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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
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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
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
KTI, Inc.
Consolidated Balance Sheet
March 31, December 31,
1996 1995
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(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
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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 $10,108,341 87,661,393 87,621,577
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$ 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
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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)
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Total stockholders' equity 7,410,345 6,880,567
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Total liabilities and stockholders' equity $ 135,497,416 $ 132,906,433
============= =============
See accompanying notes.
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KTI, Inc.
Consolidated Statement of Operations
Three months ended March 31,
1996 1995
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(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
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Total revenues 13,063,881 11,650,914
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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
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Total costs and expenses 12,236,069 10,669,165
Equity in net income of PERC 25,572 76,287
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Income before minority interest 853,383 1,058,036
Minority interest (831,253) (699,670)
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$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.
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KTI, Inc.
Consolidated Statements of Cash Flows
Three months ended March 31,
1996 1995
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(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
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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)
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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)
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Net cash provided by (used in) financing activities 701,661 (4,717,250)
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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
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Cash and cash equivalents at end of period $ 6,413,875 $ 5,256,703
=========== ===========
-Continued-
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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.
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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.
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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
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4. Debt and Accrued Interest
The Company's debt consists of the following:
March 31, December 31,
1996 1995
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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
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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
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115,761,604 115,376,162
Less current portion 8,296,514 7,977,899
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$107,465,090 $107,398,263
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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.
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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%.
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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.
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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.
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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.
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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
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EXHIBIT INDEX
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Exhibit 27 Financial Data Schedule