OPEN TO ALL SHAREHOLDERS
SEPTEMBER 26, 2002
Dear Shareholders:
I am pleased to report that KBF has made significant strides during the past year to meet our business objectives. While many of our customers across several sectors of the economy are generating and shipping decreased volumes of hazardous waste due to general economic conditions, we have increased our customer base substantially due to our ongoing sales initiatives. As a result, recycling service revenues for the nine months ended September 30, 2002 are up some 25% as compared to those from the same period last year. We continue to invest aggressively in the continued development of our facility, and we have recently begun performance testing on critical new recycling and mining processes that have the effect of increasing the value and decreasing the cost associated with our products. We have hired several management level employees that are experienced in the various aspects of our business, and we have located and are expected to hire (in the near term) a number of new senior executives that have the experience and the seasoning necessary to scale our business model at a sustainable pace. We have also made significant progress in the development of some plans that we have all been waiting to see completed. The net result of our efforts this year may be more significant than ever before. Let me take you through some of these developments and put into perspective why now may be the most exciting time for our company.
I. Recycling Service Sales.
Our core recycling and mining business has generated increased revenues year over year, from about $2.0MM in 1999, to $2.5MM in 2000, to $3.1MM in 2001 to an estimated $3.7MM for this year. These increases in volume are occurring in the face of significant organic attrition – that is, the majority of our customers in the manufacturing sectors are producing and shipping lower volumes of hazardous waste. While we continue to increase our customer base to combat this attrition, we are starting to see signs that our existing customers are increasing their production, thus paving the way for an increasing growth rate of recycling service sales. Our joint venture and direct sales efforts have also resulted in our development of a broad consumer base, with clients ranging in size from the very small to the very large, including many different Fortune 500 companies, including premier companies in the specialty chemicals, ceramics, aerospace, pharmaceuticals, telecommunications, electronics, automotive, food products, munitions, metal finishing, petroleum refining and plastics sectors.
Last year, domestic manufacturers paid in excess of six billion dollars to hazardous waste service companies to pick-up and transport more than sixty million tons of hazardous wastes to some form of off-site disposal or incineration process. Very little of the total sector revenues however were realized on the bottom lines of established market participants due to an almost frenzied competitive dynamic typified today by the industry’s too-common primary tactic: the reduction of price to gain share. While the industry as a whole is trending slowly towards rationalization and consolidation, there is little service and price cohesion from region to region, and poor management and financial performance plague the industry’s largest players. Safety-Kleen (OTCBB: SKLNQ), Clean Harbors (NASDAQ: CLHB), Philip Services (NASDAQ: PSCD) and Perma-Fix (NASDAQ: PESI) collectively control some forty percent of the domestic market, but have demonstrated a negative composite net income for the past four years.
In contrast to these companies, we control a distinct and incomparable competitive advantage in the hazardous waste management industry. Hazardous industrial wastes contain valuable commodities – metals like chrome, copper, nickel, silver and titanium, in concentrations many times greater than virgin ore extracted from
the earth, as well as partially consumed chemical compounds that retain reuse potential. KBF’s technologies mine these industrial ores for their metal value in part by reusing the constituent chemical compounds. Our technologies cost-effectively recycle, reuse and mine hazardous industrial wastes – profitably at the currently depressed price point of disposal, and are the only cost-effective and environmentally beneficial alternative to land disposal and incineration today.
As many of you know, we provide the service of recycling hazardous wastes (for which we charge a tipping fee) from which we mine metallic commodities (which we then sell) by reusing the partially spent chemical compounds within the hazardous wastes (which partially defray our variable costs). Leveraged with volume, our technologies are capable of remarkable degrees of efficiency, the scalability of which is critical to and the core driver of our business model. In a standard volume-centric manufacturing model, the variable costs of an operation are positively correlated with increases in production at all stages of the growth cycle (from start-up to maturity). By contrast, the variable costs of a facility engineered for the large-scale application of our technologies are negatively correlated with increases in production after a critical mass of volume is attained due to the facility’s service, product and reuse potential.
Driven by this effect, the prime component of our business model is to leverage our economies of scale by maximizing the distribution of qualified hazardous wastes into centralized recycling, reuse and mining facilities located in key demographic regions, the first of which being our Paterson, New Jersey facility. To achieve this and effectively scale our business model, we will develop our home demographic organically and evolve into new contiguous markets in the hub-and-spoke fashion shown here by acquiring regional hazardous waste management companies with (a) permitted regional distribution infrastructure, (b) sales and service support personnel, (c) senior-level and regional talent, (d) existing volumes of recyclables, (e) accretive earnings, and (f) the means to establish a beachhead for the KBF brand in demographics that are targeted for the development of new recycling facilities.
II. Acquisition of Jones Environmental Services.
We have just recently secured approvals for the financing necessary to acquire the first of several qualified acquisition targets: Jones Environmental Services, a profitable New England based hazardous waste management company. This acquisition will instantly catalyze our business model and transform KBF into a powerful regional service provider with service offerings dramatically unlike any competitor and one of the strongest balance sheets in the region. After the consolidation, our company will grow organically within the Northeastern and New England regions, generating a projected $3 million in EBITDA on over $19 million in sales in the first year after the acquisition. Assuming our existing facility achieves 30% of its capacity three years after the acquisition, revenue and earnings growth are expected at rates of more than 20% and 40%, respectively, per year for at least the three years subsequent to the acquisition (in the absence of additional acquisitions).
We are funding this acquisition mostly with conventional debt and a limited use of equity. While general market conditions have made the financing process difficult and lengthy, we recently secured the financing required to complete the transaction and we now expect to execute the acquisition agreement in the fourth quarter 2002. More information on this acquisition will be made available as appropriate.
III. Management Team.
After completing this acquisition, we plan to immediately hire two senior executives we have located that we believe will bring significant added value to our company. Both have impressive backgrounds, valuable related company experience and are seasoned in the tactical requirements of executing growth. These hires, in addition to the hires recently made at our facility and the exceptionally qualified management coming with Jones will play an essential role in the development of our business model moving forward.
IV. Initiation of Operations of New Recycling Processes.
Equally critical to our immediate term development is the completion our Paterson, New Jersey facility and the onset of operations of two new proprietary recycling and mining processes that are expected to greatly enhance both the value and the yield of the metallic commodities we recycle and mine. At our current levels of production, our yield of metallic commodities is about 15,000 tons per year. These commodities are an opportunity for internally generated accretive revenue and earnings growth. This growth will drive a crucial aspect of our business model – the vertical integration of refining and production capability. Upgrading, refining and manufacturing our ores into higher grade commodities can greatly increase the value we derive from our products.
Historically, about 90% of KBF’s annual recycling revenues comes from the tipping fees associated with KBF’s recycling services, while only 10% are derived from KBF’s sale of the recycled metal products. The first of KBF’s new processes to commence operations is a process that beneficiates (upgrades) our products and is expected to shift this service to product ratio from 90:10 to 75:25 on increased revenue – this process has been engineered to simultaneously increase the value of our existing metal products and decrease the costs associated with recycling and mining those products and will therefore increase the current revenue and profitability of KBF’s overall operation. As applied to our estimated 2002 sales of $3.7MM, and assuming no new volume and the operation of this new process for the whole year, the upgrading of our products would have resulted in an additional 20% increase in recycling revenue (to about $4.4MM) and a 10% decrease in the cost of sales. The process increases revenue on increased margin.
This process will also increase our ability to mine commodities from a wider array of industrial hazardous wastes and is itself projected to generate in excess of $5,000,000 in new annualized service and product revenue as the process is brought up to full production over the next twenty-four months. The beneficiation process, which began performance testing in August 2002, is the result of almost three years worth of engineering and development and has taken in excess of $2,000,000 dollars to complete.
The output of this beneficiation process will be highly concentrated metallic powders that are readily amenable to refining – the second of KBF’s new processes. The refining of selected products is expected to further shift the service to product ratio discussed above from 75:25 to 60:40, again on increased revenue and decreased cost, for selected products containing platinum group metals and certain other precious and base metals. In December 2001, KBF announced its execution of a long-term recycling contract with a distributor of industrial by-products under which KBF would construct a new process to refine high concentrations of silver from certain industrial by-products. While the distributor subsequently ceased operations, we hired former distributors of the relevant by-products and engineered and acquired the necessary equipment to refine silver as well as other precious, platinum group and base metals from industrial by-products.
As is the case with the beneficiation process, this process too will increase our ability to mine commodities from a wider array of industrial hazardous wastes and, while the revenues realized from this refining process will be partially dependent upon commodity price fluctuations, this process is projected to generate in excess of $3,000,000 in new annualized service and product revenue as the process is brought up to full production over the next twenty-four months. This process will be brought online with an immediate stream of new accretive revenue in the early fourth quarter of this year.
Our focus over the past four years has been the development of the resources we need to grow our company at an accelerated sustainable rate. Management, sales and service personnel, distribution and process infrastructure and technology – these are the essential resources we need to fulfill our ambition to build a premier environmental services company that specializes in the use of state of the art technologies to recycle, reuse and mine hazardous waste.
I am excited by our progress so far this year and, while our various growth initiatives are taking longer to develop than we have outlined in the past, I expect the near term catalysis of our business model through a combination of the items discussed above and several more developments that will be disclosed at the appropriate time.
Thank you for the opportunity to present this update to each of you and I look forward to our next communication together.
Best Regards,
KBF Pollution Management, Inc.
Kevin Kreisler
President
www.kbf-pmi.com
investorrelations@kbf-pmi.com
Safe Harbor Statement
The foregoing discussion contains forward-looking statements that are based on current expectations. Actual results, including the timing and amount of anticipated revenues, may differ due to such factors as: regulatory delays; dealings with governmental and foreign entities; economic and other conditions affecting the financial ability of actual and prospective clients; and, other risks generally affecting the financing of projects. Additional risks associated with KBF's business can be found in its Annual Report on Form 10-KSB for the year ended December 31, 2001, and other periodic filings with the SEC. KBF Pollution Management, Inc. trades on the over the counter bulletin board maintained by the NASD under the symbol ``KBFP.''
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