable after the repayment aggregate $13,459,367. Significant restrictions exist as to the amount of cash flow that can be distributed to the Company by Maine Energy and PERC. As of March 31 1996, the Company had $6,414,000 of cash and cash equivalents of which $5,649,000 is held by Maine Energy, and limited to use in Maine Energy's operations so long as existing subordinated debt remains outstanding. The Company has available unused lines of credit aggregating $780,000. Management of KTI believes that available cash flow from 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 assurances can be given in this regard. 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 as of the date made. 11 13 PART II - OTHER INFORMATION Item 1. Legal Proceedings PENPAC, Inc. ("PENPAC") filed a complaint in Superior Court of New Jersey, Passaic County, Law Division against the Company and KTI Energy, Inc. ("Energy") on April 25, 1995 in which PENPAC alleged the breach of an equipment lease agreement dated April 8, 1994 under which the Company leased-purchased sixty trailers from PENPAC. Energy guaranteed the performance of the Company under this lease. The Company and PENPAC executed a Settlement Agreement under which the Company paid $200,000 to PENPAC and will pay an additional $300,000 to PENPAC not later than July 8, 1996. The Port Authority of New York and New Jersey ("Port Authority") sued Energy and KES, Inc. ("KES"), a wholly-owned subsidiary of Energy, in the Supreme Court of the State of New York, New York County on April 11, 1995. Port Authority is sought damages in the amount of $439,819 for the cost of the storage and removal of wood recyclables that were delivered to the Howland Hook Marine Terminal ("Howland Hook") located on Staten Island and leased by Port Authority from the City of New York. The Company and the staff of the Port Authority have executed a settlement agreement for such litigation. The settlement agreement is subject to approval by the Board of Commissioners of the Port Authority. Pursuant to the settlement agreement, the Company has deposited $75,000 into an escrow account. Additional payments of $25,000 and $32,000 are due six months and one year after the date of settlement. 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 During the quarter for which this report is filed the Company filed the following reports on Form 8-K: (i) Report on Form 8-K dated January 2, 1996 reporting under Item 5 a series of agreements with Environmental Capital Holdings, Inc. And its subsidiary, American Ash Recycling Corp. 12 14 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/Leffert G. Carroll ------------------------- Name: Leffert G. Carroll Title: Senior Vice President and Chief Financial Officer (Principal Accounting Officer) By: /s/Martin J. Sergi ------------------------- Name: Martin J. Sergi Title: Treasurer and Chief Operating Officer Date: May 10, 1996 13 15 EXHIBIT INDEX ------------- Exhibit 27 Financial Data Schedule