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July 7, 1998
Board of Directors
KTI, Inc.
7000 Boulevard East
Guttenberg, NJ 07093
Dear Sirs:
You have requested our opinion as to the fairness from a financial
point of view to KTI, Inc. (the "Company") of the consideration to be paid by
the Company pursuant to the terms of the Agreement and Plan of Merger (the
"Agreement"), by and among the Company, KTI Acquisition Sub, Inc. ("Merger Sub")
a wholly owned subsidiary of the Company, FCR, Inc. ("FCR") and all of the
security holders of FCR, pursuant to which FCR will be merged (the "Merger")
with and into the Merger Sub.
Pursuant to the Agreement, the shares of common stock and each class of
preferred stock of FCR will be converted into the right to receive, in the
aggregate, $30 million in cash, 1,714,285 shares of common stock, no par value
("Company Common Stock") of the Company and Earn-Out Consideration (as defined
in the Agreement) of up to $30 million of a combination of Company Common Stock
and cash.
In arriving at our opinion, we have reviewed the draft dated June 30,
1998 of the Agreement. We also have reviewed financial and other information
that was publicly available or furnished to us by the Company and FCR, including
information provided during discussions with their respective managements.
Included in the information provided during discussions with the respective
managements were certain financial projections of FCR pro forma for the RRS
acquisition for the period beginning 1998 and ending 2002 prepared by the
management of FCR and certain financial projections of the Company for the
period beginning 1998 and ending 2002 prepared by the management of the Company.
In addition, we have compared certain financial and securities data of the
Company and FCR with various other companies whose securities are traded in
public markets, reviewed the historical stock prices and trading volumes of
Company Common Stock, reviewed prices paid in certain other business
combinations, and conducted such other financial studies, analyses and
investigations as we deemed appropriate for purposes of this opinion. We were
not provided an opportunity to discuss with management of Applegate Fibers
Insulation ("Applegate") the historical and future operating and financial
performance of Applegate.
In rendering our opinion, we have relied upon and assumed the accuracy
and completeness of all of the financial and other information that was
available to us from public sources, that was provided to us by the Company and
FCR or their respective representatives, or that was otherwise reviewed by us.
In particular, we have relied upon the estimates of the management of the
Company of the operating synergies achievable as a result of the Merger and upon
our discussion of such synergies with the management of FCR. With respect to the
financial projections supplied to us
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related to the Company and FCR, we have assumed that they have been reasonably
prepared on the basis reflecting the best currently available estimates and
judgments of the management of the Company and FCR as to the future operating
and financial performance of the Company and FCR. We have assumed that the
consummation of the acquisition of Applegate prior to December 31, 1998 will not
result in FCR assuming directly or indirectly any material liabilities other
than outstanding indebtedness reflected on the consolidated balance sheet of
KTI/FCR as of December 31, 1998. In addition, we have assumed that the cash flow
for the period from July 1, 1998 through December 31, 1998 of Applegate is
consistent with its long term cash flow generating capacity and is consistent
with the cash flow generating capacity of FCR. We have not assumed any
responsibility for making any independent evaluation of any assets or
liabilities or for making any independent verification of any of the information
reviewed by us.
Our opinion is necessarily based on economic, market, financial and
other conditions as they exist on, and on the information made available to us
as of, the date of this letter. It should be understood that, although
subsequent developments may affect this opinion, we do not have any obligation
to update, revise or reaffirm this opinion. We are expressing no opinion herein
as to the prices at which Company Common Stock will actually trade at any time.
Our opinion does not address the relative merits of the Merger and the other
business strategies being considered by the Company's Board of Directors, nor
does it address the Board's decision to proceed with the Merger. Our opinion
does not constitute a recommendation to any stockholder as to how such
stockholder should vote on the proposed transaction.
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), as part of
its investment banking services, is regularly engaged in the valuation of
businesses and securities in connection with mergers, acquisitions,
underwritings, sales and distributions of listed and unlisted securities,
private placements and valuations for corporate and other purposes.
Based upon the foregoing and such other factors as we deem relevant, we
are of the opinion that the consideration to be paid by the Company pursuant to
the Agreement is fair to the Company from a financial point of view.
Very truly yours,
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: /s/ Sam C. Pina
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Sam C. Pina
Vice President