-----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, MbIkA/JSlbHVzQO/Q4lSmPrC4Ow4O83EdxLmNBBt0oU8BW8OYUKKC3KPah2k0e89 gjIjFMqgNI+HlUVnirhW+Q== 0000950123-97-002953.txt : 19970404 0000950123-97-002953.hdr.sgml : 19970404 ACCESSION NUMBER: 0000950123-97-002953 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 19 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970403 SROS: NONE 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-25490 FILM NUMBER: 97574203 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-K405 1 FORM 10-K 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ------------------------ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NO. 0-25490 KTI, INC. NEW JERSEY 22-2665282 (STATE OF OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
7000 BOULEVARD EAST GUTTENBERG, NEW JERSEY 07093 (201) 854-7777 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common stock, no par value 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [X]. State the aggregate market value of the voting stock held by non-affiliates of the registrant. The aggregate market value shall be computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within 60 days prior to the date of filing: $36,345,118 at March 27, 1997 Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: 6,862,032 ================================================================================ 2 TABLE OF CONTENTS
PAGE ITEM NUMBER AND CAPTION NUMBER - ------------------------------------------------------------------------------------ ------ PART I Item 1. Business................................................................. 1 Item 2. Properties............................................................... 18 Item 3. Legal Proceedings........................................................ 19 Item 4. Submission of Matters to a Vote of Security Holders...................... 20 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.... 20 Item 6. Selected Financial Data.................................................. 21 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................ 22 Item 8. Financial Statements and Supplementary Data.............................. 34 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................................................... 34 PART III Item 10. Directors and Executive Officers of the Registrant....................... 34 Item 11. Executive Compensation................................................... 34 Item 12. Security Ownership of Certain Beneficial Owners and Management........... 34 Item 13. Certain Relationships and Related Transactions........................... 34 PART IV Item 14. Exhibits, Financial Statement Schedules.................................. 35
i 3 PART I ITEM 1. BUSINESS GENERAL KTI, Inc. (individually and collectively with its subsidiaries, "KTI" or the "Company") was incorporated in New Jersey in 1985. The Company is a holding company, and substantially all of its operating assets are owned by corporate and partnership subsidiaries and affiliates. The Company's objectives are focused on the development of an integrated waste handling business, providing waste recycling, processing and disposal capabilities, specialty waste disposal services, facility operations and recycling of ash combustion residue. As part of its integrated waste handling business, the Company owns waste-to-energy facilities which convert ordinary, non-hazardous solid waste from residential, commercial and industrial sources ("municipal solid waste" or "MSW") into refuse derived fuel ("RDF"), which in turn is combusted alone or with supplemental fuels to dispose of the RDF and, in the process, to generate electrical power to be sold to electrical utilities. The Company has developed and currently owns interests in two such facilities. The first facility is owned by KTI's 74.15% owned subsidiary, Maine Energy Recovery Company, Limited Partnership, a Maine limited partnership ("Maine Energy"), which is located in Biddeford, Maine. Maine Energy commenced operations in 1987. The other facility, owned by KTI's 7% owned affiliate Penobscot Energy Recovery Company, a Maine limited partnership ("PERC"), is located in Orrington, Maine. PERC commenced operations in 1988. Sources of revenues are from fees payable under waste handling agreements with over 250 municipalities and commercial waste sources for the right to dispose of MSW at the Company's facilities ("tipping fees") and payments from electrical utilities for electricity sold by the facilities. The Company also developed and operates a wood waste processing facility in Lewiston, Maine through its subsidiary KTI Bio Fuels, Inc. ("KTI Bio Fuels"). This facility commenced operations in 1986 and processes woodwaste, producing woodchips which are used by Maine Energy and PERC, as well as third parties, as supplemental fuel. These three facilities provide 60% of the long-term disposal capacity for the State of Maine. To solidify its business base in Maine and expand its integrated waste handling business vertically and geographically, KTI made a number of strategic acquisitions and entered into contract restructurings and joint ventures during 1996. In April 1996, the Company entered into a series of agreements with Environmental Capital Holdings, Inc., a Florida corporation ("ECH"), and its subsidiary American Ash Recycling Corp., a Florida corporation ("AAR"), under which the Company made the following acquisitions and commitments. (i) The Company acquired a 60% limited partnership interest in a limited partnership which operates a permitted municipal waste combustor ("MWC") ash recycling facility in Nashville, Tennessee. This facility, which commenced operations in 1993, is the first commercially operational MWC ash recycling facility in the United States. (ii) The Company acquired a 60% limited partnership interest in a limited partnership formed to operate a similar facility in the State of Maine (the "Maine Partnership"). The Maine Partnership is in the process of obtaining its federal, state and local permits. (iii) The Company agreed to become a 60% limited partner, if appropriate, in up to eight (8) more ash recycling facilities that may be developed by AAR through December, 1999. AAR's MWC proprietary ash recycling process recovers substantial quantities of metal contained in MWC ash residue and, after removing unburned materials, converts the remainder of the ash into a high grade aggregate which is sold for reuse in commercial construction, asphalt, concrete, and roadbed material applications. AAR's process recovers both ferrous and non-ferrous metals, which are cleaned to enhance their value in the scrap metal markets. AAR's process also removes unburned combustibles through the utilization of proprietary air separation processes. 1 4 With respect to the Maine Partnership and the other proposed partnerships, there can be no assurance that the intended projects would be economically feasible and, if feasible, that necessary financing and regulatory approvals would be obtained in order to construct and operate the proposed facilities. Also in April 1996, Maine Energy negotiated a reduced disposal fee retroactive to January 1, 1996 with the third party ash landfill owner that disposes of all ash residue produced at the Biddeford facility. The cost per ton was reduced from $70 per ton to $46 per ton. This reduced fee will stay constant through 1997 and then be increased by inflation. Maine Energy disposed of 55,826 tons of ash in 1996 which produced a total savings of $1,339,824. KTI's share of this savings through its ownership of Maine Energy and the Maine Partnership was $936,604 for 1996. The Company believes that the Company's effort to obtain permits for the ash recycling facility in Maine resulted in the third party ash landfill owner reducing the ash residue disposal cost, yielding such savings. In May 1996, KTI completed a restructuring of the long-term power supply contract between its waste-to-energy subsidiary, Maine Energy and Central Maine Power Company ("Central Maine"), a major utility in the State of Maine. As part of the restructuring, Maine Energy sold its generating capacity through May 31, 2007 to CL Power Sales One, L.L.C., an affiliate of Citizens Lehman Power ("CL One"). Maine Energy recorded a gain on the transaction of $33.2 million and an additional amount of $45 million was deferred which will be recognized as certain contingencies are eliminated. At closing, Maine Energy received approximately $90 million in cash and an extension of the contract for five and one-half years to December 31, 2012 in exchange for reducing the price of its above-market rate of electricity to Central Maine from 16 cents per kilowatt hour (kWh) to 7.18 cents per kWh. The new rate will escalate by 2% per year through May 31, 2007 and then convert to a market based rate for the remaining term of the contract. The proceeds, together with cash released from reserves, were used by the Company to: 1) repay the entire $64.5 million of Maine Energy's outstanding bonds and terminate the bank letter of credit supporting them and 2) reduce the subordinated debt of this subsidiary by $29.5 million. Also as a result of the transaction, the Company was able to increase its ownership in the subsidiary to 74.15% from 50.38%. In June 1996, Maine Energy received the Environmental Protection Agency ("EPA") Environmental Leadership Award. Maine Energy received the award in recognition of its performance in operating at a plateau above compliance. The Company was the only waste-to-energy company so recognized by the EPA. As a function of the program, Maine Energy will benefit via decreased reporting procedures and will spearhead a move toward facility self-certification. Maine Energy will also be a mentor to two facilities selected by the EPA who can benefit from the Biddeford facilities pollution prevention techniques and successes. In September 1996, the Company entered into a joint venture with Pinetree Waste, Inc. of Portland, Maine. The joint venture with experienced Maine waste management professionals will concentrate on the sourcing of MSW and specialty waste for Maine Energy and PERC. In November and December 1996, the Company acquired Timber Energy Investments, Inc. ("TEII"), a Florida-based company. TEII and its subsidiaries own the following facilities: - A 14-megawatt power plant in Telogia, Florida which processes biomass waste and sells electricity to Florida Power Company under a long-term contract. The power plant is subject to $13.4 million of tax exempt debt. - A 400,000-ton per year wood chip mill in Cairo, Georgia which processes pulp wood under a long-term service contract with Stone Container, Inc. ("Stone"), and - A 15-million pound plastic recycling plant in Tuscaloosa, Alabama In exchange for a purchase price of $1.85 million the Company received 49% of the common stock of TEII, preferred stock with a $50 million liquidation preference and $11.8 million in notes previously owned by Continental Casualty Company and its affiliates ("CNA"). KTI has agreed to release CNA from its current reimbursement obligations on the $13.4 million outstanding municipal bonds. The net result of this purchase and restructuring will be a retirement of approximately $61.8 million in TEII's obligations. In a series of 2 5 subsequent transactions, KTI acquired the remaining 51% of common stock of TEII for approximately $290,000. KTI currently owns 100% of the TEII preferred and common stock outstanding. Also in November 1996, the Company acquired Manner, Inc. ("Manner"), a Maryland-based company doing business as a broker of recycling plastics nationwide. Manner is expected to play a key role in the Company's participation in the plastic recycling market including the anticipated enhancement of the profitability of the acquired TEII plastic recycling plant located in Tuscaloosa, Alabama. KTI acquired Manner for 65,000 shares of KTI stock and granted incentive stock options to Manner's key personnel. The Company's current business plan for its integrated waste handling business includes the following elements: (i) to maximize the RDF production and operating efficiencies of the Maine Energy and PERC facilities, (ii) to continue to focus on lowering expenses of its waste-to-energy facilities, including identifying less costly means of disposal or by utilizing recycling opportunities for MSW process and ash combustion residues, (iii) to utilize its expanded specialty waste disposal capabilities (an increase in the amounts of specialty waste processed by the Company is planned to offset the effects of the seasonal nature of the traditional MSW market and the uncertainties of the MSW spot market, which would increase revenue due to the higher tipping fees that the Company believes its facilities will be able to charge for processing such wastes), (iv) to enhance the value of its wood waste processing business by expanding the utilization of available capacity through the acquisition of additional materials and expanding the menu of materials processed, (v) to recycle ash produced by waste-to-energy facilities, (vi) to expand its waste brokerage service, and (vii) to utilize its experience gained in restructuring Maine Energy's power supply contract, in waste handling and processing, in turning around troubled facilities and in operating waste facilities by acquiring an interest in or assuming operational responsibility for other waste disposal or recycling facilities in financial or operational distress. The implementation of parts of the foregoing business plan has only recently commenced and there can be no assurance that such plan will be successful. WASTE-TO-ENERGY TECHNOLOGY The two waste-to-energy facilities developed by the Company utilize RDF technology, which emphasizes both materials separation prior to the combustion of MSW and the production of a high quality fuel. In the RDF process utilized by the Company, non-combustible materials, such as ferrous metals, glass, grit and fine organic materials, are separated from MSW, which promotes recycling of non-combustible material and, in addition, yields a more homogeneous and efficient fuel for electric power generation, more acceptable air emissions, and decreased quantities of ash residue from combustion. The use of supplemental fuels, such as woodchips, tire chips, natural gas and fuel oil, allows the Company to compensate for seasonal variations or temporary interruptions in MSW deliveries or temporary fluctuations in the quality of the RDF used in the power production process. The combustion of RDF either alone or with supplemental fuels results in superheated steam that is delivered to a single steam turbine generator in each facility, each of which generates electricity that is transmitted through interconnection equipment to Central Maine and Bangor Hydro-Electric Company ("Bangor Hydro"), respectively, pursuant to power purchase agreements with Maine Energy and PERC. Ash residue is the remaining by-product of the Maine Energy and PERC facilities' energy generation process. The facilities have disposed of, and currently dispose of, their ash residue at landfills located within the State of Maine that are licensed by the Maine Department of Environmental Protection ("MDEP"). The Company is seeking the regulatory approvals required to recycle its ash residues, but such ash residue is not currently being recycled. There can be no assurance that the Company will be able to recycle its ash residue. MAINE ENERGY General Maine Energy is a limited partnership organized in 1983 for the purpose of developing and owning a waste-to-energy facility located in Biddeford, Maine. The Company, through its subsidiaries, owns a 74.15% 3 6 interest as the sole general partner and one of three limited partners of Maine Energy. Accordingly, the Company holds a majority ownership interest in Maine Energy. The other two limited partners are CNA Realty Corp. ("CNA Realty"), a subsidiary of CNA Financial Corporation, and Energy National, Inc., an affiliate of Pacific Generation Company ("PacifiCorp"), which own 9.6% and 16.25% interests in the partnership, respectively. Maine Energy Facility The Maine Energy facility occupies an approximately 9.1 acre site owned by Maine Energy in the City of Biddeford, Maine. The facility provides waste disposal services to municipalities in central and southern Maine. The nominal waste disposal capacity of the facility is 245,000 tons per year. The volume of waste processed at the Maine Energy facility in 1996 was 245,634 tons. Financing of Maine Energy Facility The construction of the Maine Energy facility was financed with the proceeds from the sale of $85 million original principal amount of variable rate demand resource recovery bonds issued by the City of Biddeford in two offerings (the "Biddeford Bonds"), which were secured by a letter of credit from a group of banks, and a $22 million equity investment by Maine Energy's original limited partners, CNA Realty, ENI and Project Capital 1985 ("Project Capital"). The partners subsequently made additional investments in the aggregate amount of $24.7 million in the form of subordinated loans with an interest rate of 12% per annum, which are payable solely out of distributable cash flow of Maine Energy. Payments on these loans were restricted by the terms of the documents governing the Biddeford Bonds and the letter of credit. In May 1996, in connection with the restructuring of the Central Maine PPA (as defined below) the Biddeford Bonds and the associated Letter of Credit were retired with a $64.5 million prepayment and a payment of $29.5 million was made for principal and accrued interest on the subordinated loans. The balance of the subordinated loans at December 31, 1996 was $14,575,985. While the Company believes that distributable cash flow from the facility's operations will be adequate to cover future annual interest requirements on the subordinated loans, there can be no assurance that this will occur. Management and Fees A subsidiary of the Company, Kuhr Technologies, Inc. ("Kuhr"), is the sole general partner and manager and has control of the day to day business of Maine Energy. Under the terms and conditions of an operation and maintenance agreement with Maine Energy, a subsidiary of the Company, KTI Operations, Inc. ("Operations") also administers, operates and maintains the Maine Energy facility and is paid an amount equal to the actual operating costs of the Maine Energy facility plus a monthly fixed fee, currently set at approximately $40,500 and subject to an inflationary adjustment annually. The agreement also provides for incentive payments to Operations employees at the Maine Energy facility in the event expected performance standards are exceeded. As a result of such expected performance standard being exceeded, aggregate incentive payments in the amount of $212,601, $202,016 and $203,200 have been paid to Operations employees during 1994, 1995 and 1996, respectively. Power Purchase Agreement The electricity produced by the Maine Energy facility is sold to Central Maine pursuant to a power purchase agreement dated January 12, 1984 with a term through December 31, 2012 (as amended, the "Central Maine PPA"). Central Maine serves more than 490,000 customers in an 11,000 square mile service area in central and southern Maine and purchases substantial amounts of power from Canadian utilities as well as independent power producers such as Maine Energy. In 1996, Maine Energy derived approximately $20,337,000, or 31.6% of its revenues, from the sale of electricity to Central Maine. In May, 1996 Maine Energy restructured its agreement with Central Maine by entering into a series of agreements with CL One and Central Maine, which provided for the purchase of Maine Energy's available 4 7 power generation capacity by CL One and amending the Central Maine PPA (together with the agreement, the "Agreements"). CL One made an initial payment of $85 million and agreed to also make additional quarterly payments through May 31, 2007 to Maine Energy as a portion of its purchase price and for reimbursement to Maine Energy of certain expenses. In consideration of its payments to Maine Energy, CL One would be assigned all rights to capacity from the Maine Energy facility through May 31, 2007. In the restructuring, the term of the Central Maine PPA was extended from May 31, 2007 to December 31, 2012. Maine Energy will sell energy to Central Maine through May 31, 2007 at an initial rate of 7.18 cents per kWh which would escalate annually by 2% per annum. Beginning June 1, 2007 until the expiration date of the contract, Maine Energy will be paid market value for both its energy and capacity by Central Maine. Maine Energy retired the outstanding principal amount of $64.5 million of the Biddeford Bonds with the proceeds of the sale of its capacity. Utilizing the balance of the proceeds and a portion of the reserve funds available, the Company substantially reduced the outstanding principal amount of Maine Energy's subordinated indebtedness by paying off $29.5 million of subordinated debt. As of December 31, 1996 the balance of the subordinated debt at Maine Energy was $14,575,985. Under the terms of the Central Maine restructuring, a $45 million letter of credit was issued to Central Maine by ING (US) Capital Corporation, ("ING"). If, in any year, Maine Energy fails to produce 100,000,000 kWh of electricity (a "100,000,000 kWh default") and Maine Energy does not have a force majeure defense (physical damage to the plant and other similar events), Maine Energy is obligated to pay $3.75 million to Central Maine as liquidated damages. Such payment obligation is secured by the ING letter of credit. In each year in which 100,000,000 kWh is produced, the balance of the ING letter of credit is reduced by $3.75 million. If, in any year, Maine Energy fails to produce 15,000,000 kWh of electricity (a "15,000,000 kWh default") and Maine Energy does not have a force majeure defense, Maine Energy is obligated to pay the then balance of the ING letter of credit to Central Maine as liquidated damages. In 1996, the 15,000,000 kWh and the 100,000,000 kWh tests were met, resulting in a reduction of the amount of the ING letter of credit to $41.25 million. Management of the Company restructured its relationship with Central Maine because it believes that the cash proceeds from the restructuring which enabled the Company to reduce the outstanding indebtedness of Maine Energy, should allow the Company upon refinancing or repayment of the reduced subordinated debt to access Maine Energy's available cash flow. In addition, the newly restructured Central Maine PPA will allow Maine Energy to be more competitive as electric utility deregulation become a reality. The foregoing estimate of increases in cash flow and competitive advantage, however, are forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from those set forth herein due to, among other factors, (i) failure to achieve the levels of power production projected by the Company or (ii) levels of expenses greater than those projected by the Company, and, accordingly, there can be no assurance that the Company will experience such an increase in cash flow and competitive advantage as a result of such transactions. Long-Term Waste Handling Agreements Approximately one-third of the MSW provided to Maine Energy is delivered pursuant to waste handling agreements with eighteen (18) municipalities with terms expiring on June 30, 2007 or later. The agreements are substantially similar in content except that (i) the sixteen (16) "charter" municipalities are entitled to various concessions as a result of having participated in the financial restructuring of Maine Energy in 1991, and (ii) the two "host" municipalities of Biddeford and Saco (both of which are charter municipalities) pay tipping fees in the amount of one-half of those paid by the other charter municipalities. The municipalities currently pay tipping fees to Maine Energy for the disposal of MSW ranging as of December 31, 1996 from $20.42, in the case of the two host municipalities of Biddeford and Saco, to $40.83 per ton, which are subject to adjustment. During 1996, Maine Energy reduced the tipping fees as required by the Waste Handling Agreements by $7.27 and $3.64 for charter and host communities, respectively, as a result of the retirement of the Biddeford Bonds. The annual tipping fees charged to the municipalities are increased (but not decreased) each year for inflation and any increases in variable "pass through" costs, such as disposal fees for residues. The municipalities are also responsible for costs associated with changes in law. Maine Energy was not 5 8 entitled to an increase in tipping fees in 1996 for variable "pass through" or change in law costs. Approximately 35% of Maine Energy's total waste handling revenues in 1996 was attributable to these long-term waste handling agreements. Under the Maine Energy long-term waste handling agreements, each municipality agrees to deliver to the Maine Energy facility acceptable waste in an amount equal to its "Guaranteed Annual Tonnage." Maine Energy is required to accept 110% of each municipality's Guaranteed Annual Tonnage. The total tonnage processed under long-term agreements in 1996 was only 30.4% of the total waste processed by the facility. A municipality is required to pay to Maine Energy the tipping fee for the amount of any shortfall from its Guaranteed Annual Tonnage. As a corollary to the "put-or-pay" delivery guarantee, each municipality enacted a flow control ordinance pursuant to Maine law which designates the Maine Energy facility as the exclusive disposal or reclamation facility to which all acceptable waste generated within the municipality must be delivered regardless of which entity picks up waste in such municipality. See "Governmental Regulations -- Waste Handling -- Flow Control." Each municipality has the right, once a year, to terminate its long-term waste handling agreement on one year's prior notice. The Company does not believe that currently there is a material risk that the municipalities would exercise their respective rights to terminate their agreements, as there are currently no less costly alternative longterm means of MSW disposal available in Maine Energy's market area. Other Sources of Waste The Company has short-term MSW disposal contracts with additional municipalities with terms expiring in 1997 through 2000 that provide Maine Energy with approximately 38,800 tons per year of MSW and short-term contracts principally with one to three year terms with commercial and private waste haulers that provide approximately 87,900 tons per year of MSW to the Company. The balance of Maine Energy's capacity is utilized by spot market MSW and specialty wastes. Bypass and Residue Disposal The processing of MSW at the Maine Energy facility generates materials such as non-combustible material removed from the front-end processing of MSW ("front-end process residue") and ash residue resulting from the RDF combustion process. These materials are disposed of by licensed third parties under long-term agreements. Maine Energy is also required, in the event of a shutdown of the Maine Energy facility, to dispose of MSW received by Maine Energy by delivering such MSW to PERC or to third party waste disposal facilities. PERC General PERC is a limited partnership organized in 1983 for the purpose of developing and owning a waste-to-energy facility located in Orrington, Maine. A subsidiary of the Company owns a 7% general partnership interest in PERC. The other partners of PERC are ENI, which has both a general and limited partnership interest representing an aggregate 28.71% ownership percentage, and The Prudential Insurance Company of America, which has a limited partnership interest representing a 64.29% ownership percentage. PERC Facility The PERC facility occupies an approximately 40.3 acre site owned by PERC in the Town of Orrington. The facility provides waste disposal services to municipalities in Penobscot, Hancock, Waldo, Piscataquis, Somerset, Knox, Kennebec, Lincoln and Aroostook Counties, Maine. The nominal waste disposal capacity of the facility is 325,000 tons per year. The PERC facility processed 253,523 tons of MSW in 1996. The Company intends to increase the annual processed total to approximately 325,000 tons over the next ten years. 6 9 Management and Fees A subsidiary of the Company and ENI are both general partners of PERC. The subsidiary of the Company and ENI each have one representative on a management committee, which is generally given full authority and discretion with respect to PERC's business, except as delegated to the managing general partner, which is the subsidiary of the Company. However, certain matters acted upon by the management committee, such as the addition of new partners or the transfer of partnership interests and the approval of the terms and conditions of any contract pursuant to which the partnership would expend or receive $100,000 or more in any year, must be presented to the general partners for approval or rejection. Primary day-to-day responsibility for operating the PERC facility has been contracted to ESOCO Orrington, Inc. ("ESOCO"), a subsidiary of ENI, pursuant to an operating and maintenance agreement. The term of the agreement is for five years, with renewals for successive five year terms. The subsidiary of the Company also earns an annual management fee from PERC. The base amount was set in the PERC partnership agreement subject to annual adjustments on the basis of the Consumer Price Index and was $334,338 for the year ended December 31, 1996. The subsidiary of the Company was due $2,279,105 on account of accrued management fees as of December 31, 1996, which represent the unpaid portion of management fees earned by the Company through March 31, 1991. Payment of the accrued management fees currently are restricted by the terms of the PERC partnership agreement to the extent of 10% of cash flow otherwise distributable to equity owners. The Company also receives an annual co-operator's fee which was $53,109 for the year ended December 31, 1996. In 1996, the Company was entitled to receive $691,442 as a result of PERC's operations during 1995, $398,311 of which was paid to ENI for principal and interest due on its note from the Company. The Power Purchase Agreement The electricity produced by the PERC facility is sold to Bangor Hydro pursuant to a power purchase agreement dated June 21, 1984 with a term through February 14, 2018 (the "Bangor Hydro PPA"). Bangor Hydro serves approximately 97,000 customers in a 4,900 square mile service area in portions of the counties of Penobscot, Hancock, Washington, Waldo, Piscataquis and Aroostook, Maine. In 1996, PERC derived approximately 61% of its revenues, from the sale of electricity to Bangor Hydro. Under the terms of the Bangor Hydro PPA, Bangor Hydro has agreed to purchase all electricity generated by the PERC facility up to 25 megawatts (the practical limit of the facility's equipment) and up to a maximum of approximately 166,000,000 kWh in a calendar year, net of electricity consumed at the facility. The Bangor Hydro PPA rate formula is currently favorable to PERC, providing a contract rate of 11.402 cents per kWh for 1996. A portion of the contract rate is adjusted annually to reflect changes in inflation. If PERC fails to deliver at least 105,000,000 kWh to Bangor Hydro in any calendar year, PERC is obligated to pay Bangor Hydro $4,000 for each 1,000,000 kWh by which such deliveries fall below 105,000,000 kWh. Although future performance cannot be guaranteed by past results, PERC has never failed to meet this delivery obligation. The profitability of PERC is heavily dependent on the Bangor Hydro PPA. The Company is currently working with Bangor Hydro in an attempt to restructure the Bangor Hydro PPA utilizing the Central Maine PPA restructuring as a model. The Company's objectives in a restructuring would be the same as it believes were accomplished in the Central Maine PPA restructuring. The discussions with Bangor Hydro have only recently commenced and no assurances can be given that such restructuring will be successful. Long-Term Waste Handling Agreements. As of December 31, 1996, PERC had in place 124 long-term waste handling agreements, of which 82 cover approximately 100 so-called charter municipalities ("Charter Municipalities") with terms expiring on March 31, 2004, unless sooner terminated, and all of which are substantially similar in content. The agreements provide PERC with approximately 200,000 tons per year of MSW. PERC receives approximately 20,000 tons per year of MSW from municipalities with whom PERC has short-term waste handling 7 10 agreements, 20,000 tons per year from commercial haulers and 10,000 tons per year from the spot market. As of December 31, 1996, the municipalities under the PERC long-term waste handling agreements pay an average tipping fee of $47.02 per ton to PERC for the disposal of their waste. Total waste processing revenues of PERC in 1996 were approximately $11,792,000 of which approximately 81.3% is attributable to MSW received from Charter Municipalities. The PERC long-term waste handling agreements with the Charter Municipalities are substantially similar to the Maine Energy long-term waste handling agreements, including the inclusion of "Guaranteed Annual Tonnages" and "put-or-pay" provisions and a variable tipping fee for "pass through" and change in law costs. Each PERC Charter Municipality has the right to receive a pro rata credit against tipping fees, which credits are known as "Performance Credits" and may be used to reduce future tipping fee payments at the option of the Charter Municipalities in lieu of cash payment. Performance Credits for 1995 in the amount of $1,417,567 were paid in 1996. The amount due for 1996 which will be paid during 1997 is approximately $619,000. On one year's notice, a PERC Charter Municipality may terminate its long-term waste handling agreement as of March 31, 1998, March 31, 2000 or March 31, 2002. If, as a result of such termination notices received from Charter Municipalities, the aggregate Guaranteed Annual Tonnage of non-terminating municipalities would fall below 180,000 tons, PERC may elect to terminate all waste handling agreements with Charter Municipalities. Currently no charter municipality has given any such notice for March 31, 1998. Effective March 31, 2004, Charter Municipalities, acting collectively, which have not previously terminated their PERC long-term waste handling agreements will have three options: (i) to purchase the PERC facility at its book value (as defined) as of March 31, 2004; (ii) to acquire, for $1.00, 50% of all "Distributable Cash" (defined as the revenues of PERC less expenses, amounts credited to reserve accounts and management fees) on or after April 1, 2004; or (iii) to extend the existing waste handling agreements for a period of 15 years. If the PERC Charter Municipalities are unable to agree on the option to select, the option selected by a majority of such municipalities, based upon Guaranteed Annual Tonnage, shall be the option selected. KTI BIO FUELS -- WOOD WASTE PROCESSING General The Company's Maine wood waste processing business is operated by the Company's subsidiary, KTI Bio Fuels, Inc. ("KTI Bio Fuels"). KTI Bio Fuels was organized in 1986 for the purpose of developing and operating a wood waste processing facility on a leased site in Lewiston, Maine (the "Lewiston Facility") to convert treated and untreated wood waste materials into woodchips used for disposal through use as boiler fuel. This facility also converts oversized bulky wastes, such as furniture and mattresses into a biomass boiler fuel. The principal source of revenue to KTI Bio Fuels is tipping fees from parties disposing of wood waste at the Lewiston Facility, which is supplemented by revenues from the sale of woodchips and recovered scrap metals. Maine Energy and PERC utilize woodchips produced by the Lewiston Facility as a supplemental fuel for their RDF combustion processes. In addition to Maine Energy and PERC, KTI Bio Fuels also sells its woodchips to third party biomass power plants in Maine. Lewiston Facility The Lewiston Facility occupies an approximately 9.7 acre site which is leased from an affiliate of the City of Lewiston for a term expiring 2015 . The facility has the capacity to process up to three hundred (300) tons per day of wood waste materials and consists of a waste processing building, including equipment for the magnetic separation of ferrous metals, and a large storage building where processed woodchips are stored. 8 11 Ownership A subsidiary of the Company owned a 75% ownership interest in the predecessor partnership, KTI Bio Fuels, L.P. The sole limited partner of KTI Bio Fuels L.P. was Maine Woodchips Associates, a Maine partnership ("Woodchips Associates"), which held the remaining 25% ownership interest in KTI Bio Fuels, L.P. In February 1997, the Company acquired the 25% interest owned by Maine Woodchips for 10,000 shares of its common stock and a five year warrant for 2,000 shares at $8.50 per share. Upon acquiring the ownership, KTI liquidated the partnership and moved the operation into its wholly owned subsidiary, KTI Bio Fuels KTI ASH RECYCLING, INC. On December 28, 1995 the Company, through its wholly owned subsidiary KTI Ash Recycling, Inc. ("KTI Ash"), entered into a series of agreements with Environmental Capital Holdings, Inc. ("ECH") and its subsidiary, American Ash Recycling Corp. ("AAR"). These agreements were subject to due diligence which was completed in the first quarter of 1996. Effective March 29, 1996, KTI Ash purchased a 60% interest as a limited partner in American Ash Recycling of Tennessee, Ltd., a Florida limited partnership ("AART"). The general partner is the previous owner of the Facility, American Ash Recycling Corp. of Tennessee, a Florida corporation, an affiliate of AAR. The partnership will carry on the business of the predecessor corporation. The Company has a priority on the annual distributions of earnings and cash flow from the Facility to the extent of 75% of the earning and cash flow generated until it receives $315,000 for each year on a cumulative basis. The purchase price consisted of $500,000 in cash and a short-term promissory note for $1,600,000 which was paid during 1996. The partnership owns an incinerator ash recycling plant in Nashville, Tennessee, which commenced operations in 1993. The plant recycles ash from a landfill owned by the city of Nashville and Davidson County. The Company also agreed to become a 60% limited partner of a partnership, American Ash Recycling of New England ("AARNE") to operate a similar facility in the State of Maine (the "Maine Partnership"). The Company's initial contribution to this partnership was $500,000. The Company has agreed to become a 60% limited partner in up to an additional eight facilities. The purchase price for each of these partnership interests is $2 million. ECH and AAR have a four year period to develop these eight facilities which ends December 31, 1999. Maine Energy executed an Ash Recycling Agreement with AARNE. In April 1996, Maine Energy negotiated a reduced disposal fee retroactive to January 1, 1996 with the third party ash landfill owner that disposes of all ash residue produced at the Biddeford facility. The cost per ton was reduced from $70 per ton to $46 per ton. This reduced fee will stay constant through 1997 and then be increased by inflation. Maine Energy disposed of 55,826 tons of ash in 1996 which produced a total savings of $1,339,824. KTI's share of this savings through its ownership of Maine Energy and AARNE was $936,604 for 1996. PERC also executed an Ash Recycling Agreement with AARNE. The Ash Recycling Agreement guarantees the delivery by PERC of a minimum of 35,000 tons of ash to AARNE. The processing fee is $43.50 per ton, including a trucking fee of $11.00 per ton. Under PERC's current ash recycling contract, the other party may retain PERC's ash disposal if its reduces its current price of $56.56 to match the $43.50 price contained in the AARNE Ash Recycling Agreement. The current ash recycling contract requires a one year notice period for termination, such notice will be given when AARNE receives such notice of its required federal, state and local approvals and permits. AARNE expects to complete construction of its facility within six months of receiving the necessary permits and approvals, at which time PERC will begin delivery of ash residue to AARNE. AAR's MWC proprietary ash recycling process recovers substantial quantities of metal contained in MWC ash residue and, after removing unburned materials, converts the remainder of the ash into a high grade aggregate which is sold for reuse in commercial construction, asphalt, concrete, and roadbed material applications. AAR's process recovers both ferrous and non-ferrous metals, which are cleaned to enhance their 9 12 value in the scrap metal markets. AAR's process also removes unburned combustibles through the utilization of proprietary air separation processes. With respect to the Maine Partnership and the other proposed partnerships, there can be no assurance that the intended projects would be economically feasible and, if feasible, that necessary financings and regulatory approvals would be obtained in order to construct and operate the proposed facilities. TIMBER ENERGY INVESTMENTS, INC. General TEII was formed in 1994 as a holding company, which ultimately owned a majority of common stock of Timber Energy Resources, Inc. ("TERI") and all of the outstanding stock of Timber Energy Plastics Recycling, Inc. ("TEPRI") and Timber Energy Trucking, Inc. ("TET"). Acquisition by KTI, Inc. On November 22, 1996, the Company acquired TEII from Continental Casualty Company (together with its subsidiaries, "CNA") and a group of ten individual investors. CNA sold its debt obligations of TEII (approximately $11.8 million at par plus accrued interest) and equity interests in TEII (73,500 shares, or 49%, of common stock and $50 million in preferred stock) to KTI for $1.85 million. The remaining 51% ownership interest was purchased from the group of ten individual investors for an additional approximately $290,000. As part of its purchase agreement with CNA, the Company has also agreed to obtain the release of CNA's reimbursement obligation to the letter of credit bank, Bank of Montreal ("BOM") which credit enhances the $13,400,000 of outstanding bonds. If the Company is unable to obtain the release of CNA of its obligation by August 21, 1997, then CNA has the option of reimbursing the Company $1.75 million of its purchase price and reversing the transaction. The Company has retained an investment banking firm to place the bonds and is confident it will be able to obtain the release of CNA of its obligation by the August 21, 1997 deadline. While the company believes that it will be able to release CNA of its obligation and that cash flow from the facility's operations will be adequate to cover future principal and interest payments on the bonds, there can be no assurance that these results will occur. Timber Energy Resources, Inc. General TERI is a Texas corporation organized in July 1984 for the purpose of constructing and operating bio-mass waste power plants. TERI owns and operates a 14 megawatt ("MW") steam generating, bio-mass waste-fired power plant (the "Telogia Facility") located on a 97 acre site in Telogia, Florida, which commended operations in 1988. The Telogia Facility is fueled with biomass wastes, such as residual waste from wood processing industries, clean construction and demolition wood debris, and non-recyclable paper products. Electricity generated by the Facility is sold to Florida Power Corporation under a long term power purchase agreement that expires on March 31, 2002 ("Florida Power PPA"). To assure a continuing, dependable and economical fuel supply, TERI constructed a chip mill in 1988 in Cairo, Georgia (the "Cairo Facility"), which commenced operations in December 1989. Pulpwood is processed for Stone under a "process or pay" contract. Bark trimmings from the Cairo Facility can provide up to 20% of fuel requirement for the Telogia Facility. In 1991, to further improve the supply and cost of fuel for the Telogia Facility, TERI constructed a waste paper densification line at the Telogia site. This line produces a densified fuel pellet from incoming feedstock, which has better burning characteristics than the undensified material. During 1996, approximately 80% of TERI's revenue was derived from the sale of electricity to Florida Power, with the majority of the remainder in the form of tolling fees paid by Stone and from waste bark sales to third parties. 10 13 During 1996, the Telogia Facility processed approximately 150,000 tons of wood waste and 40,000 tons of waste paper, and generated approximately 120,000 megawatt-hours of electricity, which represented 95% and 97%, respectively, of its annual capacity. The Cairo Facility processed approximately 310,000 tons of virgin wood, which represented 77% of its single shift annual capacity, and produced approximately 276,000 tons of wood chips and approximately 35,000 tons of bark trimmings. Timber Energy Plastic Recycling, Inc. TEPRI recycles post consumer low density plastic waste into products that are sold to manufacturers of plastic products at its facility which is located in Tuscaloosa, Alabama (the "Tuscaloosa Facility"). Timber Energy Trucking, Inc. At the date of acquisition, TET was inactive. In December 1996, KTI renamed TET "Power Ship Transport, Inc." and it commenced handling of Manner's transport requirements. MARKETING Most of the Company's current marketing activity is focused on contract acquisition for biomass, municipal solid and specialty waste materials supply to the Maine Energy facility, the Lewiston Facility, the Timber Facilities and the PERC facility. The Company currently is soliciting waste handling agreements for the Maine Energy facility from municipalities and commercial waste generators in Maine and in nearby areas such as northern Massachusetts and southern New Hampshire. The Company intends to enter into contracts of from one (1) to six (6) years duration in order to stabilize supply while retaining the ability to take advantage of any upward swings in regional disposal fees. The Company has recently taken additional marketing responsibilities at PERC under which the Company will attempt to fill the approximately 75,000 ton annual capacity of PERC currently being utilized by combusting supplemental fuels. The Company intends on utilizing the spot market for MSW to fill the available capacity at PERC. Disposal of oil soaked wastes, industrial wastes, out-dated pharmaceuticals, cosmetics, and other commercial wastes, known generally as "specialty wastes," is another large potential market for the Company. The MDEP has granted a permit to Maine Energy that enables the Maine Energy facility to accept a broad variety of specialty wastes for disposal by combustion. The Company believes that tipping fees on specialty wastes are substantially higher per ton than MSW delivered on a spot market basis and therefore provides improved operating margins on Maine Energy's available capacity. The Company markets its specialty waste capacity through retail brokers of such materials who sign contracts with a wholly owned subsidiary, KTI Specialty Waste, Inc. ("KTI Specialty"). On October 18, 1996 KTI Specialty Waste executed an Operating Agreement with Pine Tree Waste, Inc. ("Pine Tree"). Under the Agreement, the Company and Pine Tree established Specialties Environmental Management Company, LLC, a Maine Limited Liability Company ("SEMCO"). SEMCO will provide services on a retail basis to municipal, commercial and industrial customers to dispose of certain solid and liquid wastes in the New England Region, concentrating on: (a) premium priced unusual or difficult to dispose of wastes; (b) in and out of jurisdiction municipal solid waste; and (c) construction and demolition waste, including treated and untreated wood waste. SEMCO has entered into a contract with Maine Energy to dispose of acceptable material at Maine Energy's Biddeford facility for a term of five years which may be extended for an additional five year period at set tipping fees, adjusted annually for changes in the consumer price index. The Company is a 55% owner of the joint venture and currently utilizes SEMCO as it's retail broker to handle all of the supply of specialty waste into Maine Energy which is delivered directly by the waste generators. The Company also intends to pursue either the acquisition of or operational responsibility for existing, financially-troubled waste-to-energy or waste processing and recycling facilities with the goal of improving the operational efficiencies of such facilities utilizing its successful experiences with the Maine Energy and PERC facilities. The Company's acquisition of TEII is the first example of this strategy. The Company currently is working with several additional institutions and companies which own or have financed such facilities in an attempt to structure transactions regarding their respective facilities. 11 14 At the Lewiston Facility, most contracts have durations of one (1) year or less. Most of the wood waste materials processed by the facility are acquired as a result of bids on specific demolition or disposal projects concentrated in Maine or in nearby states such as New Hampshire, Massachusetts and Connecticut. In order to mitigate the effects of competition in these areas from companies that operate portable wood chipping equipment, KTI Bio Fuels has expanded its marketing staff and entered the oversized bulky waste ("OBW") market. KTI Bio Fuels is processing OBW such as mattresses, box springs, furniture, wooden pallets, and other similar waste materials, which is shred and blended with other process materials to be delivered for ultimate disposal through incineration at the PERC facility. In marketing the services of the Lewiston Facility, the Company emphasizes its integrated waste handling capabilities to ensure wood waste producers such as electric and telephone utilities, railroads and other large scale wood waste generators that their waste will be processed and completely destroyed through ultimate incineration at either the Maine Energy or PERC facilities or at other approved incinerator facilities that currently are doing or may do business with KTI Bio Fuels. The Company's integrated disposal facilities provide wood waste or OBW generators with disposal procedures that eliminate many potential future liabilities associated with the disposal of wood wastes by conventional means such as landfilling. Management of the Company believes that if landfill capacity becomes scarcer, then the availability of wood waste from within Maine for use by the Lewiston Facility may increase. Through direct marketing and broker affiliations, the Company plans to secure new regional accounts. Manner has a marketing staff of seven commission based recycled plastic brokers. This staff identifies industrial customers with scrap plastic resins which can be utilized in value added recycling plants. Manner manages the movement of all material through internal truck brokers. Manner is complementing the marketing personnel at TEPRI to increase the throughput of raw materials and market the recycling plastic pellets produced by TEPRI. Manner management is working closely with the Company's senior management to develop an overall marketing strategy for the Company in the plastics recycling industry. The Telogia Facility historically marketed its biomass waste capacity to brokers of waste materials resulting from the chipping of pulpwood. The Telogia Facility has been receiving the biomass waste (bark mulch and wood fines) from the Cairo Facility. Due to the requirement of transporting the material approximately 60 miles to the Telogia Facility from the Cairo Facility, this fuel supply actually costs TERI approximately $8 per ton. TERI during 1996, paid to third parties between $5 and $10 per ton for its fuel supply when the cost of transporting the material is taken into account. The Company is currently directly marketing this capacity to generators of residual waste from wood processing industries, clean construction and demolition wood debris, and non-recyclable paper products. The Company believes its marketing efforts will produce biomass wastes for the Telogia Facility which will be received on a tipping fee basis as a result of its direct marketing program. The Company will initially attempt to bring the net costs of fuel acquisition to zero for the Telogia Facility and ultimately look to produce net revenues from the tipping fee based material. As the Telogia Facility becomes less dependent on the Cairo Facility for fuel supply, the Cairo Facility biomass waste particularly bark mulch can be marketed for sale to third parties producing additional revenues for the Company. COMPETITION The Company experiences significant competition in each of its waste handling markets. Maine Energy and PERC compete with landfills and several waste-to-energy facilities and municipal incinerators in Maine and the New England region. However, the volume of MSW produced in the New England region has historically increased and the Company believes that it is likely to continue to increase while the availability of landfills for waste disposal is likely to continue to decline. Even though the implementation of recycling programs to reduce MSW has increased, the Company believes that there are limits on the percentage of MSW that ultimately can be recycled and that alternatives for disposal of MSW will continue to be needed. In addition, the Company has begun to focus on the industrial waste market as an ancillary source of waste for the Maine Energy and PERC facilities and as a means of reducing its reliance upon the MSW market. 12 15 Specifically, KTI Specialty and SEMCO have been formed to acquire specialty waste products for these facilities. The Company believes that the RDF technology employed by the Maine Energy and PERC facilities compares favorably with the mass-burn technology utilized by many other waste-to-energy facilities. In RDF systems, MSW is preprocessed to remove various non-combustible items which are recycled or landfilled. This results in a significantly reduced volume of ash residue, thereby lowering ultimate disposal costs, and is also complementary to current recycling programs. The Lewiston Facility competes with landfills and operators of portable wood chipping equipment. KTI Bio Fuels is, however, with Maine Energy and PERC, part of an integrated waste handling company which both processes wood waste into wood chips and also destroys it through combustion. The Company believes that this integrated process will become increasingly attractive to wood waste generators such as electric and telephone utilities who are seeking a means of eliminating many potential environmental liabilities associated with traditional means of landfill disposal. The Telogia facility competes for biomass fuel supply with paper companies which employ on site power generation. As the Company moves toward tipping fee based waste fuels this facility's dependence on the current fuel supply will be decreased. The facility is permitted to combust 100% of such tipping fee based fuels. Competition for tipping fee based material will principally come from landfills whose cost structure is greater than that of the Telogia Facility. Local landfill costs for biomass waste products range from $15 to $25 per ton, while the cost of processing the material ranges from $5 to $8 per ton at the Telogia Facility. Competition for the Company's ash recycling subsidiaries is primarily from ash landfills. The Company believes its ash recycling facilities will be able to compete favorably based on historical prices charged by these landfill operators. Manner competes with several other recycled plastic brokers and direct marketing from plastic recycling plans for the post industrial plastic scrap and with materials recovery facilities for post consumer plastics. The Company believes that Manner will continue to be competitive and will be able to increase revenues and maintain its operating margin as a result of its knowledge of the plastic recycling market and its reputation and relationship with its customer base. CUSTOMERS Maine Energy, TERI and PERC are contractually obliged to sell all of the electricity generated at their facilities to Central Maine, Florida Power and Bangor Hydro, respectively. The loss of these electricity customers would have a material adverse affect on the business and financial condition of the Company. Maine Energy and PERC, along with other approved incinerator facilities, purchase the majority of the output of woodchips from KTI Bio Fuel's Lewiston Facility for use as a boiler fuel supplement to their combustion processes. The Company does not believe that there will be a substantial decline in the amount of woodchips required by the Maine Energy and PERC facilities in the foreseeable future. The Nashville Facility receives its entire supply of MWC ash from the City of Nashville as a result of the operation of the Nashville Thermal Facility. If the City of Nashville reduces the current level of appropriation or the Nashville Thermal Facility fails to continue to operate there would be a material adverse affect on the business and financial condition of the Nashville Facility. Manner markets the materials acquired from its venders to plastic recycling plants throughout the United States, including TEPRI. RAW MATERIALS The raw material demands of the PERC facility currently are met mainly by PERC's long-term waste handling agreements with approximately 200 municipalities in Maine. Maine Energy received 30.4% of its raw materials in 1996 from 18 Maine municipalities under long-term waste handling agreements and the majority 13 16 of the balance from commercial and private waste haulers and municipalities with short-term contracts. Maine Energy and PERC are currently exploring other waste material opportunities in order to lessen their reliance on the MSW spot market, including pursuing agreements with commercial waste generators and entering new specialty waste markets. The Company believes that diversifying its raw materials base could be an important factor in gaining stability in the Company's waste material requirements if the MSW market declines due to recycling or other factors. The Company currently has not experienced a decline in the amounts of MSW raw material that it obtains from its current market areas. Because of its attractive tipping fees in recent years, Maine Energy has consistently received and processed waste at its nominal capacity. KTI Bio Fuels mainly relies on short-term treated and untreated wood waste disposal agreements for its raw materials requirements. Most of KTI Bio Fuel's wood waste disposal agreements have durations of one (1) year or less, with many of such agreements resulting from bids on specific demolition or disposal projects concentrated in Maine or in nearby states such as New Hampshire, Massachusetts and Connecticut. KTI Bio Fuels is exploring additional wood waste markets in other nearby states such as New York and New Jersey and is also actively seeking additional sources of chemically treated wood waste and OBW for processing at the Lewiston Facility, which would not only expand its raw materials base but also would allow KTI Bio Fuels to charge higher disposal fees for such materials. The Telogia Facility utilizes biomass fuels which are a by-product of the paper pulp woodchip industry as its raw material. The Company plans to supplement and ultimately replace this raw material with tipping fee based biomass waste, such as construction and demolition debris and non-recyclable paper products. Manner acquires recyclable post industrial and post consumer material from plastic manufacturers and materials recycling facilities. AART receives ash produced as a by-product of the combustion process at the Thermo Facility, from the City of Nashville. SEASONALITY The MSW market in Maine Energy's and PERC's market areas is seasonal, with one-third more MSW generated in the summer months than is generated during the rest of the year. Maine Energy and PERC rely on the spot MSW market and waste from commercial sources as needed to meet their waste material needs over that delivered pursuant to agreements with municipalities, and charge tipping fees based on prevailing prices in their respective market areas. The Company believes that its planned diversification of the waste material used by the Maine Energy and PERC facilities, such as combusting specialty waste products, will lessen any seasonality supply problems experienced by the facilities. KTI Bio Fuels is also affected by seasonal factors, as wood waste materials from construction and demolition sites in its market areas are also much more widely available in the warmer months of the year, when construction and demolition projects usually occur. None of the Company's other facilities is affected by seasonal factors. GOVERNMENTAL REGULATION Waste Handling General The operations of the Company's waste handling businesses are subject to extensive governmental regulations at the federal, state and local levels. The Company believes that its operations are in material compliance with existing laws and regulations material to its business. The laws, rules and regulations which govern the waste handling businesses are very broad and are subject to continuing change and interpretation. No assurance can be given that the Company will be able to obtain or maintain the licenses, permits and approvals necessary to conduct its current business or possible future expansions of its business. The failure to obtain or maintain requisite licenses, permits and approvals or otherwise to comply with such existing or future laws, rules and regulations or interpretations thereof could have a material adverse effect on the Company's 14 17 operations. The following discussion of statutes, regulations and court decisions are brief summaries, are not intended to be complete, and are qualified in their entirety by reference to such statutes, regulations and court decisions. Energy and Utility Regulation Each of the Maine Energy facility, the PERC facility and the Telogia facility has been certified by the Federal Energy Regulatory Commission as a "qualifying small power production facility" under the Public Utility Regulatory Policies Act of 1978 ("PURPA") and regulations promulgated thereunder, which grants an exemption for such facilities from most federal and state laws governing electric utility rates and financial organization. A qualified small power production facility is exempt from the Public Utility Holding Company Act of 1935 and from certain state laws and regulations governing electric utility rates and financial organization, and, the rates charged by Maine Energy, PERC and TERI for their acceptance of waste at their respective facilities are not subject to regulation under existing state and federal law. PURPA requires that electric utilities purchase electricity generated by qualifying facilities at a price equal to the purchasing utility's full "avoided cost." Avoided costs are defined by PURPA as the incremental costs to the electric utility of electric energy or capacity or both which, but for the purchase from the qualifying facility, such utility would generate itself or purchase from another source. There are certain risks that the terms of such power purchase agreements may be altered or changed adversely to Maine Energy, PERC and TERI, primarily due to a bankruptcy of the contracting utility. These risks are particularly heightened, as to Maine Energy and PERC, at the present time because of the existence of excess energy capacity in the New England area. The rates in the Maine Energy and PERC agreements were established based upon predictions made more than ten years ago as to what each of Central Maine and Bangor Hydro would spend to provide the same energy and capacity as Maine Energy or PERC, as applicable, over the terms of the power purchase agreements. Contrary to the assumptions built into the contract prices, energy demand did not grow as fast as predicted and oil prices did not increase, but rather decreased. Central Maine and Bangor Hydro may thus currently purchase energy and capacity on the open market for significantly less than they are obligated to pay Maine Energy and PERC, respectively, under the power purchase agreements. Flow Control One response by state and local governments to the increasing problems associated with solid waste disposal was the enactment of flow control ordinances which generally require that all waste generated in the municipality enacting the ordinance be directed to a specified disposal site. The purpose of these ordinances was to control the processing of solid waste from the enacting municipalities as a means of controlling waste tipping fee revenues which were relied upon as a means to support the financing and operation of solid waste disposal facilities. The enactment of flow control ordinances was authorized pursuant to Maine law and most of the municipalities with whom Maine Energy and PERC executed long-term waste handling agreements enacted such an ordinance. From the municipality's perspective, having such an ordinance in place was a corollary to its agreement to a "put-or-pay" waste handling agreement which requires the municipality to pay a guaranteed annual minimum fee to the waste-to-energy facility regardless of the actual amount of MSW delivered to the facility. In May 1994, in C&A Carbone, Inc. v. Town of Clarkstown, the United States Supreme Court struck down, as an unlawful violation of the "commerce clause" of the United States Constitution, a flow control ordinance enacted by the Town of Clarkstown, New York. The Company does not believe that loss of flow control provisions would adversely impact operations at either the Maine Energy facility or the PERC facility. The long-term waste handling agreements for such facilities contractually require the municipalities to pay for waste disposal whether or not the waste is delivered. Therefore, the municipalities have little financial incentive to pay for the disposal of MSW at alternative sites even at lower tipping fees. More significantly, however, the tipping fees charged by both Maine Energy and PERC are less than the long-term tipping fees currently being charged by landfills and other waste incinerators in the region. In addition, the closing of 15 18 landfills and the remoteness of Maine from urban areas means that there are few disposal alternatives available to Maine municipalities. Finally, as transportation costs are a significant part of total disposal costs, it is unlikely that existing disposal facilities located outside of the Maine Energy or PERC facility waste generation areas would be able to lower their tipping fees to a point that would justify the incurrence of the additional transportation expense. The Company believes that comparatively low tipping fees at the Maine Energy and PERC facilities will make them attractive alternatives to waste generators who may be free to look elsewhere if flow control ordinances restricting their disposal opportunities become unenforceable. Environmental Laws The Company's waste-to-energy, ash recycling and wood processing business activities at its facilities and its transportation and waste disposal business activities are regulated pursuant to federal, state and local environmental laws. Federal laws such as the Clean Air Act and the Clean Water Act and their state analogs govern discharges of pollutants from waste-to-energy facilities to air and water, and other federal, state and local laws such as the Resource Conservation and Recovery Act of 1976 ("RCRA") comprehensively govern the generation, transportation, storage, treatment and disposal of solid waste. These environmental regulatory laws, and others such as the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), may make the Company potentially liable in the event of environmental contamination associated with its activities, facilities or properties. The environmental regulatory laws and regulations or licenses and permits issued thereunder also establish operational standards, including specific limitations on emissions of certain air and water pollutants. Failure to meet these standards could subject the facilities to enforcement actions and, unless excused by particular circumstances, fines or other liabilities. Standards established pursuant to the environmental regulatory laws and governmental policies governing their enforcement may change. For example, new technology may be required or stricter standards may be established for the control of discharges of air or water pollutants or for solid waste or ash handling and disposal. Such future developments could affect the manner in which the Company operates its facilities and could require significant additional capital expenditures to achieve compliance with such requirements or policies. In the case of Maine Energy and PERC, however, in most circumstances all or a portion of these compliance costs may be recovered from the communities with long-term waste handling agreements as a component of the variable portion of the tipping fee pursuant to change-in-law provisions of such agreements. CERCLA, and other environmental remediation laws, may subject the Company to strict joint and several liability for the costs of remediating contamination associated with contaminated sites, including landfills, at which there has been disposal of residue or other waste handled, transported or processed by the Company and real property owned by the Company which may be contaminated. The Company has no information that might indicate that it may be a potentially responsible party under CERCLA or any other environmental remediation law. Timely applications have been made for air emissions permits for the Maine Energy and PERC facilities. Under Maine regulatory law, a permit continues in effect provided that a timely application for renewal is made. Due to protracted delays in processing the application at the state level, MDEP has elected to defer its decision until such time as the new Title V Clean Air Act Standards are promulgated. In Maine Energy's case, the Title V application was submitted in compliance with state mandate during August, 1996. Thereafter, in December, 1996 a public meeting was convened by MDEP to delineate the Title V application, and to address the favorable results of an independently conducted health risk assessment pertaining to Maine Energy. Final adjudication is expected during mid to late 1998. Management of the Company believes that Maine Energy is in compliance with the federal Clean Air Act, its implementing regulations and all other applicable regulations and, therefore, anticipates that the permit will be renewed following the hearing. There can be no assurance, however, that new conditions will not be imposed in the permit or that the permit will be renewed. PERC is not yet required to file a new application in conformity with the new Clean Air Act requirements. 16 19 Management of Maine Energy, PERC and TERI believe that relationships with Maine and Florida environmental regulators is good and there are no pending or, to such management's knowledge, any threatened enforcement actions. The Company, which is responsible for operating the Maine Energy and TERI facilities, monitors applicable environmental standards and evaluates its selection of technology to ensure that applicable standards are being met. The United States Supreme Court recently determined in City of Chicago v. Environmental Defense Fund, a case interpreting provisions of RCRA, that the generation of ash residue from waste-to-energy facilities in the incineration process is not exempt from hazardous waste regulation. The Company believes that the Supreme Court's decision will have no material adverse effect on operations at the Maine Energy and PERC facilities. The ash produced at the Maine Energy and PERC facilities is and always has been tested for hazardous wastes and has generally met the requirements of nonhazardous material according to the regulations implementing RCRA promulgated by the EPA since their adoption. Any ash residue that is designated as hazardous material is disposed of according to regulations governing the disposal of such material. Moreover, the Company's ash residue is disposed in landfills segregated to accept ash residue only and, to the Company's knowledge, the landfill facilities at which the ash residue is disposed meet or exceed the applicable standards for such facilities under RCRA. There can be no assurance, however, that the current regulations governing the testing and disposition of ash residue will not be modified and made more stringent and require operational or technological adjustments at the Maine Energy and PERC facilities, which adjustments could have a material adverse effect on the operation of such facilities and the financial viability or profitability of the Company. Maine Energy's waste handling agreements with its host communities of Biddeford and Saco prescribe a set of standards for noise, odor and ash emissions from the Maine Energy facility and impose penalties in the event of non-compliance. Since the Maine Energy facility is sited directly in the commercial area of Biddeford, the Company has implemented stringent operational practices to mitigate the escape of odors from the Maine Energy facility including the use of air lock doors at the waste-hauling trucks' entrance to, and exit from, the facility's tipping floor. Management believes that the Maine Energy facility has been in compliance with noise, odor and ash emission standards. In order to operate the Lewiston Facility, KTI Bio Fuels is required to maintain a site location and solid waste permit issued by MDEP and a junkyard permit issued by the City of Lewiston, Maine. The site location and solid waste permit has expired, but a timely application for the renewal of same was filed and the Lewiston Facility continues to operate under the grandfather provisions of Maine law. Maine state law and an ordinance of the City of Lewiston forbid the operation of "junkyards" without obtaining a permit. The nature of the Lewiston Facility's operation puts it within the definition of a junkyard. The permit is issued on a yearly basis and local officials have the authority to impose conditions in the permit consistent with public health and safety. Renewal is subject to a public hearing. The KTI Bio Fuels permit contains numerous special conditions, the majority of which were inserted in response to two fires that occurred at the Lewiston Facility, including, without limitation, restrictions on the number and size of wood waste piles which may be maintained on the premises and the requirement that fire hydrants and an additional access road to the Lewiston Facility from the main road be provided. The permit was most recently renewed on February 4, 1997. The Company believes that the Lewiston Facility is in compliance with the provisions of the permit. TERI's biomass-to-energy facility applied for renewal of its federal NPDES and state of Florida Industrial Wastewater permits during March, 1996 in conformance with both policy and schedule. Likewise, TERI submitted its Title V Air Permit application to the Florida Department of Environmental Protection ("FDEP") in June, 1996. At this juncture, a backlog of other applications at FDEP has prevented the regulatory authorities from acting on either application. Accordingly, the current permits and conditions remain in effect until further notice. TERI is considered to be in substantial compliance with its existing Air/Operating, NPDES and Industrial Wastewater Permits. The Company's ash recycling subsidiary, AART, is required to maintain permits issued by the State of Tennessee Department of Environmental and Conservation. These permits allow for the recovery of ferrous 17 20 and non-ferrous metals from the ash residue, as well as processing the ash residue for reuse as an asphalt aggregate. These permits were issued on October 9, 1992 and January 23, 1993, respectively and are "Permits-by-Rule", which are valid from the time of issuance and continue to be in effect as long as the facility is in compliance with these permits. The facility also maintains a Metropolitan Health Department Pollution Control Division Air Pollutant Service Operating Permit which was renewed on December 31, 1996 and is subject to an annual renewal. DISCONTINUED OPERATIONS During 1996, the Company disposed of its computer services segment which was composed entirely of Convergent Solutions, Inc. ("CSI"). The sale was completed in two separate transactions. On July 26,1996, certain assets and liabilities of CSI were sold to Ciber, Inc. for $5,000,000. Also, on July 29, 1996, after the transfer of certain of CSI's remaining assets and liabilities to the Company, all of the outstanding common stock of CSI was sold to certain members of its management for $5,000. In addition, the Company has notes receivable from the buyers aggregating $444,643 at December 31, 1996. The notes receivable are due on July 29, 2000. EMPLOYEES As of December 31, 1996, the Company had eighteen (18) full time employees on its corporate staff, eighty-one (81) full time employees at the Maine Energy facility, fourteen (14) full time employees at the Lewiston Facility, sixty-seven (67) full time employees at the TEII facilities and eight (8) at Manner. The employees at the PERC and Nashville facilities are not Company employees. None of the Company's employees are covered by collective bargaining agreements and the Company considers its employee relations to be good. FORWARD-LOOKING STATEMENTS All statements contained herein and in "Management's Discussion and Analysis of Financial Condition and Results of Operations" that are not historical facts, including but not limited to statements regarding the Company's current business strategy, prospective joint ventures, and plans for future development and operations and predictions of future tipping fees, management fees payable to KTI and cash flow and its uses, are based upon 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 differ materially are the following: (i) the availability of sufficient capital to finance the Company's business plan and its other capital needs on terms satisfactory to the Company; (ii) competitive factors such as availability of less expensive waste disposal outlets or expanded recycling programs that may significantly reduce the amount of waste products available to the Company's facilities; (iii) restructuring of the Company's power purchase agreements with Bangor Hydro; (iv) changes in labor, equipment and capital costs; (v) the ability of the Company to consummate any contemplated joint ventures and/or restructuring on terms satisfactory to the Company; (vi) changes in regulations affecting the waste disposal and recycling industries; (vii) the ability of the Company to comply with the restrictions imposed upon it in connection with its outstanding indebtedness; (viii) future acquisitions or strategic partnerships; (ix) general business and economic conditions; and (x) other factors described from time to time in the Company's reports filed with the Securities and Exchange Commission. 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. ITEM 2. PROPERTIES MAINE ENERGY FACILITY The Maine Energy facility occupies an approximately 9.1 acre site owned by Maine Energy in the City of Biddeford, Maine and borders the west bank of the Saco River. 18 21 PERC FACILITY The PERC facility occupies an approximately 40.3 acre site owned by PERC in the Town of Orrington, Maine. LEWISTON FACILITY The Lewiston Facility occupies an approximately 9.7 acre site which is leased from South Park Company, an affiliate of the City of Lewiston, Maine, under a long-term ground lease for a term expiring in 2015. Current annual rental charges are approximately $16,000. TERI FACILITY The TERI Facility occupies an approximately 97 acre site under long term lease from St. Joseph Land and Development Company in Telogia, Florida for a term expiring November 30, 2009 and owns a 60 acre site in Cairo, Georgia. The current annual rent charges for the Telogia Facility are approximately $58,000. TEPRI FACILITY The TEPRI Facility occupies a site under a long-term lease from Wenoha Corporation in Tuscaloosa, Alabama for a term expiring May 31, 1998, with annual options to renew for unlimited number of annual extension periods. If the lease is extended, the annual rent would increase by 4% for each option period. Current annual rent charges are approximately $73,800. NASHVILLE FACILITY The Nashville Facility occupies a site provided by the City of Nashville adjacent to the City's ash landfill as part of its contractual relationship with AART. CORPORATE OFFICES The Company's executive offices are located in Guttenberg, New Jersey. The aggregate floor area of these facilities is approximately 4,500 square feet. The lease provides for a base annual rent of approximately $96,000, plus a proportionate share of the increase of expenses such as real property taxes, utilities and maintenance costs. The lease on these offices expires on September 30, 2001 and is renewable for an additional five year term. The lease is from an affiliated party. See "Certain Relationships and Related Transactions -- Transactions with Nicholas Menonna, Jr. and Martin J. Sergi." The Company also maintains offices in Saco, Maine consisting of approximately 3,000 square feet of leased office space. The lease provides for an annual rental of approximately $26,300 which increases 5% annually during the term of the lease. The lease expires on March 31, 1999 and is renewable through 2003. ITEM 3. LEGAL PROCEEDINGS Anthony Buonaguro, a former officer of the Company, has instituted arbitration proceedings in New York, New York against the Company for alleged breaches of an employment agreement between Mr. Buonaguro and the Company more than five years prior to the filing of the arbitration proceedings. The amount of damages requested is approximately $220,000. The Company believes that it has meritorious defenses against this claim and will defend the matter. A fatality of an employee of PERC's operator, ESOCO, occurred when he was working under a conveyor belt in the plant. His widow has instituted a lawsuit against various parties. Her lawyer recently has moved to join the Company to the suit as additional defendants on the basis that the Company is an owner of PERC. PERC's insurance carrier has accepted the defense of this lawsuit. All actual owners of record are additional insureds. Under the operations and maintenance agreement with the operator, ESOCO, such operator is obligated to defend the Company. 19 22 The Company is a defendant in certain other law suits alleging various claims incurred in the ordinary course of business, none of which, either individually or in the aggregate, the Company believes will have a material adverse effect on the Company. Management of the Company does not believe that the outcome of the foregoing matters, individually or in the aggregate, will have a materially adverse effect on the Company's financial condition, cash flows or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCK HOLDER MATTERS The Company became a public company on February 8, 1995. From February 8, 1995, until February 14, 1996, the Common Stock was traded in the over-the-counter market on the NASDAQ SmallCap Market under the symbol KTIE. Since February 14, 1996, the Company's Common Stock has traded on the NASDAQ National Market tier of The NASDAQ Stock Market under the symbol KTIE. The following table sets forth the high and low sale prices for the Common Stock for the periods indicated, as reported on the NASDAQ Small Cap Market and the NASDAQ National Market System.
HIGH LOW PRICE PRICE ----- ----- February 8, 1995 through March 31, 1995............................. $6 3/8 5$1/4 April 1, 1995 through June 30, 1995................................. 6 1/8 5 3/8 July 1, 1995 through September 30, 1995............................. 8 7/8 5 3/8 October 1, 1995 through December 31, 1995........................... 9 8 1/4 January 1, 1996 through March 31, 1996.............................. 8 5/8 6 April 1, 1996 through June 30, 1996................................. 7 3/8 6 1/4 July 1, 1996 through September 30, 1996............................. 8 1/2 6 1/2 October 1, 1996 through December 31, 1996........................... 11 1/4 7
On March 27, 1997, the last reported sale price of the Common Stock as reported on the NASDAQ National Market System was $8.625 per share. There were 180 record owners of the Company's 6,862,032 outstanding shares of Common Stock as of March 27, 1997. The Company has not paid cash dividends on the Common Stock and has no plans to begin paying cash dividends in the immediate future. Furthermore, provisions of certain of the Company's debt instruments restrict the payment of cash dividends. A 5% stock dividend was declared, payable on March 28, 1997 to stockholders of record on March 14, 1997. Free cash flow, if any, will be used for strategic opportunities and to reduce debt. 20 23 ITEM 6. SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
YEAR ENDED DECEMBER 31, -------------------------------------------------- 1996 1995 1994 1993 1992 -------- -------- -------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA Revenues: Operating revenues............................ $ 35,305 $ 38,083 $ 37,783 $11,290 $ 6,287 Sale of capacity, net......................... 33,203 -------- -------- -------- ------- ------- Total revenues...................... 68,508 38,083 37,783 11,290 6,287 Total costs and expenses...................... 33,603 38,459 37,615 10,740 7,691 Equity in net income (loss) of partnerships... 333 335 324 133 (661) -------- -------- -------- ------- ------- Income (loss) from continuing operations before minority interest, income taxes and extraordinary item.......................... 35,238 (41) 492 683 (2,065) Minority interest(1).......................... (18,610) (1,287) (1,920) -------- -------- -------- ------- ------- Income (loss) from continuing operations before income taxes and extraordinary item........................................ 16,628 (1,328) (1,428) 683 (2,065) Income taxes.................................. -- 65 -------- -------- -------- ------- ------- Income (loss) from continuing operations before extraordinary item................... 16,628 (1,393) (1,428) 683 (2,065) Loss from discontinued operations............. (714) (86) Extraordinary item -- net..................... (2,247) 148 -------- -------- -------- ------- ------- Net income (loss)............................. $ 13,667 $ (1,331) $ (1,428) $ 683 $(2,065) ======== ======== ======== ======= ======= Per share data: Primary: Income (loss) from continuing operations.... $ 2.61 $ (0.26) $ (0.42) $ 0.19 $ (0.60) Loss from discontinued operations........... (0.11) (0.02) -------- -------- -------- ------- ------- Income (loss) before extraordinary item..... 2.50 (0.28) (0.42) 0.19 (0.60) Extraordinary item.......................... (0.35) 0.03 -------- -------- -------- ------- ------- Net income (loss)........................... $ 2.15 $ (0.25) $ (0.42) $ 0.19 $ (0.60) ======== ======== ======== ======= ======= Weighted average number of shares used in calculating earnings per share(2)(3)........ 6,360 5,264 3,409 3,630 3,435 ======== ======== ======== ======= ======= Fully-diluted: Income (loss) from continuing operations.... $ 2.46 $ (0.26) $ (0.42) $ 0.19 $ (0.60) Loss from discontinued operations........... (0.10) (0.02) -------- -------- -------- ------- ------- Income (loss) before extraordinary item..... 2.36 (0.28) (0.42) 0.19 (0.60) Extraordinary item.......................... (0.32) 0.03 -------- -------- -------- ------- ------- Net income (loss)........................... $ 2.03 $ (0.25) $ (0.42) $ 0.19 $ (0.60) ======== ======== ======== ======= ======= Weighted average number of shares used in calculating earnings per share(2)(3)........ 6,926 5,264 3,409 3,630 3,435 ======== ======== ======== ======= ======= BALANCE SHEET DATA Total assets.................................. $123,075 $132,906 $131,383 $21,171 $11,938 Debt.......................................... 39,073 115,376 127,348 15,348 6,148 Minority interest............................. 10,872 1,840 553 Deferred revenue.............................. 41,250 Shareholders' equity (deficit)................ 25,705 6,881 (3,911) (1,905) (3,594)
- --------------- (1) Minority interest for the year ended December 31, 1994 includes $1,367,000 of preacquisition earnings of Maine Energy. (2) Earnings (loss) per share have been determined based on the weighted average number of shares outstanding as well as the dilutive effect of outstanding options and warrants to purchase common stock, In addition, an adjustment for shares issued during the twelve month period prior to the Merger has been made for all periods presented whether dilutive or antidilutive. (3) All periods reflect the effect of a 5% common stock dividend declared by the Board of Directors on February 28, 1997 and payable March 28, 1997. 21 24 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company is a holding company deriving its revenues from its subsidiaries and PERC, an affiliate, of which it owns less than 50% and which is accounted for under the equity method of accounting. Prior to 1994, Maine Energy also was accounted for under the equity method of accounting. On September 16, 1994 and May 3, 1996, the Company acquired an additional 40.38% and 23.77%, respectively, partnership interest in Maine Energy bringing its ownership interest to 74.15% at December 31, 1996. Because the Company's controlling interest in Maine Energy was acquired in two separate transactions, the consolidated statements of operations for the year ended December 31, 1994 include the operations of Maine Energy from January 1, 1994 and include adjustments to eliminate minority interest and the pre-acquisition earnings of Maine Energy attributable to the partnership interest acquired on September 16, 1994. For presentation purposes, this section will discuss and analyze, in addition to the Company's results, the results of PERC. The Company, since its inception, has developed and managed waste facilities. The Company's subsidiary, Maine Energy, and its affiliate, PERC, both take in municipal solid waste and convert it to a fuel which is consumed in the generation of electric power. A subsidiary of the Company is the operator of Maine Energy on a cost plus basis and a co-operator of PERC on an annual fee basis. KTI BioFuels processes treated and untreated waste wood materials into woodchips which are then used as a supplemental fuel by Maine Energy and PERC or sold to other parties. On November 22, 1996, the Company acquired TEII from CNA and a group of ten investors. CNA sold its debt obligations (approximately $11.8 million at par plus accrued interest) and equity interest (73,500 shares, or 49%, of common stock and $50 million in preferred stock) to KTI for $1.85 million. The remaining 51% ownership interest was purchased from a group of ten investors for an additional approximately $290,000. As part of its purchase agreement with CNA, the Company has also agreed to obtain the release of CNA's reimbursement obligation to the letter of credit bank, BOM which credit enhances $13,400,000 of outstanding bonds. If the Company is unable to obtain the release of CNA from its obligation by August 21, 1997, then CNA has the option of reimbursing the Company $1.75 million of its purchase price and reversing the transaction. The Company has retained an investment banking firm in connection with the bonds and is confident it will be able to obtain the release of CNA of its obligation by the August 21, 1997 deadline. While the Company believes that cash flow from the facility's operations will be adequate to cover future principal and interest payments on the bonds, there can be no assurance that this will occur. TEII's Telogia Facility takes in biomass fuels to be combusted to produce electric power. TEII's Cairo Facility processes pulpwood under a tolling agreement to produce woodchips for use in the paper industry. TEII's Tuscaloosa Facility takes in post consumer low density recyclable plastics and processes the material through a washing, grinding and extruding process to produce a high quality, low density plastic resin pellets. Effective March 29, 1996, KTI Ash purchased a 60% interest as a limited partner in American Ash Recycling of Tennessee, Ltd., a Florida limited partnership ("AART"). The general partner is the previous owner of the Facility, American Ash Recycling Corp. of Tennessee, a Florida corporation, an affiliate of AAR. The partnership will carry on the business of the predecessor corporation. The Company has a priority on the distributions of earnings and cash flow from the Facility to the extent of 75% of the earning and cash flow generated until it receives $315,000 per annum on a cumulative basis. The purchase price consisted of $500,000 in cash and a short-term promissory note for $1,600,000 which was paid during 1996. AART recycles MWC ash at its Nashville Facility converting the ash principally into construction aggregate after recovering recyclable metals. The Company also agreed to become a 60% limited partner of a partnership, American Ash Recycling of New England ("AARNE") to operate a similar facility in the State of Maine (the "Maine Partnership"). The Company's initial contribution to this partnership was $500,000. 22 25 The Company has agreed to become a 60% limited partner in up to an additional eight facilities. The purchase price for each of these partnership interests is $2 million. ECH and AAR have a four year period to develop these eight facilities which ends December 31, 1999. Maine Energy, PERC and the Telogia Facility principally derive their revenues from sale of electric power generated as a by-product of the combustion of waste products and sold under long-term contracts with local utilities and, in the case of Maine Energy and PERC, from tipping fees received under long-term, short-term and commercial waste disposal contracts with municipalities and spot-market waste received from haulers. The utilities pay each facility based on the kilowatts delivered to the utility in accordance with rates agreed to at the inception of the contracts. PERC's and the Telogia Facility's rates are adjusted annually for expected or actual increases in inflation. In May, 1996 Maine Energy restructured its agreement with Central Maine by entering into a series of agreements with CL One and Central Maine, which provided for the purchase of Maine Energy's available power generation capacity by CL One and amending the Central Maine PPA (together with the agreement, the "Agreements"). CL One made an initial payment of $85 million and agreed to also make additional quarterly payments through May 31, 2007 to Maine Energy as a portion of its purchase price and for reimbursement to Maine Energy of certain expenses. In consideration of its payments to Maine Energy, CL One would be assigned all rights to capacity from the Maine Energy facility through May 31, 2007. In the restructuring, the term of the Central Maine PPA was extended from May 31, 2007 to December 31, 2012. Maine Energy will sell energy to Central Maine through May 31, 2007 at an initial rate of 7.18 cents per kWh which would escalate annually by 2% per annum. Beginning June 1, 2007 until the expiration date of the contract, Maine Energy will be paid market value for both its energy and capacity by Central Maine. Maine Energy retired the outstanding principal amount of $64.5 million of the Biddeford Bonds with the proceeds of the sale of its capacity. Utilizing the balance of the proceeds and a portion of the reserve funds available, the Company substantially reduced the outstanding principal amount of Maine Energy's subordinated indebtedness by paying off $29.5 million of subordinated debt. As of December 31, 1996 the balance of the subordinated debt at Maine Energy was $14,575,985. Under the terms of the Central Maine restructuring, a $45 million letter of credit was issued to Central Maine by ING (US) Capital Corporation, ("ING"). If, in any year, Maine Energy fails to produce 100,000,000 kWh of electricity (a "100,000,000 kWh default") and Maine Energy does not have a force majeure defense (physical damage to the plant and other similar events), Maine Energy is obligated to pay $3.75 million to Central Maine as liquidated damages. Such payment obligation is secured by the ING letter of credit. In each year in which 100,000,000 kWh is produced, the balance of the ING letter of credit is reduced by $3.75 million. If, in any year, Maine Energy fails to produce 15,000,000 kWh of electricity (a "15,000,000 kWh default") and Maine Energy does not have a force majeure defense, Maine Energy is obligated to pay the then balance of the ING letter of credit to Central Maine as liquidated damages. In 1996, the 15,000,000 kWh and the 100,000,000 kWh tests were met, resulting in a reduction of the amount of the ING letter of credit to $41.25 million. The disposal fees paid by the municipalities and waste haulers to Maine Energy and PERC are based on the tons of MSW delivered. The rate charged by each of Maine Energy and PERC under its long-term contracts for each ton delivered is based on the contractual tipping fee rate consisting of a fixed component and a variable component which is adjusted as a result of inflation, changes in law and changes in operating costs of the applicable facility. The fixed fee component escalates annually with changes in the local consumer price index. Maine Energy's and PERC's variable fee is determined by comparing certain of the then current operating and financing costs against contractually agreed-to base operating and financing costs. In the case of Maine Energy, the cumulative net increases of all of these cost items is divided by a total tonnage factor for the facility to determine the per ton variable component. PERC's variable component is calculated in a similar fashion but takes into account not only net increases but also net decreases in these costs. This can cause the variable component to be a negative amount effectively reducing PERC's fixed fee component. Based on PERC's current long-term contracts, any decreases or increases in operating or financing costs are passed through to the affected municipal customers with no benefit or detriment to PERC. The rate charged by each 23 26 of Maine Energy and PERC for short-term municipal and commercial contracts (usually one to six years) and spot market contracts are based on the general market conditions for MSW. ANALYSIS OF TONNAGE RECEIVED
YEAR ENDED DECEMBER 31, ------------------------------- 1996 1995 1994 ------- ------- ------- MAINE ENERGY: Long-Term Municipal Contracts................................. 71,203 68,380 70,339 Short-Term Municipal Contracts................................ 45,445 36,214 22,211 Spot Market................................................... 72,634 83,647 120,678 Commercial.................................................... 56,352 36,452 16,125 ------- ------- ------- Total............................................... 245,634 224,693 229,353 ======= ======= ======= PERC: Long-Term Municipal Contracts................................. 203,875 200,908 200,464 Short-Term Municipal Contracts................................ 18,341 17,614 25,477 Spot Market................................................... 13,163 16,703 17,218 Commercial.................................................... 18,144 13,396 4,879 ------- ------- ------- Total............................................... 253,523 248,621 248,038 ======= ======= =======
The Company's MSW waste disposal operations are subject to seasonal fluctuations. Reduced volumes of waste are generated during the winter months. This requires reductions in spot market tipping fees and increases reliance on supplemental fuel, principally woodchips. The Company's Maine facilities are located in summer vacation areas and larger volumes of waste are generated during that season enabling increases in the spot market tipping fees charged to the customers of Maine Energy and PERC and decreases in their reliance on supplemental fuel. General economic conditions of the surrounding area also have an impact on the availability of waste, with greater levels of waste usually generated during periods of good economic conditions. DISCONTINUED OPERATIONS On February 8, 1995, the Company acquired CSI. As a result of the acquisition the Company participated in two business segments, waste handling and computer services. The original business of the Company prior to the Merger are included in waste handling and the CSI businesses are included in computer services segment. The Company's operations in the computer services segment were carried out principally by its wholly-owned subsidiary DataFocus. DataFocus is primarily engaged in client-server systems software engineering and application development services. During the past three years, DataFocus has developed and brought to market a new software product, NuTCRACKER(TM), which assists customers in porting from the UNIX to the Microsoft Windows NT operating environment. On July 19, 1996, DataFocus executed an agreement with CIBER, Inc. ("CIBER"). Pursuant to the Agreement, DataFocus sold substantially all of the assets of DataFocus' Business Systems Division, other than cash and accounts receivable, to CIBER for $5,000,000, subject to customary prorations, on July 26, 1996. DataFocus retained cash, accounts receivables and substantially all of the liabilities of its Business Systems Division that arose prior to July 26, 1996. The net proceeds of such sale, including cash and accounts receivable retained, less related liabilities, are approximately $4,250,000. Additionally, on July 29, 1996, the Company sold the stock of DataFocus to certain members of the management of DataFocus. Pursuant to the sale, the Company received $5,000 in cash, the cancellation of stock options issued to DataFocus management to purchase 132,328 shares of the Company's common stock, the cancellation of an option to purchase 20% of the common stock of DataFocus, and a royalty agreement. 24 27 Under the royalty agreement, the Company receives a monthly base royalty payment of $5,000 and quarterly payments of additional royalties, equal to 5% of net revenue from the sale of NuTCRACKER software product in excess of $4,000,000 per year. DataFocus will have the right to repurchase the royalty agreement from the Company for the following payments: $400,000 prior to July 29, 1997; three times the royalty payments due to the Company for the twelve months immediately prior to the date of notice of repurchase, if given on or after July 29, 1997 but before July 29, 1998; two times the royalty payments due to the Company for the twelve months immediately prior to the date of notice of repurchase, if given on or after July 29, 1998 but before July 29, 1999; or an amount equal to the royalty payments due to the Company for the twelve months immediately prior to the date of notice of repurchase, if given after July 29, 1999. As part of the sale of DataFocus to its management, the Company agreed to loan up to $500,000 to certain members of the management of DataFocus, including Thomas A. Bosanko, who was a director of the Company through August 13, 1996. The loan bears interest of 8% per annum and provides for level quarterly principal payments to repay the loan over a four year period. The loan is secured by Company common stock owned by such members of management of DataFocus. The royalty agreement provides that royalty payments to the Company terminate three years after the repayment of the loans. Loss from discontinued operations of $714,000 for the year ended December 31, 1996, resulted from the sale and disposal of the Company's computer service division. 25 28 RESULTS OF OPERATIONS Year Ended December 31, 1996 Compared with Year Ended December 31, 1995
YEAR ENDED DECEMBER 31, ------------------------------------------ 1996 1995 ------------------ ----------------- ($ THOUSANDS) Revenue: Electric power revenues............................ $ 20,821 30.4 % $26,470 69.5 % Sale of capacity, net.............................. 33,203 48.5 % Waste processing revenues.......................... 11,024 16.1 % 8,314 21.8 % Other waste handling revenues...................... 3,459 5.0 % 3,299 8.7 % ------- ----- ------- ---- - Total revenues............................. 68,507 100.0 % 38,083 100.0 % Costs and expenses: Electric power and waste processing operating costs........................................... 26,453 38.6 % 26,139 68.6 % Selling, general and administrative................ 2,389 3.5 % 2,941 7.7 % Interest expense -- net............................ 4,464 6.5 % 9,379 24.6 % ------- ----- ------- ---- - Total costs and expenses............................. 33,306 48.6 % 38,459 101.0 % Equity in net income of PERC......................... 332 0.5 % 335 0.9 % Loss on sale of investments.......................... (296) (0.4)% ------- ----- ------- ---- - Income (loss) from continuing operations before minority interest, income taxes and extraordinary item............................................... 35,237 51.4 % (41) (0.1)% Minority interest.................................... (18,610) (27.2)% (1,287) (3.4)% ------- ----- ------- ---- - Income (loss) from continuing operations before income taxes and extraordinary item................ 16,627 24.3 % (1,328) (3.5)% Income taxes......................................... (65) (0.2)% ------- ----- ------- ---- - Income (loss) from continuing operations before extraordinary item................................. 16,627 24.3 % (1,393) (3.7)% Discontinued operations Loss from discontinued operations.................. (714) (1.0)% (86) (0.2)% ------- ----- ------- ---- - Income (loss) before extraordinary item.............. 15,913 23.2 % (1,479) (3.9)% Extraordinary item -- gain (loss) on early extinguishment of debt, net of minority interest... (2,247) (3.3)% 148 0.4 % ------- ----- ------- ---- - Net income (loss).................................... $ 13,666 19.9 % $(1,331) (3.5)% ======= ===== ======= =====
Revenues Electric power revenues decreased by $5,649,000, or 21.3%, for the year ended December 31, 1996 compared to 1995. The decreased revenue principally resulted from a reduced contract rate under the amended PPA from 16.52c per kWh to 7.18c per kWh for all power produced after May 3, 1996. As a result of certain contingencies required by the sale of capacity under the PPA, the Company has deferred $45,000,000 of revenue from this transaction which is being amortized through May 31, 2007, of which $3,750,000 has been amortized into revenues in 1996. As a result of the purchase of TEII on November 22, 1996, $484,000 of electric power revenue is included for the year ended December 31, 1996. Sale of capacity, net was $33,203,000 for the year ended December 31, 1996 arising from the sale of capacity under Maine Energy's PPA. Revenues from waste processing increased $2,711,000, or 32.6%, for the year ended December 31, 1996 compared to the same period in 1995. This increase is primarily the result of the acquisition of the Nashville Facility which produced revenues of approximately $1,827,000 from the date of acquisition and increased 26 29 revenues from the Company's specialty waste subsidiary of approximately $900,000 which is a direct result of the increase of 8,786 tons in specialty waste processed at Maine Energy. The total tonnage increase at Maine Energy of 21,000 tons which resulted in increased revenues of $768,000 for 1996 was offset by the permanent tipping fee reduction in charter and host community tipping fees of $7.27 per ton as required by Maine Energy's long-term waste supply contracts upon the retirement of the $64.5 million in bonds at Maine Energy. Other waste handling revenues for the year ended December 31, 1996 increased by $161,000, or 4.9%, as compared to the year ended December 31, 1995. This increase is primarily the result of the acquisitions of Manner and the Nashville Facility which recorded sales of recycled plastic and recovered metals of $398,000 and $702,000, respectively, from the date of acquisition to December 31, 1996. This was partially offset by decreases in KTI BioFuels revenues of $749,000 principally resulting from a 22,353 ton, or 29.2% decrease in woodwaste revenues compared to 1995. This decrease was primarily as the result of diminished supply of wastewood due to severe weather conditions during the first quarter of 1996. Lease revenue from transportation equipment decreased by $239,000 as a result of previous equipment sales. Costs and Expenses Waste handling operating costs increased by $314,000, or 1.2%, for the year ended December 31, 1996, compared to the corresponding period in 1995. The principal cause of the increase in 1996 is the purchase of TEII, Manner and AART resulting in increased costs of $2,909,000 during 1996. These increases were partially offset by decreased depreciation and amortization expenses of $787,000, primarily as a result of a change in the estimated useful lives of the plant assets; decreased net disposal costs of plant residues of $410,000, primarily as a result of the renegotiated ash disposal contract; a decrease in the need for supplemental fuels ($273,000) as a result of an increase in the MSW received at the facility; and, decreased maintenance and related costs of $346,000 all from the Maine Energy facility. Additional decreased costs arose from the transportation division which during 1995 suspended operations. Also, during 1995, the transportation division recorded a provision of $521,000 to reduce the carrying value of certain transportation equipment. No such provision was required during 1996. Selling, general and administrative expenses decreased by $552,000, or 18.8%, for the year ended December 31, 1996 as compared to the year ended December 31, 1995. The decrease was principally a result of a decrease in amortization expense resulting from the write off of deferred costs related to the PPA restructuring. Interest and Other Items Interest -- net decreased by $4,915,000 or 52.4% during the year ended December 31, 1996 as compared to the year ended December 31, 1995. The primary decreases for the year were $1,728,000 resulting from the retirement of $64,500,000 of bonds at Maine Energy, $2,010,000 resulting from the payment of $29,500,000 of subordinating debt at Maine Energy and $1,177,000 resulting from decreased letter of credit fees at Maine Energy due to the retirement of the bonds. The increase in minority interest of $17,323,000 for the year ended December 31, 1996 principally resulted from the minority interest of 49.62% share of Maine Energy's gain from sale of capacity. Loss from sale of investments of $296,000 for the year ended December 31, 1996, resulted from the sale of long-term fixed rate municipal bonds pledged by Maine Energy to the letter of credit banks immediately prior to the sale of capacity on May 3, 1996. Extraordinary item of $2,247,000 for the year ended December 31, 1996, resulted from the early extinguishment of the Biddeford Bonds at Maine Energy, net of minority interest. Equity in the net income of PERC decreased by $2,000, or .6%, for the year ended December 31, 1996. The Company's ownership interest in PERC is 7%. 27 30 PERC Revenues from electric power for 1996 increased by $210,000 over 1995, as a result of a 2.8% increase in contract rate per kilowatt for 1996, offset by a decrease in power production of 2,635 mWh or 1.6%. Waste processing revenues for 1996 increased $625,000, or 5.6%, compared to 1995. This resulted principally from a $1.68 per ton, or 3.7%, increase in PERC's average tipping fee arising principally as the result of increases in spot market disposal rates and a 4,900 ton, or 1.9% increase in MSW received in 1996. PERC's tipping fee revenues are principally derived under long-term contracts, and increases or decreases in revenues will principally be a result of inflation adjustments, increases or decreases in pass-through facility costs and change in law pricing provisions. Operating expenses for the year ended December 31, 1996 increased $1,007,000, or 5.0%, as compared with the year ended December 31, 1995, principally due to increased disposal costs of $626,000, maintenance costs $669,000 and operating and fuel costs $511,000. These increases were offset by a decrease of $799,000 in performance credits payable to the Charter Municipalities. Beginning in 1994, PERC, in accordance with agreements with its charter municipality customers, paid an amount representing 50% of "distributable cash," as defined in the agreements, to the charter municipalities. Expense with respect to these agreements was $619,000 in the year ended December 31, 1996, compared to $1,418,000 in 1995. Net interest expense for the year ended December 31, 1996 decreased by $633,000, or 16.6%, as compared with the year ended December 31, 1995. This decrease was primarily due to lower interest rates on the variable rate bond debt as well as a reduction in outstanding principal on such bonds. Interest expense on the variable rate bond debt is a pass-through cost to municipal customers. As a result, changes in interest expense do not have a significant effect on net income. 28 31 Year Ended December 31, 1995 Compared with Year Ended December 31, 1994
YEAR ENDED DECEMBER 31, --------------------------------------- 1995 1994 ----------------- ---------------- ($ THOUSANDS) Revenue: Electric power revenues............................... $26,470 69.5% $26,837 70.5% Waste processing revenues............................. 8,314 21.8% 7,718 20.3% Other waste handling revenues......................... 3,299 8.7% 3,230 8.5% ------- ------ ------- ---- - Total revenues................................ 38,083 100.0% 37,785 99.2% Costs and expenses: Electric power and waste processing operating costs... 26,139 68.6% 25,501 67.0% Selling, general and administrative................... 2,941 7.7% 2,401 6.3% Interest expense -- net............................... 9,379 24.6% 9,714 25.5% ------- ------ ------- ---- - Total costs and expenses...................... 38,459 101.0% 37,616 98.8% Equity in net income of PERC.......................... 335 0.9% 324 0.9% ------- ------ ------- ---- - Income (loss) from continuing operations before (41) (0.1)% 493 1.3% minority interest, income taxes and extraordinary item............................................... Minority interest..................................... (1,287) (3.4)% (553) (1.5)% Pre-acquisition earnings minority interest............ (1,367) (3.6)% ------- ------ ------- ---- - Loss from continuing operations before income taxes (1,328) (3.5)% (1,427) (3.7)% and extraordinary item............................. Income taxes.......................................... (65) (0.2)% ------- ------ ------- ---- - Loss from continuing operations before (1,393) (3.7)% (1,427) (3.7)% extraordinary item................................. Discontinued operations Loss from discontinued operations.................. (86) (0.2)% ------- ------ ------- ---- - Loss before extraordinary item........................ (1,479) (3.9)% (1,427) (3.7)% Extraordinary item -- gain on early extinguishment 148 0.4% of debt............................................ ------- ------ ------- ---- - Net loss.............................................. $(1,331) (3.5)% $(1,427) (3.7)% ======= ====== ======= =====
Revenues Electric power revenues decreased by $367,000, or 1.4%, for the year ended December 31, 1995 compared to 1994. The decrease resulted from a decrease in electric power generated by Maine Energy of 1.8% for 1995, which was partially offset by a 0.2% increase in the contract rate per kilowatt hour in 1995. Revenues from waste processing increased $596,000, or 7.7%, for the year ended December 31, 1995 compared to the same period in 1994. The increase resulted from an increase at Maine Energy in the average tipping fee of $4.97, per ton or 16.1%, principally in spot market and commercial tonnage, and from a shift in mix in waste received in 1995 to higher priced municipal and commercial tonnage. The volume of MSW received in 1995 decreased by 4,660 tons, or 2.0%, in 1995. The average tipping fee increase resulted in an increase in revenues of $1,117,000, and the decrease in volume resulted in a decrease of $145,000. This amount was partially offset by the absence in 1995 of the recovery from the State of Maine of waste import fees of $640,000 recorded in the year ended December 31, 1994. Other waste handling revenues for the year ended December 31, 1995 increased by $69,000, or 2.1%, as compared to the year ended December 31, 1994. This increase is primarily a result of increases in KTI BioFuels tipping fee revenues of $621,000 and woodchip sales of $154,000, both principally resulting from 29 32 increases in tonnage in 1995 compared to the prior year. These increases were offset in part by the absence in 1995 of revenues from transportation services. Transportation revenues in 1994, the final year of the Company's active participation in the transportation business, were $510,000. Also included in other waste handling revenues is rental income, principally of transportation equipment, of $298,000 and $292,000 for the years ended December 31, 1995 and 1994, respectively. Costs and Expenses Electric power and waste handling operating costs increased by $638,000, or 2.5%, for the year ended December 31, 1995, compared to the corresponding period in 1994. Principal causes of the increase in 1995 include costs resulting from the settlement of claims of $389,000 relating to businesses sold in prior years, and a provision of $521,000 to reduce the carrying value of certain transportation equipment and additional equipment and maintenance expense of $502,000 and depreciation expense of $413,000 both at Maine Energy. These increases were partially offset by a $543,000 decrease in costs of the transportation business which reduced operations in the fourth quarter of 1994 and a decrease of $375,000 in amortization as a result of deferred renegotiation costs being fully amortized at Maine Energy. Selling, general and administrative expenses increased by $540,000, or 22.4%, for the year ended December 31, 1995 as compared to the year ended December 31, 1994. The increase principally resulted from $380,000 of payroll and related costs principally attributed to the corporate staff and increases in consulting expenses of $132,000. Interest and Other Items Interest expense -- net decreased by $336,000 during the year ended December 31, 1995 as compared to the year ended December 31, 1994. The primary decreases for the year were $272,000 resulting from decreases in obligations related to transportation equipment and $152,000 resulting from the extinguishment of the debt owed to CSI prior to the Merger. These decreases were offset in part by a net increase of $116,000 at Maine Energy. The increase at Maine Energy is the result of a $636,000 increase in interest on its variable rate bond debt partially offset by a $242,000 increase in interest income, a $160,000 decrease in subordinated note interest resulting from a repayment of principal and a $118,000 reduction in letter of credit fees resulting from a decrease in the principal amount of bonds outstanding. Minority interest of $1,287,000 for the year ended December 31, 1995 resulted from the elimination of 49.62% of Maine Energy's net income, net of amortization of the step up in basis of certain assets. In 1994, 90% of the net income of Maine Energy was eliminated as "Pre-acquisition Earnings" for income prior to September 16, 1994. Equity in the net income of PERC increased by $11,000, or 3.4%, for the year ended December 31, 1995. The increase resulted from an increase in PERC's net income of $151,000. The Company's ownership interest in PERC is 7%. PERC Revenues from electric power for 1995 increased by $389,000 over 1994, as a result of a 2.4% increase in contract rate per kilowatt for 1995. Waste processing revenues for 1995 increased $597,000, or 5.6%, compared to 1994. This resulted principally from a $4.37 per ton, or 10.6%, increase in PERC's average tipping fee arising principally as the result of the pass-through of increases in the interest paid on PERC's variable rate bonds. PERC's tipping fee revenues are principally derived under long-term contracts, and increases or decreases in revenues will principally be a result of inflation adjustments, increases or decreases in pass-through facility costs and change in law pricing provisions. Waste processing revenue in 1994 included a $306,000 retroactive adjustment for 1993 pass-through costs and the refund of $174,000 of fees for imported MSW paid in prior years. No such adjustments occurred in 1995. Operating expenses for the year ended December 31, 1995 increased $687,000, or 3.6%, as compared with the year ended December 31, 1994, principally due to an increase of $978,000 in performance credits payable to the Charter Municipalities partially offset by reductions in disposal costs. 30 33 Net interest expense for the year ended December 31, 1995 increased by $148,000, or 4.0%, as compared with the year ended December 31, 1994. This increase was primarily due to the increase in interest rates on the variable rate bond debt offset by a reduction in outstanding principal on such bonds. Interest expense on the variable rate bond debt is a pass through cost to municipal customers. As a result, changes in interest expense do not have a significant effect on net income. LIQUIDITY AND CAPITAL RESOURCES The Company is a holding company and receives cash flow from its subsidiaries. Receipt of cash flow from its affiliate PERC is currently restricted by covenants under loan agreements, distribution restrictions under partnership agreements with its equity investors, and put-or-pay agreements with municipalities. Maine Energy's cash flow is required to retire the remaining outstanding balance of $14,575,985 as of December 31, 1996 before partners cash distributions can begin. As a result, the following discussion is organized to present liquidity and capital resources of the Company separate from Maine Energy and PERC and liquidity and capital resources of each of Maine Energy and PERC independently. The Company Through December 31, 1996, the Company has accumulated management fees receivable from PERC in the amount of $2,279,000. These fees are payable by PERC only out of cash flow after all current operating costs and debt service payments of the project. PERC has significant restrictions on the amount of cash flow that can be distributed to the Company. Also, management fees are only paid annually and only if the partnership meets certain operating results set forth in its loan documents. The Company has pledged to ENI, the other general partner of PERC, a portion of the Company's share of PERC management fees as a means of repaying a $1,693,000 advance ENI made on the Company's behalf to PERC to cover the Company's additional partnership capital requirement in 1989. While no assurance can be given, based upon current conditions, management of the Company expects annual management fees to be received on a current basis and accrued management fees from prior years to be paid from PERC's distributable cash flow as the project continues its recent trend of distribution of cash to its partners. The future operating results of PERC will determine the exact term over which the accrued management fees will be received by the Company. As of December 31, 1996 the Company owed ENI $1,353,479. During 1996, the Company received $691,442 in current and accrued management fees on account of 1995 operations of which $298,311 was paid to ENI. The Company anticipates receipt of cash from PERC during 1997 on account of 1996 operations of $686,363 of which $389,381 will be paid to ENI. Since February 28, 1991, the Company has been receiving operating and management fees from Maine Energy on a current basis. During 1996 the Company received $548,080 for operating and management fees from Maine Energy on account of 1996 operations. The Company also received $857,534 for accrued management fees through February 28, 1990. On October 24, 1996 the Company executed a Note Purchase Agreement with WEXFORD KTI LLC, a Delaware limited liability company ("WEXFORD"). Pursuant to the Note Purchase Agreement, the Company issued an 8%, $5,000,000 convertible subordinated note (the "Note") to WEXFORD. The Note is due on October 31, 2002 and is convertible into the Company's common stock at a conversion price of $8.50 per share. The Notes are subordinated to bank debt. The Note Purchase Agreement has customary and usual covenants, including limitations in incurring additional indebtedness and on incurring liens on assets. The $8.50 per share conversion price may be adjusted in certain circumstances under antidilution provisions. Of the proceeds, $2,300,000 was used to fund certain designated acquisition costs of TEII. The balance was used for transaction costs of approximately $200,000 and working capital. The Company has financed its operations and capital expenditures primarily from cash flow from its subsidiaries which are not contractually restricted from making distributions, collateralized equipment 31 34 financing, unsecured subordinated debt, borrowings from CSI prior to the Merger and proceeds from the sale of the Company's common stock. The Company and its subsidiaries, other than Maine Energy and PERC, at December 31, 1996 had indebtedness maturing in 1997 of $4,124,000. During 1996, the Company, other than Maine Energy and PERC, incurred additional debt of approximately $23,664,000, primarily as a result of the acquisition of TEII and the issuance of 8%, convertible subordinated debt and retired approximately $7,400,000 of debt. As of December 31, 1996, the Company had cash on hand without regard to Maine Energy and PERC of approximately $3,579,000 and $490,000 available in lines of credit from a bank. Management of the Company believes that cash flow from its 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 assurance can be given in this regard. There are no pending agreements or commitments relating to either new debt or equity financing by the Company. Maine Energy During the last three years Maine Energy has financed its operations and capital expenditures from cash flows from operations. Cash provided by operations was $89,259,000 in 1996, as compared to $8,987,000 in 1995. During 1996 Maine Energy sold its generating capacity to CL One for a period through May 31, 2007. In exchange CL One has agreed to make a series of quarterly payments to Maine Energy including an initial payment of $85 million. Maine Energy capital expenditures were $2,939,000 and $2,121,000 for additions to property, plant and equipment during 1996 and 1995, respectively. During May 1996, Maine Energy retired the entire outstanding principal balance of $64.5 million of its tax exempt variable rate revenue bonds and $29.5 million of its subordinated loan accrued interest and principal from the proceeds from the sale of capacity. As of December 31, 1996 and December 31, 1995, in addition to Maine Energy's operating cash of $1,648,000 and $5,507,000, respectively, Maine Energy, as required under the terms of the credit agreement with the issuer of its letter of credit, has on account an additional $7,433,000 and $13,363,000, respectively, of reserves to be used for capital improvements, debt service, operating shortfalls and working capital requirements. Management of the Company believes Maine Energy has adequate cash resources available to fund its future operations and anticipated capital expenditures. Capital expenditures for Maine Energy for the year ending December 31, 1997 are expected to be approximately $2,581,000, which has principally been set aside in the above mentioned reserves accounts. PERC PERC has financed its recent operations and capital expenditures primarily by cash flow from operations. Cash provided by operations was $8,493,000 in 1996 as compared to $10,328,000 in 1995. PERC's capital expenditures were $1,192,000 and $1,172,000 for additions to property, plant and equipment during 1996 and 1995, respectively. At December 31, 1996 and December 31, 1995, PERC had outstanding tax-exempt, variable rate revenue bonds backed by bank letters of credit in the aggregate amounts of $53,500,000 and $59,400,000, respectively. The variable interest rate on the Orrington Bonds at December 31, 1996 and 1995 was 4.25% and 6.125%, respectively. The bonds are payable pursuant to a schedule through May 2003. During 1996 and 1995 PERC made principal payments to bondholders in the amounts of $5,900,000 and $4,900,000, respectively. As of December 31, 1996 and 1995, in addition to PERC's operating cash of $5,440,000 and $6,465,000, respectively, PERC, as required under the terms of the credit agreement with its letter of credit banks and the trust indenture governing the Orrington Bonds, had on account an additional $8,482,000 and $8,364,000, respectively, of cash reserves to be used for capital improvements, debt service, operating shortfalls and working capital requirements. 32 35 Company management believes PERC has adequate cash resources available to fund its current project operations and currently anticipated capital expenditures. PERC plans capital expenditures for the year ending December 31, 1997 of approximately $782,000. PERC intends to finance the requirements through cash flow from operations. TAX LOSS CARRYFORWARDS At December 31, 1996, the Company had net operating loss carryforwards of approximately $47,587,000 for income tax purposes that expire in years 2002 through 2010 and are subject to the limitations described below. In addition, the Company has general business credits carryforwards of approximately $530,000 that expire in the years 1999 through 2006 and alternative minimum tax credits of approximately $687,000 which do not expire. For financial reporting purposes, such amounts are treated as deferred tax assets and a valuation allowance has been recognized to offset these deferred tax assets. These deferred tax assets can be utilized against future net income of the Company. When utilized by the Company net income will not be reduced by income tax provisions. 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 occurred at the Company. 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 $1,100,000 of taxable income, or approximately $375,000 of equivalent credit per year. As a result of the Company's acquisition of TEII, the Company's ability to utilize TEII's net operating loss carryforwards will be limited to approximately $874,000 per year. These limitations may be increased if the Company recognizes a gain on the disposition of the respective assets which had a fair market value greater than its tax basis on the date of the ownership change. ENVIRONMENTAL CONTINGENCIES While increasing environmental regulation often presents new business opportunities to the Company and PERC, it likewise often results in increased operating costs as the Company and PERC 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. There were no pending governmental environmental enforcement proceedings where the Company or PERC believe potential monetary sanctions will exceed $100,000. 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 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. 33 36 INFLATION The effect of inflation on operating costs has been minimal in recent 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 competitors. In addition, each of Maine Energy and PERC can contractually increase its waste processing fees to municipal customers annually based on inflation. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of the Company and those of its unconsolidated equity basis investees, Penobscot Energy Recovery Company, together with the reports of independent auditors thereon and related schedules appear on pages F-27 to F-37. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS Incorporated by reference to the Company's definitive proxy statement for the 1997 Annual Meeting of Shareholders which will be filed with the Securities and Exchange Commission on or before April 30, 1997. ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference to the Company's definitive proxy statement for the 1997 Annual Meeting of Shareholders which will be filed with the Securities and Exchange Commission on or before April 30, 1997. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated by reference to the Company's definitive proxy statement for the 1997 Annual Meeting of Shareholders which will be filed with the Securities and Exchange Commission on or before April 30, 1997. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by reference to the Company's definitive proxy statement for the 1997 Annual Meeting of Shareholders which will be filed with the Securities and Exchange Commission on or before April 30, 1997. 34 37 PART IV ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) The following financial statements are filed as a part of this report: CONSOLIDATED FINANCIAL STATEMENTS OF KTI, INC.: Report of Independent Auditors.................................................. Consolidated Balance Sheets at December 31, 1996 and 1995....................... Consolidated Statements of Operations for each of the three years in the period ended December 31, 1996....................................................... Consolidated Statements of Stockholders Equity (Deficit) for each of the three years in the period ended December 31, 1996................................... Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1996....................................................... Notes to Consolidated Financial Statements...................................... FINANCIAL STATEMENTS OF PENOBSCOT ENERGY RECOVERY COMPANY: Report of Independent Auditors.................................................. Balance Sheets at December 31, 1996 and 1995.................................... Statements of Income for each of the three years in the period ended December 31, 1996............................................................. Statements of Changes in Partners' Capital for each of the three years in the period ended December 31, 1996................................................ Statements of Cash Flows for each of the three years in the period ended December 31, 1996............................................................. Notes to Financial Statements...................................................
(b) The following exhibits which are furnished with this report or incorporated herein by reference, are filed as part of this report. EXHIBIT INDEX *2. Agreement and Plan of Merger (filed as Annex I to the Joint Proxy Statement Prospectus part of the Registrant's Registration Statement on Form S-4 (No. 33-85234) effective January 6, 1995). (1)3.1 Restated Certificate of Incorporation of Registrant filed with the Secretary of State of the State of New Jersey on July 12, 1994, as amended through March 13, 1995. (12)3.2 By-Laws of Registrant, as amended. *4.1 Specimen Form of Common Stock Certificate. (3)4.2 Form of Warrant. (3)4.3 Loan Agreement dated as of June 1, 1985 between City of Biddeford, Maine and Maine Energy Recovery Company, as amended. (3)4.4 Subordinated Note of Maine Energy Recovery Company dated as of December 1, 1990 in the original principal amount of $14,252,338.39 payable to CNA Realty Corp. (3)4.5 Subordinated Note of Maine Energy Recovery Company dated as of December 1, 1990 in the original principal amount of $9,495,327.45 payable to Energy National, Inc. (3)4.6 Subordinated Note of Maine Energy Recovery Company dated as of December 1, 1990 in the original principal amount of $4,737,517.54 payable to Project Capital 1985.
35 38 (3)4.7 Loan Agreement dated as of April 1, 1986 between Town of Orrington, Maine and Penobscot Energy Recovery Company, as amended. (3)4.8 Credit Agreement dated as of May 15, 1986 by and among Penobscot Energy Recovery Company, PERC Management Company and Energy National, Inc. and The Banking Institutions Signatory Hereto and Bankers Trust Company, as Agent, as amended. *10.1 Second Amended and Restated Agreement and Certificate of Limited Partnership of Penobscot Energy Recovery Company dated May 15, 1986, as amended. *10.2 Agreement between Penobscot Energy Recovery Company and Bangor Hydro-Electric Company dated June 21, 1984, as amended. *10.3 Form of Penobscot Energy Recovery Company Waste Disposal Agreement (City of Bangor) dated April 1, 1991 and Schedule of Substantially Identical Waste Disposal Agreements. *10.4 Operation and Maintenance Agreement Between Esoco Orrington, Inc. and Penobscot Energy Recovery Company dated June 30, 1989. *10.5 Residue Disposal Agreement between Penobscot Energy Recovery Company and Sawyer Environmental Recovery Facilities, Inc. dated September 19, 1985, as amended. *10.6 Amended and Restated Bypass Agreement between Sawyer Environmental Recovery Facilities, Inc. and Penobscot Energy Recovery Company dated April 4, 1994. *10.7 Second Amended and Restated Agreement and Certificate of Limited Partnership of Maine Energy Recovery Company dated June 30, 1986, as amended. *10.8 Power Purchase Agreement Between Maine Energy Recovery Company and Central Maine Power Company dated January 12, 1984, as amended. *10.9 Operation and Maintenance Agreement Between Maine Energy Recovery Company and KTI Operations, Inc. dated December 1, 1990. *10.10 Host Municipalities' Waste Handling Agreement among Biddeford-Saco Solid Waste Committee, City of Biddeford, City of Saco and Maine Energy Recovery Company dated June 7, 1991. *10.11 Form of Maine Energy Recovery Company Waste Handling Agreement (Town of North Berwick) dated June 7, 1991 and Schedule of Substantially Identical Waste Disposal Agreements. *10.12 Material Disposal and Transportation Agreement among Consolidated Waste Service, Inc., Waste Management of New Hampshire and Maine Energy Recovery Company dated October 21, 1991. *10.13 Front-End Process Residue Agreement between Arthur Schofield, Inc. and Maine Energy Recovery Company dated May 27, 1994. *10.14 Second Amended and Restated Agreement and Certificate of Limited Partnership of FTI Limited Partnership dated December 11, 1986, as amended. *10.15 Land Lease dated November 25, 1985 between City of Lewiston and Fuel Technologies, Inc. as amended. *10.16 KTI, Inc. 1994 Long-Term Incentive Award Plan. *10.17 Employment Agreement between KTI, Inc. and Nicholas Menonna, Jr. dated May 1, 1994. *10.18 Employment Agreement between KTI, Inc. and Martin J. Sergi dated May 1, 1994. *10.19 Registration Rights Agreement between Davstar Managed Investments Corp. and KTI Environmental Group, Inc. dated March 17, 1993. *10.20 Registration Rights Agreement among KTI Environmental Group, Inc., Martin J. Sergi and Midlantic National Bank dated May 10, 1994. *10.21 Registration Rights Agreement among KTI Environmental Group, Inc., Nicholas Menonna, Jr. and Midlantic National Bank dated May 10, 1994.
36 39 (2)10.22 KTI, Inc. Directors Stock Option Plan. (3)10.23 Form of Registration Rights between KTI, Inc. and Mona Kalimian, Mark D. Kalimian, and Linda Berley dated July 27, 1995 and Schedule of Substantially Identical Registration Rights Agreements. (4)10.24 Letter Agreement dated as of November 10, 1995 among Central Maine Power, Maine Energy Recovery Company and Citizens Lehman Power. (4)10.25 Global Agreement dated December 28, 1995 between Environmental Capital Holdings, Inc. and KTI, Inc. (4)10.26 Agreement of Limited Partnership of American Ash Recycling of Tennessee, Ltd. dated December 28, 1995. (4)10.27 Agreement of Limited Partnership of American Ash Recycling of New England, Ltd. dated December 28, 1995. (5)10.28 First Amendment to Agreement of Limited Partnership of American Ash Recycling of Tennessee, Ltd., dated March 16, 1996. (6)10.29 Agreement dated as of July 19, 1996 by and among KTI, Inc., DataFocus Incorporated and CIBER, Inc. (6)10.30 Agreement dated July 19, 1996 by and among KTI, Inc., Thomas Bosanko and Patrick B. Higbie. (7)10.31 Operating Agreement of Specialties Environmental Management Company, LLC dated as of October 18, 1996. (8)10.32 Amendment to Employment Agreements between KTI, Inc. and Nicholas Menonna, Jr. and Martin J. Sergi. (9)10.33 Note Purchase Agreement dated as of October 23, 1996 between KTI, Inc. and WEXFORD KTI LLC. (9)10.34 Registration Rights Agreement dated as of October 23, 1996 between KTI, Inc. and WEXFORD KTI LLC. (9)10.35 Escrow Agreement dated as of October 23, 1996 between KTI, Inc. and WEXFORD KTI LLC and Key Trust of Ohio, N.A. (10)10.36 Securities Purchase Agreement by and among KTI Plastic Recycling, Inc., Continental Casualty Company, CNA Realty Corp., CLE, Inc. and Timber Energy Investment, Inc. dated as of November 22, 1996. (11)10.37 Securities Purchase Agreement by and among KTI Plastic Recycling, Inc. and Diane Goodman and Seth Lehner dated as of November 25, 1996. (12)10.38 Loan and Security Agreement between KTI, Inc., KTI Environmental Group, Inc., Kuhr Technologies, Inc., KTI Limited Partners, Inc., KTI Operations, Inc. and PERC, Inc., Borrowers, and Key Bank of New York, Lender, dated October 29, 1996. (12)10.39 Pledge Agreement between each Borrower and Key Bank of New York dated October 29, 1996 (6 Agreements). (12)10.40 Key Trust Company PRISM Prototype Retirement Plan and Trust adopted as of December 11, 1996. (12)10.41 Option and Consulting Agreement by and among KTI, Inc. and L.T. Lawrence & Co., Inc. dated as of June 1, 1996. (12)10.42 First Amendment to Option and Consulting Agreement by and among KTI, Inc. and L.T. Lawrence & Co., Inc. dated as of December 18, 1996. (12)10.43 Warrant to purchase 200,000 shares of KTI, Inc. common stock at $7.50 per share issued to L.T. Lawrence & Co., Inc. dated as of December 18, 1996.
37 40 (12)10.44 Warrant to purchase 6,000 shares of KTI, Inc. common stock at $8.50 per share issued to Thomas E. Schulze dated as of January 2, 1997. (12)10.45 Warrant to purchase 3,000 shares of KTI, Inc. common stock at $8.50 per share issued to John E. Turner dated as of January 2, 1997. (12)10.46 Warrant to purchase 6,000 shares of KTI, Inc. common stock at $8.50 per share issued to Robert E. Wetzel dated as of January 2, 1997. (12)10.47 Warrant to purchase 15,000 shares of KTI, Inc. common stock at $6.00 per share issued to The Baldwin & Clarke Companies dated as of January 2, 1997. (12)10.48 Warrant to purchase 15,000 shares of KTI, Inc. common stock at $7.00 per share issued to The Baldwin & Clarke Companies dated as of January 2, 1997. (12)10.49 Third Amendment to Second Amended and Restated Certificate and Agreement of Limited Partnership of FTI Limited Partnership dated as of January 23, 1997. (12)10.50 Warrant to purchase 2,000 shares of KTI, Inc. common stock at $8.50 per share issued to Maine Woodchips Associates dated as of January 23, 1997. (12)10.51 Registration Rights Agreement by and between KTI, Inc. and Maine Woodchips Associates dated as of January 23, 1997. (12)21 List of all subsidiaries of Registrant. (12)23.1 Consent of Ernst & Young LLP
- --------------- * Filed as an Exhibit to Registrant's Registration Statement on Form S-4 (No. 33-85234) effective January 6, 1995. (1) Filed as an Exhibit to Registrant's Current Report on Form 8-K dated March 13, 1995. (2) Filed as an Exhibit to Registrant's Proxy Statement dated June 5, 1995. (3) Filed with the Registration Statement on Form S-1 dated December 6, 1995. (4) Filed with the Amendment No. 1 to the Registration Statement on Form S-1 dated February 2, 1996. (5) Filed as an Exhibit to Registrant's Current Report on Form 8-K dated April 15, 1996. (6) Filed with Form 8-K dated July, 1996. (7) Filed with Form 8-K dated October 18, 1996. (8) Filed with Form 8-K dated October 23, 1996. (9) Filed with Form 8-K dated October 24, 1996. (10) Filed with Form 8-K dated November 22, 1996. (11) Filed with Form 8-K dated November 25, 1996. (12) Filed herewith.
REPORTS ON FORM 8-K FILED DURING THE FOURTH QUARTER OF 1996 Four Reports on Form 8-K were filed in the fourth quarter of 1996. No financial statements were included with such Forms 8-K. The following is a list of the Forms 8-K filed and the dates thereof. (i) A Form 8-K was filed on October 28, 1996 reporting that Nicholas Menonna, Jr., Chairman of the Board of Directors and Chief Executive Officer and Martin J. Sergi, President, Chief Operating Officer and Chief Financial Officer propose to modify certain provisions of their employment contract with respect to their 1996 bonuses, resulting in a significant reduction in their expected compensation. 38 41 (ii) A Form 8-K was filed on October 31, 1996 reporting the execution of a Note Purchase Agreement with Wexford KTI LLC, a Delaware limited liability company. Pursuant to the Note Purchase Agreement, the Company issued an 8%, $5,000,000 convertible subordinated note to Wexford KTI LLC. (iii) A Form 8-K was filed on December 3, 1996 to report the execution of an agreement to purchase certain investments in Timber Energy Investments, Inc. (iv) A Form 8-K was filed on December, 1996 to report the execution of an agreement to purchase all of the common stock of Manner, Inc., a Maryland corporation. 39 42 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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/ NICHOLAS MENONNA, JR. Date: March 28, 1997 -------------------------------- Nicholas Menonna, Jr. Chairman of the Board, and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
SIGNATURE TITLE DATE - ------------------------------------------ --------------------------------- --------------- /s/ NICHOLAS MENONNA, JR. Chairman of the Board, Chief March 28, 1997 - ------------------------------------------ Executive Officer and Director Nicholas Menonna, Jr. (Principal Executive Officer) /s/ MARTIN J. SERGI Vice Chairman, President, Chief March 28, 1997 - ------------------------------------------ Operating Officer, Chief Martin J. Sergi Financial Officer and Director (Principal Financial and Accounting Officer) - ------------------------------------------ Director March 28, 1997 Robert M. Davies /s/ JEFFREY R. POWER Director March 28, 1997 - ------------------------------------------ Jeffrey R. Power /s/ ROSS PIRASTEH Director March 28, 1997 - ------------------------------------------ Ross Pirasteh /s/ DIBO ATTAR Director March 28, 1997 - ------------------------------------------ Dibo Attar Director March 28, 1997 - ------------------------------------------ Jack Polak
40 43 KTI, INC. INDEX TO FINANCIAL STATEMENTS
PAGE ---- The following consolidated financial statements and schedules of KTI, Inc. are included in Item 3: CONSOLIDATED FINANCIAL STATEMENTS OF KTI, INC.: Report of Independent Auditors...................................................... F-2 Consolidated Balance Sheets at December 31, 1996 and 1995........................... F-3 Consolidated Statements of Operations for each of the three years in the period ended December 31, 1996........................................................... F-4 Consolidated Statements of Changes in Stockholders' Equity (Deficit) for each of the three years in the period ended December 31, 1996.......................... F-5 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1996........................................................... F-6 Notes to Consolidated Financial Statements.......................................... F-7 FINANCIAL STATEMENTS OF PENOBSCOT ENERGY RECOVERY COMPANY: Report of Independent Auditors...................................................... F-25 Balance Sheets at December 31, 1996 and 1995........................................ F-26 Statements of Income for each of the three years in the period ended December 31, 1996.............................................................................. F-27 Statements of Changes in Partners' Capital for each of the three years in the period ended December 31, 1996........................................................... F-28 Statements of Cash Flows for each of the three years in the period ended December 31, 1996.......................................................................... F-29 Notes to Financial Statements....................................................... F-30 The following consolidated financial statement schedule of KTI, Inc. is included in Item 14(d): II Valuation and Qualifying Accounts.......................................... F-34
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. F-1 44 REPORT OF INDEPENDENT AUDITORS The Board of Directors KTI, Inc. We have audited the accompanying consolidated balance sheets of KTI, Inc. as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of KTI, Inc. at December 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. Also, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP Hackensack, New Jersey February 28, 1997 F-2 45 KTI, INC. CONSOLIDATED BALANCE SHEET
DECEMBER 31, DECEMBER 31, 1996 1995 ------------ ------------ ASSETS Current Assets Cash and cash equivalents..................................... $ 5,227,381 $ 6,454,558 Restricted funds -- current portion........................... 5,163,965 7,042,404 Accounts receivable, net of allowances of $291,939 and $480,662................................................... 4,080,503 8,983,699 Management fees receivable -- current portion................. 566,634 556,578 Consumables and spare parts................................... 2,100,311 1,258,397 Notes receivable -- officers/shareholders and affiliates -- current...................................... 57,629 96,225 Other receivables............................................. 398,320 295,723 Other current assets.......................................... 480,034 742,638 ------------ ------------ Total current assets.................................. 18,074,777 25,430,222 Restricted funds................................................ 2,903,761 6,502,227 Management fees receivable -- affiliates........................ 2,175,203 2,376,696 Notes receivable -- officers/shareholders and affiliates........ 212,835 224,438 Other receivables............................................... 711,783 495,901 Investment in PERC.............................................. 3,792,429 3,594,638 Deferred costs, net of accumulated amortization of $208,096 and $524,236...................................................... 1,020,120 3,818,732 Goodwill and other intangibles, net of accumulated amortization of $297,941 and $539,483...................................... 2,179,466 3,613,621 Deferred project development costs.............................. 909,998 Other assets.................................................... 238,893 486,778 Property, equipment and leasehold improvements, net of accumulated depreciation of $12,671,949 and $10,108,341....... 90,855,366 86,363,180 ------------ ------------ Total assets.......................................... $123,074,631 $132,906,433 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable.............................................. $ 2,371,430 $ 2,512,109 Accrued expenses.............................................. 1,829,959 5,322,013 Current portion of long-term debt............................. 4,123,840 7,977,899 Income taxes payable.......................................... 200,000 290,000 Other current liabilities..................................... 465,585 614,837 ------------ ------------ Total current liabilities............................. 8,990,814 16,716,858 Other liabilities............................................... 1,308,199 70,368 Long-term debt, less current portion............................ 34,949,148 107,398,263 Minority interest............................................... 10,871,852 1,840,377 Deferred revenue................................................ 41,250,000 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 13,333,333; issued and outstanding 6,836,766 in 1996 and 5,946,973 in 1995.............................. 68,368 59,470 Additional paid-in capital...................................... 38,575,892 33,427,091 Accumulated (deficit)........................................... (12,939,642) (26,605,994) ------------ ------------ Total stockholders' equity...................................... 25,704,618 6,880,567 ------------ ------------ Total liabilities and stockholders' equity............ $123,074,631 $132,906,433 ============ ============
See accompanying notes. F-3 46 KTI, INC. CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, --------------------------------------- 1996 1995 1994 ----------- ----------- ----------- Revenues: Electric power revenues............................... $20,820,860 $26,470,093 $26,836,890 Sale of capacity, net................................. 33,203,252 Waste processing revenues............................. 11,024,265 8,313,434 7,718,172 Other waste handling revenues......................... 3,459,546 3,298,984 3,229,640 ----------- ----------- ----------- Total revenues................................ 68,507,923 38,082,511 37,784,702 Costs and expenses: Electric power and waste processing operating costs... 26,453,290 26,139,179 25,500,606 Selling, general and administrative:.................. 2,389,008 2,940,941 2,401,059 Interest -- net....................................... 4,463,873 9,378,605 9,714,599 ----------- ----------- ----------- Total costs and expenses...................... 33,306,171 38,458,725 37,616,264 Equity in net income of PERC............................ 332,655 334,844 324,283 Loss on sale of investments............................. (296,459) ----------- ----------- ----------- Income (loss) from continuing operations before minority interest, income taxes and extraordinary item......... 35,237,948 (41,370) 492,721 Minority interest....................................... 18,609,797 1,287,005 553,372 Pre-acquisition earnings minority interest -- Maine Energy................................................ 1,366,968 ----------- ----------- ----------- Income (loss) from continuing operations before income taxes and extraordinary item.......................... 16,628,151 (1,328,375) (1,427,619) Income taxes............................................ -- 65,000 -- ----------- ----------- ----------- Income (loss) from continuing operations before extraordinary item.................................... 16,628,151 (1,393,375) (1,427,619) Discontinued operations Loss from discontinued operations (including a loss on disposal of $549,788 and income taxes of $200,000 in 1996)................. (714,422) (85,897) -- ----------- ----------- ----------- Income before extraordinary item........................ 15,913,729 (1,479,272) (1,427,619) Extraordinary item -- gain (loss) on early extinguishment of debt, net of minority interest... (2,247,377) 147,778 ----------- ----------- ----------- Net income (loss)....................................... $13,666,352 $(1,331,494) $(1,427,619) =========== =========== =========== Earnings (loss) per common share and common share equivalent: Primary: Income (loss) from continuing operations.............. $ 2.61 $ (0.26) $ (0.42) Loss from discontinued operations..................... (0.11) (0.02) -- ----------- ----------- ----------- Income (loss) before extraordinary item............... 2.50 (0.28) (0.42) Extraordinary item.................................... (0.35) 0.03 -- ----------- ----------- ----------- Net income (loss)..................................... $ 2.15 $ (0.25) $ (0.42) =========== =========== =========== Weighted average number of shares used in computation........................................ 6,359,593 5,263,797 3,409,081 =========== =========== =========== Fully-diluted: Income (loss) from continuing operations.............. $ 2.46 $ (0.26) (0.42) Loss from discontinued operations..................... (0.10) (0.02) -- ----------- ----------- ----------- Income (loss) before extraordinary item............... 2.36 (0.28) (0.42) Extraordinary item.................................... (0.32) 0.03 -- ----------- ----------- ----------- Net income (loss)..................................... $ 2.03 $ (0.25) $ (0.42) =========== =========== =========== Weighted average number of shares used in computation........................................ 6,925,976 5,263,797 3,409,081 =========== =========== ===========
See accompanying notes. F-4 47 KTI, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK ADDITIONAL ------------------- PAID-IN ACCUMULATED SHARES AMOUNT CAPITAL DEFICIT TOTAL --------- ------- ----------- ------------ ----------- Balance at December 31, 1993........ 3,463,110 $34,631 $21,459,154 $(23,398,705) $(1,904,920) Net loss.......................... (1,427,619) (1,427,619) Repurchase and cancellation of common stock................... (86,493) (865) (129,083) (448,176) (578,124) --------- ------- ----------- ------------ ----------- Balance at December 31,1994......... 3,376,617 33,766 21,330,071 (25,274,500) (3,910,663) Net loss.......................... (1,331,494) (1,331,494) Issuance of common stock from exercise of stock options...... 73,980 740 256,077 256,817 Issuance of common stock in connection with business combination.................... 1,801,044 18,010 8,983,708 9,001,718 Issuance of common stock.......... 695,332 6,954 2,857,235 2,864,189 --------- ------- ----------- ------------ ----------- Balance at December 31, 1995........ 5,946,973 59,470 33,427,091 (26,605,994) 6,880,567 Net income........................ 13,666,352 13,666,352 Issuance of common stock under exercise of stock options...... 55,346 553 280,107 280,660 Issuance of common stock from exercise of warrants........... 41,183 412 225,114 225,526 Issuance of common stock upon conversion of debt............. 725,015 7,250 4,044,697 4,051,947 Issuance of stock purchase warrants....................... 143,738 143,738 Issuance of common stock in connection with business combination.................... 68,249 683 455,145 455,828 --------- ------- ----------- ------------ ----------- Balance at December 31, 1996........ 6,836,766 $68,368 $38,575,892 $(12,939,642) $25,704,618 ========= ======= =========== ============ ===========
See accompanying notes. F-5 48 KTI, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ---------------------------------------------- 1996 1995 1994 ------------ ----------- ------------- OPERATING ACTIVITIES Net income (loss)................................................................ $ 13,666,352 $(1,331,494) $ (1,427,619) Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: Loss on disposal of discontinued operations.................................... 549,788 Extraordinary loss (gain)...................................................... 2,247,377 (147,778) Depreciation and amortization.................................................. 6,336,252 7,505,364 2,842,655 Minority interest.............................................................. 18,609,797 1,287,005 553,372 Deferred revenue............................................................... 41,250,000 -- Provision for losses on accounts receivable.................................... 323,750 51,335 Provision for asset valuation.................................................. 23,892 520,500 Interest accrued and capitalized on debt....................................... 1,451,005 2,237,816 298,034 Non-cash employee compensation from stock purchase............................. -- 51,962 Non-cash interest expense from issuance of warrants............................ 143,738 Equity in net income of PERC, net of distributions............................. (197,791) (258,467) (324,283) Loss on sale of assets......................................................... 93,612 83,744 47,000 Loss on sale of debt securities................................................ 296,459 Changes in operating assets and liabilities Increasing (decreasing) cash: Accounts receivable.......................................................... 4,702,570 (2,342,539) 1,132,173 Management fees receivable................................................... 191,437 98,930 551,758 Consumables and spare parts.................................................. (841,914) (23,376) (35,440) Other receivables............................................................ 201,451 513,103 404,192 Other assets................................................................. 814,277 (92,788) 532,722 Notes receivable............................................................. (459,930) 90,000 Accounts payable............................................................. (3,282,978) (318,483) 886,311 Income taxes................................................................. (90,000) Other liabilities............................................................ (96,130) 157,563 (1,060,164) ------------ ----------- ----------- Net cash provided by operating activities........................................ 85,609,264 8,354,812 4,452,046 INVESTING ACTIVITIES Additions to property, equipment and leasehold improvements...................... (3,412,428) (2,916,071) (475,888) Proceeds from sale of assets..................................................... 469,300 468,426 2,892,798 Proceeds from sale of discontinued operation..................................... 5,005,000 -- Deferred project development costs............................................... (909,998) -- Net change in restricted funds: Cash equivalents............................................................... (2,858) 5,143,775 4,383,808 Debt securities available-for-sale............................................. 5,579,480 (5,875,939) Costs incurred in connection with merger......................................... -- (449,761) (787,342) Cash acquired in merger with Convergent Solutions, Inc........................... -- 2,838,188 Purchase of additional partnership interest in Maine Energy...................... (792,340) -- (1,456,059) Cash acquired in purchase of additional partnership interest in Maine Energy..... -- 1,723,819 Acquisition of businesses, net of cash acquired.................................. (2,956,828) Notes receivable -- officers/shareholders and affiliates......................... (9,801) 28,053 145,456 ------------ ----------- ----------- Net cash provided by (used in) investing activities.............................. 2,969,527 (763,329) 6,426,592 FINANCING ACTIVITIES Deferred financing costs......................................................... (1,188,463) (2,091,488) (66,482) Proceeds from issuance of debt................................................... 8,785,955 400,034 4,974,155 Proceeds from sale of common stock............................................... 506,201 2,973,065 -- Principal payments on debt and costs related to early extinguishment............. (97,909,661) (9,804,750) (8,830,096) ------------ ----------- ----------- Net cash used in financing activities............................................ (89,805,968) (8,523,139) (3,922,423) ------------ ----------- ----------- Decrease in cash and cash equivalents............................................ (1,227,177) (931,656) 6,956,215 Cash and cash equivalents at beginning of period................................. 6,454,558 7,386,214 429,999 ------------ ----------- ----------- Cash and cash equivalents at end of period....................................... $ 5,227,381 $ 6,454,558 $ 7,386,214 ============ =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest paid.................................................................... $ 6,144,505 $ 6,619,869 $ 1,880,890 ============ =========== =========== NON CASH INVESTING AND FINANCING ACTIVITIES Fixed assets disposed of under capital leases.................................... $ 1,427,282 Fixed assets received from AJR in settlement of receivable....................... 707,333 Fixed assets purchased under capital lease....................................... 569,469 Debt issued in connection with: Purchase of additional partnership interest in Maine Energy.................... $ 164,000 1,572,345 Retirement of common stock for notes receivable -- officer/shareholder........... 578,124 Common Stock issued in connection with the merger with Convergent Solutions, Inc............................................................................ $ 9,001,718 Liquidation of dent payable to Convergent Solutions, Inc......................... (4,666,127) Conversion of debt to equity..................................................... 4,051,947 Common Stock issued in connection with the purchase of Manner, Inc............... 455,813
See accompanying notes. F-6 49 KTI, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 1. ORGANIZATION KTI, Inc. ("KTI") and subsidiaries (collectively, the "Company"), are engaged in the development of an integrated waste handling business for municipal solid and specialty wastes through the development, ownership and operation of facilities which provide recycling, processing and disposal services to communities, utilities and commercial waste generators. The Company's operations are located in the eastern United States. These operations include its wholly-owned consolidated subsidiaries, its majority-owned consolidated subsidiaries, including Maine Energy Recovery Company ("Maine Energy"), American Ash Recycling of Tennessee, Ltd. ("AART"), American Ash Recycling of New England, Ltd. ("AARNE") and its unconsolidated equity basis investee, Penobscot Energy Recovery Company ("PERC"). Maine Energy and PERC earn a significant portion of their revenue from municipalities and the local electric utility in their respective geographic locations within Maine. In addition, the Company's wholly-owned subsidiary, Timber Energy Investments, Inc. ("TEII"), earns a substantial portion of its revenue from an electric utility in the State of Florida and AART earns substantially all of its revenues as a result of a contract with the City of Nashville. Maine Energy, PERC and TEII are subject to the provisions of various federal and state energy laws and regulations, including the Public Utility Regulatory Policy Act of 1978, as amended. In addition, federal, state and local environmental laws establish standards governing certain aspects of the Company's operations. The Company believes it has all permits, licenses and approvals necessary to operate. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of KTI and its wholly-owned and majority-owned subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation. As described in Note 7, on September 16, 1994 the Company acquired certain limited partnership interests in Maine Energy aggregating 40.38%. Prior to this transaction, the Company was a 10% owner and the sole general partner of Maine Energy. As a result of the Company's aggregate ownership interest at that date, Maine Energy's financial statements have been included in the Company's consolidated statement of operations for the year ended December 31, 1994. In accordance with Accounting Research Bulletin No. 51, the consolidated statement of operations includes Maine Energy's operations for the year ended December 31, 1994 as though the acquisition had occurred at the beginning of the year and includes adjustments to eliminate minority interest and the pre-acquisition earnings of Maine Energy attributable to the partnership interests acquired on September 16, 1994. The Company's investment in PERC is accounted for under the equity method based on the Company's significant influence over its financial and operating policies (see Note 8). The ownership interest of minority owners in the equity and earnings of the Company's less than 100 percent-owned consolidated subsidiaries is recorded as minority interest. The Company accounts for 100 percent of the losses of those consolidated subsidiaries in which the minority owners' are limited partners and their cumulative share of losses has exceeded their capital basis in the subsidiary. The Company has accounted for losses totaling approximately $2,471,000 and $2,358,000 attributable to such minority ownership at December 31, 1996 and 1995, respectively. The Company will account for 100 percent of any income of such less than 100 percent-owned subsidiaries until this balance is restored. F-7 50 KTI, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Cash Equivalents The Company considers all highly liquid investments with a maturity of 90 days or less when purchased to be cash equivalents. Restricted Funds Restricted funds consist of cash, cash equivalents held in trust and, at December 31, 1995, investments in tax-exempt debt securities ($5,875,939), all of which are available, under certain circumstances, for current operating expenses, debt service, capital improvements and repairs and maintenance in accordance with certain contractual obligations and amounts deposited in a bank in connection with one of the Company's debt obligations. Restricted funds available for current operating and debt service purposes are classified as current assets. Management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported as a separate component of stockholders' equity (deficit). The amortized cost of debt securities classified as available-for-sale is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest income. Property, Equipment and Leasehold Improvements Property, equipment and leasehold improvements are stated at cost, less accumulated depreciation and amortization. All costs incurred for additions and improvements, including interest during construction, are capitalized. The Company capitalized net interest costs of $110,000 in 1996. Capitalizable interest costs were not material in 1995 and 1994. Depreciation of property and equipment is provided using the straight-line method over the estimated useful lives ranging from three to forty five years. Assets under capital leases are amortized using the straight-line method over the estimated useful lives ranging from five to seven years. Leasehold improvements are amortized on a straight-line basis over the shorter of the term of the lease or the estimated useful life of the improvement. Goodwill and Intangibles Goodwill represents costs in excess of net assets of businesses acquired in purchase transactions. Goodwill is being amortized on a straight-line basis principally over periods of five to ten years. Intangible assets included the value assigned to a power purchase agreement owned by Maine Energy. The unamortized portion of this asset was included in the determination of the gain on sale of capacity in 1996. Deferred Financing and Other Deferred Costs Costs incurred in connection with debt and letter of credit financings have been deferred and are being amortized over the life of the related debt or letter of credit issues using the interest method. The unamortized portion of these costs related to the Maine Energy bonds was included in the determination of the extraordinary loss in 1996. Costs incurred in connection with renegotiation of certain municipal waste contracts were deferred and were amortized over 60 months, which represented the minimum period covered by the new agreements. These costs were fully amortized during 1995. During 1995, the Company deferred approximately $741,000 of costs incurred in connection with negotiating an amendment to its Power Purchase Agreement (the "PPA") with Central Maine Power Company ("CMP"). This amount was included in the determination of the gain on sale of capacity. F-8 51 KTI, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Deferred Project Development Costs The Company defers certain external direct costs incurred in the development of new projects. Amortization of these costs begins when the project becomes operational. If management concludes that the related project will not be completed, the deferred costs are expensed immediately. Revenue Recognition Electric power revenues are earned from the sale of electricity to local utilities under the specific agreements with the utilities. Revenue is recorded at the contract rate specified in each agreement as it is delivered. Electric power revenue also includes the portion of the deferred gain on sale of electric generating capacity recognized during the respective period. (See Note 3.) Waste processing revenues consist principally of fees charged to customers for waste disposal. Substantially all waste processing revenues are earned from customers located in a geographic region proximate to the facility. Revenue is generally recorded upon acceptance based on rates specified in the applicable long-term contracts. Certain of these rates are subject to adjustment based on the levels of certain operating expenses and net operating income, as defined, of Maine Energy. Management fees from affiliates included in other waste handling revenues, related to providing general partner services to PERC, are recognized in accordance with the partnership agreement. Service and other revenues in connection with transportation and waste management are recognized upon completion of the services. Income Taxes Deferred income taxes are determined using the liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Business Combinations The Company has accounted for all business combinations under the purchase method of accounting. Under this method, the purchase price is allocated to the assets and liabilities of the acquired enterprise as of the acquisition date (to the extent of the Company's ownership interest) based on their estimated respective fair values and are subject to revision for a period not to exceed one year from the date of acquisition. The results of operations of the acquired enterprise are included in the Company's consolidated financial statements for the period subsequent to the acquisition. 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 the Company's initial public offering of common stock in February, 1995 must be treated as outstanding for all periods prior to the offering whether dilutive or anti-dilutive. For purposes of the computation, the number of shares treated as outstanding is reduced based on the number of shares that could be repurchased based on the initial public price of the Company's common stock. Fully diluted earnings per share is computed by adjusting both net income and shares outstanding as if the conversions of certain debt instruments occurred on the first day of the year. Primary earnings per share for 1996 would have been $2.32 per share had these conversions occurred on the first day of the year. F-9 52 KTI, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Evaluation of Long-Lived Assets The Company assesses long-lived assets for impairment as prescribed by FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. Under those rules, goodwill associated with assets acquired in a purchase business combination is included in impairment evaluations when events or circumstances exist that indicate the carrying amount of those assets may not be recoverable. The Company's evaluation at December 31, 1996 has been based on projected operating results of the businesses giving rise to the goodwill. Management believes that these projections are reasonable, however actual future operating results may differ. Stock Dividend On February 28, 1997, a 5% stock dividend was declared by the Board of Directors for shareholders of record on March 14, 1997. The stock dividend is payable March 28, 1997. All stock related data in the consolidated financial statements reflect the stock dividend for all periods presented. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Reclassifications Certain prior year amounts have been reclassified to conform with the current year presentation. 3. SALE OF ELECTRIC GENERATION CAPACITY AND RESTRUCTURE OF POWER PURCHASE AGREEMENT On May 3, 1996, Maine Energy completed a restructuring of its Power Purchase Agreement ("PPA") with Central Maine Power ("CMP") and the sale of the rights to 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 ("Capacity Payment") and the PPA was amended to reflect a reduction in CMP's purchase price for electric power. In addition, the term of the PPA was extended from 2007 to 2012. The Company also received reimbursement of certain transaction costs, including interest on the Capacity Payment from November 6, 1995 to closing and certain other payments. 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 pro rata 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 pro rata 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 the 100,000,000 kWh and the 15,000,000 kWh levels are adjusted in the case of a force majeure event, as defined. Maine Energy produced approximately 170,000,000 kWh of electricity in 1996. In order to secure CMP's right to liquidated damages, Maine Energy has obtained 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. Under the terms of the letter of credit agreement, Maine Energy is required to maintain certain restricted funds. The letter of credit is collateralized by liens on substantially all of Maine Energy's assets. Based on these contingencies, Maine Energy deferred an amount totaling $45,000,000 on the date of the transaction. This amount is being recognized as revenue as the contingencies are eliminated. As of December 31, 1996, the letter of credit and remaining deferred amount equaled $41,250,000. F-10 53 KTI, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Maine Energy used the proceeds from the sale of its capacity to repay $64,500,000 Resource Recovery Bonds and to retire the related bank letter of credit. This prepayment resulted in the recognition of an extraordinary loss of $2,247,377 (net of minority interest of $2,213,475). The remaining proceeds were used together with certain unrestricted cash balances on hand to repay $29,500,000 of outstanding subordinated notes payable to Maine Energy limited partners. 4. ACQUISITION AND DISPOSAL OF CONVERGENT SOLUTIONS, INC. On February 8, 1995, the Company acquired by way of merger (the "Merger") Convergent Solutions, Inc. ("CSI"), a publicly-owned company engaged in the development and marketing of computer software products and related services. The acquisition was completed through the exchange of one share of the Company's common stock for each share of outstanding CSI common stock. On that date, 1,801,044 shares of the Company's common stock valued at $5.00 per share were exchanged in the Merger. The purchase price including the stock exchanged and transaction costs of approximately $2,000,000 was approximately $11,100,000. The transaction has been accounted for as a purchase. The purchase price exceeded the fair value of the net assets acquired by approximately $2,655,000 which was recorded as goodwill and was being amortized over a five year period. In connection with the acquisition, the Company filed a registration statement with the Securities and Exchange Commission to register the shares of its common stock which were issued to complete the Merger. During 1996, the Company disposed of its computer services segment which was comprised entirely of CSI. The sale was completed in two separate transactions. On July 26,1996 certain assets and liabilities of CSI were sold to Ciber, Inc. for $5,000,000. Also, on July 29, 1996, all of the outstanding common stock of CSI was sold to certain members of its management for $5,000. In addition, the Company has notes receivable from the buyers aggregating $444,643 at December 31, 1996. The notes receivable are due on July 29, 2000. The results of operations of CSI have been classified as discontinued operations in the accompanying financial statements. CSI's revenues for 1996 and 1995 were $5,785,050 and $10,198,851, respectively. 5. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS Property, equipment and leasehold improvements consist of the following:
1996 1995 ------------ ----------- Land............................................. $ 907,839 $ 746,563 Buildings and site improvements.................. 15,397,462 15,729,403 Machinery and equipment.......................... 85,419,005 76,415,325 Transportation equipment......................... 34,929 1,115,796 Furniture and fixtures........................... 1,337,879 1,373,650 Computer equipment............................... 507,195 Leasehold improvements........................... 430,201 583,589 ------------ ----------- 103,527,315 96,471,521 Less allowances for depreciation and 12,671,949 10,108,341 amortization................................... ------------ ----------- $ 90,855,366 $86,363,180 ============ ===========
Beginning October 1, 1996, Maine Energy revised the estimated average useful lives used to compute depreciation for substantially all of its plant and equipment. These revisions were made to more properly reflect the remaining useful lives of the assets. The change had the effect of increasing income before extraordinary item and net income by approximately $432,000 ($.07 per share). F-11 54 KTI, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. OTHER RECEIVABLES The Company has entered into several sales-type leases related to the sale of transportation equipment. These leases have original terms of up to 5 years and provide for fixed monthly payments. Future minimum lease payments, excluding interest, to be received related to these leases are as follows: 1997.............................................. $192,026 1998.............................................. 398,147
7. ACQUISITIONS On May 3, 1996, the Company purchased additional limited partnership interests in Maine Energy aggregating 23.77% from certain other existing limited partners. The aggregate cost of the acquisitions was approximately $485,000. The acquisition resulted in a reduction in the carrying value of property and equipment of approximately $7,800,000. Subsequent to this purchase, the Company's ownership in Maine Energy aggregated 74.15%. During the fourth quarter of 1996, the Company acquired all of the outstanding common stock of TEII. TEII, through its subsidiaries, is engaged in the generation of electricity and the processing of wood and plastic materials. The purchase price, including all direct costs, was approximately $2,142,000 in cash. The cost of the acquisition exceeded the fair value of TEII's net assets by approximately $2,035,000 which has been recorded as goodwill. In connection with this acquisition, the Company has an obligation to obtain a letter of credit to support TEII's outstanding Resource Recovery Revenue Bonds payable in an amount sufficient to allow the release of a similar letter of credit guaranteed by a party affiliated with the seller. On March 31, 1996, the Company acquired a 60% limited partnership interest in American Ash Recycling Co. of Tennessee, a limited partnership, ("AART"). AART is engaged in the processing of ash residue from a waste-to-energy facility located in Nashville, Tennessee. The purchase price for the limited partnership interest was $2,100,000. The cost of the acquisition exceeded the fair value of AART's net assets by approximately $800,000 which has been recorded as goodwill. On November 25, 1996, the Company acquired all of the outstanding common stock of Manner, Inc. ("Manner") a company engaged in the purchase and sale of recyclable plastic materials. The purchase price was approximately $456,000 and was entirely financed through the issuance of 65,000 shares of the Company's common stock. The cost of the acquisition exceeded the fair value of Manner's net assets by approximately $421,000 which has been recorded as goodwill. On September 16, 1994, the Company purchased certain limited partnership interests in Maine Energy aggregating 40.38% from certain of the existing limited partners. The aggregate cost of the acquisition was approximately $3.1 million and was partially financed through the issuance of notes payable aggregating $1,572,346 to the sellers. Prior to this transaction, the Company was a 10% owner and the sole general partner of Maine Energy. Prior to the September 16, 1994 limited partnership interest acquisition, the Company accounted for its 10% ownership interest under the equity method. The difference between the Company's actual capital contributions and its ownership interest in the partnership's total contributed capital is being amortized over the term of the partnership's energy sales contract. This amount is included in goodwill. In 2007, certain of Maine Energy's municipal customers have the right to obtain a 20% interest in Maine Energy's cash flows, as defined in certain agreements, to be applied against the municipalities' future waste disposal costs. Maine Energy's ability to distribute assets to its partners is restricted by the provisions of certain agreements among Maine Energy, the partners and certain third parties. The following unaudited pro forma summary presents selected operating data as if the acquisitions described above had occurred as of the beginning of the respective periods and does not purport to be F-12 55 KTI, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) indicative of the results that would have occurred had the merger been completed as of those dates or of results which may occur in the future.
1996 1995 ------- ------- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Net revenues............................................. $79,321 $50,153 Net income (loss) before extraordinary item.............. 22,369 (1,347) Net income (loss)........................................ 20,122 (1,200) Net income (loss) per share before extraordinary item.... 3.52 (.26) Net income (loss) per share.............................. 3.16 (.23)
The pro forma amounts presented for 1996 include approximately $7,211,000 of income from Maine Energy resulting from the gain on sale of electric generating capacity attributable to the additional limited partnership interest acquired in 1996. 8. INVESTMENT IN PERC PERC is a 25 megawatt waste-to-energy project which began operations in 1988. The Company is a co-general partner and 7% owner of PERC until such time that the return on equity, as defined, of the limited partners exceeds their aggregate capital contributions. Commencing on that date and continuing through the remaining term of the partnership, the Company's ownership interest increases to 28 percent. Investment in PERC represents the Company's net investment in the partnership. The PERC partnership agreement provided for the respective partners to make capital contributions in amounts disproportionate to their ownership interest in the partnership. Differences between the Company's capital contributions and its ownership interest in the partnership's total contributed capital are being amortized over the term of the partnership's power purchase agreement. Amortization is included in the determination of the Company's equity in the partnership's net income. In 2004, certain of PERC's municipal customers have the right to purchase the waste-to-energy facility for an amount equal to its book value at the purchase date, as defined, or to receive 50% of the partnerships' cash flows, as defined, to be applied against the municipalities' future waste disposal costs. PERC's ability to distribute assets to its partners is restricted by the provisions of certain agreements among PERC, the partners and certain third parties. The Company's ownership interest in PERC is summarized as follows:
DECEMBER 31, ------------------------- 1996 1995 ---------- ---------- Credited capital contributions...................... $2,112,587 $2,112,587 Distributions....................................... (211,239) (76,375) Excess of actual capital contributions over ownership interest (net of accumulated amortization of $384,338 and $289,285 at December 31, 1996 and December 31, 1995 respectively)...... 1,331,398 1,392,043 Cumulative interest in partnership income........... 594,090 166,383 ---------- ---------- $3,792,429 $3,594,638 ========== ==========
F-13 56 KTI, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Summarized financial information for PERC is as follows:
DECEMBER 31, --------------------------- 1996 1995 ----------- ----------- BALANCE SHEET DATA: Total assets...................................... $91,760,278 $94,766,638 Bonds payable (non-recourse)...................... 53,500,000 59,400,000 Total liabilities................................. 59,667,838 66,450,262 Partners' capital................................. 32,092,440 28,316,376 STATEMENTS OF OPERATIONS DATA: Revenues.......................................... 30,294,859 29,458,979 Operating expenses................................ 21,013,967 20,007,226 Net income........................................ 6,110,107 5,647,488
9. DEBT The Company's debt consists of the following:
DECEMBER 31, DECEMBER 31, 1996 1995 ------------ ------------ (A) 8% convertible subordinated note payable............ $ 5,000,000 $ -- (B) 12% term note payable to bank....................... 1,657,448 2,607,448 (C) 10% note payable to Energy National, Inc............ 1,353,479 1,455,430 (D) $1,000,000 bank line of credit at bank prime rate 589,904 plus .25%........................................... (E) $300,000 bank line of credit at bank prime rate plus 220,000 1.5%................................................ (F) 9.94% secured term notes payable.................... 780,357 (G) Notes payable to limited partners of Maine Energy... 490,063 326,063 (H) 8.63% secured term note payable..................... 400,000 (I) 9.9% secured term notes payable to GE Capital....... 190,368 382,699 (J) 10.13% secured term notes payable................... 179,997 428,193 (K) Note payable to former shareholder.................. 127,137 183,494 (L) Subordinated convertible notes payable.............. -- 3,721,182 Other............................................... 108,250 1,455,558 ----------- ------------ 11,097,003 10,560,067 Resource Recovery Revenue Bonds Payable.................. 13,400,000 64,500,000 12% Subordinated Notes Payable to Maine Energy Limited Partners............................................... 14,575,985 40,316,095 ----------- ------------ 39,072,988 115,376,162 Less current portion................................ 4,123,840 7,977,899 ----------- ------------ $ 34,949,148 $107,398,263 =========== ============
- --------------- (A) During 1996, the Company issued an 8% convertible subordinated note to a private lender to fund certain designated acquisitions. The note is due October 31, 2002 and is convertible into the Company's common stock at a conversion price of $8.50 per share. Interest on the note is payable quarterly. (B) During 1989, a subsidiary of the Company entered into a $4.0 million 5-year Term Loan Agreement, as amended, with a bank. On September 16, 1994, the Company and the bank entered into a Purchase and Sales Agreement under which the Company purchased the subsidiary's debt obligation to the bank. F-14 57 KTI, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Payment of the purchase price included cash of $1.5 million and a $2,607,448 term note payable to the bank bearing interest at the bank's prime rate. On August 15, 1996, the Company and the bank entered into an Amended and Restated Term Note for $1,857,448. The term of the note is through July 31, 1998, with principal payments in the amount of $50,000 per month plus interest at the bank's prime rate (8.25% at December 31, 1996) and a payment at maturity in the amount of $707,447. During 1995, interest was also payable monthly at the bank's prime rate (8.5% at December 31, 1995). (C) This debt arose when Energy National Inc., a co-general partner in PERC, made an advance on behalf of the Company to meet a capital call by PERC. Interest and principal are payable annually on the date PERC distributes its annual and any accrued general partner fees. Annual principal payments are due in amounts equal to 60 percent of the Company's current and accrued general partner fees paid from PERC after payment of interest on the outstanding balance of this obligation. The unpaid balance is secured by all future general partner fee payments to be made to the Company by PERC. (D) In October 1996, the Company obtained a line of credit with a bank in the amount of $1,000,000 bearing interest at the bank's prime rate plus .25% (8.50% at December 31, 1996). The line of credit is secured by the Company's investment in certain of its subsidiaries and is subject to renewal on June 30, 1997. (E) During 1996, certain subsidiaries of the Company obtained a line of credit with a bank in the amount of $300,000 bearing interest at the bank's prime rate plus 1.5% (9.75% at December 31, 1996) of which $220,000 is outstanding at December 31, 1996. The line of credit is secured by accounts receivables of the Company's subsidiaries and is subject to renewal on April 30, 1997. (F) AART note payable to a commercial lender bearing interest at 9.94%, with monthly payments of principal and interest in the amount of $42,500. The note matures on August 20, 1998. The balance is secured by equipment with an aggregate net carrying value of $2,776,486 at December 31, 1996. (G) Aggregate balance due to limited partners of Maine Energy in connection with the purchase of certain limited partnership interests (see Note 7). The balance bears interest at one percent over a published prime interest rate (9.25% and 9.5% at December 31, 1996 and 1995, respectively). These balances are secured by the limited partnership interests in Maine Energy. The outstanding balance is due in 1997. (H) In December 1996, a subsidiary of the Company entered into a secured term note with a commercial lender. The note bears interest at 8.63% with monthly principal and interest payments of $8,231. The note matures on December 31, 2001. The balance is secured by equipment with an aggregate net carrying value of $886,385 at December 31, 1996. (I) Secured term note payable in monthly installments of principal and interest of approximately $18,400 through August 1998. Secured by equipment with an aggregate net carrying value of $361,551 at December 31,1996. (J) Secured term note payable to a commercial lender with original terms of 48 months. Payable in monthly installments of principal and interest aggregating approximately $10,900. Secured by equipment with an aggregate net carrying value of $224,656 at December 31, 1996. (K) Non-interest bearing note payable to former shareholder in connection with the repurchase and retirement of certain shares of the Company's common stock. The note is payable in equal monthly installments of $5,750. The note has been discounted using an effective interest rate of 8%. The note is secured by cash deposited in an escrow account with a balance of $117,201 and $181,612 at December 31, 1996 and 1995, respectively. (L) In March 1993, the Company issued Davstar Managed Investments Corporation a $1,500,000 subordinated term note payable, 252,248 shares of the Company's common stock and a warrant to purchase an additional 297,430 shares of the Company's common stock at a stated purchase price of $5.64. The aggregate original issue discount representing the fair value of the common stock and the warrant was $258,989. The note carried interest at a stated rate of 8% and had an effective interest rate, including the amortization of the original issue discount of 18%. Various additional subordinated unsecured 12% term F-15 58 KTI, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) notes payable in an aggregate amount of $2,295,000 were issued to foreign lenders during 1993 and 1994. These lenders were associated with Davstar Managed Investments Corporation through affiliation of their respective management. The Company paid all interest on these obligations through December 31, 1994 by the issuance of additional shares of its common stock. On January 1, 1996, the terms of these notes were amended. Under this amended agreement, $500,000 of principal was converted to 74,866 shares of the Company's common stock at $7.0125 per share and accrued interest of $50,301 was capitalized. Interest was payable quarterly and principal was payable in full on April 1, 1997. The amended notes were convertible into common stock at the option of the holder subsequent to September 30, 1996 at 75% of the market price, as defined, at the time of conversion within the limits of not less than $5.00 and not more than $13.50 per share, subject to adjustments. In December 1996, the notes were converted into 650,148 shares of the Company's common stock. Resource Recovery Revenue Bonds Payable The City of Biddeford, on behalf of Maine Energy, issued $81,000,000 of Resource Recovery Revenue Bonds in June 1985 to partially finance the construction of the Maine Energy waste-to-energy facility. The bonds carried interest at variable rates (3.90% at December 31, 1995), which was determined monthly by the remarketing agent for the bonds. In May 1996, the bonds were retired. In connection with the acquisition of TEII, the Company assumed $15,685,000 of Liberty County, Florida Resource Recovery Revenue Bonds. The bonds bear interest at variable rates (4.20% at December 31, 1996), which are determined weekly by the remarketing agent for the bonds. The bonds have an annual sinking fund payment due each October ($1,000,000 due October 1997), with final payment due January 2003. The bonds are fully secured by an irrevocable letter of credit issued by a bank. The letter of credit and related agreements require, among other things, maintenance of various insurance coverages and restricts the borrowers ability to incur additional indebtedness. The bonds and letter of credit are collateralized by liens on TEII's electric generating facility located in Liberty County, Florida. Subordinated Notes Payable to Maine Energy Limited Partners These notes, as amended, bear interest at 12%. Payments of principal and interest are made solely at the discretion of Maine Energy's general partner. However, all principal and interest must be repaid prior to any partner distributions. To the extent interest is not paid, accrued interest is capitalized. Excluding any amounts which may be paid on the subordinated notes payable to the Maine Energy Limited Partners, aggregate maturities as of December 31, 1996 of the Company's debt for each of the next five years are as follows: 1997............................................. $4,123,840 1998............................................. 3,076,230 1999............................................. 1,755,209 2000............................................. 2,022,411 2001............................................. 1,834,314
10. STOCKHOLDERS' EQUITY In connection with certain debt obligations issued during 1996, the Company issued warrants to purchase 420,572 shares of common stock at $5.71 per share. The aggregate original issue discount representing the fair value of the warrants was $143,738. During July and August of 1995, in a private transaction the Company sold 650,412 shares of its common stock and warrants to purchase an additional 382,031 common shares exercisable during the period F-16 59 KTI, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) commencing from the date of grant of the warrants and terminating not more than five years from the date of grant at an exercise price of $5.48. The proceeds of this transaction were $2,512,227, net of expenses of approximately $225,000. In December 1995, in a private transaction, the Company sold 44,920 shares of its common stock to an officer of the Company. The cash proceeds of this transaction were $300,000 and the Company recognized compensation expense of $51,962. 11. STOCK OPTION PLANS The Company has four stock option plans; the 1986 Stock Option Plan of KTI, Inc. (the "1986 Plan"), the KTI, Inc. 1994 Long-Term Incentive Award Plan and the DataFocus Long-Term Incentive Plan (collectively, the "1994 Incentive Plans") and the KTI, Inc. Directors Stock Option Plan (the "Directors Plan"). All plans are administered by the Compensation Committee of the Board of Directors. In addition to options granted under these plans, the Company also issued statutory non-plan options to purchase 41,503 shares of common stock at $3.63 per share to certain officers of the Company in 1986. All of these statutory options were exercised during 1995. The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation," ("SFAS No. 123") requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Elements of the various plans include the following: THE 1986 PLAN. A maximum of 66,190 shares are subject to the 1986 Plan. Options were granted at prices not less than the fair market value at the date of grant. All options granted had 10 year terms and vested immediately. No new options can be granted under this plan. THE 1994 INCENTIVE PLAN. The 1994 Incentive Plans were adopted by the Board of Directors during 1994 and approved by the Company's shareholders during 1995. A maximum of 466,666 shares are subject to the 1994 Incentive Plans. Options may be granted at prices not less than the fair market value at the date of grant and normally vest at 20% per year beginning one year from the date of grant. Vested options may be exercised at any time until their expiration which may be up to ten years from the date of grant. Unvested options are forfeited upon termination of the employee. As a result of the merger with CSI, options issued under CSI's previously existing plans were replaced by options to purchase the Company's common stock having essentially the same terms and conditions. The sale of CSI's operations during 1996 resulted in the forfeiture of certain outstanding options. THE DIRECTORS PLAN. The Directors Plan was adopted by the Board of Directors and approved by the Company's shareholders during 1995. A maximum of 100,000 shares are subject to the Directors Plan. Under the Directors Plan, non-employee Directors are automatically granted non-statutory options on August 1 of each year, commencing on August 1, 1995 for the lesser of (i) 4,000 shares or (ii) a number of shares having a maximum market value of $36,000. Options granted may not be exercised within one year of grant and have 10 year terms. In addition to the Plans described above, the Company's Board of Directors from time to time has granted key employees non-plan options. During 1995, the Board of Directors made a non-plan option grant. These non-plan options have a ten year term, were granted at the then current fair market value and vested 20% per year commencing on the first anniversary of the grant date. F-17 60 KTI, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Option activities under the plans and for the non-plan options are detailed in the following table:
1994 WEIGHTED INCENTIVE AVERAGE EXERCISE 1986 PLAN PLANS DIRECTOR PLAN NON PLAN PRICE PER SHARE --------- --------- ------------- -------- ------------------ Outstanding at January 1, 1994........ 69,500 -- -- 28,350 $ 3.46 Granted............................. 15,263 -- -- -- $ 3.46 Exercised........................... -- -- -- -- $ -- Forfeited........................... (69,500) -- -- -- $ 3.46 ------- -------- ------ ------- ----- Outstanding at January 1, 1995........ 15,263 -- -- 28,350 $ 3.46 Granted............................. -- 162,745 16,800 105,000 $ 6.91 Assumed............................. -- 445,507 -- -- $ 5.66 Exercised........................... -- (1,603) -- (28,350) $ 3.49 Forfeited........................... -- (63,204) -- -- $ 4.63 ------- -------- ------ ------- ----- Outstanding at January 1, 1996........ 15,263 543,444 16,800 105,000 $ 6.09 Granted............................. -- 226,574 31,500 -- $ 7.23 Exercised........................... -- (55,346) -- -- $ 5.38 Forfeited........................... -- (292,333) -- -- $ 6.15 ------- -------- ------ ------- ----- Outstanding at December 31, 1996...... 15,263 422,340 48,300 105,000 $ 6.62 ======= ======== ====== ======= ===== Exercisable at December 31, 1996...... 15,263 122,101 16,800 21,000 $ 5.84 ======= ======== ====== ======= ===== Exercisable at December 31, 1995...... 15,263 381,955 -- -- $ 5.75 ======= ======== ====== ======= =====
The weighted-average fair value of options granted was $5.38 and $5.37 for 1996 and 1995, respectively. At December 31, 1996, for each of the following classes of options as determined by range of exercise price, the following information regarding weighted-average exercise prices and weighted-average remaining contractual lives of each class is as follows:
WEIGHTED-AVERAGE EXERCISE PRICE WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE NUMBER OF OF REMAINING OPTIONS EXERCISE PRICE OF OPTIONS OUTSTANDING CONTRACTUAL LIFE OF CURRENTLY OPTIONS CURRENTLY OPTION CLASS OUTSTANDING OPTIONS OUTSTANDING OPTIONS EXERCISABLE EXERCISABLE - ------------------------ ----------- ---------------- -------------------- ----------- ----------------- Prices ranging from $3.63 - $5.45......... 15,263 $ 3.46 7 15,263 $3.46 Prices ranging from $6.00 - $8.75......... 575,643 $ 7.25 7.79 159,901 $6.07
Pro forma information regarding net income and earnings per share is required by SFAS No. 123, and has been determined as if the Company had been accounting for its employee stock options under the fair value method of that statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions for 1996 and 1995, respectively: weighted average risk-free interest rates of 6.5% and 6.4%; no dividends; volatility factors of the expected market price of the Company's common stock of .642 and .642; and for both periods a weighted-average expected life of the options of 8 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in F-18 61 KTI, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options granted in 1996 and 1995 is amortized to expense over the options' vesting period. The Company's pro forma information follows:
1996 1995 ----------- ----------- Pro forma net income (loss)....................... $13,478,958 $(1,379,776) Pro forma primary earnings (loss) per share....... $ 2.12 $ (.26) Pro forma fully diluted earnings (loss) per $ 2.00 $ (.26) share...........................................
The pro forma disclosures presented above for 1995 reflect compensation expense only for options granted in 1995 and for 1996 only for options granted in 1995 and 1996. These amounts may not necessarily be indicative of the pro forma effect of SFAS No. 123 for future periods in which options may be granted. F-19 62 KTI, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 12. INCOME TAXES At December 31, 1996 the Company has net operating loss carryforwards of approximately $47,587,000 for income tax purposes that expire in years 2002 through 2010, general business credit carryovers of approximately $530,000 which expire in years 1999 through 2006 and alternative minimum tax credits of approximately $687,000, which do not expire. All of these carryforwards are subject to limitation as described below. Significant components of the Company's deferred tax liabilities and assets are as follows:
DECEMBER 31, --------------------------------------------- 1996 1995 1994 ------------ ------------ ----------- Deferred tax assets Current: Reserve on notes and accounts receivable.......... $ 37,000 $ 50,000 $ 53,000 State taxes, net.................................. 14,000 27,000 5,000 Other liabilities................................. 47,000 223,000 -- ------------- ------------- ----------- Total current deferred tax assets....... 98,000 300,000 58,000 Valuation allowance for current deferred tax (98,000) (300,000) (58,000) assets.......................................... ------------- ------------- ----------- -- -- -- ------------- ------------- ----------- Non-current: Depreciation...................................... 440,000 255,000 104,000 State taxes, net.................................. 2,083,000 923,000 817,000 General business credit carryforwards............. 530,000 850,000 530,000 Alternative minimum tax credit carryforwards...... 687,000 687,000 -- Deferred development fees......................... 117,000 120,000 126,000 Net operating loss carryforwards.................. 16,655,000 7,702,000 9,066,000 ------------- ------------- ----------- Total non-current deferred tax assets... 20,512,000 10,537,000 10,643,000 Valuation allowance for non-current (15,449,000) (10,344,000) (8,981,000) deferred tax assets............................. ------------- ------------- ----------- Net non-current deferred tax assets..... 5,063,000 193,000 1,662,000 ------------- ------------- ----------- Non-current deferred tax liabilities Equity investments................................ 5,063,000 193,000 1,662,000 ------------- ------------- ----------- Net non-current deferred taxes.................... $ -- $ -- $ -- ============= ============= ===========
F-20 63 KTI, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Significant components of the provision for income taxes are as follows:
YEAR ENDED DECEMBER 31, --------------------------------------- 1996 1995 1994 ----------- --------- --------- Current: Federal.............................. $ -- $ -- $ -- State................................ -- 65,000 -- ----------- --------- --------- Total Current.......................... -- 65,000 -- Deferred: Federal.............................. $ 5,075,000 $(274,000) $(448,000) State................................ 863,000 (128,000) (57,000) Valuation allowance.................. (5,938,000) 402,000 505,000 ----------- --------- --------- Total deferred......................... -- -- -- ----------- --------- --------- $ -- $ 65,000 $ -- =========== ========= =========
The components of the provision for deferred income taxes from continuing operations for the years ended December 31, 1996, 1995 and 1994 are as follows:
YEAR ENDED DECEMBER 31, ------------------------------------------- 1996 1995 1994 ----------- ----------- ----------- Net operating loss carryforwards.... $ 951,000 $ 1,364,000 $(1,579,000) Equity investments.................. 4,870,000 (1,470,000) 686,000 State taxes, net.................... 110,000 (128,000) (57,000) Deferred development fees........... 3,000 6,000 6,000 Depreciation........................ (185,000) (142,000) (70,000) Change in reserve on receivables.... 13,000 25,000 509,000 Accrued and other expenses.......... 176,000 (57,000) -- Change in valuation allowance....... (5,938,000) 402,000 505,000 ----------- ----------- ----------- Provision for deferred income taxes............................. $ -- $ -- $ -- =========== =========== ===========
The reconciliation of income tax computed at the federal statutory tax rates to income tax expense is:
YEAR ENDED DECEMBER 31, --------------------------------------- 1996 1995 1994 ----------- --------- --------- Tax (benefit) at US statutory rates.... $ 5,033,000 $(452,000) $(486,000) State income taxes, net of federal tax benefit.............................. 863,000 (85,000) (57,000) Amortization of goodwill............... 42,000 191,000 38,000 Change in valuation allowance from continuing operations................ (5,938,000) 402,000 505,000 Other.................................. -- 9,000 -- ----------- --------- --------- $ -- $ 65,000 $ -- =========== ========= =========
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" F-21 64 KTI, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) has increased by more than 50 percentage points over the lowest percentage of such stock owned during a three-year testing period. During 1994, such a change in ownership occurred. As a result of the change, the Company's ability to utilize certain of its net operating loss carryforwards and general business credits will be limited to approximately $1,100,000 of taxable income, or approximately $375,000 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. During 1995, the Company acquired Convergent Solutions, Inc. As a result of this combination, the Company recorded deferred tax assets of $1,203,000 and a related valuation allowance for the same amount. During 1996, the Company acquired Timber Energy Investments, Inc. ("TEII"). As a result of this acquisition, the Company recorded a deferred tax asset related to net operating loss carryforwards of $25,580,000, 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 of TEII is limited to approximately $874,000 per year. 13. COMMITMENTS The Company has entered into various facility and equipment operating leases. The facility lease agreements generally require the Company to pay certain expenses including maintenance costs and a percentage of real estate taxes. The lease expires in 2001. The Company entered into a sublease agreement for certain of its office facilities. Rental expense, net of sublease income, for all operating leases amounted to $145,000, $133,000, and $100,000 for the years ended December 31, 1996, 1995 and 1994, respectively. As of December 31, 1996, future minimum rental commitments on noncancelable operating leases, net of sublease income are as follows: 1997.............................................. $279,000 1998.............................................. 237,000 1999.............................................. 186,000 2000.............................................. 189,000 2001.............................................. 165,000
The Company has entered into employment agreements with certain of its key employees which provide for fixed compensation and bonuses based on operating results, as defined. These agreements generally continue until terminated by the employee or the Company and, under certain circumstances, provide for salary continuation for a specified period. At December 31, 1996 the Company's maximum aggregate liability under the agreements if all the employees were terminated by the Company is $1,490,000. In connection with their operations, Maine Energy, TEII and PERC have entered into certain contractual agreements with respect to the supply and acceptance of municipal solid waste and the sale of electric power. 14. EMPLOYEE BENEFIT PLAN The Company has established a defined contribution employee savings and investment retirement plan under Section 401(k) of the Internal Revenue Code. All employees are eligible to participate in the plan after satisfying certain eligibility requirements. The Company contributes on behalf of each participating employee an amount equal to 4% of the employees eligible salary. The Company's contribution was approximately $164,000 $146,000, and $156,000 for the years ended December 31, 1996, 1995 and 1994, respectively. F-22 65 KTI, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 15. RELATED PARTY TRANSACTIONS The Company receives an annual management fee (adjusted annually for changes in the Consumer Price Index) as co-general partner of PERC. During the years ended December 31, 1996, 1995 and 1994, the Company earned management fees of approximately $417,800, $406,500, and $395,700 respectively. As described in Note 9 above, a portion of these fees are required to be applied to outstanding interest and principal due to Energy National, Inc. The receivable from PERC was approximately $2,279,000 and $2,419,000 at December 31, 1996 and December 31, 1995, respectively. Payment of this obligation by PERC is limited by the provisions of certain agreements to which the Company and PERC are parties. The Company expects the remaining balance to be realized over a 10-year period. The Company leases its administrative offices from a company whose principals include certain officers and shareholders of KTI. Rents for the years ended December 31, 1996, 1995 and 1994 were $109,500 $101,000, and $97,000, respectively. During the years 1988 to 1991, the Company made loans evidenced by promissory notes, including those related to the sale of the Company's real estate business (KTI Realty, Inc.), and made certain other advances to a then officer/shareholder of the Company. The individual's employment as an officer of the Company was terminated during 1992. During 1992, the Company began legal action against the former officer for collection of the notes, among other matters. In February 1994, the former shareholder transferred title to all of his shares of the Company's common stock to a third party. Based on the former officer's aggregate obligations to the Company ($1,069,544 at December 31, 1993), management challenged his right to transfer these shares and threatened additional legal action. In April 1994, the Company and the third party entered into an agreement under which 82,374 of these shares were transferred to the Company to settle the former officer's obligations to the Company. The cost of these shares was $578,124. In addition, the Company entered into an agreement with the former officer/shareholder under which all of his debts to the Company were discharged and the related litigation was dismissed. Provision for loss on the remaining balance due from the former officer had been provided in prior years. During 1991, the Company formed EWM Holdings, LP (a limited partnership) ("Eastern") as the sole general partner and a 50% owner and accounted for the investment using the equity method. EWM Holdings, LP acquired 95% of the outstanding common stock of Eastern Waste Management Corp. and Rilco Group, Inc. which were engaged in the ownership and operation of a solid waste transfer station. In August 1993, Eastern sold its operations. In connection with the sale of Eastern's operations, N&M Consulting, Inc., a company under the control of relatives of a Company shareholder and officer, entered into a consulting agreement under which it receives certain fees from the buyer. N&M Consulting, Inc. has entered into an agreement with the Company under which it pays the Company fees equal to the fees it receives from the buyer. The Company received approximately $25,000 $54,000, and $128,000 under this arrangement in 1996, 1995 and 1994, respectively. 16. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The carrying amount and estimated fair values of financial instruments at December 31, 1996 and 1995 are summarized as follows: The following methods and assumptions were used to estimate the fair value of financial instruments; Cash, restricted cash and accounts receivable -- the carrying amounts reported in the balance sheet for cash, cash equivalents, and restricted funds including debt securities approximate their fair value. F-23 66 KTI, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Management fees receivable -- the fair value is estimated using discounted cash flow analyses, using estimates of current market interest rates and periods in which the receivables will be realized. Notes and other receivables -- the fair value is estimated using discounted cash flow analyses, using appropriate interest rates. Resource Recovery Revenue Bonds Payable -- carrying amount of bonds payable approximates fair value. Debt -- the fair value is estimated based on discounting the estimated future cash flows using the Company's incremental borrowing rate for similar debt instruments.
DECEMBER 31, 1996 DECEMBER 31, 1995 ------------------------- ------------------------- CARRYING ESTIMATED CARRYING ESTIMATED AMOUNT FAIR VALUE AMOUNT FAIR VALUE ----------- ----------- ----------- ----------- ASSETS Cash................................ $ 3,315,705 $ 3,315,705 $ 6,454,558 $ 6,454,558 Restricted cash..................... 9,979,402 9,979,402 13,544,631 13,544,631 Accounts receivable (net)........... 4,080,503 4,080,503 8,983,699 8,983,699 Management fee receivable........... 2,741,837 2,097,532 2,933,274 2,250,752 Notes receivable (net).............. 270,464 250,071 380,663 309,938 Other receivables................... 1,110,103 912,862 791,624 738,885 LIABILITIES Resources Recovery Revenue Bonds Payable.......... 13,400,000 13,400,000 64,500,000 64,500,000 Other debt.......................... 25,672,988 24,792,930 50,876,162 50,106,923
17. CONTINGENCIES The Port Authority of New York and New Jersey ("Port Authority") sued certain wholly-owned subsidiaries of KTI, in the Supreme Court of the State of New York, New York County on April 11, 1995. Port Authority 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 located on Staten Island and leased by Port Authority from the City of New York. The Company and the Port Authority have settled this litigation. Pursuant to the settlement agreement, the Company has paid $100,000 to the Port Authority. An additional payment of $32,000 is due in April 1997. The Company had fully provided for the settlement amount in 1995. The Company is involved in additional outstanding litigation, but the Company expects to settle all such litigation within the limits of its insurance policies. In the opinion of Management, the outcome of these matters individually and in the aggregate will not have a material effect on the Company's financial position, cash flows or results of operations. F-24 67 REPORT OF INDEPENDENT AUDITORS Partners Penobscot Energy Recovery Company We have audited the accompanying balance sheets of Penobscot Energy Recovery Company (a limited partnership) as of December 31, 1996 and 1995, and the related statements of income, changes in partners' capital and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Penobscot Energy Recovery Company at December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. ERNST & YOUNG LLP February 7, 1997 F-25 68 PENOBSCOT ENERGY RECOVERY COMPANY (A LIMITED PARTNERSHIP) BALANCE SHEETS
DECEMBER 31, --------------------------- 1996 1995 ----------- ----------- ASSETS Cash and cash equivalents......................................... $ 5,439,833 $ 6,465,266 Accounts receivable............................................... 4,695,790 3,967,028 Restricted funds.................................................. 8,481,761 8,363,958 Prepaid expenses and other assets................................. 480,561 389,533 Property, plant and equipment, net (Note 3)....................... 71,321,295 73,853,243 Deferred costs, less accumulated amortization of $4,518,768 in 1996 and $4,838,526 in 1995....................... 1,341,038 1,727,610 ----------- ----------- Total................................................... $91,760,278 $94,766,638 =========== =========== LIABILITIES AND PARTNERS' CAPITAL Accounts payable (Note 6)......................................... $ 1,640,871 $ 1,313,602 Accrued expenses and other liabilities............................ 1,271,103 2,281,092 Management and development fees payable to general partners (Note 6).............................................................. 3,255,864 3,455,568 Bonds payable (Note 4)............................................ 53,500,000 59,400,000 ----------- ----------- Total liabilities....................................... 59,667,838 66,450,262 Partners' capital: Contributed capital............................................. 23,605,435 25,939,478 Retained earnings............................................... 8,487,005 2,376,898 ----------- ----------- Total partners' capital................................. 32,092,440 28,316,376 ----------- ----------- Total................................................... $91,760,278 $94,766,638 =========== ===========
See accompanying notes. F-26 69 PENOBSCOT ENERGY RECOVERY COMPANY (A LIMITED PARTNERSHIP) STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, ------------------------------------------- 1996 1995 1994 ----------- ----------- ----------- Revenues (Note 2): Electric power revenues........................... $18,487,405 $18,276,914 $17,888,227 Waste processing revenues......................... 11,807,454 11,182,065 10,585,266 ----------- ----------- ----------- Total..................................... 30,294,859 29,458,979 28,473,493 Operating expenses: Supplemental fuels (Note 6)....................... 1,026,128 872,581 892,517 Electric power purchases.......................... 124,215 110,303 92,967 Disposal costs.................................... 4,879,689 4,253,355 4,436,119 Operating and management fees (Note 6)............ 5,353,385 5,165,224 5,130,913 Equipment and maintenance costs................... 3,196,370 2,527,208 2,347,437 Depreciation...................................... 3,679,624 3,689,987 3,672,193 Real estate taxes................................. 555,690 521,350 486,312 Insurance......................................... 349,820 379,675 368,962 Other............................................. 1,849,046 2,487,543 1,893,177 ----------- ----------- ----------- Total..................................... 21,013,967 20,007,226 19,320,597 ----------- ----------- ----------- Operating income.................................... 9,280,892 9,451,753 9,152,896 Interest and other financing costs, net (Note 5).... (3,170,785) (3,804,265) (3,656,271) ----------- ----------- ----------- Net income.......................................... $ 6,110,107 $ 5,647,488 $ 5,496,625 =========== =========== ===========
See accompanying notes. F-27 70 PENOBSCOT ENERGY RECOVERY COMPANY (A LIMITED PARTNERSHIP) STATEMENTS OF CHANGES IN PARTNERS' CAPITAL YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
GENERAL PARTNERS LIMITED PARTNERS TOTAL ----------------------- ------------------------- ------------------------- RETAINED RETAINED RETAINED CONTRIBUTED EARNINGS CONTRIBUTED EARNINGS CONTRIBUTED EARNINGS CAPITAL (DEFICIT) CAPITAL (DEFICIT) CAPITAL (DEFICIT) ----------- --------- ----------- ----------- ----------- ----------- Balance, January 1, 1994........ $ 3,016,552 $(876,721) $27,148,974 $(7,890,494) $30,165,526 $(8,767,215) Capital distributions......... (58,481) (58,481) -- Net income.................... 549,663 4,946,962 -- 5,496,625 ---------- --------- ----------- ----------- ----------- ----------- Balance, December 31, 1994...... 3,016,552 (327,058) 27,090,493 (2,943,532) 30,107,045 (3,270,590) Capital distributions......... (109,107) (4,058,460) (4,167,567) -- Net income.................... 564,749 5,082,739 -- 5,647,488 ---------- --------- ----------- ----------- ----------- ----------- Balance, December 31, 1995...... 2,907,445 237,691 23,032,033 2,139,207 25,939,478 2,376,898 Distributions................. (192,663) (2,141,380) (2,334,043) Net income.................... 611,011 5,499,096 6,110,107 ---------- --------- ----------- ----------- ----------- ----------- Balance, December 31, 1996...... $ 2,714,782 $ 848,702 $20,890,653 $ 7,638,303 $23,605,435 $ 8,487,005 ========== ========= =========== =========== =========== ===========
See accompanying notes. F-28 71 PENOBSCOT ENERGY RECOVERY COMPANY (A LIMITED PARTNERSHIP) STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ------------------------------------------- 1996 1995 1994 ----------- ----------- ----------- OPERATING ACTIVITIES Net income.......................................... $ 6,110,107 $ 5,647,488 $ 5,496,625 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization..................... 4,085,410 4,208,161 4,212,193 Changes in asset and liability accounts: Increasing (decreasing) cash: Accounts receivable............................ (728,762) 52,943 (62,621) Prepaid expenses and other assets.............. (91,028) (141,673) 61,376 Accounts payable............................... 327,269 (50,312) (263,237) Accrued expenses and other liabilities......... (1,009,989) 716,787 853,632 Management and development fees payable........ (199,704) (105,726) (1,609,391) ------------ ----------- ------------ Net cash provided by operating activities........... 8,493,303 10,327,668 8,688,577 INVESTING ACTIVITIES Additions to property, plant and equipment.......... (1,191,890) (1,171,925) (1,799,623) Net change in restricted funds...................... (117,803) (384,211) 526,827 Proceeds from sale of property, plant and equipment......................................... 25,000 ------------ ----------- ------------ Net cash used in investing activities............... (1,284,693) (1,556,136) (1,272,796) FINANCING ACTIVITIES Payment of bond principal........................... (5,900,000) (4,900,000) (3,800,000) Distributions....................................... (2,334,043) (4,167,567) (58,481) ------------ ----------- ------------ Net cash used in financing activities............... (8,234,043) (9,067,567) (3,858,481) ------------ ----------- ------------ (Decrease) increase in cash and cash equivalents.... (1,025,433) (296,035) 3,557,300 Cash and cash equivalents at beginning of year...... 6,465,266 6,761,301 3,204,001 ------------ ----------- ------------ Cash and cash equivalents at end of year............ $ 5,439,833 $ 6,465,266 $ 6,761,301 ============ =========== ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest paid....................................... $ 2,425,761 $ 2,980,420 $ 2,224,872 ============ =========== ============
See accompanying notes. F-29 72 PENOBSCOT ENERGY RECOVERY COMPANY (A LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 1. ORGANIZATION AND DESCRIPTION OF OPERATIONS Penobscot Energy Recovery Company ("PERC") is a limited partnership formed on December 28, 1983 and organized to design, construct, operate, own and manage a facility located in Orrington, Maine for the conversion of solid waste and supplemental fuel to electric power (the "Project"). Certain contractual agreements relating to this facility have been entered into, including agreements with respect to the supply of solid waste, the sale of electric power, and operation and maintenance of the facility. PERC Management Company ("PMC"), which is ultimately owned by KTI, Inc. ("KTI"), and Energy National, Inc. ("ENI") are general partners. ENI and another entity are limited partners. The ownership interests of the partners are as follows:
OWNERSHIP INTERESTS --------------------- GENERAL LIMITED PARTNERS PARTNERS -------- -------- PMC....................................................... 7% ENI....................................................... 3 25.7% Other limited partner..................................... 64.3 --- ---- - 10% 90.0% === =====
Profits and losses are to be allocated 10% to the general partners and 90% to the limited partners until such time that the return on equity, as defined in the Partnership Agreement, of the limited partners exceeds their aggregate capital contributions. Commencing on that date and continuing through the remaining term of the Partnership, such allocations, including gains and losses upon net sale or refinancing, shall be 40% to the general partners and 60% to the limited partners. According to the Partnership agreement, the Partnership has a limited life extending to December 31, 2018, unless further extended by a vote of all of the partners. The Project is subject to the provisions of various federal and state energy laws and regulations including the Public Utility Regulatory Policies Act of 1978, as amended. In addition, federal, state and local environmental laws establish standards governing certain aspects of the Project's operations. The Company believes it has all permits, licenses and approvals necessary to operate the facility. 2. SIGNIFICANT ACCOUNTING POLICIES Property, Plant and Equipment Property, plant and equipment are stated at cost, less accumulated depreciation. All costs incurred for additions and improvements to the facility, including interest during construction, are capitalized. Depreciation is provided on the straight-line method over estimated useful lives. Deferred Costs Costs incurred by PERC in connection with permanent financings have been deferred and are being amortized over the life of the related debt issues using the interest method. During 1991, PERC finalized negotiations with municipalities and entered into new long-term waste handling agreements which resulted in higher waste handling fees. Costs associated with the renegotiation were deferred and amortized over 60 months which represented the minimum period covered by the new agreements. F-30 73 PENOBSCOT ENERGY RECOVERY COMPANY (A LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Restricted Funds Restricted funds consist of cash and cash equivalents held in trust which are available for debt service, certain capital improvements and repairs and maintenance. Revenues Electric power revenues are earned from the sale of electricity to Bangor Hydro-Electric Company ("BHE"), a utility serving a portion of the State of Maine, under a Power Purchase Agreement (the "Agreement"). Revenue is recorded at the contract rate specified in the Agreement as the electricity is delivered. Waste processing revenues consist principally of fees charged to customers for waste disposal. Substantially all waste processing revenues are earned from customers located in a geographic region proximate to the facility. Revenue is generally recorded upon delivery based on rates specified in the applicable long-term contracts. Certain of these contract rates are adjusted quarterly based on actual costs incurred in the prior quarter. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Income Taxes There is no provision in the financial statements for income taxes as the income or loss is included in the income tax returns of the partners. Statements of Cash Flows For purposes of the statements of cash flows, PERC considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Fair Values of Financial Instruments The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash, cash equivalents and restricted funds The carrying amounts reported in the balance sheet for cash, cash equivalents and restricted funds approximate their fair value. Bonds payable The carrying amount of the Company's borrowings under its bonds payable approximates their fair value. F-31 74 PENOBSCOT ENERGY RECOVERY COMPANY (A LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 3. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following:
1996 1995 ------------ ------------ Machinery and equipment......................... $ 66,727,285 $ 66,191,892 Buildings and site improvements................. 30,426,327 30,098,486 Furniture and fixtures.......................... 799,576 787,609 Parts and supplies.............................. 2,041,659 1,783,380 Land............................................ 322,783 322,783 ------------ ------------ Total........................................... 100,317,630 99,184,150 Less accumulated depreciation................... (28,996,335) (25,330,907) ------------ ------------ Property, plant and equipment, net.............. $ 71,321,295 $ 73,853,243 ============ ============
4. FINANCING TRANSACTIONS On May 22, 1986, the Town of Orrington, on behalf of PERC, issued $50,400,000 of Floating Rate Demand Resource Recovery Revenue Bonds to finance the Project. Commencing May 1, 1988, the bonds became variable rate obligations based on rates for certain tax-exempt obligations, as determined weekly by the remarketing agent for the bonds (4.125% and 5.875% at December 31, 1996 and 1995, respectively). Additionally, on December 3, 1986, the Town of Orrington, on behalf of PERC, issued $30,600,000 of Floating Rate Demand Resource Recovery Revenue Bonds to supplement the previous financing of the Project. These bonds also bear interest based on rates for certain tax-exempt obligations, as determined weekly by the remarketing agent for the bonds (4.25% and 6.125% at December 31, 1996 and 1995, respectively). The bonds are subject to mandatory redemption in quarterly installments of varying amounts through November 2003 and are subject to redemption at the option of PERC at the redemption price of 100% of the principal amount thereof plus accrued interest. Aggregate principal maturities for the next five years and thereafter are as follows: 1997............................................................ $ 4,800,000 1998............................................................ 6,200,000 1999............................................................ 7,000,000 2000............................................................ 7,800,000 2001............................................................ 8,800,000 Thereafter...................................................... 18,900,000 ----------- Total........................................................... $53,500,000 ===========
The bonds are fully secured by irrevocable letters of credit from a group of banks. The bonds and letter of credit are collateralized by liens on substantially all of PERC's assets and contain certain restrictive covenants which require, among other things, maintenance of working capital, as defined, and restrict PERC's ability to incur additional indebtedness, make loans and acquire investments. If necessary, the limited partners are obligated to fund up to $5,000,000 to reimburse any shortfalls in principal and interest payments under the bond and related letter of credit agreements. F-32 75 PENOBSCOT ENERGY RECOVERY COMPANY (A LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 5. INTEREST AND OTHER FINANCING COSTS -- NET Interest and other financing costs for the years ended December 31, 1996, 1995 and 1994 consist of:
1996 1995 1994 ---------- ---------- ---------- Interest expense........................... $2,262,680 $2,963,143 $2,433,048 Letter of credit fees...................... 976,982 1,075,143 1,148,917 Amortization of deferred bond financing costs.................................... 351,252 376,894 398,720 Remarketing and bank fees.................. 288,436 153,904 180,528 Interest income............................ (708,565) (764,819) (504,942) ---------- ---------- ---------- Interest and other financing costs -- net............................. $3,170,785 $3,804,265 $3,656,271 ========== ========== ==========
6. RELATED PARTY TRANSACTIONS PERC incurred management fees payable to the general partners of $595,408, $580,668, and $565,165 in 1996, 1995 and 1994, respectively, in accordance with the Partnership Agreement. PERC purchases a portion of its supplemental fuel (wood chips) from KTI BioFuels, L.P., an affiliate of PMC. During 1996, 1995 and 1994, these purchases totalled approximately $279,700, $153,600 and $148,546, respectively. Accounts payable includes $21,070 and $8,748 due to KTI BioFuels, L.P. at December 31, 1996 and 1995, respectively. Effective May 1, 1989, PERC entered into an Operation and Maintenance Agreement with ESOCO Orrington, Inc., an affiliate of ENI. For the years ended December 31, 1996, 1995 and 1994, PERC paid operating and maintenance fees to ESOCO of approximately $4,500,000, $4,400,000 and $4,200,000, respectively, plus additional approved pass through operating costs. The amounts payable as of December 31, 1996 and 1995 were $346,359 and $349,031, respectively. PERC had waste processing revenue of approximately $615,546, $603,820 and $564,942 from Orrington Waste Ltd. (a limited partnership including certain general and limited partners of PERC) (OWL) in 1996, 1995 and 1994, respectively. OWL and PERC have a long-term put-pay agreement under which OWL pays waste disposal fees to PERC equivalent to those charged to other municipalities. Included in accounts receivable at December 31, 1996 and 1995 is approximately $60,160 and $87,296, respectively, related to the waste processing revenue recognized. 7. WASTE HANDLING AGREEMENTS Certain of PERC's long-term, put-pay contracts with municipalities for disposal of solid waste contain provisions which, at the date the bonds are fully paid, allow the municipalities to purchase the facility or terminate or extend the contracts. Certain of the long-term, put-pay contracts with municipalities contain provisions which allow the municipalities to receive a portion of PERC's annual cash flows, as defined. Based on PERC's cash flows, as defined, approximately $619,000, $1,418,000 and $440,000 was payable to these municipalities for 1996, 1995 and 1994, respectively. These amounts are included in other expenses. F-33 76 SCHEDULE II KTI, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - ---------------------------------- --------- ------------------------- ------------ ---------- ADDITIONS ------------------------- CHARGED TO BALANCE AT CHARGED TO OTHER BALANCE AT BEGINNING COSTS AND ACCOUNTS -- DEDUCTIONS -- END OF DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD - ---------------------------------- ---------- ---------- ----------- ------------- ---------- YEAR ENDED DECEMBER 31, 1996 Deducted from assets accounts: Allowance for doubtful accounts... $ 480,662 23,632 $ 212,355(1) $ 291,939 YEAR ENDED DECEMBER 31, 1995 Deducted from asset accounts: Allowance for doubtful accounts... 156,912 323,750 480,662 YEAR ENDED DECEMBER 31, 1994 Deducted from asset accounts: Allowance for doubtful accounts... 105,577 51,335 156,912 Allowance for notes receivable -- officers/shareholders and affiliates...................... 1,097,065 618,941(1) 0 478,124(1)
- --------------- (1) Uncollectible accounts written off, net of recoveries. F-34 EX-3.2 2 BY-LAWS OF THE REGISTRANT 1 EXHIBIT 3.2 Amended and Restated as of February 28, 1997 BY-LAWS OF KTI, INC. (hereinafter called the "Corporation") ARTICLE I OFFICES Section 1. Registered Office. The registered office of the Corporation shall be in the State of New Jersey. Section 2. Other Offices. The Corporation may also have offices at such other places both within and without the State of New Jersey as the Board of Directors may from time to time determine. ARTICLE II MEETINGS OF SHAREHOLDERS Section 1. Place of Meetings. Meetings of the shareholders for the election of Directors or for any other purpose shall be held at such time and place, either within or without the State of New Jersey as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting or in a duly executed waiver of notice thereof. Section 2. Annual Meetings. The Annual Meeting of Shareholders for the election of Directors, and the transaction of such other business as may properly come before such meeting shall be held on such date and at such time as shall be designated from time to time by the Board of Directors and stated in the notice of the Meeting. Written notice of the Annual Meeting stating the place, date and hour and purpose or purposes of the meeting shall be given to each shareholder entitled to vote at such meeting not less than ten nor more than sixty days before the date of the meeting. Section 3. Special Meetings. Unless otherwise prescribed by law or by the Certificate of Incorporation, Special Meetings of Shareholders, for any purpose or purposes, may be called by a majority of the Board of Directors, the Chairman of the Board of Directors (the "Chairman") or the President. Such request shall state the purpose or purposes of the proposed Meeting. Unless 2 otherwise required by law, written notice of a Special Meeting stating the place, date and hour of the Meeting and the purpose or purposes for which the Meeting is called shall be given not less than ten nor more than sixty days before the date of the Meeting to each shareholder entitled to vote at such meeting. Section 4. Quorum. Except as otherwise provided by law or by the Certificate of Incorporation, the holders of a majority of the capital stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all Meetings of Shareholders for the transaction of business. If, however, such quorum shall not be present or represented at any Meeting of Shareholders, the shareholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the Meeting from time to time, without notice other than announcement at the Meeting, until a quorum shall be present or represented. At such adjourned Meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the Meeting as originally noticed. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned Meeting, a notice of the adjourned Meeting shall be given to each shareholder entitled to vote at the Meeting. Section 5. Voting. Unless otherwise required by law, the Certificate of Incorporation or these By-Laws, any question brought before any Meeting of Shareholders shall be decided by the vote of the holders of a majority of the stock represented and entitled to vote thereat. Unless otherwise provided by law or the Certificate of Incorporation, each shareholder represented at a Meeting of Shareholders shall be entitled to cast one vote for each share of the capital stock entitled to vote thereat held by such shareholder. Such votes may be cast in person or by proxy, but no proxy shall be voted on or after 11 months from its date, unless such proxy provides for a longer period, and in no event shall a proxy be valid after three years from its date. The Board of Directors, in its discretion, or the Officer of the Corporation presiding at a Meeting of Shareholders, in such Officer's discretion, may require that any votes cast at such Meeting shall be cast by written ballot, and such ballot shall be so required at an election of Directors if a shareholder so demands at the election and before the voting begins. Section 6. Consent of Shareholders in Lieu of Meeting. Unless otherwise provided by law or in the Certificate of Incorporation, any action required or permitted to be taken at any Annual or Special Meeting of Shareholders of the Corporation may be taken without a meeting, without prior notice and without a vote, if all the shareholders entitled to vote thereon consent thereto in writing; provided that in the case of action taken pursuant to Chapter 10 of the New Jersey Business Corporation Act (the "NJBCA"), such action may be taken without a meeting only if all shareholders entitled to vote thereon sign the written consent and the advance notice required by subsection 14A:5-6 of the NJBCA is given to all other shareholders. Unless otherwise provided by law or in the Certificate of Incorporation any action required or permitted to be taken at any Annual or Special Meeting of Shareholders of the Corporation, other than the annual election of Directors, may be taken without a meeting and without a vote upon the written consent of shareholders who would have been entitled to cast the minimum number of votes which would be necessary to authorize such action at a meeting at which all shareholders entitled to vote thereon were present and voting; provided that if such written consent is not signed by all shareholders who would have been entitled to vote thereon, the advance notice required by 2 3 subsection 14A:5-6 of the NJBCA, if applicable, shall be given to those shareholders who have not consented in writing. Section 7. List of Shareholders Entitled to Vote. The Officer or agent of the Corporation who has charge of the stock transfer books of the Corporation shall make and certify before every Meeting of Shareholders, a complete list of the shareholders entitled to vote at the Meeting, arranged in alphabetical order within each class, series or group of shareholders maintained by the Corporation for convenience of reference, and showing the address of each shareholder and the number of shares registered in the name of each shareholder. The list shall also be produced and kept at the time and place of the Meeting during the whole time thereof, and may be inspected by any shareholder of the Corporation who is present. The list shall be prima facie evidence as to who are the shareholders entitled to examine such list or to vote in person or by proxy at any Meeting of Shareholders. ARTICLE III DIRECTORS Section 1. Number and Election of Directors. The Board of Directors shall consist of not less than three Directors, with the actual number to be fixed from time to time by a vote of the majority of the Directors then in office. A Director shall hold office until the Annual Meeting of Shareholders or thereafter when such Director's successor shall be elected and shall qualify, subject, however, to prior death, resignation, retirement, disqualification or removal from office. Except as provided in Section 2 of this Article, Directors shall be elected by a plurality of the votes cast at Annual Meetings of Shareholders. Any Director may resign at any time upon notice to the Corporation. Directors need not be shareholders. Section 2. Nominations. Nominations for the election of Directors may be made by the Board of Directors, by a committee appointed by the Board of Directors or by any shareholder entitled to vote in the election of Directors generally. Any shareholder entitled to vote in the election of Directors generally may nominate one or more persons for election as Directors at a Shareholders' Meeting only if written notice of such shareholder's intent to make such nomination or nominations has been given, either by personal delivery or by United States mail, postage prepaid, to the Chairman not later than (i) with respect to an election to be held at an Annual Meeting of Shareholders 90 days prior to the anniversary date of the immediately preceding Annual Meeting, and (ii) with respect to an election to be held at a Special Meeting of Shareholders for the election of Directors, the close of business on the tenth day following the date on which notice of such Meeting is first given to the shareholders. Each such notice shall set forth: (a) the name and address of the shareholder who intends to make the nominations and of the person or persons to be nominated; (b) each nominee's age and principal occupation or employment; (c) the number of shares of stock of the Corporation beneficially owned by each nominee; (d) a representation that the shareholder is a holder of record of stock of the Corporation entitled to vote at such Meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (e) a description of all arrangements or understandings between the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are 3 4 to be made by the shareholder; (f) such other information regarding each nominee proposed by such shareholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission and any other information or tangible evidence, such as fingerprints, which any governmental agency may require the Corporation to provide pursuant to any federal or state law, rule or regulation and (g) the consent of each nominee to serve as a Director of the Corporation if so elected. A shareholder who does not comply with the foregoing procedures may be precluded from nominating a candidate for election as a Director at a Meeting of Shareholders. Notwithstanding anything to the contrary contained in this Section 2, if the Corporation is required to obtain the consent of any governmental agency prior to the election of any person nominated by a shareholder or if the Board of Directors or any committee of the Board of Directors determines that a nominee if elected would jeopardize the retention of any authorization held by the Corporation issued by a governmental agency, the Board of Directors or any committee of the Board of Directors may strike such nominee from the ballot or determine not to place the nominee on the ballot. Section 3. Vacancies. Any vacancy on the Board of Directors that results from an increase in the number of Directors may be filled by a majority of the Board of Directors then in office, and any other vacancy occurring in the Board of Directors may be filled by a majority of the Directors then in office, although less than a quorum, or by a sole remaining Director. Section 4. Duties and Powers. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these By-Laws directed or required to be exercised or done by the shareholders. Section 5. Meetings. The Board of Directors of the Corporation may hold meetings, both regular and special, either within or without the State of New Jersey. Regular meetings of the Board of Directors may be held without notice at such time and at such place as may from time to time be determined by the Board of Directors. Special meetings of the Board of Directors may be called by the Chairman, the Vice Chairman, if there be one or more,, the President, or any two Directors. Notice thereof stating the place, date and hour of the meeting shall be given to each Director either by mail not less than forty-eight (48) hours before the date of the meeting, by telephone, facsimile or telegram on twenty-four (24) hours' notice, or on such shorter notice as the person or persons calling such meeting may deem necessary or appropriate in the circumstances. Section 6. Quorum. Except as may be otherwise specifically provided by law, the Certificate of Incorporation or these By-Laws, at all meetings of the Board of Directors or any committee thereof, a majority of the entire Board of Directors shall constitute a quorum for the transaction of business and the majority of the directors on any committee present at any meeting shall constitute a quorum for such committee. The act of a majority at such meeting shall be the act of the Board of Directors or of the committee. If a quorum shall not be present at any meeting of the Board of Directors or of any committee the Directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. 4 5 Section 7. Actions of Board. Unless otherwise provided by the Certificate of Incorporation or these By-Laws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all the members of the Board of Directors or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors or committee. Section 8. Meetings by Means of Conference Telephone. Unless otherwise provided by the Certificate of Incorporation of these By-Laws, members of the Board of Directors of the Corporation, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors or such committee by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section 8 shall constitute presence in person at such meeting. Section 9. Committees. The Board of Directors shall have four standing committees, the Audit Committee, the Compensation Committee, the Executive Committee and the Nominating Committee. The Board of Directors may, by resolution passed by a majority of the entire Board of Directors, designate one or more additional committees, each committee to consist of one or more of the Directors of the Corporation. The Board of Directors may designate one or more Directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of any such committee. In the absence or disqualification of a member of a committee, and in the absence of a designation by the Board of Directors of an alternate member to replace the absent or disqualified member, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any absent or disqualified member. Each committee, having more than one Director as a member shall elect a director on such committee as the Chairperson of such committee. Any committee, to the extent allowed by law and as expressly provided in the resolution establishing such committee, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, except that no committee shall have the power to declare dividends, to elect or remove officers, or to authorize the issue of any class of stock of the Corporation. Each committee shall keep regular minutes and report to the Board of Directors when required. Section 9.A. The Audit Committee. The Audit Committee shall consist of not less than three Directors, who are not employees of the Corporation or of any of its subsidiaries and who do not have any significant personal or corporate business relationships with Corporation or any of its subsidiaries. The members of the Audit Committee shall be elected by the Board of Directors. The Audit Committee is authorized and directed to: (a) review the procedures and policies of the Corporation and its subsidiaries, including but not limited to: (i) internal security of cash and other assets, (ii) financial controls and policies, and (iii) risk management and insurance coverages; (b) to confer with the Officers of the Corporation responsible for financial matters and with auditors (i) to develop a recommendation to the Board of Directors of the Corporation for the scope of the audit, (ii)to cause bids to be obtained to audit the financial statements of the 5 6 Corporation, (iii) to make recommendations to the Board of Directors of a firm of independent certified public accountants to employ for the annual audit, (iv) to meet with the auditors upon completion of the audit to review the financial statements, internal financial controls and to receive comments as to deficiencies, if any, and (v) to review management responses to such comments and (c) to carry out such other duties and functions as are customary for the Audit Committee of a publicly traded corporation or are assigned to the Audit Committee by the Board of Directors of the Corporation. The Audit Committee shall meet not less than twice per year and at such other times as it deems advisable (a) to make recommendations as to the scope of the audit and to recommend an auditor to conduct the annual audit and (b) to receive the report of the auditors and thereafter to report its recommendations or findings to the Board of Directors. The Audit Committee shall keep minutes of its meetings. The Audit Committee may confer directly with any Officer or employee of the Corporation at its sole discretion. Section 9.B. The Compensation Committee. The Compensation Committee shall consist of not less than two Directors, who are not employees of the Corporation or of any of its subsidiaries and who do not have any significant personal or corporate business relationships with Corporation or any of its subsidiaries. The members of the Compensation Committee shall be elected by the Board of Directors. The Compensation Committee shall administer the Corporation's 1994 Long-Term Compensation Incentive Award Plan and any successor or similar plans, the making of recommendations concerning other bonuses, stock options, performance, achievement or other incentive plans, and the determination of salaries of employees who are Directors of the Corporation. Section 9.C. The Executive Committee. The Executive Committee shall consist of not less than three Directors. The members of the Executive Committee shall be elected by the Board of Directors. The function of the Executive Committee is to review the businesses of the Corporation and to advise the Board of Directors and the Officers of the Corporation as to potential business opportunities, strategies and acquisitions and divestitures. The Executive Committee does not make decisions but acts in an advisory capacity only. Section 9.D. The Nominating Committee. The Nominating Committee shall consist of not less than three Directors, at least one of whom is not an employee of the Corporation or of any of its subsidiaries and who do not have any significant personal or corporate business relationships with Corporation or any of its subsidiaries. The members of the Nominating Committee shall be elected by the Board of Directors. The Nominating Committee shall consider the size and composition of the Board of Directors, review the performance of Officers and Directors, and recommend individuals for retention or election as Officers or Directors Section 10. Compensation. The Directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary or retainer as director. No such payment shall preclude any Director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. 6 7 Section 11. Interested Directors. No contract or transaction between the Corporation and one or more of its Directors or Officers, or between the Corporation and any other corporation, partnership, association, or other organization in which one or more of its Directors or Officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the Director or Officer is present at or participates in the meeting of the Board of Directors or committee thereof which authorizes the contract or transaction, or solely because such Director's or Officer's or their votes are counted for such purpose if (i) the material facts as to such Director's or Officer's or their relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board of Directors or committee in good faith authorizes, approves, or ratifies the contract or transaction by the affirmative vote of a majority of the disinterested Directors, even though the disinterested Directors be less than a quorum; or (ii) the material facts as to such Director's or Officer's or their relationship or interest and as to the contract or transaction are disclosed or are known to the shareholders entitled to vote thereon, and the contract or transaction is specifically authorized, approved or ratified in good faith by the shareholders; or (iii) the contract or transaction is fair and reasonable as to the Corporation as of the time it is authorized, approved or ratified, by the Board of Directors, a committee thereof or the shareholders. Common or interested Directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. ARTICLE IV OFFICERS Section 1. General. The Officers of the Corporation shall be chosen by the Board of Directors and shall be a Chairman of the Board of Directors, a President, the Chairman of the Executive Committee, a Secretary, a Treasurer and a Controller. The Board of Directors, in its discretion, may also choose one or more Vice Chairman of the Board of Directors (each of whom must be a Director) and one or more Senior Vice Presidents, one or more Vice Presidents, one or more Assistant Vice Presidents, Assistant Secretaries, Assistant Treasurers and other officers. Any number of offices may be held by the same person, unless otherwise prohibited by law, the Certificate of Incorporation or these By-Laws. The Officers of the Corporation need not be shareholders of the Corporation nor, except in the case of the Chairman of the Board of Directors, the Chairman of the Executive Committee and any Vice Chairman of the Board of Directors, need such Officers be Directors of the Corporation. Section 2. Election. The Board of Directors shall elect the Officers of the Corporation who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors. Any vacancy occurring in any office of the Corporation shall be filled by the Board of Directors. Section 3. Voting Securities Owned by the Corporation. Powers of attorney, proxies, waivers of notice of meeting, consents and other instruments relating to securities owned by the Corporation may be executed in the name of and on behalf of the Corporation by the Chairman, 7 8 any Vice Chairman, the President, the Chairman of the Executive Committee, any Senior Vice President or any Vice President and any such Officer may, in the name of and on behalf of the Corporation, take all such action as any such Officer may deem advisable to vote in person or by proxy at any meeting of security holders of any corporation in which the Corporation may own securities and at any such meeting shall possess and may exercise any and all rights and power incident to the ownership of such securities and which, as the owner thereof, the Corporation might have exercised and possessed if present. The Board of Directors may, by resolution, from time to time confer like powers upon any other person or persons. Section 4. Chairman of the Board of Directors. The Chairman shall preside at all Meetings of Shareholders and of the Board of Directors, and may be the Chief Executive Officer of the Corporation. Except where by law the signature of the President is required, the Chairman shall possess the same power as the President to sign all contracts, certificates and other instruments of the Corporation which may be authorized by the Board of Directors. The Chairman shall also perform such other duties and may exercise such other powers as from time to time may be assigned to the Chairman by these By-Laws or by the Board of Directors. During the absence or disability of the President, the Chairman shall exercise all the powers and discharge all the duties of the President. Section 5. Chief Executive Officer. The Chief Executive Officer shall, subject to the control of the Board of Directors, have general supervision of the business of the Corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect. Such Officer shall execute all bonds, mortgages, contracts and other instruments of the Corporation requiring a seal, under the seal of the Corporation, except where required or permitted by law to be otherwise signed and executed and except that the other Officers of the Corporation may sign and execute documents when so authorized by these By-Laws, the Board of Directors or the Chief Executive Officer. In the absence or disability of the Chairman of the Board of Directors, or if there be none, the President shall preside at all Meetings of Shareholders and the Board of Directors. The Chief Executive Officer shall also perform such other duties and may exercise such other powers as from time to time may be assigned to Such Officer by these By-Laws or by the Board of Directors. Section 6. President. The Board of Directors shall appoint a President who may have the duties of the Chief Operating Officer unless another officer of the Corporation is so designated. The President shall have such duties as delegated to Such Officer by the Chief Executive Officer, and such other responsibilities as are delegated to the President by law, the Certificate of Incorporation or these By-Laws. Section 7. Chief Operating Officer. The Chief Operating Officer shall, subject to the control of the Board of Directors and the Chief Executive Officer, have general supervision over the operations of the Corporation and shall see that all orders and resolutions of the Board of Directors and all orders of the Chief Executive Officer are carried into effect. Section 7.A. The Chairman of the Executive Committee. The Chairman of the Executive Committee shall preside at all meeting of the Executive Committee and shall have primary 8 9 responsibility for the review of all acquisitions or divestitures by the Corporation of new or existing businesses. Section 8. Senior Vice Presidents, Vice Presidents and Assistant Vice Presidents. At the request of the Chief Executive Officer or in such Officer's absence or in the event of such Officer's inability or refusal to act, the Chief Operating Officer, the President, the Chairman of the Executive Committee, the Senior Vice President or the Senior Vice Presidents if there are more than one (in the order designated by the Board of Directors), the Vice President or the Vice Presidents if there is more than one (in the order designated by the Board of Directors) shall perform the duties of the Chief Executive Officer, and when so acting, shall have all the powers of and be subject to all the restrictions upon the Chief Executive Officer. Each Senior Vice President and each Vice President shall perform such other duties and have such other powers as the Board of Directors, the Chief Executive Officer, the Chairman, the Chief Operating Officer, the President or the Chairman of the Executive Committee from time to time may prescribe. If there be no Chief Executive Officer, no Chairman, no Chief Operating Officer, no President, no Chairman of the Executive Committee, no Senior Vice President and no Vice President, the Board of Directors shall designate the Officer of the Corporation who, in the absence of the Chief Executive Officer or in the event of the inability or refusal of the Chief Executive Officer to act, shall perform the duties of the Chief Executive Officer, and when so acting, shall have all the powers of and be subject to all the restrictions upon the Chief Executive Officer. Assistant Vice Presidents shall perform such duties and have such powers as the Board of Directors, the Chairman or the President from time to time may prescribe. Section 9. Secretary. The Secretary shall attend all meetings of the Board of Directors and all Meetings of Shareholders and record all the proceedings thereat in a book or books to be kept for that purpose; the Secretary shall also perform like duties for the standing committees when required. The Secretary shall give, or cause to be given, notice of all Meetings of Shareholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or the Chief Executive Officer, under whose supervision Such Officer shall be. If the Secretary shall be unable or shall refuse to cause to be given notice of all meetings of the shareholders and special meetings of the Board of Directors, and if there be no Assistant Secretary, then either the Board of Directors or the Chief Executive Officer may choose another Officer to cause such notice to be given. The Secretary shall have custody of the seal of the Corporation and the Secretary or any Assistant Secretary, if there be one, shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by the signature of the Secretary or by the signature of any such Assistant Secretary. The Board of Directors may give general authority to any other officer to affix the seal of the Corporation and to attest the affixing by Such Officer's signature. The Secretary shall see that all books, reports, statements, certificates and other documents and records required by law to be kept or filed are properly kept or filed, as the case may be. Section 10. Treasurer. The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. The Treasurer shall disburse the funds of the Corporation as may be ordered by the 9 10 Board of Directors, the Chief Executive Officer, the Chairman, the Chief Operating Officer, the President or the Chairman of the Executive Committee, taking proper vouchers for such disbursements, and shall render to the Chief Executive Officer and the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all such person's transactions as Treasurer and of the financial condition of the Corporation. If required by the Board of Directors, the Treasurer shall give the Corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of such office and for the restoration to the Corporation, in case of such Officer's death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in such person's possession or control belonging to the Corporation. Section 11. Controller. The Controller shall have such duties and responsibilities as may be assigned to such person by the Chairman, the President, The Chairman of the Executive Committee or the Treasurer. Section 12. Assistant Secretaries. Except as may be otherwise provided in these By-Laws, Assistant Secretaries, if there be any, shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors, the Chief Executive Officer, or the Secretary, and in the absence of the Secretary or in the event of such Secretary's disability or refusal to act, shall perform the duties of the Secretary, and when so acting, shall have all the power of and be subject to all the restrictions upon the Secretary. Section 12. Assistant Treasurers. Assistant Treasurers, if there be any, shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors, the Chief Executive Officer, the Chairman, the President, the Chairman of the Executive Committee or the Treasurer, and in the absence of the Treasurer or in the event of such Treasurer's disability or refusal to act, shall perform the duties of the Treasurer, and when so acting, shall have all the powers of and be subject to all the restrictions upon the Treasurer. If required by the Board of Directors, an Assistant Treasurer shall give the Corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of such office and for the restoration to the corporation, in case of death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in such person's possession or control belonging to the Corporation. Section 13. Other Officers. Such other officers as the Board of Directors may choose shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors, the Chairman, the President The Chairman of the Executive Committee. The Board of Directors may delegate to any other officer of the Corporation the power to choose such other officers and to prescribe their respective duties and powers. ARTICLE V STOCK 10 11 Section 1. Form of Certificates. Every holder of stock in the Corporation shall be entitled to have a certificate signed, in the name of the Corporation (i) by the Chairman or a Vice Chairman of the Board of Directors, or the President or a Senior Vice President or a Vice President and (ii) by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the Corporation. The certificate shall state upon its face that the Corporation is organized under the laws of the State of New Jersey, the name of the person to whom issued, and the number and class of shares, and the designation of series, if any, which such certificate represents. Section 2. Signatures. Where a certificate is countersigned by (i) a transfer agent other than the Corporation or its employee, or (ii) a registrar other than the Corporation or its employee, any other signature on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such Officer, transfer agent or registrar at the date of issue. Section 3. Lost Certificates. The Board of Directors may direct a new certificate to be issued in place of any certificate theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate, or his legal representative, to advertise the same in such manner as the Board of Directors shall require and/or to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or destroyed. Section 4. Transfers. Stock of the Corporation shall be transferable in the manner prescribed by law and in these By-Laws. Transfers of stock shall be made on the books of the Corporation only by the person named in the certificate or by his attorney lawfully constituted in writing and upon the surrender of the certificate therefor, which shall be canceled before a new certificate shall be issued. Section 5. Record Date. In order that the Corporation may determine the shareholders entitled to notice of or to vote at any Meeting of Shareholders or any adjournment thereof, or entitled to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty days nor less than ten days before the date of such meeting, nor more than sixty days prior to the date fixed for tabulation of written consents (or, if no tabulation date has been fixed, no more than sixty days prior to the last day on which consents received may be counted under the NJBCA), nor more than sixty days prior to any other action. A determination of shareholders of record entitled to notice of or to vote at a Meeting of Shareholders shall apply to 11 12 any adjournment of the Meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned Meeting. Section 6. Beneficial Owners. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by law. ARTICLE VI NOTICES Section 1. Notices. Whenever written notice is required by law, the Certificate of Incorporation or these By-Laws, to be given to any director, member of a committee or shareholder, such notice may be given by mail, addressed to such director, member of a committee or shareholder, at such person's address as it appears on the records of the Corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Written notice may also be given personally or by telecopy, telegram, telex or cable. Section 2. Waivers of Notice. Whenever any notice is required by law, the Certificate of Incorporation or these By-Laws, to be given to any director, member of a committee or shareholder, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. ARTICLE VII GENERAL PROVISIONS Section 1. Dividends. Dividends upon the capital stock of the Corporation, subject to the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, and may be paid in cash, in property, or in shares of the capital stock. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Board of Directors from time to time, in its absolute discretion, deems proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for any proper purpose, and the Board of Directors may modify or abolish any such reserve. Section 2. Disbursements. All checks or demands for money and notes of the Corporation shall be signed by such Officer or Officers or such other person or persons as the Board of Directors may from time to time designate. Section 3. Fiscal Year. The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors. 12 13 Section 4. Corporate Seal. The corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization and the words "Corporate Seal, New Jersey". The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. ARTICLE VIII AMENDMENTS Section 1. These By-Laws may be altered, amended or repealed, in whole or in part, or new By-Laws may be adopted by the shareholders or by the Board of Directors, provided, however, that notice of such alteration, amendment, repeal or adoption of new By-Laws be contained in the notice of such Meeting of Shareholders or Board of Directors as the case may be. All such amendments must be approved either by the holders of a majority of the outstanding capital stock entitled to vote thereon or by a majority of the entire Board of Directors then in office. Section 2. Entire Board of Directors. As used in this Article VIII and in these By-Laws generally, the term "entire Board of Directors" means the total number of directors which the Corporation would have if there were no vacancies in the actual number then fixed. 13 EX-10.38 3 LOAN AND SECURITY AGREEMENT 1 EXHIBIT 10.38 LOAN AND SECURITY AGREEMENT BETWEEN KTI, INC., KTI ENVIRONMENTAL GROUP, INC., KUHR TECHNOLOGIES INC., KTI LIMITED PARTNERS, INC., KTI OPERATIONS, INC. AND PERC, INC., BORROWERS, AND KEY BANK OF NEW YORK, LENDER. DATED: OCTOBER 29, 1996 2 TABLE OF CONTENTS ARTICLE 1. DEFINITIONS............................................ 1 ARTICLE 2. THE REVOLVING LOAN..................................... 6 2.1. Advances............................................... 6 2.2. Manner of Borrowing.................................... 6 2.3. Overadvances........................................... 6 2.4. Evidence of Borrower's Obligations..................... 6 2.5. Payments............................................... 7 2.6. Application of Payments and Collections................ 7 ARTICLE 3. LENDER'S COMPENSATION.................................. 7 3.1. Interest............................................... 7 3.2. Underwriting Fee....................................... 7 3.3. Facility Fee........................................... 7 3.4. Computation of Interest and Fees....................... 7 ARTICLE 4. APPLICATION OF PROCEEDS................................ 8 ARTICLE 5. SECURITY INTEREST IN COLLATERAL........................ 8 ARTICLE 6. RECOURSE TO SECURITY................................... 8 ARTICLE 7. INDUCING REPRESENTATIONS............................... 8 7.1. Organization and Qualifications........................ 8 7.2. Corporate Name and Address............................. 9 7.3. Subsidiaries........................................... 9 7.4. Legally Enforceable Agreement.......................... 9 7.5. Solvent Financial Condition............................ 9 7.6. Financial Statements................................... 9 7.7. Forecasts.............................................. 10 7.8. Joint Ventures......................................... 10 7.9. Patents, Trademarks, Copyrights and Licenses........... 10 7.10. Existing Business Relationship......................... 10 7.11. Broker's Fees.......................................... 10 7.12. Investment Company Act; Federal Reserve Board Regulations................... 10 7.13. Tax Returns............................................ 11 7.14. Litigation............................................. 11 7.15. Penobscot Energy Recovery Company and Maine Energy Recovery Company Limited Partnership................... 11 7.16. Power Purchase Contracts............................... 11 7.17. KTI Operations Operation and Maintenance Agreement..... 11 (i) 3 7.18. Receivables Locations................................ 12 7.19. Existing Indebtedness................................ 12 7.20. Existing Liens....................................... 12 7.21. Material Agreements.................................. 12 7.22. Corporate Restrictions............................... 12 7.23. Survival of Representations and Warranties........... 12 ARTICLE 8. FINANCIAL STATEMENTS AND INFORMATION; CERTAIN NOTICES TO LENDER.......................... 12 8.1. Financial Data....................................... 12 8.2. Projections.......................................... 13 8.3. Notice of Event of Default and Other Adverse Business Developments....................................... 13 8.4. Other Information.................................... 14 ARTICLE 9. ACCOUNTING........................................... 14 ARTICLE 10. AFFIRMATIVE COVENANTS................................ 15 10.1. Business and Existence............................... 15 10.2. Transactions with Affiliates......................... 15 10.3. Taxes................................................ 15 10.4. Compliance with Laws................................. 15 10.5. Compliance with ERISA................................ 15 10.6. Business Records..................................... 15 10.7. Litigation........................................... 15 10.8. Events of Default.................................... 15 10.9. Name Change.......................................... 15 10.10. Access to Books and Records.......................... 16 10.11. Solvent.............................................. 16 10.12. Compliance with Environmental Laws................... 16 10.13. Primary Deposit Accounts............................. 16 10.13. Revolving Loan Balances.............................. 16 ARTICLE 11. NEGATIVE COVENANTS................................... 16 11.1. Indebtedness......................................... 16 11.2. Guaranties........................................... 16 11.3. Mergers; Consolidations.............................. 16 11.4. New Business......................................... 16 11.5. Sale or Disposition.................................. 16 11.6. Acquisitions......................................... 17 11.7. Defaults............................................. 17 11.8. Loans................................................ 17 11.9. Limitations on Liens................................. 17 11.11. Affiliate Transactions............................... 18 (ii) 4 11.12. Borrower's Name and Offices.......................... 18 11.14. Fiscal Year.......................................... 18 11.16. Subsidiaries......................................... 18 ARTICLE 12. FINANCIAL COVENANTS.................................. 18 12.1. Minimum Current Ratio................................ 18 12.2. Maximum Leverage Ratio............................... 19 ARTICLE 13. FURTHER RIGHTS OF LENDER............................. 19 13.1. Lender's Right to Take Certain Actions............... 19 13.2. Lender's Rights to Perform Borrower's Obligations.... 19 13.3. Lender's Right to Set-Off............................ 19 13.4. Lender's Right of Inspection......................... 20 ARTICLE 14. CONDITIONS PRECEDENT; CLOSING........................ 20 ARTICLE 15. TERM................................................. 21 ARTICLE 16. EVENTS OF DEFAULT.................................... 21 16.1. Defaults............................................. 22 16.2. Obligations Immediately Due.......................... 22 16.3. Continuation of Security Interests................... 22 ARTICLE 17. REMEDIES OF LENDER................................... 22 17.1. Rights Under Uniform Commercial Code................. 22 17.2. Waiver of Rights by Borrower......................... 23 17.3. Lender's Rights...................................... 23 17.4. Borrower to Pay Costs................................ 24 ARTICLE 18. GENERAL PROVISIONS................................... 24 18.1. Rights Cumulative.................................... 24 18.2. Successors and Assigns............................... 24 18.3. Notice............................................... 24 18.4. Strict Performance................................... 25 18.5. Waiver of Right to Jury Trial........................ 26 18.6. Amendments........................................... 26 18.7. Waiver............................................... 26 18.8. Conflict of Laws..................................... 26 18.9. Expenses............................................. 27 (iii) 5 LIST OF EXHIBITS EXHIBIT A Schedule of Receivables' Records' Locations EXHIBIT B Schedule of Litigation EXHIBIT C Form of Revolving Loan Note EXHIBIT D List of Subsidiaries and Affiliates of Each Borrower EXHIBIT E List of Existing Indebtedness of Each Borrower EXHIBIT F Form of Pledge Agreement EXHIBIT G Partnership Agreement for Penobscot Energy Recovery Company, L.P. EXHIBIT H Partnership Agreement for Maine Energy Recovery Company, L.P. EXHIBIT I List of Existing Power Purchase, Waste Handling and Additional Material Contracts EXHIBIT J List of all Tradenames EXHIBIT K List and Description of Borrowers' Joint Ventures EXHIBIT L List of Existing Liens Affecting the Borrowers EXHIBIT M Operation and Maintenance Agreement between Maine Energy Recovery Company and KTI Operations, Inc. (iv) 6 LOAN AND SECURITY AGREEMENT THIS LOAN AND SECURITY AGREEMENT made this 29th day of October, 1996, by and between KTI, INC., a New Jersey corporation with its principal office and place of business at 7000 Boulevard East, Guttenberg, New Jersey 07093 ("KTI"), KTI Environmental Group, Inc., a New Jersey corporation with its principal office and place of business at 7000 Boulevard East, Guttenberg, New Jersey 07093 ("KTI Environmental"), Kuhr Technologies Inc., a New Jersey corporation with its principal office and place of business at 7000 Boulevard East, Guttenberg, New Jersey 07093 ("Kuhr"), KTI Limited Partners, Inc., a Delaware corporation with its principal office and place of business at 7000 Boulevard East, Guttenberg, New Jersey 07093 ("KTI Limited"), KTI Operations, Inc., a Delaware corporation with its principal office and place of business at 7000 Boulevard East, Guttenberg, New Jersey 07093 ("KTI Operations") and PERC, INC., a Delaware corporation with its principal office and place of business at 7000 Boulevard East, Guttenberg, New Jersey 07093 ("PERC") (KTI, KTI Environmental, Kuhr, KTI Limited, KTI Operations and PERC referred to herein individually, as the "Borrower" and, collectively, as the "Borrowers"), and KEY BANK OF NEW YORK, a New York banking corporation, with its principal executive office and place of business at 66 South Pearl Street, Albany, New York 12207 (the "Lender"). RECITALS: A. Borrowers have requested that Lender extend a One Million Dollar ($1,000,000.00) line of credit facility to provide Borrowers with continued working capital support. B. Lender is willing to provide Borrowers with a line of credit facility on the terms and conditions set forth herein. AGREEMENT: 1. DEFINITIONS. As used herein, the following terms shall have the following meanings (terms defined in the singular to have the same meaning when used in the plural and vice versa): 1.1. "Account Debtor" shall mean any Person who is or may become obligated under or on account of any Receivable. 1.2. "Advance" shall mean any loan or advance by the Lender with respect to the Revolving Loan. 1.3. "Affiliate" shall mean any Person: (i) which directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, any 1 7 Borrower; (ii) which beneficially owns or holds 5% or more of any class of the Voting Stock of any Borrower; or (iii) 5% or more of the Voting Stock (or in the case of a Person which is not a corporation, 5% or more of the equity interest) of which is beneficially owned or held by any Borrower. For purposes hereof, "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of Voting Stock, by contract or otherwise. 1.4. "Base Rate" shall mean the rate of interest set, determined or announced on a periodic basis by Lender as its "Base Rate" which rate of interest is not necessarily the lowest rate charged by Lender on loans and other credits which may be extended by Lender at rates both above and below the Base Rate. 1.5. "Capital Expenditures" shall mean expenditures which are required to be capitalized in accordance with Generally Accepted Accounting Principles and shall include all payments in respect of Capital Leases and leasehold improvements. 1.6. "Closing Date" shall mean the date on which all of the conditions precedent set forth in Section 14 are satisfied and the initial Advance is made hereunder. 1.7. "Collateral" shall mean all of the Property and interests in Property described in Section 5 hereof, and all other personal Property of Borrower and interests of Borrower in personal Property that now or hereafter secures the payment and performance of any of the Obligations pursuant to any of the Loan Documents or otherwise. 1.8. "Current Assets" shall mean at any date the amount at which all of the current assets of KTI would be properly classified as current assets on KTI's consolidated balance sheet at such date in accordance with Generally Accepted Accounting Principles. 1.9. "Current Liabilities" shall mean at any date the amount at which all of the current liabilities of KTI would be properly classified as current liabilities on a consolidated balance sheet at such date in accordance with Generally Accepted Accounting Principles. Obligations to Lender under this Agreement in respect of the Revolving Loan shall be treated as Current Liabilities. 1.10. "Current Ratio" shall mean, for any fiscal period of KTI, the ratio of (i) Current Assets for such period to (ii) Current Liabilities for such period. 1.11. "Default" shall mean an event or condition the occurrence of which would, with the lapse of time or the giving of notice, or both, become an Event of Default. 1.12. "Environment" shall mean any water or water vapor, any land including land surface or subsurface, air, fish, wildlife, biota and all other natural resources. 2 8 1.13. "Environmental Laws" shall mean all federal, state and local environmental, land use, zoning, health, chemical use, safety and sanitation laws, statutes, ordinances and codes relating to the protection of the Environment and/or governing use, storage, treatment, generation, transportation, processing, handling, production or disposal of hazardous substances and the rules, regulations, policies, guidelines, interpretations, decisions orders and directives of federal, state and local governmental agencies and authorities with respect thereto. 1.14. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. 1.15. "Events of Default" shall have the meaning set forth in Article 16 of this Agreement. 1.16. "Generally Accepted Accounting Principles" shall mean generally accepted accounting principles consistently applied and maintained throughout the period indicated and consistent with the prior financial practice of the Borrowers and any predecessor, except for changes mandated by the Financial Accounting Standards Board or any similar accounting authority of comparable standing. Whenever any accounting term is used herein which is not otherwise defined, it shall be interpreted in accordance with Generally Accepted Accounting Principles. 1.17. "Indebtedness" shall mean and include all obligations for borrowed money of any kind or nature, including funded and unfunded debt, contingent obligations under letters of credit, and all obligations for the acquisition or use of any fixed asset, including capitalized leases, or improvements which are payable over a period longer than one year, regardless of the term thereof or the person or persons to whom the same is payable. 1.18. "Leverage Ratio" shall mean the ratio of Borrowers' (i) total Liabilities to (ii) Tangible Net Worth. 1.19. "Liabilities" shall have the meaning given to that term in accordance with Generally Accepted Accounting Principles. Liabilities to Affiliates shall be treated as Liabilities except where excluded by consolidation in accordance with Generally Accepted Accounting Principles. 1.20. "Lien" shall mean any interest in Property securing an obligation owed to, or a claim by, a Person other than the owner of the Property, whether such interest is based on the common law, statute or contract, and including, but not limited to, the security interest, security title or lien arising from a security agreement, mortgage, deed of trust, deed to secure debt, encumbrance pledge, conditional sale or trust receipt or a lease, consignment or bailment for security purposes. The term "Lien" shall include reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances affecting Property. For the purpose of this Agreement, Borrowers shall be deemed to be the owners of any Property which it has acquired or holds subject to a conditional 3 9 sale agreement or other arrangement pursuant to which title to the Property has been retained by or vested in some other Person for security purposes. 1.21. "Loan" shall mean the loans and Advances made by the Lender hereunder, and shall include the Revolving Loan. 1.22. "Loan Documents" shall mean all documents and instruments to be delivered by Borrowers under this Agreement or in connection with the Loan, as the same may be amended, modified or supplemented from time to time. 1.23. "Maximum Amount of the Revolving Facility" shall mean One Million Dollars ($1,000,000.00). 1.24. "Obligations" shall mean and include all loans (including the Loans), advances, debts, liabilities, obligations, covenants and duties owing by any Borrower to Lender (or to any entity under common control with Lender) of any kind or nature, present or future, whether or not evidenced by any note, guaranty or other instrument, whether arising under this Agreement, the Loan Documents or under any other agreement or by operation of law, whether or not for the payment of money, whether arising by reason of an extension of credit, opening, guaranteeing or confirming of a letter of credit, loan, guaranty, indemnification or in any other manner, whether direct or indirect (including those acquired by assignment), absolute or contingent, due or to become due, now due or hereafter arising and however acquired. The term includes, but without limitation, all interest, charges, expenses, commitment, facility, collateral management or other fees, attorneys' fees, and any other sum chargeable to any Borrower under this Agreement, the Loan Documents or any other agreement with Lender. 1.25. "Person" shall mean an individual, partnership, corporation, limited liability company, joint venture, joint stock company, land trust, business trust or unincorporated organization, or a government or agency or political subdivision thereof. 1.26. "Plan" means an employee benefit plan or other plan now or hereafter maintained for employees of any Borrower or any subsidiary and covered by Title IV of ERISA. 1.27. "Property" shall mean any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. 1.28. "Purchase Money Indebtedness" means and includes (i) any Indebtedness (other than the Obligations) for the payment of all or any part of the purchase price of any fixed assets, (ii) any Indebtedness (other than the Obligations) incurred at the time of or within ten (10) days prior to or after the acquisition of any fixed assets for the purpose of financing all or any part of the purchase price thereof, and (iii) any renewals, extensions or refinancings thereof and any increases not greater than ten percent (10%) in the principal amounts thereof, outstanding at the time. 4 10 1.29. "Receivables" shall mean and include all present and future accounts, contract rights, promissory notes, chattel paper, instruments and documents, bonds, certificates and policies of insurance and insurance proceeds, investment securities, notes, instruments and deposit accounts, book accounts, credits and reserves and all forms of obligations whatsoever owing, together with all instruments, all documents of title representing any of the foregoing, and all rights in any merchandise or goods which any of the same may represent, all files and records with respect to any collateral or security given by any Borrower to Lender, together with all right, title, security and guaranties with respect to each Receivable, including any right of stoppage in transit, whether now owned or hereafter created or acquired by any Borrower or in which any Borrower now has or hereafter acquires any interest. 1.30. "Reportable Event" shall have the meaning assigned to that term in Title IV of ERISA. 1.31. "Revolving Loan" shall mean the loan and Advances to be made by Lender to Borrower pursuant to Article 2 of this Agreement. 1.32. "Revolving Loan Note" shall mean the promissory note substantially in the form annexed hereto as Exhibit "C", to be given by Borrowers to Lender to evidence the Revolving Loan. 1.33. "Solvent" shall mean when used with respect to any Person, such Person (i) owns property the fair value of which is greater than the amount required to pay all of such Person's Indebtedness (including contingent debts), (ii) owns property the present fair salable value of which is greater than the amount that will be required to pay the probable liabilities of such Person on its then existing Indebtedness as such become absolute and matured, (iii) is able to pay all of its Indebtedness as such Indebtedness matures, and (iv) has capital sufficient to carry on its then existing business. 1.34. "Tangible Net Worth" shall mean at any date a sum equal to: (i) the consolidated stockholders' equity of KTI and its consolidated subsidiaries plus the amount reported by Maine Energy Recovery Company as "deferred revenue" on its balance sheet (net of any minority interests) as a result of the sale of electric power capacity to Central Maine Power Company pursuant to a power purchase agreement dated May 3, 1996, MINUS (ii) the amount (to the extent reflected in determining such consolidated stockholders' equity) of (i) all investments in unconsolidated subsidiaries, (ii) all unamortized debt discount and expense, unamortized deferred charges, goodwill, patents, trademarks, service marks, trade names, copyrights, organization or developmental expenses of other intangible items; provided, however, that in no event shall KTI's 5 11 investment in PERC be treated as including an amount determined in accordance with this paragraph. 1.35. "This Agreement" shall include all amendments, modifications and supplements and shall refer to this Agreement as the same may be in effect at the time such reference becomes operative. 1.36. "Voting Stock" shall mean securities of any class or classes of a corporation the holders of which are ordinarily, in the absence of contingencies, entitled to elect a majority of the corporate directors (or Persons performing similar functions). 2. THE REVOLVING LOAN. 2.1. Advances. For so long as no Default or Event of Default exists, Lender, in its sole discretion, shall lend to Borrowers on the request of any Borrower a sum equal up to the Maximum Amount of the Revolving Loan. A determination of whether to make any requested Advance shall be within Lender's sole discretion. The outstanding principal balance of the Revolving Loan shall be payable on demand. The above provisions and certain other provisions of this Agreement are intended to set forth the manner of computation of certain limitations of the amounts which the Lender intends to loan or advance to Borrower but neither the Lender's discretionary right to make additional loans and advances to Borrower nor the security interests, liens or mortgages granted to Lender in any collateral shall in any way be limited by any such provision or by the type or types of collateral utilized in making any such computation. 2.2. Manner of Borrowing. The Borrowers shall give Lender telephonic notice (promptly confirmed in writing, if Lender so requests) of each Advance requested by it not later than 12:00 noon (prevailing time) on the date such Advance is to be made. Providing no Event of Default has occurred, Lender shall make such Advance on such date by transferring the amount thereof in immediately available funds for credit to such account (other than a payroll account) at a bank in the United States as the Borrower may specify. Lender shall not be responsible for any failure of any amount so transferred to be credited to any such account, unless such failure is due to Lender's gross negligence or willful misconduct. 2.3. Overadvances. Borrowers acknowledge that Lender has advised it that Lender does not presently intend to permit Borrowers to incur Obligations at any time in a principal amount exceeding the Maximum Amount of the Revolving Loan. However, it is agreed that should Obligations of Borrowers to Lender incurred under the Revolving Loan or otherwise exceed that figure or any other limitation herein set forth, all such obligations shall nevertheless constitute Obligations under this Agreement and shall be entitled to the benefit of all security and protection under this Agreement and all Loan Documents. 2.4. Evidence of Borrowers' Obligations. Borrowers' obligation to pay the principal of, and interest on, the Revolving Loan shall be evidenced by the Revolving Loan Note, 6 12 executed by Borrowers and delivered to Lender on the date hereof, in the form of Exhibit "C" hereto. 2.5. Payments. All payments with respect to the Obligations shall be made by Borrowers to Lender in U.S. currency and without any defense, offset or counterclaim of any kind, at 66 South Pearl Street, Albany, New York by noon (Albany, New York time) on the date when due. Whenever any payment to be made shall otherwise be due on a day that is not a business day, such payment shall be made on the next succeeding business day and such extension of time shall be included in computing interest in connection with any such payment. Lender is hereby authorized, in its sole and absolute discretion from time to time (and without regard to whether or not a Default or Event of Default exists) to charge any account of Borrowers maintained with Lender for each payment of any of the Obligations as they become due. 2.6. Application of Payments and Collections. Borrowers irrevocably waive the right to direct the application of any and all payments and collections at any time or times hereafter received by Lender from or on behalf of Borrowers and Borrowers do hereby irrevocably agree that Lender shall have the continuing exclusive right to apply and reapply any and all such payments and collections received at any time or times hereafter by Lender against the Obligations, in such manner as Lender may deem advisable, notwithstanding any entry by Lender upon any of its books and records. Credit will be given to Borrowers for funds received during business hours one (1) business day after receipt thereof by Lender conditional upon final collection. 3. LENDER'S COMPENSATION. 3.1. Interest. Borrowers shall pay interest monthly on the first day of each month for the preceding month, commencing November 1, 1996, on the average daily unpaid principal amount of the Revolving Loan, at a fluctuating rate which is equal to the Base Rate plus one quarter percent (1/4%). On and after the occurrence of an Event of Default hereunder, Borrowers shall pay interest on all Obligations due to Lender at a fluctuating rate which is equal to the Base Rate plus three and one-quarter percent (3 1/4%). In no event shall any interest to be paid hereunder or under any Loan Document exceed the maximum rate permitted by law. 3.2. Underwriting Fee. Borrowers shall pay Lender on the Closing Date an underwriting fee in the amount of Five Thousand Dollars ($5,000.00). 3.3. Facility Fee. Borrowers shall pay Lender on the Closing Date a facility fee in the amount of Two Thousand Five Hundred Dollars ($2,500.00). 3.4. Computation of Interest and Fees. All interest and fees hereunder shall be computed on the basis of a year consisting of three hundred sixty (360) days for the number of days actually elapsed and may be charged by Lender to any account of Borrowers with Lender or any Affiliate of Lender. 7 13 4. APPLICATION OF PROCEEDS. The proceeds of the Loan shall be used solely by Borrowers as working capital needed in the normal operation of Borrowers' businesses. Any advance of loan proceeds by any Borrower to any Affiliate (other than a Borrower) shall be deemed an Event of Default hereunder. 5. SECURITY INTEREST IN COLLATERAL. To secure the prompt payment and performance of all of Borrowers' Obligations to Lender, Borrowers jointly and severally transfer and assign to Lender and grant Lender, subject to those Liens specifically described on Exhibit "E" attached, a first priority Lien on and first security interest in all of the following Property and interests in Property of Borrowers, whether now owned or existing or hereafter created, acquired or arising and wheresoever located: (A) All Receivables; (B) All monies or other Property of any kind, now or at any time or times hereafter, in the possession or under the control of Lender or any entity under common control with Lender or any representative, agent or correspondent of Lender; (C) All of the issued and outstanding capital stock, or other equity interest, as the case may be, of any first level subsidiary of any of the Borrowers. Such security shall be evidenced by the execution and deliver of pledge agreements in substantially the form of Exhibit "F" attached; (D) All accessions to, substitutions for and all replacements, products and cash and non-cash proceeds of (A), (B), and (C) above, including, without limitation, proceeds of and unearned premiums with respect to insurance policies insuring any of the Collateral and claims against any Person for loss of, damage to, or destruction of any or all of the Collateral; and (E) All books and records (including, without limitation, customer lists, credit files, computer programs, printouts and other computer materials and records) of Borrowers pertaining to any of (A), (B), (C) and (D) above. 6. RECOURSE TO SECURITY. Recourse to security shall not be required for any Obligation hereunder upon the occurrence and during the continuance of any Event of Default. The Lender shall not be required to exercise any remedy granted hereunder with respect to the Collateral as a condition of enforcing its rights against the Borrowers. 7. INDUCING REPRESENTATIONS. In order to induce Lender to make the Loan, Borrowers jointly and severally make the following representations and warranties to Lender: 7.1. Organization and Qualifications. Each of KTI, KTI Environmental, and Kuhr is a corporation duly organized and existing under the laws of the State of New Jersey. Each of 8 14 KTI Limited, KTI Operations and PERC is a corporation duly organized and existing under the laws of the State of Delaware. Each Borrower is qualified to do business in every jurisdiction where the nature of its business requires it to be so qualified and where failure to so qualify might materially affect its business or assets. 7.2. Corporate Name and Address. Other than as listed on Exhibit "J", during the preceding five (5) years, no Borrower has been known as or used any corporate, fictitious or trade names. Borrowers' executive offices are at the addresses set forth above. 7.3. Subsidiaries. Other than as listed on Exhibit "D" hereto, no Borrower has any subsidiaries or Affiliates (not including individuals). Exhibit "D" also contains, as of the date hereof, an organizational chart of the Borrowers and their Affiliates, accurately reflecting, among other things, all equity interests owned by each in any Borrower or their Affiliates. All Affiliates listed on Exhibit "D" are either limited partnerships, corporations or limited liability companies duly organized and existing under the laws of the state designated on such chart as their respective states of incorporation or organization, as the case may be. 7.4. Legally Enforceable Agreement. The execution, delivery and performance of this Agreement, and each and all of the other Loan Documents and all and any other instruments and documents to be delivered by Borrowers or their Affiliates hereunder and the creation of all Liens, mortgages and security interests provided for herein are within each Borrower's corporate power, have been duly authorized by all necessary or proper corporate action (including the consent of shareholders where required), are not in contravention of any agreement or indenture to which any Borrower is a party or by which it is bound, or of the Certificate of Incorporation or By-Laws of any Borrower, and to the best of each Borrower's knowledge are not in contravention of any provision of law and the same do not require the consent or approval of any governmental body, agency, authority or any other person which has not been obtained and a copy thereof furnished to Lender. 7.5. Solvent Financial Condition. Each Borrower is Solvent. 7.6. Financial Statements. The consolidated balance sheet and income statements of KTI as of December 31, 1995, certified by KTI's regularly retained certified public accountants, and the internally prepared consolidated balance sheet as of June 30, 1996 of KTI, and consolidated income statement for the period ending June 30, 1996 of KTI, copies of which have been delivered to Lender, fairly present its financial condition and results of operations as relevant and as of such dates and there have been no material adverse changes since such dates. To the best of KTI's knowledge, after due investigation by KTI, as of December 31, 1995, KTI had no contingent liabilities, liabilities for taxes, unusual forward or long-term commitments, or unrealized or unanticipated losses from any unfavorable commitments which were not disclosed in such December 31, 1995 financial statements or the notes thereto which either individually or in the aggregate would be material. 9 15 7.7. Forecasts. Prior to the Closing Date, KTI shall deliver to Lender forecasted financial statements consisting of consolidated balance sheets, cash flow statements and income statements together with appropriate supporting details and a statement of the underlying assumptions, ranges and limitations (the "Forecasts"). Such Forecasts shall cover the one-year period commencing on January 1, 1997 and be prepared on a monthly basis. Such shall be prepared in good faith and, subject to the limitations and uncertainties inherent in trying to project future economic and business trends or results, shall represent the good faith opinion of KTI and its senior management and have a reasonable basis. The Forecasts shall indicate all material assumptions used in preparing such Forecasts, including the issuance of preferred or common stock, the disposition of Datafocus, and the acquisition of other entities or additional ownership in existing subsidiaries or Affiliates. 7.8. Joint Ventures. Other than as listed and described on Exhibit "K", no Borrower is engaged in any joint venture or partnership with any other person. 7.9. Patents, Trademarks, Copyrights and Licenses. Each Borrower owns or possesses all the patents, trademarks, service marks, trade names, copyrights and licenses necessary for the present and planned future conduct of its business without any known material conflict with the rights of others. 7.10. Existing Business Relationship. There exists no actual or threatened termination, cancellation or limitation of, or any materially adverse modification or change in, the business relationship of any Borrower with any customer or group of customers whose purchases individually or in the aggregate are material to the operations of any Borrower, or with any material supplier (other than in the ordinary course of business where one supplier is replaced by another offering terms not materially different to Borrower). 7.11. Broker's Fees. No broker's or finder's fees or commissions will be payable by Borrower to any person in connection with the transactions contemplated by this Agreement. 7.12. Investment Company Act: Federal Reserve Board Regulations. No Borrower is an "investment company", or an "affiliated person" of, or "promoter" or "principal underwriter" for, an "investment company", as such terms are defined in the Investment Company Act of 1940, as amended (15 U.S.C. Sections 80(a)(1), et seq.). The makings of the Loan hereunder by Lender, the application of the proceeds and repayment thereof by the Borrowers and the performance of the transactions contemplated by this Agreement will not violate any provision of said Act, or any rule, regulation or order issued by the Securities and Exchange Commission thereunder. No Borrower owns any margin security as that term is defined in Regulation U of the Board of Governors of the Federal Reserve System and the proceeds of the borrowings made pursuant to this Agreement will be used only for the purposes contemplated hereunder. None of the proceeds will be used, directly or indirectly, for the purpose of purchasing or carrying any margin security or for the purpose of reducing or retiring any indebtedness which was originally incurred to purchase or carry margin security or for any other purpose which might constitute any of the loans under this Agreement a "purpose credit" within the meaning of said 10 16 Regulation U or Regulations G or X of the Federal Reserve Board. No Borrower will take, or permit any agent acting on its behalf to take, any action which might cause this Agreement or any document or instrument delivered pursuant hereto to violate any regulation of the Federal Reserve Board. 7.13. Tax Returns. Borrowers have filed all tax returns (Federal, State or local) required to be filed to date and paid all taxes shown thereon to be due including interest and penalties or has provided adequate reserves therefor. No assessments have been made against any Borrower by any taxing authority nor has any penalty or deficiency been made by any such authority. No Federal income tax return of any Borrower is presently being examined by the Internal Revenue Service nor are the results of any prior examination by the Internal Revenue Service or any State or local tax authority being contested by any Borrower. 7.14. Litigation. Other than as described on Exhibit "B" attached hereto, no action or proceeding which, if adversely decided, would materially affect or impair any Borrower's business or financial condition, is now pending or, to the knowledge of any Borrower, is threatened against any Borrower at law, in equity or otherwise, before any court, board, commission, agency or instrumentality of the Federal or State government or of any municipal government or any agency or subdivision thereof, or before any arbitrator or panel of arbitrators and no Borrower has accepted liability for any such action or proceeding. There is no proceeding pending before any governmental agency (Federal, State or local) and, to the best of each Borrower's knowledge, no investigation has been commenced before any such government agency the effect of which, if adversely decided, would materially affect or impair any Borrower's business or financial condition. 7.15. Penobscot Energy Recovery Company, L.P. and Maine Energy Recovery Company, L.P. Exhibit "G" and "H" contain, respectively, the limited partnership agreements of Penobscot Energy Recovery Company ("Penobscot Energy") and Maine Energy Recovery Company Limited Partnership ("Maine Energy"), including all amendments thereto. Both Penobscot Energy and Maine Energy are limited partnerships duly organized and existing under the laws of Maine, and each are qualified to do business in every jurisdiction where the nature of their businesses require them to be so qualified and where failure to so qualify might materially affect their respective businesses or assets. 7.16. Power Purchase Contracts. Exhibit "I" contains a list of all existing power purchase, waste handling and similar contracts entered into by Penobscot Energy and Maine Energy, providing information regarding such contracts in such form as may be required by Lender. 7.17. KTI Operations Operation and Maintenance Agreement. Exhibit "M" contains a copy of the current Operation and Maintenance Agreement between Maine Energy Recovery Company and KTI Operations, including all amendments thereto. 11 17 7.18. Receivables Locations. Annexed hereto as Exhibit "A" is a list showing all places at which the Borrowers maintain, or will maintain, records relating to Receivables. 7.19. Existing Indebtedness. No Borrower has any existing Indebtedness other than described on Exhibit "E." 7.20. Existing Liens. No Borrower is subject to any Lien other than those described on Exhibit "L." 7.21. Material Agreement. No Borrower is in default under any contract, lease, loan, indenture, mortgage, security agreement or other material agreement or obligation to which it is a party or by which any of its properties are bound. 7.22. Corporate Restrictions. No Borrower is a party to any indenture, agreement, instrument or lease or subject to any charter by-law or other corporate restriction materially and adversely affecting the business, operations, properties or assets of any Borrower. 7.23. Survival of Representations and Warranties. Borrowers jointly and severally covenant, warrant and represent to Lender that all representations and warranties of Borrowers contained in this Agreement or any of the other Loan Documents shall be true at the time of each Borrower's execution of this Agreement and the other Loan Documents, and Lender's right to bring an action for breach of any such representation or warranty or to exercise any remedy hereunder based upon the breach of such representation or warranty shall survive the execution, delivery and acceptance hereof by the Lender and the closing of the transactions described herein or related hereto. 8. FINANCIAL STATEMENTS AND INFORMATION; CERTAIN NOTICES TO LENDER. So long as Borrowers shall have any Obligation to Lender under this Agreement, they shall deliver or cause to be delivered to Lender: 8.1. Financial Data. (i) Quarterly Financial Data. As soon as practicable and in any event within forty-five (45) days after the end of the first three quarters of each fiscal year, commencing with the fiscal quarter ending September 30, 1996, an unaudited consolidated and consolidating balance sheet of KTI and unaudited consolidated and consolidating statement of operations and cash flow for KTI reflecting results of operations from the beginning of KTI's fiscal year to the end of such quarter and for such quarter, fairly presenting the financial condition and results of operations of KTI as of the applicable dates and for the applicable periods and prepared in accordance with GAAP applied on a consistent basis with prior practices (except as otherwise stated therein and except that such statements need not contain all footnotes), subject to changes resulting from normal year-end and audit adjustments, setting forth in each case in comparative form consolidated and consolidating figures for such periods and for the 12 18 corresponding periods in the preceding fiscal year and certified by the chief financial officer of KTI, subject to changes for year-end and audit adjustments; (ii) as soon as practicable, and in any event upon the earlier of (A) the filing by KTI of its report on Form 10-K with the Securities and Exchange Commission or (B) one hundred five (105) days after the end of each fiscal year, audited consolidated and unaudited consolidating balance sheets of KTI as at the end of such year, setting forth in each case in comparative form corresponding figures from the budget referred to in clause (iii) hereof and from the preceding annual audit, all in reasonable detail, and, in the case of such consolidated financial statements, examined by independent public accountants of recognized national standing selected by KTI, whose report shall state that the scope of the examination was made in accordance with GAAP; (iii) not later than 30 days prior to the commencement of each upcoming fiscal year of KTI, beginning with the fiscal year commencing January 1, 1997, the annual budget of KTI presenting monthly and annual information on a consolidated and consolidating basis; (iv) at the time of the delivery of the financial statements required by clauses (i) and (ii) of this Section 8.1, a certificate of the chief financial officer of KTI (A) to the effect that to the best knowledge of KTI there exists no Event of Default, or if such Event of Default exists, specifying the nature thereof, the period of existence thereof and the action KTI proposes to take with respect thereto, and (B) also setting forth the calculations required to establish whether KTI is in compliance with Section 12; (v) as soon as available, any written report pertaining to material deficiencies in respect of KTI's internal control matters submitted to KTI by KTI's independent accountants in connection with each annual or interim special audit of the financial condition of KTI made by such independent public accountants and, upon a request by Lender, a written statement prepared by the chief financial officer of KTI summarizing the actions that KTI proposes to take in response thereto; (vi) with reasonable promptness, such other financial information, or information respecting results of operations, business or prospects of KTI, as Lender may reasonably request. 8.2. Projections. Not more than thirty (30) days following the end of each fiscal year of Borrowers, projections prepared by Borrowers consisting of projected balance sheets, cash flow statements, and profit and loss statements, on a monthly basis for each of the forthcoming twelve months, together with such appropriate supporting details and statements of assumptions as Lender may reasonably request; 8.3. Notice of Event of Default and Other Adverse Business Developments. Within five (5) days after becoming aware of the existence of a Default or any Event of Default under this Agreement or after becoming aware of any developments or other information which more likely than not would materially or adversely affect its properties, business, prospects, profits or condition (financial or otherwise) or its ability to perform this Agreement, including, without limitation, the following: (i) any substantial dispute that may arise between any Borrower and any governmental regulatory body or law enforcement authority, including any action by the 13 19 United States Securities and Exchange Commission and any action relating to any tax liability of any Borrower; (ii) all litigation commenced against any Borrower where the amount claimed in any one suit or action is $100,000.00 or more and all litigation where the amount claimed in the aggregate is $100,000.00 or more except when the same is fully covered by insurance and the insurer accepts liability therefor; (iii) any labor controversy resulting in or threatening to result in a strike or work stoppage against any Borrower; (iv) any proposal by any public authority to acquire the assets or business of any Borrower; (v) any proposed or actual change of any Borrower's name, identity or corporate structure; and (vi) any other matter which has resulted or may result in a material adverse change in any Borrower's financial condition or operations. In each case, such Borrower will provide Lender with telephonic or telegraphic notice specifying and describing the nature of such Event of Default or development or information, and such anticipated effect, which telephonic or telegraphic notice shall be promptly confirmed in writing within five (5) days; and 8.4. Other Information. Such other information respecting the financial condition of any Borrower or any property of any Borrower in which Lender may have a Lien as Lender may, from time to time, reasonably request. Each Borrower authorizes Lender, upon the occurrence and during the continuance of an Event of Default and upon reasonable notice to Borrowers, to communicate directly with the Borrowers' independent certified public accountants and authorizes those accountants to disclose to Lender any and all financial statements and other information of any kind that they may have with respect to the Borrowers and their business and financial and other affairs. Lender shall treat information so obtained as confidential. Borrowers shall deliver a letter addressed to such accountants instructing them to comply with the provisions of this Section . 9. ACCOUNTING. Lender will account monthly to Borrowers. Each and every account shall be deemed final, binding and conclusive upon the Borrower in all respects, as to all matters reflected therein, unless Borrowers, within thirty (30) business days after the date the account was rendered, delivers to Lender written notice of any objections which it may have to any such account and in that event only those items expressly objected to in such notice shall be deemed to be disputed by Borrowers. 14 20 10. AFFIRMATIVE COVENANTS. Borrowers jointly and severally represent and warrant that, so long as any Borrower shall have any Obligation to Lender hereunder, it will: 10.1. Business and Existence. Preserve and maintain its separate corporate existence and rights, privileges and franchises in connection herewith. Each Borrower will transact business in its own name and will invoice all Receivables in its own name; 10.2. Transactions with Affiliates. Wherever it engages in transactions with any of its Affiliates conduct the same on an arms-length basis or other basis more favorable to Borrowers; 10.3. Taxes. Pay and discharge all taxes, assessments, government charges and levies imposed upon it, its income or its profits or upon any property belonging to it prior to the date on which penalties attach thereto, except where the same may be contested in good faith by appropriate proceedings; 10.4. Compliance With Laws. Comply with all Federal, State or local laws and regulations regarding the collection, payment and deposit of employees' income, unemployment and Social Security taxes; 10.5. Compliance With ERISA. Comply with all applicable provisions of ERISA and the Internal Revenue Code of 1986, as amended (the "Code"). No Borrower will engage in any transaction which would subject it to tax, penalty or liability for prohibited transactions imposed by ERISA or the Code; 10.6. Business Records. Keep adequate records and books of account with respect to its business activities in which proper entries are made in accordance with sound bookkeeping practices reflecting all financial transactions of each Borrower; 10.7. Litigation. Give Lender prompt notice of any suit at law or in equity against itself involving money or property valued in excess of One Hundred Thousand Dollars ($100,000.00) except where the same is fully covered by insurance and the insurer accepts liability therefor, or any investigation or proceeding before or by any administrative or governmental agency the effect of which would be to limit materially, prohibit or restrict the manner in which the Borrower presently conducts its business or to declare any substance contained in any product manufactured or distributed by any Borrower to be dangerous; and 10.8. Events of Default. Borrower shall provide Lender within five (5) days after Borrower becomes aware of the existence of an Event of Default with telephonic or telegraphic notice specifying the nature of such default. 10.9. Name Change. Provide Lender with written notice of any change of name or the creation of any subsidiary. 15 21 10.10. Access to Books and Records. Provide Lender with such reports and with such access to each Borrower's books and records as Lender deems reasonably necessary to enable Lender to monitor this credit facility. 10.11. Solvent. Borrower shall continue to be Solvent. 10.12. Compliance With Environmental Laws. Comply in all material respects with all applicable Environmental Laws. 10.13. Primary Deposit Accounts. Unless otherwise approved by Lender, in writing, maintain each Borrower's primary depository accounts, if any, with Lender. 10.14. Revolving Loan Balances. Cause the outstanding principal balance of the Revolving Loan to be zero for a period of not less than thirty (30) consecutive days each year. 11. NEGATIVE COVENANTS. So long as any Borrower shall have any Obligation to Lender hereunder and unless Lender has first consented thereto in writing, no Borrower will: 11.1. Indebtedness. Create, incur, assume or suffer to exist any Indebtedness, except Obligations to Lender, Indebtedness for Capital Expenditures, trade debt incurred in the ordinary course of Borrowers' business, and existing Indebtedness described on Exhibit "E" (as well as any renewals, extensions or refinancings of such Indebtedness and any increases not greater than ten percent (10%) in the principal amounts thereof, outstanding at the time). 11.2. Guaranties. Assume, guarantee or endorse or otherwise become directly or contingently liable in connection with any other liability of any other person, firm or corporation without Lender's prior written consent, which shall not be unreasonably withheld, provided, however, that the foregoing shall not prohibit the endorsement of negotiable instruments for deposit or collection and similar transactions in the ordinary course of business; 11.3. Mergers; Consolidations. Except for the transactions expressly provided in Section 6.1(c) in the Note Purchase Agreement dated as of October 23, 1996 between KTI and Wexford KTI LLC by Wexford, merge into or consolidate with any other entity nor acquire all or any substantial part of the properties of any Person without Lender's prior written consent, which shall not be unreasonably withheld; 11.4. New Business. Enter into any new business other than its present business without Lender's prior written consent, which shall not be unreasonably withheld; 11.5. Sale or Disposition. Sell or dispose of any assets (as that term is defined in accordance with Generally Accepted Accounting Principles) in excess of a total amount of Fifty Thousand Dollars ($50,000.00) in any calendar year or grant any Person an option to acquire any such assets; 16 22 11.6. Acquisitions. Acquire or commit or agree to acquire all or any material portion of the stock, securities or assets of any other Person without Lender's prior written consent, which shall not be unreasonably withheld; 11.7. Defaults. Permit any landlord, mortgagee, trustee under deed of trust or lienholder to declare a default under any lease, mortgage, deed of trust or lien on real estate owned or leased by any Borrower, which default remains uncured for a period in excess of thirty (30) days from its occurrence or if such default is of a nature that it cannot with due diligence be cured within thirty (30) days, if any Borrower shall fail to commence to cure such default within such thirty (30) days period and thereafter prosecute to such cure diligently; 11.8. Loans. Make any loan or advance or extend any credit in amounts exceeding, individually, or in the aggregate, one hundred thousand dollars ($100,000.00) (except in the ordinary course of business) to any Person (whether or not an Affiliate of any Borrower) or make any investment in any Person or its securities; or enter into any management agreement with any Person other than employment contracts entered into in the regular course of its business; 11.9. Limitations on Liens. Suffer any Lien, encumbrance, mortgage or security interest on any of its property, except: (a) Liens at any time granted in favor of Lender; (b) Liens for taxes (excluding any Lien imposed pursuant to any of the provisions of ERISA) not yet due or being contested, but only if such Lien does not affect adversely Lender's rights or the priority of Lender's Liens in any of the collateral; (c) Liens securing the claims or demands of materialmen, mechanics, carriers, warehousemen, landlords and other like Persons for labor, materials, supplies or rentals incurred in the ordinary course of Borrowers' business, but only if the payment thereof is not at the time required and only if such Liens are junior in priority to the Liens in favor of Lender; (d) Liens resulting from deposits made in the ordinary course of business in connection with workmen's compensation, unemployment insurance, social security and other like laws; (e) attachment, judgment and other similar non-tax Liens (excluding liens in favor of any governmental entity arising under or in connection with any environmental law or regulation) arising in connection with court proceedings, but only if and for so long as the execution or other enforcement of such Liens is and continues to be effectively stayed and bonded on appeal in a manner satisfactory to Lender for the full amount thereof, the validity and amount of the claims secured thereby are being actively contested in good faith and by appropriate lawful proceedings, such Liens do not, in the 17 23 aggregate, materially detract from the value of the property of any Borrower or materially impair the use thereof in the operation of Borrowers' business and such Liens are and remain junior in priority to the Liens in favor of Lender; (f) reservations, exceptions, easements, rights of way, and other similar consensual encumbrances affecting real Property, provided that, in Lender's reasonable judgment, they do not in the aggregate materially detract from the value of said Properties or materially interfere with their use in the ordinary conduct of Borrower's business; (g) such other Liens as appear on Exhibit "L" attached hereto; (h) Liens in respect of Purchase Money Indebtedness granted to the vendor or person financing the vendor of Equipment so long as the Lien granted is limited to the specific Equipment so acquired and the debt secured by the Lien is the unpaid balance of the acquisition cost of the specific Equipment on which the Lien is granted and the transaction does not violate any other provision of this Agreement; and (i) such other Liens as Lender may hereafter approve in writing. 11.10. Affiliate Transactions. (i) Divest itself of any material assets by (x) transferring them to any existing subsidiary or any future subsidiary to whose existence Lender may hereafter have consented or (y) by entering into a partnership, joint venture, or similar arrangement, or (ii) make any material change in its capital structure or enter into any management contract permitting a third party management rights with respect to any Borrower's business; 11.11. Borrowers' Name and Offices. Transfer its executive offices or change its corporate name or maintain records (including computer printouts and programs) with respect to Receivables or keep Inventory or Equipment at any locations other than those at which the same are presently kept or maintained, except with Lender's prior written consent and after the delivery to Lender of financing statements in form satisfactory to Lender. If such financing statements shall be delivered, Lender will not unreasonably withhold its consent; 11.12. Fiscal Year. Change its fiscal year. 11.13. Subsidiaries. Create any subsidiary or permit itself to become a subsidiary of any other Person without Lender's prior written consent, which shall not be unreasonably withheld. 12. FINANCIAL COVENANTS. KTI covenants that it shall for the fiscal year ending December 31, 1996: 12.1. Minimum Current Ratio. Maintain a Current Ratio of not less than 2.0 to 1.0. 18 24 12.2. Maximum Leverage Ratio. Maintain a Leverage Ratio not greater than 2.0 to 1.0. 13. FURTHER RIGHTS OF LENDER. 13.1. Lender's Right to Take Certain Actions. Each Borrower shall do all reasonable things and shall deliver all reasonable instruments requested by Lender to protect or perfect any security interest, mortgage or lien given hereunder including, without limitation, financing statements under the Uniform Commercial Code and all documents and instruments necessary under the Federal Assignment of Claims Act. Lender may examine, inspect and copy or make extracts from all property and all books and records of Borrowers at any time during regular business hours. Borrower authorizes Lender to execute alone any financing statement or other documents or instruments that Lender may require to perfect, protect or establish any Lien or security interest hereunder and further authorizes Lender to sign each Borrower's name on the same. Upon the occurrence and during the continuation of any Event of Default, each Borrower appoints such person or persons as Lender may designate as its attorney-in-fact to endorse the name of Borrower on any checks, notes, drafts or other forms of payment or security that may come into the possession of either Lender or any Affiliate of Lender, to sign each Borrower's name on invoices or bills of lading, drafts against customers, notice of assignment, verifications and schedules and, generally, to do all things necessary to carry out this Agreement. The powers granted herein, being coupled with an interest, are irrevocable, and each Borrower approves and ratifies all acts of the attorney-in-fact. Neither the Lender nor the attorney-in-fact shall be liable for any act or omission, error in judgment or mistake of law so long as the same is not malicious or grossly negligent. 13.2. Lender's Right to Perform Borrowers' Obligations. In the event that any Borrower shall fail to pay any tax, assessment, government charge or levy (unless any Borrower has contested and is diligently prosecuting a claim with respect to any such tax, assessment, government charge of levy), except as the same may be otherwise permitted hereunder, or in the event that any lien, encumbrance or security interest prohibited hereby shall not be paid in full or discharged, or in the event that any Borrower shall fail to perform or comply with any other covenant, promise or Obligation to Lender hereunder or under any Loan Document, Lender may, but shall not be required to, perform, pay, satisfy, discharge or bond the same for the account of Borrowers, and all monies so paid by Lender, including reasonable attorneys' fees, shall be treated as an advance hereunder to Borrowers. 13.3. Lender's Right of Set-Off. Lender may, at any time upon the occurrence and during the continuance of an Event of Default hereunder which Lender, in its reasonable judgment, deems material and without any further notice to Borrowers (such notice being expressly waived), set-off or apply any and all deposits (general or special, time or demand, provisional or final) at any time held by, or any other indebtedness at any time owing by Lender or any Affiliate of Lender or any participant in Lender's loans to Borrowers to or for the credit or the account of Borrowers against any Obligation irrespective of whether any demand has been made hereunder or whether such Obligation is mature. The rights given hereunder are cumulative with all of the other rights and remedies of Lender, including other rights of set-off, 19 25 under this or any Agreement or by operation of law or otherwise and shall also constitute a security interest in such deposits. Lender shall promptly notify Borrowers of any such set-off and application but failure so to do shall not affect the validity of such set-off. 13.4. Lender's Right of Inspection. At any time and from time to time, (a) after the occurrence of any Event of Default or (b) with Borrower's consent, which shall not be unreasonably withheld, Lender or any agents or representatives of Lender, upon reasonable notice to Borrowers (unless an Event of Default shall have occurred hereunder, in which event no notice to Borrowers shall be required) may examine and make copies of and abstracts from the records and books of account of, and visit and inspect the properties (including, but without limitation, the locations of the Equipment) of, Borrowers and discuss the affairs, finances and accounts of Borrowers with any of its officers, employees, directors and accountants. 14. CONDITIONS PRECEDENT; CLOSING. As conditions precedent to the making of any loan or Advance hereunder, Borrowers shall deliver to Lender, or shall cause to be delivered to Lender, the following documents duly executed and in form satisfactory to Lender and its counsel; (a) the Revolving Loan Note and each of the other Loan Documents duly executed and delivered by the appropriate parties thereto; (b) Copies of all filing receipts or acknowledgements issued by any governmental authority to evidence any filing or recordation necessary to perfect the Liens of Lender in the Collateral and evidence in a form acceptable to Lender that such Liens constitute valid and perfected first priority security interests and Liens; (c) Appropriate corporate resolutions of the Board of Directors of each Borrower; (d) A closing certificate executed by the Chief Executive Officer and Chief Financial Officer of KTI certifying that (i) the representations and warranties set forth in this Agreement are true and correct in all material respects on and as of such date, (ii) there has been no material adverse change in the financial conditions of KTI since September 30, 1996, and (iii) on such date no Event of Default has occurred or is continuing. (e) The letter to accountants required by Section 8.5 of this Agreement; (f) The favorable written opinion of McDermott, Will & Emery, counsel to the Borrowers, in form and substance satisfactory to Lender; (g) The favorable written opinion of Robert E. Wetzel, in-house counsel to the Borrowers, in form and substance satisfactory to Lender; 20 26 (h) A copy of each Borrower's Certificate of Incorporation and By-Laws, and all amendments thereto; (i) A Good Standing Certificate issued by the Secretary of State of each jurisdiction where the conduct of any Borrower's business activities or the ownership of its Properties necessitates qualification; and (j) Such other documents, instruments, agreements, and information as Lender or its counsel shall reasonably request. 15. TERM. This Agreement shall terminate on June 30, 1997. 16. EVENTS OF DEFAULT. 16.1. Defaults. Upon the happening of any of the following Events of Default: (a) if any of the Borrowers shall fail to make payment when due of any Obligation under this Agreement or any Loan Document; or (b) if any of the Borrowers shall fail to comply with any term, condition, covenant, warranty or representation of or in this Agreement, any other Loan Document or any other agreement between Lender and the Borrower and such failure continues for a period in excess of thirty (30) days after notice thereof is given by Lender to Borrower; or (c) if any Borrower shall cease to be Solvent, make an assignment for the benefit of its creditors, call a meeting of its creditors to obtain any general financial accommodation, suspend business or if any case under any provision of the Bankruptcy Code, including provisions for reorganizations, shall be commenced by or against Borrower, unless such case is dismissed within thirty (30) days of the date of its commencement; or (d) if any statement or representation contained in any financial statement or certificate delivered by any Borrower to Lender shall be willfully and materially false when made and Lender reasonably believes that such statement or representation affects the creditworthiness of any Borrower; or (e) if any federal tax lien of more than Twenty-Five Thousand Dollars ($25,000.00) is filed of record against any Borrower and is not bonded or discharged within ten (10) days; or (f) if Borrowers' independent public accountants shall refuse to deliver any opinion required by this Agreement; or 21 27 (g) if a receiver shall be appointed for all or any material portion of the assets of any Borrower and the same shall not have been discharged within sixty (60) days; or (h) if a judgment for more than Fifty Thousand Dollars ($50,000.00) shall be entered against any Borrower and shall not be stayed, vacated, bonded, paid or discharged within sixty (60) days except a judgment where the claim is covered by insurance and the insurance company has accepted liability therefor; or (i) upon the happening of any Reportable Event which Lender in good faith determines might constitute grounds for the termination of any Plan, or if a trustee shall be appointed by an appropriate United States District Court or other court of administrative tribunal to administer any Plan, or if the Pension Benefit Guaranty Corporation shall institute proceedings to terminate any Plan or to appoint a trustee to administer any Plan; or (j) upon the occurrence and continuance of any condition which, in the Lender's reasonable opinion, has or may have a material adverse effect on the business, prospects or financial condition of any Borrower, then and in any such event, Lender may terminate this Agreement without prior notice or demand to Borrowers or may demand payment of all Obligations (whether otherwise then payable on demand or not) without terminating this Agreement and shall, in any event, be under no further responsibility to extend any credit or afford any financial accommodation to Borrowers, whether under this Agreement or otherwise. 16.2. Obligations Immediately Due. Upon the effective date of termination for any reason, all of Borrowers' Obligations to Lender, including but not limited to the Revolving Loan, shall immediately become due and payable without further notice or demand. 16.3. Continuation of Security Interests. Notwithstanding any termination, until all Obligations of Borrower shall have been fully paid and satisfied, Lender shall retain all security in and title to all existing and future Receivables, and other collateral held by it hereunder or under any other agreement and Borrowers shall continue to assign Receivables to Lender and continue to turn over collections to it. 17. REMEDIES OF LENDER. 17.1. Rights Under Uniform Commercial Code. Upon the occurrence of any Event of Default which Lender, in its judgment, deems to be material or upon any termination of this Agreement following an Event of Default which Lender, in its reasonable judgment, deems to be material, then Lender shall have, in addition to all of its other rights under this Agreement or otherwise (which rights shall be cumulative), all of the rights and remedies of a secured party under the Uniform Commercial Code and shall have the right to enter upon any premises where the Collateral is kept and peacefully retake possession thereof. Lender may, without demand, 22 28 advertising or notice all of which Borrowers hereby waive (except as the same may be required by law), sell, lease, dispose of, deliver and grant options to a third party to purchase, lease or otherwise dispose of any and all Receivables or other security or Collateral held by it or for its account at any time or times in one or more public or private sales or other dispositions, for cash, on credit or otherwise, as such prices and upon such terms as Lender, in its sole reasonable discretion, deems advisable. Notice of any public sale shall be sufficient if it describes the security or Collateral to be sold in general terms, stating the amounts thereof, the nature of the business in which such Collateral was created and the location and nature of the properties covered by the other security interests or mortgages and the prior liens thereon, and is published at least once in The Times Union or The Wall Street Journal, not less than five (5) business days prior to the date of sale. If The Times Union or The Wall Street Journal are not then being published, publication may be made in lieu thereof in any newspaper then being circulated in the City of Albany, New York which the Lender may elect. All requirements of reasonable notice under this Article shall be met if such notice is mailed via certified or registered, postage prepaid, to Borrowers at their address set forth above or such other address as they may have, in writing, provided to Lender, at least five (5) days before the time of such sale or disposition. Lender may, if it deems it reasonable, postpone or adjourn any sale of any Collateral from time to time by an announcement at the time and place of the sale to be so postponed or adjourned without being required to give a new notice of sale, provided, however, that Lender shall provide Borrowers with written notice of the time and place of such postponed or adjourned sale. Lender may be the purchaser at any such sale if it is public, and payment may be made, in whole or in part, in respect of such purchase price by the application of Obligations due from Borrowers to Lender. Borrowers shall be obligated for, and the proceeds of sale shall be applied first to, the costs of retaking, refurbishing, storing, guarding, insuring, preparing for sale, and selling the collateral, including the fees and disbursements of attorneys, auctioneers, appraisers and accountants employed by Lender. Proceeds shall then be applied to the payment in whatever order Lender may elect, of all Obligations of the Borrowers. Lender shall immediately return any excess to the Borrowers and Borrowers shall remain liable for any deficiency. 17.2. Waiver of Rights by Borrowers. Except as may be otherwise specifically provided herein or in any other agreement between Lender and Borrowers which may be applicable, Borrowers waive, to the extent permitted by law, any bonds, security or sureties required by any statute, rule or otherwise by law as an incident to any taking of possession by Lender of Property subject to Lender's Lien. Upon the occurrence and during the continuance of an Event of Default, Borrowers also consent that Lender may enter upon any premises owned by or leased to it without obligation to pay rent or for use and occupancy, through self help, without judicial process and without having first given notice to Borrowers or obtained an order of any court. These waivers and all other waivers provided for in this Agreement and any other agreements or instruments executed in connection herewith have been negotiated by the parties. 17.3. Lender's Rights. Borrowers agree that Lender shall not have any obligation to preserve rights to any Collateral against prior parties or to marshall any Collateral of any kind for the benefit of any other creditor of Borrowers or any other person. Upon the occurrence and 23 29 during the continuance of any Event of Default which Lender, in its reasonable judgment, deems material, Lender is hereby granted a license or other right to use, without charge, Borrowers' labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral and Borrowers' rights under all licenses and any franchise, sales or distribution agreements shall inure to Lender's benefit for such purpose. 17.4. Borrowers to Pay Costs. Borrowers agree that (a) after the occurrence of an Event of Default or (b) in the event that Borrowers request that Lender take, consider taking or forbear from taking any action, whether under this Agreement or otherwise, it shall pay all reasonable costs and expenses which may be incurred by Lender, including but not limited to the costs and expenses of amending, implementing, perfecting, collecting, defending, declaring, monitoring and enforcing Lender's rights, security interests and Collateral hereunder or under any instrument or agreement delivered in connection herewith, including, but not limited to, searches and filings at all times, and Lender's reasonable attorneys' fees (regardless of whether any litigation is commenced, whether default is declared hereunder, and regardless of tribunal or jurisdiction). 18. GENERAL PROVISIONS. 18.1. Rights Cumulative. Lender's rights and remedies under this Agreement shall be cumulative and non-exclusive of any other rights or remedies which it may have under any other agreement or instrument, by operation of law or otherwise. 18.2. Successors and Assigns. This Agreement is entered into for the benefit of the parties hereto and their successors and assigns. It shall be binding upon and shall inure to the benefit of the said parties, their successors and assigns. 18.3. Notice. Wherever this Agreement provides for notice to either party (except as expressly provided to the contrary), it shall be given by messenger, electronic transmission, telegram or certified or registered mail, return receipt requested, effective when received by the corporate party to whom addressed, and shall be addressed as follows, or to such other address as the party affected may hereafter designate. If to Lender: Key Bank of New York 66 South Pearl Street Albany, New York 12207 Attention: John Stewart, Vice President With a copy to: Patrick K. Greene, Esq. Crane, Kelley, Greene & Parente 90 State Street, Suite 1500 Albany, New York 12207 24 30 If to Borrower: KTI, INC. 7000 Boulevard East Guttenberg, New Jersey 07093 Attention: Robert E. Wetzel, Esq. KTI Environmental Group, Inc. 7000 Boulevard East Guttenberg, New Jersey 07093 Attention: Robert E. Wetzel, Esq. Kuhr Technologies Inc. 7000 Boulevard East Guttenberg, New Jersey 07093 Attention: Robert E. Wetzel, Esq. KTI Limited Partners, Inc. 7000 Boulevard East Guttenberg, New Jersey 07093 Attention: Robert E. Wetzel, Esq. KTI Operations, Inc. 7000 Boulevard East Guttenberg, New Jersey 07093 Attention: Robert E. Wetzel, Esq. PERC, Inc. 7000 Boulevard East Guttenberg, New Jersey 07093 Attention: Robert E. Wetzel, Esq. With a copy to: Brian Hoffman, Esq. McDermott, Will & Emery 50 Rockefeller Plaza New York, NY 10020-5400 18.4. Strict Performance. The failure, at any time or times hereafter, to require strict performance by Borrowers of any provision of this Agreement shall not waive, affect or diminish any right of Lender thereafter to demand strict compliance and performance therewith. Any suspension or waiver by Lender of any Event of Default by Borrowers under this Agreement or any of the other Loan Documents shall not suspend, waive or affect any other Event of Default by Borrowers under this Agreement or any of the other Loan Documents, whether the same is prior or subsequent thereto and whether of the same or a different type. 25 31 18.5. WAIVER OF RIGHT TO JURY TRIAL. BORROWERS JOINTLY AND SEVERALLY WAIVE THE RIGHT TO TRIAL BY JURY IN THE EVENT OF ANY ACTION, SUIT, PROCEEDING, COUNTERCLAIM OR OTHER LITIGATION TO WHICH THE LENDER AND ANY BORROWER ARE PARTIES IN RESPECT OF ANY MATTER ARISING UNDER THIS AGREEMENT OR ANY OTHER MATTER INVOLVING BORROWERS AND LENDER, WHETHER OR NOT OTHER PERSONS ARE ALSO PARTIES THERETO. BORROWERS ACKNOWLEDGE THAT THE FOREGOING WAIVER IS A MATERIAL INDUCEMENT TO LENDER'S ENTERING INTO THIS AGREEMENT AND THAT LENDER IS RELYING ON THE FOREGOING WAIVER IN ITS FUTURE DEALINGS WITH BORROWERS. BORROWERS REPRESENT AND WARRANT THAT THEY HAVE REVIEWED THIS JURY WAIVER PROVISION WITH THEIR LEGAL COUNSEL, AND HAS MADE THIS WAIVER KNOWINGLY AND VOLUNTARILY. 18.6. Amendments. This Agreement and the other agreements to which it refers constitute the complete agreement between the parties with respect to the subject matter and may not be changed, modified, waived, amended or terminated orally, but only by a writing signed by the party to be charged. 18.7. Waiver. Upon the occurrence and during the continuance of any Event of Default, Borrowers waive presentment, protest, notice of dishonor and notice of protest upon any instrument on which it may be liable to Lender as maker, endorser, guarantor or otherwise. 18.8. Conflict of Laws. This Agreement shall be deemed to have been made in Albany, New York, and shall be governed by and construed in accordance with the internal laws of the State of New York; provided, however, that if any of the Collateral shall be located in any jurisdiction other than New York, the laws of such jurisdiction shall govern the method, manner and procedure for foreclosure of Lenders' lien upon such Collateral and the enforcement of Lenders' other remedies in respect of such Collateral to the extent that the laws of such jurisdiction are different from or inconsistent with the laws of New York. As part of the consideration for new value received, and regardless of any present or future domicile or principal place of business of any Borrower or Lender, Borrowers hereby consent and agree that any court in Albany County, New York, or at Lender's option, the United States District Court for the Northern District of New York, shall have jurisdiction to hear and determine any claims or disputes between Borrowers and Lender pertaining to this Agreement or to any matter arising out of or related to this Agreement; provided, however, Lender may, at its option, commence any action, suit or proceeding in any other appropriate forum or jurisdiction to obtain possession of or foreclose upon any Collateral, to obtain equitable relief or to enforce any judgment or order obtained by Lender against Borrowers or with respect to any Collateral, to enforce any other right or remedy under this Agreement or to obtain any other relief deemed appropriate by Lender. Borrowers expressly submit and consent in advance to such jurisdiction in any action or suit commenced in any such court, and Borrowers hereby waive any objection which Borrowers may have based upon lack of personal jurisdiction, improper venue or forum non conveniens and hereby consents to the granting of such legal or equitable relief as is deemed appropriate by such court. 26 32 18.9. Expenses. If, at any time or times prior or subsequent to the date hereof, regardless of whether or not an Event of Default then exists or any of the transactions contemplated hereunder are concluded, Lender employs counsel for advice or other representation, or incurs legal expenses or other costs or out-of-pocket expenses in connection with: (A) the negotiation and preparation of this Agreement or any of the other Loan Documents, any amendment of or modification of this Agreement or any of the other Loan Documents; (B) the administration of this Agreement or any of the other Loan Documents and the transactions contemplated hereby and thereby; (C) periodic audits and appraisals performed by Lender; (D) any litigation, contest, dispute, suit, proceeding or action (whether instituted by Lender, Borrowers or any other Person) in any way relating to the Collateral, this Agreement or any of the other Loan Documents or Borrowers' affairs; (E) any attempt to enforce any rights or remedies of Lender against any Borrower or any other Person which may be obligated to Lender by virtue of this Agreement or any of the other Loan Documents, including, without limitation, the Account Debtors; or (F) any attempt to inspect, verify, protect, preserve, restore, collect, sell, liquidate or otherwise dispose of or realize upon the Collateral; then, in any such event, the reasonable attorneys' fees arising from such services and all reasonable expenses, costs, charges and other reasonable fees of such counsel of Lender or relating to any of the events or actions described in this Section shall be payable by Borrowers to Lender, and shall be additional Obligations hereunder secured by the Collateral. Additionally, if any taxes (excluding taxes imposed upon or measured by the net income of Lender, but including any intangibles tax, stamp tax or recording tax) shall be payable on account of the execution or delivery of this Agreement, or the execution, delivery, issuance or recording of any of the other Loan Documents, or the creation of any of the Obligations hereunder, by reason of any existing or hereafter enacted federal or state statute, Borrowers will pay (or will promptly reimburse Lender for the payment of) all such taxes, including, but not limited to, any interest and penalties thereon, and will indemnify and hold Lender harmless from and against liability in connection therewith. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their officers thereunto duly authorized on the day and year first above written. KTI, INC. By: /s/ Martin J. Sergi ------------------------ Name: Martin J. Sergi Title: President KTI ENVIRONMENTAL GROUP, INC. By: /s/ Martin J. Sergi ------------------------ Name: Martin J. Sergi Title: President 27 33 KUHR TECHNOLOGIES INC. By: /s/ Martin J. Sergi ------------------------ Name: Martin J. Sergi Title: President KTI LIMITED PARTNERS, INC. By: /s/ Martin J. Sergi ------------------------ Name: Martin J. Sergi Title: President KTI OPERATIONS, INC. By: /s/ Martin J. Sergi ------------------------ Name: Martin J. Sergi Title: President PERC, INC. By: /s/ Martin J. Sergi ------------------------ Name: Martin J. Sergi Title: President KEY BANK OF NEW YORK By: /s/ John Stewart ------------------------ Name: John Stewart Title: Vice President 28 34 STATE OF NEW JERSEY )ss.: COUNTY OF HUDSON ) On this 29th day of October, 1996, before me personally came Martin J. Sergi, to me known, who being by me duly sworn, did depose and say that he resides at 17 Ridge Road, Denville, N.J., that he is the President of KTI, Inc., the corporation described in, and which executed the above instrument; and that he signed his name thereto by like order of the Board of Directors of said corporation. /s/ Francis J. Elenio --------------------- Notary Public FRANCIS J. ELENIO NOTARY PUBLIC OF NEW JERSEY My Commission Expires Sept. 25, 2000 STATE OF NEW JERSEY )ss.: COUNTY OF HUDSON ) On this 29th day of October, 1996, before me personally came Martin J. Sergi, to me known, who being by me duly sworn, did depose and say that he resides at 17 Ridge Road, Denville, N.J., that he is the President of KTI Environmental Group, Inc., the corporation described in, and which executed the above instrument; and that he signed his name thereto by like order of the Board of Directors of said corporation. /s/ Francis J. Elenio --------------------- Notary Public FRANCIS J. ELENIO NOTARY PUBLIC OF NEW JERSEY My Commission Expires Sept. 25, 2000 STATE OF NEW JERSEY )ss.: COUNTY OF HUDSON ) On this 29th day of October, 1996, before me personally came Martin J. Sergi, to me known, who being by me duly sworn, did depose and say that he resides at 17 Ridge Road, Denville, N.J., that he is the President of Kuhr Technologies Inc., the corporation described in, and which executed the above instrument; and that he signed his name thereto by like order of the Board of Directors of said corporation. /s/ Francis J. Elenio --------------------- Notary Public FRANCIS J. ELENIO NOTARY PUBLIC OF NEW JERSEY My Commission Expires Sept. 25, 2000 29 35 STATE OF NEW JERSEY )ss.: COUNTY OF HUDSON ) On this 29th day of October, 1996, before me personally came Martin J. Sergi, to me known, who being by me duly sworn, did depose and say that he resides at 17 Ridge Road, Denville, N.J., that he is the President of KTI Limited Partners, Inc., the corporation described in, and which executed the above instrument; and that he signed his name thereto by like order of the Board of Directors of said corporation. /s/ Francis J. Elenio --------------------- Notary Public FRANCIS J. ELENIO NOTARY PUBLIC OF NEW JERSEY My Commission Expires Sept. 25, 2000 STATE OF NEW JERSEY )ss.: COUNTY OF HUDSON ) On this 29th day of October, 1996, before me personally came Martin J. Sergi, to me known, who being by me duly sworn, did depose and say that he resides at 17 Ridge Road, Denville, N.J., that he is the President of KTI Operations, Inc., the corporation described in, and which executed the above instrument; and that he signed his name thereto by like order of the Board of Directors of said corporation. /s/ Francis J. Elenio --------------------- Notary Public FRANCIS J. ELENIO NOTARY PUBLIC OF NEW JERSEY My Commission Expires Sept. 25, 2000 STATE OF NEW JERSEY )ss.: COUNTY OF HUDSON ) On this 29th day of October, 1996, before me personally came Martin J. Sergi, to me known, who being by me duly sworn, did depose and say that he resides at 17 Ridge Road, Denville, N.J., that he is the President of PERC, Inc., the corporation described in, and which executed the above instrument; and that he signed his name thereto by like order of the Board of Directors of said corporation. /s/ Francis J. Elenio --------------------- Notary Public FRANCIS J. ELENIO NOTARY PUBLIC OF NEW JERSEY My Commission Expires Sept. 25, 2000 30 36 STATE OF NEW JERSEY )ss.: COUNTY OF HUDSON ) On this 29th day of October, 1996, before me personally came John Stewart, to me known, who being by me duly sworn, did depose and say that he resides at _________________, New York, that he is the Vice President of Key Bank of New York, the corporation described in, and which executed the above instrument; and that he signed his name thereto by like order of the Board of Directors of said corporation. -------------------- Notary Public 31 EX-10.39 4 PLEDGE AGREEMENT 1 EXHIBIT 10.39 PLEDGE AGREEMENT THIS PLEDGE AGREEMENT made as of this 29th day of October, 1996, between KTI, INC., with its principal office and place of business at 7000 Boulevard East, Guttenberg, New Jersey 07093 (the "Pledgor"), and KEY BANK OF NEW YORK, a New York state banking corporation with its principal office at 66 South Pearl Street, New York, New York 12207 (the "Pledgee"). Pledgor has entered into a Loan and Security Agreement dated of even date herewith between the Pledgor and the Pledgee (the "Loan Agreement"). In order to induce Pledgee to make the advances provided for in the Loan Agreement, Pledgor wishes to grant security and assurance to Pledgee in order to secure its performance of the obligations under the Loan Agreement and Note (as defined in the Loan Agreement), and to that effect to pledge to Pledgee all of the issued and outstanding capital stock of KTI Environmental Group, Inc., a New Jersey corporation (the "Pledged Shares"). NOW, THEREFORE, in consideration of the foregoing and for $1.00 and other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto mutually agree as follows: 1. Security Interest. As security for the obligations under the Note, including any renewals or extensions thereof, Pledgor hereby delivers, pledges and assigns to Pledgee and creates in Pledgee for its benefit a first security interest in, all of its right, title and interest in and to all of the Pledged Shares together with all rights and privileges of Pledgor with respect thereto, all proceeds, income and profits thereof and all property received in addition thereto, in exchange thereof or in substitution therefor (the "Collateral"). 2. Stock Dividends, Options, or Other Adjustments. Prior to the full payment and performance of the obligations, Pledgee shall receive, as Collateral, any and all additional shares of stock or any other property of any kind distributable on or by reason of the Collateral pledged hereunder, whether in the form of stock dividends, warrants, partial liquidation, conversion, prepayments or redemptions (in whole or in part) liquidation or otherwise, with the sole exception of cash dividends or cash interest payments, as the case may be. For the term of this Agreement the Pledged Shares shall be held by Pledgee. If any additional shares of capital stock, instruments, or other property against which a security interest can only be perfected by possession by Pledgee, which are distributable on or by reason of the Collateral pledged hereunder, shall come into the possession or control of Pledgor, Pledgor shall hold or control and forthwith transfer and deliver the same to Pledgee subject to the provisions of this Agreement. 3. Delivery of Share Certificates; Stock Powers. Instruments and stock certificates representing the Collateral are being delivered to Pledgee simultaneously herewith together with stock powers duly executed in blank by Pledgor. Pledgor shall promptly deliver to Pledgee, or cause the corporations or other entity issuing the Collateral to deliver directly to Pledgee, share 2 certificates or other documents representing Collateral acquired or received after the date of this Agreement with a stock power duly executed by Pledgor. If at any time Pledgee notifies Pledgor that additional stock powers endorsed in blank held by Pledgee with respect to the Collateral are required, Pledgor shall promptly execute in blank and deliver such stock powers as Pledgee may request. 4. Power of Attorney. Pledgor hereby constitutes and irrevocably appoints Pledgee, with full power of substitution and revocation by Pledgee, as Pledgor's true and lawful attorney-in-fact, to affix to certificates and documents representing the Collateral the stock powers delivered with respect thereto, to transfer or cause the transfer of the Collateral, or any part thereof on the books of the corporation or other entity issuing the same, to the name of Pledgee or Pledgee's nominee and thereafter exercise as to such Collateral all the rights, power and remedies of an owner. The power of attorney granted pursuant to this Agreement and all authority hereby conferred are granted and conferred solely to protect Pledgee's interest in the Collateral and shall not impose any duty upon Pledgee to exercise any power. This power of attorney shall be irrevocable as one coupled with an interest prior to the payment in full and/or satisfaction and termination of all obligations to Pledgee. 5. Inducing Representations of Pledgor. Pledgor represents and warrants to Pledgee with respect to its collateral that: (a) Pledgor is the sole legal and beneficial owner of, and has good and marketable title to, the Collateral, free and clear of all pledges, liens, security interests and other encumbrances and restrictions on the transfer and assignment thereof, other than the security interest created by this Agreement, and Pledgor has the requisite right and authority to execute this Agreement and to pledge the Collateral to Pledgee as provided for herein; (b) There are no outstanding options, warrants or other agreements with respect to the Collateral; (c) The Collateral has been validly issued and is fully paid and non-assessable and is not subject to any charter, by-law, statutory, contractual or other restrictions governing its issuance, transfer, ownership or control, except that sale may be limited in the absence of an effective registration under the Securities Act of 1933, as amended, and under applicable state securities laws or of an opinion of counsel satisfactory to the issuer that the sale or transfer is exempt from registration under said act and laws. (d) Any consent, approval or authorization of or designation or filing with any authority on the part of Pledgor which is required in connection with the pledge and security interest granted under this Agreement has been obtained or effected; (e) The execution and delivery of this Agreement by Pledgor, and the performance by Pledgor of its obligations hereunder, will not result in a violation of the certificate of incorporation, by-laws, or of any mortgage, indenture, contract, instrument, 2 3 judgment, decree, order, statute, rule or regulation to which Pledgor is subject; (f) Pledgor has delivered to Pledgee the Pledged Shares duly endorsed in blank or accompanied by an assignment or assignments sufficient to transfer title thereto and/or the local equivalent necessary to perfect the security interest; and (g) The Pledged shares constitute all the issued and outstanding capital stock of the issuers thereof. 6. Obligations of Pledgor. Pledgor further covenants to Pledgee with respect to the Collateral that: (a) Pledgor will not sell, transfer or convey any interest in, or suffer or permit any lien or encumbrance to be created upon or with respect to, any of the Collateral (other than as created under this Agreement) during the term of the pledge established hereby; and (b) Pledgor will, at its own expense, at any time and from time to time at Pledgee's reasonable request, do, make, procure, execute and deliver all acts, things, writings, assurances and other documents as may be proposed by Pledgee to further enhance, preserve, establish, demonstrate or enforce Pledgee's rights, interests and remedies created by, provided in or emanating from this Agreement. 7. Rights of Pledgor. So long as no Event of Default has occurred and is continuing (as used herein "Event of Default" shall mean the occurrence of any Event of Default under the Note, Loan Agreement, any note, document or instrument delivered or to be delivered pursuant or in connection with the Loan Agreement (collectively, the "Loan Documents") or the failure of Pledgor to perform any obligation, or the breach of any covenant, under this Agreement), and so long as Pledgee has not transferred the Collateral to its own name under Section 4 hereof: (a) Pledgor shall be entitled to receive and retain any cash dividends or cash interest payments paid on the Collateral; and (b) Pledgor shall be entitled to vote or consent with respect to the Collateral in any manner not inconsistent with this Agreement, the Note and Security Agreement. Pledgor hereby grants to Pledgee an irrevocable proxy to vote the Collateral which proxy shall be effective immediately upon the occurrence of any Event of Default. Upon request of Pledgee, Pledgor agrees to deliver to Pledgee such further evidence of such irrevocable proxy as Pledgee may request. 8. Rights of Pledgee. At any time after the occurrence of an Event of Default, and so long as such Event of Default continues, without notice, Pledgee may: (a) Cause the Collateral to be transferred to its name or to the name of its nominee or nominees and thereafter exercise as to such Collateral all of the rights, powers and 3 4 remedies of an owner; (b) Collect by legal proceedings or otherwise all dividends, interest, principal payments, capital distributions and other sums now or hereafter payable on account of the Collateral, and hold the same as part of the Collateral, or apply the same to any of the obligations in such manner and order as Pledgee may decide in its sole discretion; (c) Enter into any extension, subordination, reorganization, deposit, merger, or consolidation agreement, or any other agreement relating to or affecting the Collateral, and in connection therewith deposit or surrender control of the Collateral thereunder, and accept other property in exchange therefor and hold and apply such property or money so received in accordance with the provisions hereof; and (d) Discharge any taxes, liens, security interests or other encumbrances levied or placed on the Collateral, pay for the maintenance and preservation of the Collateral, or pay for insurance on the Collateral; the amount of such payments, plus any and all fees, costs and expenses of Pledgee (including attorneys' fees and disbursements), in connection therewith, shall, at Pledgee's option, be reimbursed by Pledgor on demand or added to the obligations secured hereby. 9. Event of Default; Remedies. Upon the occurrence and continuance of an Event of Default as hereinbefore defined: (a) In addition to all the rights and remedies of a secured party under the Uniform Commercial Code in effect in the State of New York at that time, Pledgee shall have the right, and without demand or performance or other demand, advertisement or notice of any kind, except as specified below, to or upon the Pledgor or any other person (all and each of which demands, advertisements and/or notices are hereby expressly waived to the extent permitted by law), to proceed forthwith to collect, receive, appropriate and realize upon the Collateral, or any part thereof and to proceed forthwith to sell, assign, give an option or options to purchase, contract to sell, or otherwise dispose of and deliver the Collateral or any part thereof in one or more parcels at public or private sale or sales at any stock exchange, broker's board or at any of Pledgee's offices or elsewhere at such prices and on such terms (including, without limitation, a requirement that any purchaser of all or any part of the Collateral shall be required to purchase any securities constituting the Collateral solely for investment and without any intention to make a distribution thereof) as Pledgee deems to be commercially reasonable. If any notification of intended disposition of the Collateral is required by law, such notification shall be deemed reasonable and properly given if mailed, postage prepaid, at least ten (10) days before any such disposition to Pledgor's address indicated above. Any disposition of the Collateral or any part thereof may be for cash or on credit or for future delivery without assumption of any credit risk, with the right to Pledgee to purchase all or any part of the Collateral so sold at any such sale or sales, public or private, free of any equity or right of redemption in the Pledgor, which right or equity is hereby expressly waived or released by the Pledgor. 4 5 (b) All of the Pledgee's rights and remedies, including but not limited to the foregoing, shall be cumulative and not exclusive and shall be enforceable alternatively, successively or concurrently as Pledgee may deem expedient. (c) Pledgee may elect to obtain the advice of any independent nationally-known investment banking firm with respect to the method and manner of sale or other disposition of any of Collateral, the best price reasonably obtainable therefor, the consideration of cash and/or credit terms, or any other details concerning such sale or disposition. Pledgee, in its sole discretion, may elect to sell on such credit terms which it deems reasonable. The sale of any of the Collateral on credit terms shall not relieve Pledgor or the Borrowers of their liability under any of the Obligations until the full purchase price for the Collateral has been paid in full. All payments received by Pledgee in respect of a sale of Collateral shall be applied to the obligations in the manner provided in Section 10 of this Agreement, as and when such payments are received. (d) Pledgor recognizes that Pledgee may be unable to effect a public sale of all or a part of the Collateral by reason of certain prohibitions contained in any applicable securities law, but may be compelled to resort to more private sales to a restricted group of purchases who will be obliged to agree, among other things, to acquire the Collateral for their own account, for investment and not with a view for the distribution or resale thereof. Pledgor agrees that private sales so made may be at prices and on other terms less favorable to the seller than if the Collateral were sold at public sale, and that Pledgee has no obligation to delay the sale of any Collateral for the period of time necessary to permit the registration of the Collateral for public sale under the Act. Pledgor agrees that a private sale or sales made under the foregoing circumstances shall be deemed to have been made in a commercially reasonable manner. (e) If any consent, approval or authorization of any state, municipal or other governmental department, agency or authority should be necessary to effectuate any sale or other disposition of the Collateral, or any partial disposition of the Collateral, Pledgor will execute all such applications and other instruments as may be required in connection with securing any such consent, approval or authorization, and will otherwise use its best efforts to secure the same. Pledgor further agrees to use its best efforts to secure such sale or other disposition of the Collateral as Pledgee may deem necessary pursuant to the terms of this Agreement. (f) Upon any sale or other disposition, Pledgee shall have the right to deliver, assign and transfer to the purchaser thereof the Collateral so sold or disposed of. Each purchaser at any such sale or other disposition (including Pledgee) shall hold the Collateral free from any claim or right of whatever kind, including any equity or right of redemption of Pledgor. Pledgor specifically waives all rights of redemption, stay or appraisal which it had or may have under any rule of law or statute now existing or hereafter adopted. (g) Pledgee shall not be obligated to make any sale or other disposition, unless the terms thereof shall be satisfactory to it. Pledgee may, without notice or publication, adjourn 5 6 any private or public sale, and, upon ten (10) days' prior notice to Pledgor, hold such sale at any time or place to which the same may be so adjourned. In case of any sale of all or any part of the Collateral, on credit or future delivery, the Collateral so sold may be retained by Pledgee until the selling price is paid by the purchaser thereof, but Pledgee shall incur no liability in case of the failure of such purchaser to take up and pay for the property so sold and, in case of any such failure, such property may again be sole as herein provided. 10. Disposition of Proceeds. (a) The proceeds of any sale or disposition of all or any part of the Collateral shall be applied by Pledgee in the following order: (i) to the payment in full of the costs and expenses of such sale or sales, collections, and the protection, declaration and enforcement of any security interest granted hereunder, including the compensation of Pledgee's agents and attorneys; (ii) to the payment of the obligations; and (iii) to the payment to Pledgor of any surplus then remaining from such proceeds, subject to the rights of any holder of a lien on the Collateral of which Pledgee has actual notice. (b) In the event that the proceeds of any sale or other disposition are insufficient to cover the amount of the obligations, Pledgor shall remain liable for any deficiency. 11. Termination. This Agreement shall continue to full force and effect until all obligations shall have been paid in full and satisfied and the Loan Agreement shall have been terminated. Subject to any sale or other disposition by Pledgee of the Collateral or any part thereof pursuant to this Agreement, the Collateral shall be returned to Pledgor upon full payment, satisfaction and termination of all of the obligations of Pledgor. 12. Expenses of Pledgee. All expenses (including Pledgee's fees and charges and fees and disbursements of counsel) incurred by Pledgee in connection with the perfection and continuation of the security interest granted hereunder and any actual or attempted sale, exchange of, or any enforcement, collection, compromise or settlement respecting, the Collateral, or any other action taken by Pledgee hereunder whether directly or as attorney-in-fact pursuant to a power of attorney or other authorization therein conferred, for the purpose of satisfaction of the liability of Borrowers and Pledgor for failure to pay the obligations or as additional amounts owing by Pledgor to cover Pledgee's costs of acting against the Collateral, shall be deemed an obligation of Pledgor for all purposes of this Agreement and Pledgee may apply the Collateral to payment of or reimbursement of itself and the Bank for such liability. 6 7 13. General Provisions. (a) Pledgee or its designee is hereby appointed the attorney-in-fact of Pledgor for the purpose of carrying out the provisions of this Agreement and taking any action and executing any instrument which Pledgee reasonably may deem necessary and advisable to accomplish the purposes hereof, which appointment as attorney-in-fact is irrevocable as one coupled with an interest. (b) Pledgee and its assigns shall have no obligation in respect to the Collateral, except to use reasonable care in holding the Collateral and to hold and dispose of the same in accordance with the terms of this Agreement. (c) Any notice or other communication given hereunder shall be in writing and sent by registered or certified mail, postage prepaid, as follows; If to Pledgor: KTI, Inc. 7000 Boulevard East Guttenberg, New Jersey 07093 Attention: Robert E. Wetzel, Esq., General Counsel With a copy thereof to: KTI, Inc. 7000 Boulevard East Guttenberg, New Jersey 07093 Attention: Martin Sergi, President If to Pledgee: Key Bank of New York 66 South Pearl Street Albany, New York 12207 Attention: John Stewart, Vice President With a copy thereof to: Crane, Kelley, Greene & Parente 90 State Street Albany, New York 12207 Attention: Patrick K. Greene, Esq. 7 8 Either party hereto may change its address for notice by giving notice thereof to the other party in accordance with the provisions of this paragraph. (d) NO FAILURE ON THE PART OF PLEDGEE TO EXERCISE, AND NO DELAY IN EXERCISING, ANY RIGHT, POWER OR REMEDY HEREUNDER SHALL OPERATE AS A WAIVER THEREOF, NOR SHALL ANY SINGLE OR PARTIAL EXERCISE BY PLEDGEE OF ANY RIGHT,POWER OR REMEDY HEREUNDER PRECLUDE ANY OTHER OR FUTURE EXERCISE THEREOF, OR THE EXERCISE OF ANY OTHER RIGHT, POWER OR REMEDY. THE REMEDIES HEREIN PROVIDED ARE CUMULATIVE AND ARE NOT EXCLUSIVE OF ANY REMEDIES PROVIDED BY LAW OR ANY OTHER AGREEMENT. THE REPRESENTATIONS, COVENANTS AND AGREEMENTS OF PLEDGOR HEREIN CONTAINED SHALL SURVIVE THE DATE HEREOF. NEITHER THIS AGREEMENT NOR THE PROVISIONS HEREOF CAN BE CHANGED, WAIVED OR TERMINATED ORALLY. THIS AGREEMENT SHALL BE BINDING UPON AND INURE TO THE BENEFIT OF THE PARTIES HERETO AND THEIR RESPECTIVE SUCCESSORS, LEGAL REPRESENTATIVES AND ASSIGNS. THIS AGREEMENT MAY BE EXECUTED IN TWO OR MORE COUNTERPARTS AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement on the date first above written. KTI, INC. By: /s/ Martin J. Sergi ---------------------- Name: Martin J. Sergi Title: President KEY BANK OF NEW YORK By: /s/ John Stewart ---------------------- Name: John Stewart Title: Vice President 8 9 STATE OF NEW JERSEY )ss.: COUNTY OF HUDSON ) On this 29th day of October, 1996, before me personally came Martin J. Sergi, to me known, who being by me duly sworn, did depose and say that he resides at 17 Ridge Road, Danville, New Jersey, that he is the President of KTI, Inc., the corporation described in, and which executed the above instrument; and that he signed his name thereto by like order of the Board of Directors of said corporation. /s/ Francis J. Elenio ----------------------- Notary Public FRANCIS J. ELENIO NOTARY PUBLIC OF NEW JERSEY My Commission Expires Sept. 25, 2000 STATE OF NEW JERSEY )ss.: COUNTY OF HUDSON ) On this 29th day of October, 1996, before me personally came John Stewart, to me known, who being by me duly sworn, did depose and say that he resides at _________________, New York, that he is the Vice President of Key Bank of New York, the corporation described in, and which executed the above instrument; and that he signed his name thereto by like order of the Board of Directors of said corporation. --------------------- Notary Public 9 10 PLEDGE AGREEMENT THIS PLEDGE AGREEMENT made as of this 29th day of October, 1996, between KTI ENVIRONMENTAL GROUP, INC., with its principal office and place of business at 7000 Boulevard East, Guttenberg, New Jersey 07093 (the "Pledgor"), and KEY BANK OF NEW YORK, a New York state banking corporation with its principal office at 66 South Pearl Street, New York, New York 12207 (the "Pledgee"). Pledgor has entered into a Loan and Security Agreement dated of even date herewith between the Pledgor and the Pledgee (the "Loan Agreement"). In order to induce Pledgee to make the advances provided for in the Loan Agreement, Pledgor wishes to grant security and assurance to Pledgee in order to secure its performance of the obligations under the Loan Agreement and Note (as defined in the Loan Agreement), and to that effect to pledge to Pledgee all of the issued and outstanding capital stock of Kuhr Technologies, a New Jersey corporation, KTI Limited Partners, Inc., a Delaware corporation and KTI Operations Inc., a Delaware corporation (collectively, the "Pledged Shares"). NOW, THEREFORE, in consideration of the foregoing and for $1.00 and other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto mutually agree as follows: 1. Security Interest. As security for the obligations under the Note, including any renewals or extensions thereof, Pledgor hereby delivers, pledges and assigns to Pledgee and creates in Pledgee for its benefit a first security interest in, all of its right, title and interest in and to all of the Pledged Shares together with all rights and privileges of Pledgor with respect thereto, all proceeds, income and profits thereof and all property received in addition thereto, in exchange thereof or in substitution therefor (the "Collateral"). 2. Stock Dividends, Options, or Other Adjustments. Prior to the full payment and performance of the obligations, Pledgee shall receive, as Collateral, any and all additional shares of stock or any other property of any kind distributable on or by reason of the Collateral pledged hereunder, whether in the form of stock dividends, warrants, partial liquidation, conversion, prepayments or redemptions (in whole or in part) liquidation or otherwise, with the sole exception of cash dividends or cash interest payments, as the case may be. For the term of this Agreement the Pledged Shares shall be held by Pledgee. If any additional shares of capital stock, instruments, or other property against which a security interest can only be perfected by possession by Pledgee, which are distributable on or by reason of the Collateral pledged hereunder, shall come into the possession or control of Pledgor, Pledgor shall hold or control and forthwith transfer and deliver the same to Pledgee subject to the provisions of this Agreement. 3. Delivery of Share Certificates; Stock Powers. Instruments and stock certificates representing the Collateral are being delivered to Pledgee simultaneously herewith together with stock powers duly executed in blank by Pledgor. Pledgor shall promptly deliver to Pledgee, or 11 cause the corporations or other entity issuing the Collateral to deliver directly to Pledgee, share certificates or other documents representing Collateral acquired or received after the date of this Agreement with a stock power duly executed by Pledgor. If at any time Pledgee notifies Pledgor that additional stock powers endorsed in blank held by Pledgee with respect to the Collateral are required, Pledgor shall promptly execute in blank and deliver such stock powers as Pledgee may request. 4. Power of Attorney. Pledgor hereby constitutes and irrevocably appoints Pledgee, with full power of substitution and revocation by Pledgee, as Pledgor's true and lawful attorney-in-fact, to affix to certificates and documents representing the Collateral the stock powers delivered with respect thereto, to transfer or cause the transfer of the Collateral, or any part thereof on the books of the corporation or other entity issuing the same, to the name of Pledgee or Pledgee's nominee and thereafter exercise as to such Collateral all the rights, power and remedies of an owner. The power of attorney granted pursuant to this Agreement and all authority hereby conferred are granted and conferred solely to protect Pledgee's interest in the Collateral and shall not impose any duty upon Pledgee to exercise any power. This power of attorney shall be irrevocable as one coupled with an interest prior to the payment in full and/or satisfaction and termination of all obligations to Pledgee. 5. Inducing Representations of Pledgor. Pledgor represents and warrants to Pledgee with respect to its collateral that: (a) Pledgor is the sole legal and beneficial owner of, and has good and marketable title to, the Collateral, free and clear of all pledges, liens, security interests and other encumbrances and restrictions on the transfer and assignment thereof, other than the security interest created by this Agreement, and Pledgor has the requisite right and authority to execute this Agreement and to pledge the Collateral to Pledgee as provided for herein; (b) There are no outstanding options, warrants or other agreements with respect to the Collateral; (c) The Collateral has been validly issued and is fully paid and non-assessable and is not subject to any charter, by-law, statutory, contractual or other restrictions governing its issuance, transfer, ownership or control, except that sale may be limited in the absence of an effective registration under the Securities Act of 1933, as amended, and under applicable state securities laws or of an opinion of counsel satisfactory to the issuer that the sale or transfer is exempt from registration under said act and laws. (d) Any consent, approval or authorization of or designation or filing with any authority on the part of Pledgor which is required in connection with the pledge and security interest granted under this Agreement has been obtained or effected; (e) The execution and delivery of this Agreement by Pledgor, and the performance by Pledgor of its obligations hereunder, will not result in a violation of the 2 12 certificate of incorporation, by-laws, or of any mortgage, indenture, contract, instrument, judgment, decree, order, statute, rule or regulation to which Pledgor is subject; (f) Pledgor has delivered to Pledgee the Pledged Shares duly endorsed in blank or accompanied by an assignment or assignments sufficient to transfer title thereto and/or the local equivalent necessary to perfect the security interest; and (g) The Pledged shares constitute all the issued and outstanding capital stock of the issuers thereof. 6. Obligations of Pledgor. Pledgor further covenants to Pledgee with respect to the Collateral that: (a) Pledgor will not sell, transfer or convey any interest in, or suffer or permit any lien or encumbrance to be created upon or with respect to, any of the Collateral (other than as created under this Agreement) during the term of the pledge established hereby; and (b) Pledgor will, at its own expense, at any time and from time to time at Pledgee's reasonable request, do, make, procure, execute and deliver all acts, things, writings, assurances and other documents as may be proposed by Pledgee to further enhance, preserve, establish, demonstrate or enforce Pledgee's rights, interests and remedies created by, provided in or emanating from this Agreement. 7. Rights of Pledgor. So long as no Event of Default has occurred and is continuing (as used herein "Event of Default" shall mean the occurrence of any Event of Default under the Note, Loan Agreement, any note, document or instrument delivered or to be delivered pursuant or in connection with the Loan Agreement (collectively, the "Loan Documents") or the failure of Pledgor to perform any obligation, or the breach of any covenant, under this Agreement), and so long as Pledgee has not transferred the Collateral to its own name under Section 4 hereof: (a) Pledgor shall be entitled to receive and retain any cash dividends or cash interest payments paid on the Collateral; and (b) Pledgor shall be entitled to vote or consent with respect to the Collateral in any manner not inconsistent with this Agreement, the Note and Security Agreement. Pledgor hereby grants to Pledgee an irrevocable proxy to vote the Collateral which proxy shall be effective immediately upon the occurrence of any Event of Default. Upon request of Pledgee, Pledgor agrees to deliver to Pledgee such further evidence of such irrevocable proxy as Pledgee may request. 8. Rights of Pledgee. At any time after the occurrence of an Event of Default, and so long as such Event of Default continues, without notice, Pledgee may: (a) Cause the Collateral to be transferred to its name or to the name of its 3 13 nominee or nominees and thereafter exercise as to such Collateral all of the rights, powers and remedies of an owner; (b) Collect by legal proceedings or otherwise all dividends, interest, principal payments, capital distributions and other sums now or hereafter payable on account of the Collateral, and hold the same as part of the Collateral, or apply the same to any of the obligations in such manner and order as Pledgee may decide in its sole discretion; (c) Enter into any extension, subordination, reorganization, deposit, merger, or consolidation agreement, or any other agreement relating to or affecting the Collateral, and in connection therewith deposit or surrender control of the Collateral thereunder, and accept other property in exchange therefor and hold and apply such property or money so received in accordance with the provisions hereof; and (d) Discharge any taxes, liens, security interests or other encumbrances levied or placed on the Collateral, pay for the maintenance and preservation of the Collateral, or pay for insurance on the Collateral; the amount of such payments, plus any and all fees, costs and expenses of Pledgee (including attorneys' fees and disbursements), in connection therewith, shall, at Pledgee's option, be reimbursed by Pledgor on demand or added to the obligations secured hereby. 9. Event of Default; Remedies. Upon the occurrence and continuance of an Event of Default as hereinbefore defined: (a) In addition to all the rights and remedies of a secured party under the Uniform Commercial Code in effect in the State of New York at that time, Pledgee shall have the right, and without demand or performance or other demand, advertisement or notice of any kind, except as specified below, to or upon the Pledgor or any other person (all and each of which demands, advertisements and/or notices are hereby expressly waived to the extent permitted by law), to proceed forthwith to collect, receive, appropriate and realize upon the Collateral, or any part thereof and to proceed forthwith to sell, assign, give an option or options to purchase, contract to sell, or otherwise dispose of and deliver the Collateral or any part thereof in one or more parcels at public or private sale or sales at any stock exchange, broker's board or at any of Pledgee's offices or elsewhere at such prices and on such terms (including, without limitation, a requirement that any purchaser of all or any part of the Collateral shall be required to purchase any securities constituting the Collateral solely for investment and without any intention to make a distribution thereof) as Pledgee deems to be commercially reasonable. If any notification of intended disposition of the Collateral is required by law, such notification shall be deemed reasonable and properly given if mailed, postage prepaid, at least ten (10) days before any such disposition to Pledgor's address indicated above. Any disposition of the Collateral or any part thereof may be for cash or on credit or for future delivery without assumption of any credit risk, with the right to Pledgee to purchase all or any part of the Collateral so sold at any such sale or sales, public or private, free of any equity or right of redemption in the Pledgor, which right or equity is hereby expressly waived or released by the 4 14 Pledgor. (b) All of the Pledgee's rights and remedies, including but not limited to the foregoing, shall be cumulative and not exclusive and shall be enforceable alternatively, successively or concurrently as Pledgee may deem expedient. (c) Pledgee may elect to obtain the advice of any independent nationally-known investment banking firm with respect to the method and manner of sale or other disposition of any of Collateral, the best price reasonably obtainable therefor, the consideration of cash and/or credit terms, or any other details concerning such sale or disposition. Pledgee, in its sole discretion, may elect to sell on such credit terms which it deems reasonable. The sale of any of the Collateral on credit terms shall not relieve Pledgor or the Borrowers of their liability under any of the Obligations until the full purchase price for the Collateral has been paid in full. All payments received by Pledgee in respect of a sale of Collateral shall be applied to the obligations in the manner provided in Section 10 of this Agreement, as and when such payments are received. (d) Pledgor recognizes that Pledgee may be unable to effect a public sale of all or a part of the Collateral by reason of certain prohibitions contained in any applicable securities law, but may be compelled to resort to more private sales to a restricted group of purchases who will be obliged to agree, among other things, to acquire the Collateral for their own account, for investment and not with a view for the distribution or resale thereof. Pledgor agrees that private sales so made may be at prices and on other terms less favorable to the seller than if the Collateral were sold at public sale, and that Pledgee has no obligation to delay the sale of any Collateral for the period of time necessary to permit the registration of the Collateral for public sale under the Act. Pledgor agrees that a private sale or sales made under the foregoing circumstances shall be deemed to have been made in a commercially reasonable manner. (e) If any consent, approval or authorization of any state, municipal or other governmental department, agency or authority should be necessary to effectuate any sale or other disposition of the Collateral, or any partial disposition of the Collateral, Pledgor will execute all such applications and other instruments as may be required in connection with securing any such consent, approval or authorization, and will otherwise use its best efforts to secure the same. Pledgor further agrees to use its best efforts to secure such sale or other disposition of the Collateral as Pledgee may deem necessary pursuant to the terms of this Agreement. (f) Upon any sale or other disposition, Pledgee shall have the right to deliver, assign and transfer to the purchaser thereof the Collateral so sold or disposed of. Each purchaser at any such sale or other disposition (including Pledgee) shall hold the Collateral free from any claim or right of whatever kind, including any equity or right of redemption of Pledgor. Pledgor specifically waives all rights of redemption, stay or appraisal which it had or may have under any rule of law or statute now existing or hereafter adopted. 5 15 (g) Pledgee shall not be obligated to make any sale or other disposition, unless the terms thereof shall be satisfactory to it. Pledgee may, without notice or publication, adjourn any private or public sale, and, upon ten (10) days' prior notice to Pledgor, hold such sale at any time or place to which the same may be so adjourned. In case of any sale of all or any part of the Collateral, on credit or future delivery, the Collateral so sold may be retained by Pledgee until the selling price is paid by the purchaser thereof, but Pledgee shall incur no liability in case of the failure of such purchaser to take up and pay for the property so sold and, in case of any such failure, such property may again be sole as herein provided. 10. Disposition of Proceeds. (a) The proceeds of any sale or disposition of all or any part of the Collateral shall be applied by Pledgee in the following order: (i) to the payment in full of the costs and expenses of such sale or sales, collections, and the protection, declaration and enforcement of any security interest granted hereunder, including the compensation of Pledgee's agents and attorneys; (ii) to the payment of the obligations; and (iii) to the payment to Pledgor of any surplus then remaining from such proceeds, subject to the rights of any holder of a lien on the Collateral of which Pledgee has actual notice. (b) In the event that the proceeds of any sale or other disposition are insufficient to cover the amount of the obligations, Pledgor shall remain liable for any deficiency. 11. Termination. This Agreement shall continue to full force and effect until all obligations shall have been paid in full and satisfied and the Loan Agreement shall have been terminated. Subject to any sale or other disposition by Pledgee of the Collateral or any part thereof pursuant to this Agreement, the Collateral shall be returned to Pledgor upon full payment, satisfaction and termination of all of the obligations of Pledgor. 12. Expenses of Pledgee. All expenses (including Pledgee's fees and charges and fees and disbursements of counsel) incurred by Pledgee in connection with the perfection and continuation of the security interest granted hereunder and any actual or attempted sale, exchange of, or any enforcement, collection, compromise or settlement respecting, the Collateral, or any other action taken by Pledgee hereunder whether directly or as attorney-in-fact pursuant to a power of attorney or other authorization therein conferred, for the purpose of satisfaction of the liability of Borrowers and Pledgor for failure to pay the obligations or as additional amounts owing by Pledgor to cover Pledgee's costs of acting against the Collateral, shall be deemed an obligation of Pledgor for all purposes of this Agreement and Pledgee may apply the Collateral to payment of or reimbursement of itself and the Bank for such liability. 6 16 13. General Provisions. (a) Pledgee or its designee is hereby appointed the attorney-in-fact of Pledgor for the purpose of carrying out the provisions of this Agreement and taking any action and executing any instrument which Pledgee reasonably may deem necessary and advisable to accomplish the purposes hereof, which appointment as attorney-in-fact is irrevocable as one coupled with an interest. (b) Pledgee and its assigns shall have no obligation in respect to the Collateral, except to use reasonable care in holding the Collateral and to hold and dispose of the same in accordance with the terms of this Agreement. (c) Any notice or other communication given hereunder shall be in writing and sent by registered or certified mail, postage prepaid, as follows; If to Pledgor: KTI Environmental Group, Inc. 7000 Boulevard East Guttenberg, New Jersey 07093 Attention: Robert E. Wetzel, Esq., General Counsel With a copy thereof to: KTI Environmental Group, Inc. 7000 Boulevard East Guttenberg, New Jersey 07093 Attention: Martin Sergi, President If to Pledgee: Key Bank of New York 66 South Pearl Street Albany, New York 12207 Attention: John Stewart, Vice President With a copy thereof to: Crane, Kelley, Greene & Parente 90 State Street Albany, New York 12207 Attention: Patrick K. Greene, Esq. 7 17 Either party hereto may change its address for notice by giving notice thereof to the other party in accordance with the provisions of this paragraph. (d) NO FAILURE ON THE PART OF PLEDGEE TO EXERCISE, AND NO DELAY IN EXERCISING, ANY RIGHT, POWER OR REMEDY HEREUNDER SHALL OPERATE AS A WAIVER THEREOF, NOR SHALL ANY SINGLE OR PARTIAL EXERCISE BY PLEDGEE OF ANY RIGHT,POWER OR REMEDY HEREUNDER PRECLUDE ANY OTHER OR FUTURE EXERCISE THEREOF, OR THE EXERCISE OF ANY OTHER RIGHT, POWER OR REMEDY. THE REMEDIES HEREIN PROVIDED ARE CUMULATIVE AND ARE NOT EXCLUSIVE OF ANY REMEDIES PROVIDED BY LAW OR ANY OTHER AGREEMENT. THE REPRESENTATIONS, COVENANTS AND AGREEMENTS OF PLEDGOR HEREIN CONTAINED SHALL SURVIVE THE DATE HEREOF. NEITHER THIS AGREEMENT NOR THE PROVISIONS HEREOF CAN BE CHANGED, WAIVED OR TERMINATED ORALLY. THIS AGREEMENT SHALL BE BINDING UPON AND INURE TO THE BENEFIT OF THE PARTIES HERETO AND THEIR RESPECTIVE SUCCESSORS, LEGAL REPRESENTATIVES AND ASSIGNS. THIS AGREEMENT MAY BE EXECUTED IN TWO OR MORE COUNTERPARTS AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement on the date first above written. KTI ENVIRONMENTAL GROUP, INC. By: /s/ Martin J. Sergi ---------------------------------- Name: Martin J. Sergi Title: President KEY BANK OF NEW YORK By: /s/ John Stewart --------------------------------- Name: John Stewart Title: Vice President 8 18 STATE OF NEW JERSEY )ss.: COUNTY OF HUDSON ) On this 29th day of October, 1996, before me personally came Martin J. Sergi, to me known, who being by me duly sworn, did depose and say that he resides at 17 Ridge Road, Denville, N.J., that he is the President of KTI Environmental Group, Inc., the corporation described in, and which executed the above instrument; and that he signed his name thereto by like order of the Board of Directors of said corporation. /s/ Francis J. Elenio ----------------------------- Notary Public FRANCIS J. ELENIO NOTARY PUBLIC OF NEW JERSEY My Commission Expires Sept. 25, 2000 STATE OF NEW JERSEY )ss.: COUNTY OF HUDSON ) On this 29th day of October, 1996, before me personally came John Stewart, to me known, who being by me duly sworn, did depose and say that he resides at _________________, New York, that he is the Vice President of Key Bank of New York, the corporation described in, and which executed the above instrument; and that he signed his name thereto by like order of the Board of Directors of said corporation. ----------------------------- Notary Public 9 19 PLEDGE AGREEMENT THIS PLEDGE AGREEMENT made as of this 29th day of October, 1996, between KTI LIMITED PARTNERS, INC., with its principal office and place of business at 7000 Boulevard East, Guttenberg, New Jersey 07093 (the "Pledgor"), and KEY BANK OF NEW YORK, a New York state banking corporation with its principal office at 66 South Pearl Street, New York, New York 12207 (the "Pledgee"). Pledgor has entered into a Loan and Security Agreement dated of even date herewith between the Pledgor and the Pledgee (the "Loan Agreement"). In order to induce Pledgee to make the advances provided for in the Loan Agreement, Pledgor wishes to grant security and assurance to Pledgee in order to secure its performance of the obligations under the Loan Agreement and Note (as defined in the Loan Agreement), and to that effect to pledge to Pledgee all of the issued and outstanding capital stock of PERC Management Company, a Maine limited partnership and Maine Energy Recovery Co., a Maine limited partnership (collectively, the "Pledged Shares"). NOW, THEREFORE, in consideration of the foregoing and for $1.00 and other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto mutually agree as follows: 1. Security Interest. As security for the obligations under the Note, including any renewals or extensions thereof, Pledgor hereby delivers, pledges and assigns to Pledgee and creates in Pledgee for its benefit a first security interest in, all of its right, title and interest in and to all of the Pledged Shares together with all rights and privileges of Pledgor with respect thereto, all proceeds, income and profits thereof and all property received in addition thereto, in exchange thereof or in substitution therefor (the "Collateral"). 2. Stock Dividends, Options, or Other Adjustments. Prior to the full payment and performance of the obligations, Pledgee shall receive, as Collateral, any and all additional shares of stock or any other property of any kind distributable on or by reason of the Collateral pledged hereunder, whether in the form of stock dividends, warrants, partial liquidation, conversion, prepayments or redemptions (in whole or in part) liquidation or otherwise, with the sole exception of cash dividends or cash interest payments, as the case may be. For the term of this Agreement the Pledged Shares shall be held by Pledgee. If any additional shares of capital stock, instruments, or other property against which a security interest can only be perfected by possession by Pledgee, which are distributable on or by reason of the Collateral pledged hereunder, shall come into the possession or control of Pledgor, Pledgor shall hold or control and forthwith transfer and deliver the same to Pledgee subject to the provisions of this Agreement. 3. Delivery of Share Certificates; Stock Powers. Instruments and stock certificates representing the Collateral are being delivered to Pledgee simultaneously herewith together with stock powers duly executed in blank by Pledgor. Pledgor shall promptly deliver to Pledgee, or 20 cause the corporations or other entity issuing the Collateral to deliver directly to Pledgee, share certificates or other documents representing Collateral acquired or received after the date of this Agreement with a stock power duly executed by Pledgor. If at any time Pledgee notifies Pledgor that additional stock powers endorsed in blank held by Pledgee with respect to the Collateral are required, Pledgor shall promptly execute in blank and deliver such stock powers as Pledgee may request. 4. Power of Attorney. Pledgor hereby constitutes and irrevocably appoints Pledgee, with full power of substitution and revocation by Pledgee, as Pledgor's true and lawful attorney-in-fact, to affix to certificates and documents representing the Collateral the stock powers delivered with respect thereto, to transfer or cause the transfer of the Collateral, or any part thereof on the books of the corporation or other entity issuing the same, to the name of Pledgee or Pledgee's nominee and thereafter exercise as to such Collateral all the rights, power and remedies of an owner. The power of attorney granted pursuant to this Agreement and all authority hereby conferred are granted and conferred solely to protect Pledgee's interest in the Collateral and shall not impose any duty upon Pledgee to exercise any power. This power of attorney shall be irrevocable as one coupled with an interest prior to the payment in full and/or satisfaction and termination of all obligations to Pledgee. 5. Inducing Representations of Pledgor. Pledgor represents and warrants to Pledgee with respect to its collateral that: (a) Pledgor is the sole legal and beneficial owner of, and has good and marketable title to, the Collateral, free and clear of all pledges, liens, security interests and other encumbrances and restrictions on the transfer and assignment thereof, other than the security interest created by this Agreement, and Pledgor has the requisite right and authority to execute this Agreement and to pledge the Collateral to Pledgee as provided for herein; (b) There are no outstanding options, warrants or other agreements with respect to the Collateral; (c) The Collateral has been validly issued and is fully paid and non-assessable and is not subject to any charter, by-law, statutory, contractual or other restrictions governing its issuance, transfer, ownership or control, except that sale may be limited in the absence of an effective registration under the Securities Act of 1933, as amended, and under applicable state securities laws or of an opinion of counsel satisfactory to the issuer that the sale or transfer is exempt from registration under said act and laws. (d) Any consent, approval or authorization of or designation or filing with any authority on the part of Pledgor which is required in connection with the pledge and security interest granted under this Agreement has been obtained or effected; (e) The execution and delivery of this Agreement by Pledgor, and the performance by Pledgor of its obligations hereunder, will not result in a violation of the 2 21 certificate of incorporation, by-laws, or of any mortgage, indenture, contract, instrument, judgment, decree, order, statute, rule or regulation to which Pledgor is subject; (f) Pledgor has delivered to Pledgee the Pledged Shares duly endorsed in blank or accompanied by an assignment or assignments sufficient to transfer title thereto and/or the local equivalent necessary to perfect the security interest; and (g) The Pledged shares constitute all the issued and outstanding capital stock of the issuers thereof. 6. Obligations of Pledgor. Pledgor further covenants to Pledgee with respect to the Collateral that: (a) Pledgor will not sell, transfer or convey any interest in, or suffer or permit any lien or encumbrance to be created upon or with respect to, any of the Collateral (other than as created under this Agreement) during the term of the pledge established hereby; and (b) Pledgor will, at its own expense, at any time and from time to time at Pledgee's reasonable request, do, make, procure, execute and deliver all acts, things, writings, assurances and other documents as may be proposed by Pledgee to further enhance, preserve, establish, demonstrate or enforce Pledgee's rights, interests and remedies created by, provided in or emanating from this Agreement. 7. Rights of Pledgor. So long as no Event of Default has occurred and is continuing (as used herein "Event of Default" shall mean the occurrence of any Event of Default under the Note, Loan Agreement, any note, document or instrument delivered or to be delivered pursuant or in connection with the Loan Agreement (collectively, the "Loan Documents") or the failure of Pledgor to perform any obligation, or the breach of any covenant, under this Agreement), and so long as Pledgee has not transferred the Collateral to its own name under Section 4 hereof: (a) Pledgor shall be entitled to receive and retain any cash dividends or cash interest payments paid on the Collateral; and (b) Pledgor shall be entitled to vote or consent with respect to the Collateral in any manner not inconsistent with this Agreement, the Note and Security Agreement. Pledgor hereby grants to Pledgee an irrevocable proxy to vote the Collateral which proxy shall be effective immediately upon the occurrence of any Event of Default. Upon request of Pledgee, Pledgor agrees to deliver to Pledgee such further evidence of such irrevocable proxy as Pledgee may request. 8. Rights of Pledgee. At any time after the occurrence of an Event of Default, and so long as such Event of Default continues, without notice, Pledgee may: (a) Cause the Collateral to be transferred to its name or to the name of its 3 22 nominee or nominees and thereafter exercise as to such Collateral all of the rights, powers and remedies of an owner; (b) Collect by legal proceedings or otherwise all dividends, interest, principal payments, capital distributions and other sums now or hereafter payable on account of the Collateral, and hold the same as part of the Collateral, or apply the same to any of the obligations in such manner and order as Pledgee may decide in its sole discretion; (c) Enter into any extension, subordination, reorganization, deposit, merger, or consolidation agreement, or any other agreement relating to or affecting the Collateral, and in connection therewith deposit or surrender control of the Collateral thereunder, and accept other property in exchange therefor and hold and apply such property or money so received in accordance with the provisions hereof; and (d) Discharge any taxes, liens, security interests or other encumbrances levied or placed on the Collateral, pay for the maintenance and preservation of the Collateral, or pay for insurance on the Collateral; the amount of such payments, plus any and all fees, costs and expenses of Pledgee (including attorneys' fees and disbursements), in connection therewith, shall, at Pledgee's option, be reimbursed by Pledgor on demand or added to the obligations secured hereby. 9. Event of Default; Remedies. Upon the occurrence and continuance of an Event of Default as hereinbefore defined: (a) In addition to all the rights and remedies of a secured party under the Uniform Commercial Code in effect in the State of New York at that time, Pledgee shall have the right, and without demand or performance or other demand, advertisement or notice of any kind, except as specified below, to or upon the Pledgor or any other person (all and each of which demands, advertisements and/or notices are hereby expressly waived to the extent permitted by law), to proceed forthwith to collect, receive, appropriate and realize upon the Collateral, or any part thereof and to proceed forthwith to sell, assign, give an option or options to purchase, contract to sell, or otherwise dispose of and deliver the Collateral or any part thereof in one or more parcels at public or private sale or sales at any stock exchange, broker's board or at any of Pledgee's offices or elsewhere at such prices and on such terms (including, without limitation, a requirement that any purchaser of all or any part of the Collateral shall be required to purchase any securities constituting the Collateral solely for investment and without any intention to make a distribution thereof) as Pledgee deems to be commercially reasonable. If any notification of intended disposition of the Collateral is required by law, such notification shall be deemed reasonable and properly given if mailed, postage prepaid, at least ten (10) days before any such disposition to Pledgor's address indicated above. Any disposition of the Collateral or any part thereof may be for cash or on credit or for future delivery without assumption of any credit risk, with the right to Pledgee to purchase all or any part of the Collateral so sold at any such sale or sales, public or private, free of any equity or right of redemption in the Pledgor, which right or equity is hereby expressly waived or released by the 4 23 Pledgor. (b) All of the Pledgee's rights and remedies, including but not limited to the foregoing, shall be cumulative and not exclusive and shall be enforceable alternatively, successively or concurrently as Pledgee may deem expedient. (c) Pledgee may elect to obtain the advice of any independent nationally-known investment banking firm with respect to the method and manner of sale or other disposition of any of Collateral, the best price reasonably obtainable therefor, the consideration of cash and/or credit terms, or any other details concerning such sale or disposition. Pledgee, in its sole discretion, may elect to sell on such credit terms which it deems reasonable. The sale of any of the Collateral on credit terms shall not relieve Pledgor or the Borrowers of their liability under any of the Obligations until the full purchase price for the Collateral has been paid in full. All payments received by Pledgee in respect of a sale of Collateral shall be applied to the obligations in the manner provided in Section 10 of this Agreement, as and when such payments are received. (d) Pledgor recognizes that Pledgee may be unable to effect a public sale of all or a part of the Collateral by reason of certain prohibitions contained in any applicable securities law, but may be compelled to resort to more private sales to a restricted group of purchases who will be obliged to agree, among other things, to acquire the Collateral for their own account, for investment and not with a view for the distribution or resale thereof. Pledgor agrees that private sales so made may be at prices and on other terms less favorable to the seller than if the Collateral were sold at public sale, and that Pledgee has no obligation to delay the sale of any Collateral for the period of time necessary to permit the registration of the Collateral for public sale under the Act. Pledgor agrees that a private sale or sales made under the foregoing circumstances shall be deemed to have been made in a commercially reasonable manner. (e) If any consent, approval or authorization of any state, municipal or other governmental department, agency or authority should be necessary to effectuate any sale or other disposition of the Collateral, or any partial disposition of the Collateral, Pledgor will execute all such applications and other instruments as may be required in connection with securing any such consent, approval or authorization, and will otherwise use its best efforts to secure the same. Pledgor further agrees to use its best efforts to secure such sale or other disposition of the Collateral as Pledgee may deem necessary pursuant to the terms of this Agreement. (f) Upon any sale or other disposition, Pledgee shall have the right to deliver, assign and transfer to the purchaser thereof the Collateral so sold or disposed of. Each purchaser at any such sale or other disposition (including Pledgee) shall hold the Collateral free from any claim or right of whatever kind, including any equity or right of redemption of Pledgor. Pledgor specifically waives all rights of redemption, stay or appraisal which it had or may have under any rule of law or statute now existing or hereafter adopted. 5 24 (g) Pledgee shall not be obligated to make any sale or other disposition, unless the terms thereof shall be satisfactory to it. Pledgee may, without notice or publication, adjourn any private or public sale, and, upon ten (10) days' prior notice to Pledgor, hold such sale at any time or place to which the same may be so adjourned. In case of any sale of all or any part of the Collateral, on credit or future delivery, the Collateral so sold may be retained by Pledgee until the selling price is paid by the purchaser thereof, but Pledgee shall incur no liability in case of the failure of such purchaser to take up and pay for the property so sold and, in case of any such failure, such property may again be sole as herein provided. 10. Disposition of Proceeds. (a) The proceeds of any sale or disposition of all or any part of the Collateral shall be applied by Pledgee in the following order: (i) to the payment in full of the costs and expenses of such sale or sales, collections, and the protection, declaration and enforcement of any security interest granted hereunder, including the compensation of Pledgee's agents and attorneys; (ii) to the payment of the obligations; and (iii) to the payment to Pledgor of any surplus then remaining from such proceeds, subject to the rights of any holder of a lien on the Collateral of which Pledgee has actual notice. (b) In the event that the proceeds of any sale or other disposition are insufficient to cover the amount of the obligations, Pledgor shall remain liable for any deficiency. 11. Termination. This Agreement shall continue to full force and effect until all obligations shall have been paid in full and satisfied and the Loan Agreement shall have been terminated. Subject to any sale or other disposition by Pledgee of the Collateral or any part thereof pursuant to this Agreement, the Collateral shall be returned to Pledgor upon full payment, satisfaction and termination of all of the obligations of Pledgor. 12. Expenses of Pledgee. All expenses (including Pledgee's fees and charges and fees and disbursements of counsel) incurred by Pledgee in connection with the perfection and continuation of the security interest granted hereunder and any actual or attempted sale, exchange of, or any enforcement, collection, compromise or settlement respecting, the Collateral, or any other action taken by Pledgee hereunder whether directly or as attorney-in-fact pursuant to a power of attorney or other authorization therein conferred, for the purpose of satisfaction of the liability of Borrowers and Pledgor for failure to pay the obligations or as additional amounts owing by Pledgor to cover Pledgee's costs of acting against the Collateral, shall be deemed an obligation of Pledgor for all purposes of this Agreement and Pledgee may apply the Collateral to payment of or reimbursement of itself and the Bank for such liability. 6 25 13. General Provisions. (a) Pledgee or its designee is hereby appointed the attorney-in-fact of Pledgor for the purpose of carrying out the provisions of this Agreement and taking any action and executing any instrument which Pledgee reasonably may deem necessary and advisable to accomplish the purposes hereof, which appointment as attorney-in-fact is irrevocable as one coupled with an interest. (b) Pledgee and its assigns shall have no obligation in respect to the Collateral, except to use reasonable care in holding the Collateral and to hold and dispose of the same in accordance with the terms of this Agreement. (c) Any notice or other communication given hereunder shall be in writing and sent by registered or certified mail, postage prepaid, as follows; If to Pledgor: KTI Limited Partners, Inc. 7000 Boulevard East Guttenberg, New Jersey 07093 Attention: Robert E. Wetzel, Esq., General Counsel With a copy thereof to: KTI Limited Partners, Inc. 7000 Boulevard East Guttenberg, New Jersey 07093 Attention: Martin Sergi, President If to Pledgee: Key Bank of New York 66 South Pearl Street Albany, New York 12207 Attention: John Stewart, Vice President With a copy thereof to: Crane, Kelley, Greene & Parente 90 State Street Albany, New York 12207 Attention: Patrick K. Greene, Esq. 7 26 Either party hereto may change its address for notice by giving notice thereof to the other party in accordance with the provisions of this paragraph. (D) NO FAILURE ON THE PART OF PLEDGEE TO EXERCISE, AND NO DELAY IN EXERCISING, ANY RIGHT, POWER OR REMEDY HEREUNDER SHALL OPERATE AS A WAIVER THEREOF, NOR SHALL ANY SINGLE OR PARTIAL EXERCISE BY PLEDGEE OF ANY RIGHT,POWER OR REMEDY HEREUNDER PRECLUDE ANY OTHER OR FUTURE EXERCISE THEREOF, OR THE EXERCISE OF ANY OTHER RIGHT, POWER OR REMEDY. THE REMEDIES HEREIN PROVIDED ARE CUMULATIVE AND ARE NOT EXCLUSIVE OF ANY REMEDIES PROVIDED BY LAW OR ANY OTHER AGREEMENT. THE REPRESENTATIONS, COVENANTS AND AGREEMENTS OF PLEDGOR HEREIN CONTAINED SHALL SURVIVE THE DATE HEREOF. NEITHER THIS AGREEMENT NOR THE PROVISIONS HEREOF CAN BE CHANGED, WAIVED OR TERMINATED ORALLY. THIS AGREEMENT SHALL BE BINDING UPON AND INURE TO THE BENEFIT OF THE PARTIES HERETO AND THEIR RESPECTIVE SUCCESSORS, LEGAL REPRESENTATIVES AND ASSIGNS. THIS AGREEMENT MAY BE EXECUTED IN TWO OR MORE COUNTERPARTS AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement on the date first above written. KTI LIMITED PARTNERS, INC. By:/s/ Martin J. Sergi ------------------------------- Name: Martin J. Sergi Title: President KEY BANK OF NEW YORK By: /s/ John Stewart ------------------------------- Name: John Stewart Title: Vice President 8 27 STATE OF NEW JERSEY )ss.: COUNTY OF HUDSON ) On this 29th day of October, 1996, before me personally came Martin J. Sergi, to me known, who being by me duly sworn, did depose and say that he resides at ________________________________, that he is the President of KTI Limited Partners, Inc., the corporation described in, and which executed the above instrument; and that he signed his name thereto by like order of the Board of Directors of said corporation. /s/ Francis J. Elenio ------------------------------- Notary Public FRANCIS J. ELENIO NOTARY PUBLIC OF NEW JERSEY My Commission Expires Sept 25, 2000 STATE OF NEW JERSEY )ss.: COUNTY OF HUDSON ) On this 29th day of October, 1996, before me personally came John Stewart, to me known, who being by me duly sworn, did depose and say that he resides at _________________, New York, that he is the Vice President of Key Bank of New York, the corporation described in, and which executed the above instrument; and that he signed his name thereto by like order of the Board of Directors of said corporation. ------------------------------- Notary Public 9 28 PLEDGE AGREEMENT THIS PLEDGE AGREEMENT made as of this 29th day of October, 1996, between KUHR TECHNOLOGIES INC., with its principal office and place of business at 7000 Boulevard East, Guttenberg, New Jersey 07093 (the "Pledgor"), and KEY BANK OF NEW YORK, a New York state banking corporation with its principal office at 66 South Pearl Street, New York, New York 12207 (the "Pledgee"). Pledgor has entered into a Loan and Security Agreement dated of even date herewith between the Pledgor and the Pledgee (the "Loan Agreement"). In order to induce Pledgee to make the advances provided for in the Loan Agreement, Pledgor wishes to grant security and assurance to Pledgee in order to secure its performance of the obligations under the Loan Agreement and Note (as defined in the Loan Agreement), and to that effect to pledge to Pledgee all of the issued and outstanding capital stock of PERC, Inc., a Delaware corporation and Maine Energy Recovery Co., a Maine limited partnership (collectively, the "Pledged Shares"). NOW, THEREFORE, in consideration of the foregoing and for $1.00 and other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto mutually agree as follows: 1. Security Interest. As security for the obligations under the Note, including any renewals or extensions thereof, Pledgor hereby delivers, pledges and assigns to Pledgee and creates in Pledgee for its benefit a first security interest in, all of its right, title and interest in and to all of the Pledged Shares together with all rights and privileges of Pledgor with respect thereto, all proceeds, income and profits thereof and all property received in addition thereto, in exchange thereof or in substitution therefor (the "Collateral"). 2. Stock Dividends, Options, or Other Adjustments. Prior to the full payment and performance of the obligations, Pledgee shall receive, as Collateral, any and all additional shares of stock or any other property of any kind distributable on or by reason of the Collateral pledged hereunder, whether in the form of stock dividends, warrants, partial liquidation, conversion, prepayments or redemptions (in whole or in part) liquidation or otherwise, with the sole exception of cash dividends or cash interest payments, as the case may be. For the term of this Agreement the Pledged Shares shall be held by Pledgee. If any additional shares of capital stock, instruments, or other property against which a security interest can only be perfected by possession by Pledgee, which are distributable on or by reason of the Collateral pledged hereunder, shall come into the possession or control of Pledgor, Pledgor shall hold or control and forthwith transfer and deliver the same to Pledgee subject to the provisions of this Agreement. 3. Delivery of Share Certificates; Stock Powers. Instruments and stock certificates representing the Collateral are being delivered to Pledgee simultaneously herewith together with stock powers duly executed in blank by Pledgor. Pledgor shall promptly deliver to Pledgee, or 29 cause the corporations or other entity issuing the Collateral to deliver directly to Pledgee, share certificates or other documents representing Collateral acquired or received after the date of this Agreement with a stock power duly executed by Pledgor. If at any time Pledgee notifies Pledgor that additional stock powers endorsed in blank held by Pledgee with respect to the Collateral are required, Pledgor shall promptly execute in blank and deliver such stock powers as Pledgee may request. 4. Power of Attorney. Pledgor hereby constitutes and irrevocably appoints Pledgee, with full power of substitution and revocation by Pledgee, as Pledgor's true and lawful attorney-in-fact, to affix to certificates and documents representing the Collateral the stock powers delivered with respect thereto, to transfer or cause the transfer of the Collateral, or any part thereof on the books of the corporation or other entity issuing the same, to the name of Pledgee or Pledgee's nominee and thereafter exercise as to such Collateral all the rights, power and remedies of an owner. The power of attorney granted pursuant to this Agreement and all authority hereby conferred are granted and conferred solely to protect Pledgee's interest in the Collateral and shall not impose any duty upon Pledgee to exercise any power. This power of attorney shall be irrevocable as one coupled with an interest prior to the payment in full and/or satisfaction and termination of all obligations to Pledgee. 5. Inducing Representations of Pledgor. Pledgor represents and warrants to Pledgee with respect to its collateral that: (a) Pledgor is the sole legal and beneficial owner of, and has good and marketable title to, the Collateral, free and clear of all pledges, liens, security interests and other encumbrances and restrictions on the transfer and assignment thereof, other than the security interest created by this Agreement, and Pledgor has the requisite right and authority to execute this Agreement and to pledge the Collateral to Pledgee as provided for herein; (b) There are no outstanding options, warrants or other agreements with respect to the Collateral; (c) The Collateral has been validly issued and is fully paid and non-assessable and is not subject to any charter, by-law, statutory, contractual or other restrictions governing its issuance, transfer, ownership or control, except that sale may be limited in the absence of an effective registration under the Securities Act of 1933, as amended, and under applicable state securities laws or of an opinion of counsel satisfactory to the issuer that the sale or transfer is exempt from registration under said act and laws. (d) Any consent, approval or authorization of or designation or filing with any authority on the part of Pledgor which is required in connection with the pledge and security interest granted under this Agreement has been obtained or effected; (e) The execution and delivery of this Agreement by Pledgor, and the performance by Pledgor of its obligations hereunder, will not result in a violation of the 2 30 certificate of incorporation, by-laws, or of any mortgage, indenture, contract, instrument, judgment, decree, order, statute, rule or regulation to which Pledgor is subject; (f) Pledgor has delivered to Pledgee the Pledged Shares duly endorsed in blank or accompanied by an assignment or assignments sufficient to transfer title thereto and/or the local equivalent necessary to perfect the security interest; and (g) The Pledged shares constitute all the issued and outstanding capital stock of the issuers thereof. 6. Obligations of Pledgor. Pledgor further covenants to Pledgee with respect to the Collateral that: (a) Pledgor will not sell, transfer or convey any interest in, or suffer or permit any lien or encumbrance to be created upon or with respect to, any of the Collateral (other than as created under this Agreement) during the term of the pledge established hereby; and (b) Pledgor will, at its own expense, at any time and from time to time at Pledgee's reasonable request, do, make, procure, execute and deliver all acts, things, writings, assurances and other documents as may be proposed by Pledgee to further enhance, preserve, establish, demonstrate or enforce Pledgee's rights, interests and remedies created by, provided in or emanating from this Agreement. 7. Rights of Pledgor. So long as no Event of Default has occurred and is continuing (as used herein "Event of Default" shall mean the occurrence of any Event of Default under the Note, Loan Agreement, any note, document or instrument delivered or to be delivered pursuant or in connection with the Loan Agreement (collectively, the "Loan Documents") or the failure of Pledgor to perform any obligation, or the breach of any covenant, under this Agreement), and so long as Pledgee has not transferred the Collateral to its own name under Section 4 hereof: (a) Pledgor shall be entitled to receive and retain any cash dividends or cash interest payments paid on the Collateral; and (b) Pledgor shall be entitled to vote or consent with respect to the Collateral in any manner not inconsistent with this Agreement, the Note and Security Agreement. Pledgor hereby grants to Pledgee an irrevocable proxy to vote the Collateral which proxy shall be effective immediately upon the occurrence of any Event of Default. Upon request of Pledgee, Pledgor agrees to deliver to Pledgee such further evidence of such irrevocable proxy as Pledgee may request. 8. Rights of Pledgee. At any time after the occurrence of an Event of Default, and so long as such Event of Default continues, without notice, Pledgee may: (a) Cause the Collateral to be transferred to its name or to the name of its 3 31 nominee or nominees and thereafter exercise as to such Collateral all of the rights, powers and remedies of an owner; (b) Collect by legal proceedings or otherwise all dividends, interest, principal payments, capital distributions and other sums now or hereafter payable on account of the Collateral, and hold the same as part of the Collateral, or apply the same to any of the obligations in such manner and order as Pledgee may decide in its sole discretion; (c) Enter into any extension, subordination, reorganization, deposit, merger, or consolidation agreement, or any other agreement relating to or affecting the Collateral, and in connection therewith deposit or surrender control of the Collateral thereunder, and accept other property in exchange therefor and hold and apply such property or money so received in accordance with the provisions hereof; and (d) Discharge any taxes, liens, security interests or other encumbrances levied or placed on the Collateral, pay for the maintenance and preservation of the Collateral, or pay for insurance on the Collateral; the amount of such payments, plus any and all fees, costs and expenses of Pledgee (including attorneys' fees and disbursements), in connection therewith, shall, at Pledgee's option, be reimbursed by Pledgor on demand or added to the obligations secured hereby. 9. Event of Default; Remedies. Upon the occurrence and continuance of an Event of Default as hereinbefore defined: (a) In addition to all the rights and remedies of a secured party under the Uniform Commercial Code in effect in the State of New York at that time, Pledgee shall have the right, and without demand or performance or other demand, advertisement or notice of any kind, except as specified below, to or upon the Pledgor or any other person (all and each of which demands, advertisements and/or notices are hereby expressly waived to the extent permitted by law), to proceed forthwith to collect, receive, appropriate and realize upon the Collateral, or any part thereof and to proceed forthwith to sell, assign, give an option or options to purchase, contract to sell, or otherwise dispose of and deliver the Collateral or any part thereof in one or more parcels at public or private sale or sales at any stock exchange, broker's board or at any of Pledgee's offices or elsewhere at such prices and on such terms (including, without limitation, a requirement that any purchaser of all or any part of the Collateral shall be required to purchase any securities constituting the Collateral solely for investment and without any intention to make a distribution thereof) as Pledgee deems to be commercially reasonable. If any notification of intended disposition of the Collateral is required by law, such notification shall be deemed reasonable and properly given if mailed, postage prepaid, at least ten (10) days before any such disposition to Pledgor's address indicated above. Any disposition of the Collateral or any part thereof may be for cash or on credit or for future delivery without assumption of any credit risk, with the right to Pledgee to purchase all or any part of the Collateral so sold at any such sale or sales, public or private, free of any equity or right of redemption in the Pledgor, which right or equity is hereby expressly waived or released by the 4 32 Pledgor. (b) All of the Pledgee's rights and remedies, including but not limited to the foregoing, shall be cumulative and not exclusive and shall be enforceable alternatively, successively or concurrently as Pledgee may deem expedient. (c) Pledgee may elect to obtain the advice of any independent nationally-known investment banking firm with respect to the method and manner of sale or other disposition of any of Collateral, the best price reasonably obtainable therefor, the consideration of cash and/or credit terms, or any other details concerning such sale or disposition. Pledgee, in its sole discretion, may elect to sell on such credit terms which it deems reasonable. The sale of any of the Collateral on credit terms shall not relieve Pledgor or the Borrowers of their liability under any of the Obligations until the full purchase price for the Collateral has been paid in full. All payments received by Pledgee in respect of a sale of Collateral shall be applied to the obligations in the manner provided in Section 10 of this Agreement, as and when such payments are received. (d) Pledgor recognizes that Pledgee may be unable to effect a public sale of all or a part of the Collateral by reason of certain prohibitions contained in any applicable securities law, but may be compelled to resort to more private sales to a restricted group of purchases who will be obliged to agree, among other things, to acquire the Collateral for their own account, for investment and not with a view for the distribution or resale thereof. Pledgor agrees that private sales so made may be at prices and on other terms less favorable to the seller than if the Collateral were sold at public sale, and that Pledgee has no obligation to delay the sale of any Collateral for the period of time necessary to permit the registration of the Collateral for public sale under the Act. Pledgor agrees that a private sale or sales made under the foregoing circumstances shall be deemed to have been made in a commercially reasonable manner. (e) If any consent, approval or authorization of any state, municipal or other governmental department, agency or authority should be necessary to effectuate any sale or other disposition of the Collateral, or any partial disposition of the Collateral, Pledgor will execute all such applications and other instruments as may be required in connection with securing any such consent, approval or authorization, and will otherwise use its best efforts to secure the same. Pledgor further agrees to use its best efforts to secure such sale or other disposition of the Collateral as Pledgee may deem necessary pursuant to the terms of this Agreement. (f) Upon any sale or other disposition, Pledgee shall have the right to deliver, assign and transfer to the purchaser thereof the Collateral so sold or disposed of. Each purchaser at any such sale or other disposition (including Pledgee) shall hold the Collateral free from any claim or right of whatever kind, including any equity or right of redemption of Pledgor. Pledgor specifically waives all rights of redemption, stay or appraisal which it had or may have under any rule of law or statute now existing or hereafter adopted. 5 33 (g) Pledgee shall not be obligated to make any sale or other disposition, unless the terms thereof shall be satisfactory to it. Pledgee may, without notice or publication, adjourn any private or public sale, and, upon ten (10) days' prior notice to Pledgor, hold such sale at any time or place to which the same may be so adjourned. In case of any sale of all or any part of the Collateral, on credit or future delivery, the Collateral so sold may be retained by Pledgee until the selling price is paid by the purchaser thereof, but Pledgee shall incur no liability in case of the failure of such purchaser to take up and pay for the property so sold and, in case of any such failure, such property may again be sole as herein provided. 10. Disposition of Proceeds. (a) The proceeds of any sale or disposition of all or any part of the Collateral shall be applied by Pledgee in the following order: (i) to the payment in full of the costs and expenses of such sale or sales, collections, and the protection, declaration and enforcement of any security interest granted hereunder, including the compensation of Pledgee's agents and attorneys; (ii) to the payment of the obligations; and (iii) to the payment to Pledgor of any surplus then remaining from such proceeds, subject to the rights of any holder of a lien on the Collateral of which Pledgee has actual notice. (b) In the event that the proceeds of any sale or other disposition are insufficient to cover the amount of the obligations, Pledgor shall remain liable for any deficiency. 11. Termination. This Agreement shall continue to full force and effect until all obligations shall have been paid in full and satisfied and the Loan Agreement shall have been terminated. Subject to any sale or other disposition by Pledgee of the Collateral or any part thereof pursuant to this Agreement, the Collateral shall be returned to Pledgor upon full payment, satisfaction and termination of all of the obligations of Pledgor. 12. Expenses of Pledgee. All expenses (including Pledgee's fees and charges and fees and disbursements of counsel) incurred by Pledgee in connection with the perfection and continuation of the security interest granted hereunder and any actual or attempted sale, exchange of, or any enforcement, collection, compromise or settlement respecting, the Collateral, or any other action taken by Pledgee hereunder whether directly or as attorney-in-fact pursuant to a power of attorney or other authorization therein conferred, for the purpose of satisfaction of the liability of Borrowers and Pledgor for failure to pay the obligations or as additional amounts owing by Pledgor to cover Pledgee's costs of acting against the Collateral, shall be deemed an obligation of Pledgor for all purposes of this Agreement and Pledgee may apply the Collateral to payment of or reimbursement of itself and the Bank for such liability. 6 34 13. General Provisions. (a) Pledgee or its designee is hereby appointed the attorney-in-fact of Pledgor for the purpose of carrying out the provisions of this Agreement and taking any action and executing any instrument which Pledgee reasonably may deem necessary and advisable to accomplish the purposes hereof, which appointment as attorney-in-fact is irrevocable as one coupled with an interest. (b) Pledgee and its assigns shall have no obligation in respect to the Collateral, except to use reasonable care in holding the Collateral and to hold and dispose of the same in accordance with the terms of this Agreement. (c) Any notice or other communication given hereunder shall be in writing and sent by registered or certified mail, postage prepaid, as follows; If to Pledgor: Kuhr Technologies Inc. 7000 Boulevard East Guttenberg, New Jersey 07093 Attention: Robert E. Wetzel, Esq., General Counsel With a copy thereof to: Kuhr Technologies Inc. 7000 Boulevard East Guttenberg, New Jersey 07093 Attention: Martin Sergi, President If to Pledgee: Key Bank of New York 66 South Pearl Street Albany, New York 12207 Attention: John Stewart, Vice President With a copy thereof to: Crane, Kelley, Greene & Parente 90 State Street Albany, New York 12207 Attention: Patrick K. Greene, Esq. 7 35 Either party hereto may change its address for notice by giving notice thereof to the other party in accordance with the provisions of this paragraph. (d) NO FAILURE ON THE PART OF PLEDGEE TO EXERCISE, AND NO DELAY IN EXERCISING, ANY RIGHT, POWER OR REMEDY HEREUNDER SHALL OPERATE AS A WAIVER THEREOF, NOR SHALL ANY SINGLE OR PARTIAL EXERCISE BY PLEDGEE OF ANY RIGHT,POWER OR REMEDY HEREUNDER PRECLUDE ANY OTHER OR FUTURE EXERCISE THEREOF, OR THE EXERCISE OF ANY OTHER RIGHT, POWER OR REMEDY. THE REMEDIES HEREIN PROVIDED ARE CUMULATIVE AND ARE NOT EXCLUSIVE OF ANY REMEDIES PROVIDED BY LAW OR ANY OTHER AGREEMENT. THE REPRESENTATIONS, COVENANTS AND AGREEMENTS OF PLEDGOR HEREIN CONTAINED SHALL SURVIVE THE DATE HEREOF. NEITHER THIS AGREEMENT NOR THE PROVISIONS HEREOF CAN BE CHANGED, WAIVED OR TERMINATED ORALLY. THIS AGREEMENT SHALL BE BINDING UPON AND INURE TO THE BENEFIT OF THE PARTIES HERETO AND THEIR RESPECTIVE SUCCESSORS, LEGAL REPRESENTATIVES AND ASSIGNS. THIS AGREEMENT MAY BE EXECUTED IN TWO OR MORE COUNTERPARTS AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement on the date first above written. KUHR TECHNOLOGIES, INC. By:/s/ Martin J. Sergi ---------------------------- Name: Martin J. Sergi Title: President KEY BANK OF NEW YORK By: /s/ John Stewart ---------------------------- Name: John Stewart Title: Vice President 8 36 STATE OF NEW JERSEY )ss.: COUNTY OF HUDSON ) On this 29th day of October, 1996, before me personally came Martin J. Sergi, to me known, who being by me duly sworn, did depose and say that he resides at 17 Ridge Road, Denville N.J., that he is the President of Kuhr Technologies, Inc., the corporation described in, and which executed the above instrument; and that he signed his name thereto by like order of the Board of Directors of said corporation. /s/ Francis J. Elenio ---------------------------- Notary Public FRANCIS J. ELENIO NOTARY PUBLIC OF NEW JERSEY My Commission Expires Sept. 25, 2000 STATE OF NEW JERSEY )ss.: COUNTY OF HUDSON ) On this 29th day of October, 1996, before me personally came John Stewart, to me known, who being by me duly sworn, did depose and say that he resides at _________________, New York, that he is the Vice President of Key Bank of New York, the corporation described in, and which executed the above instrument; and that he signed his name thereto by like order of the Board of Directors of said corporation. ---------------------------- Notary Public 9 EX-10.40 5 KEY TRUST AGREEMENT 1 03/24/95 EXHIBIT 10.40 BASIC PLAN DOCUMENT # 05 PLAN # 002 IRS LETTER SERIAL NO.: D363689a PRISM(R) PROTOTYPE RETIREMENT PLAN & TRUST SECTION 401(k) PROFIT SHARING PLAN (NONSTANDARDIZED) ADOPTION AGREEMENT(1) The Employer(2), designated below, hereby establishes a profit-sharing plan (optionally including a cash or deferred arrangement (as defined in Section 401(k) of the Internal Revenue Code)) for all Eligible Employees as defined in this Adoption Agreement pursuant to the terms of the PRISM(R) PROTOTYPE RETIREMENT PLAN & TRUST BASIC PLAN DOCUMENT # 05. A. EMPLOYER INFORMATION: 1. NAME: K T I , Inc. 2. ADDRESS: 7000 Boulevard East 3. ADDRESS: Guttenberg, NJ 07093 4. ATTENTION: Francis J. Elenio TELEPHONE: 201-854-7777 5. EMPLOYER TAXPAYER IDENTIFICATION NUMBER(3): 22-2665282 B. BASIC PLAN PROVISIONS: 1. PLAN NAME (SELECT ONE): a. [ ] This plan is established effective _____, 19__, (the "Effective Date") as a profit sharing plan and trust (optionally with a "cash or deferred arrangement" as defined in Code Section 401(k)) to be known as _____ Plan and Trust (the "Plan") in the form of the PRISM(R) PROTOTYPE RETIREMENT PLAN & TRUST. - --------------- (1) Footnotes in this Adoption Agreement are not to be construed as part of the Plan provisions but are explanatory only. To the extent a footnote is inconsistent with the provisions of the Basic Plan Document or applicable law, the provisions of the Plan shall be construed in conformity with the Basic Plan Document or law. (2) Terms that are capitalized are defined in the PRISM(R) PROTOTYPE RETIREMENT PLAN & TRUST BASIC PLAN DOCUMENT. (3) The Plan will have an individual TIN, distinct from the Employer TIN. 2 b. [X]This plan is an amendment and restatement in the form of the PRISM(R) PROTOTYPE RETIREMENT PLAN & TRUST, effective January 1, 1997, (the "Effective Date") of the K T I 401(k) Savings & Investment Plan Plan and Trust (the "Plan"), originally effective as of January 1, 1987 (the "Original Effective Date"). 2. EMPLOYER'S THREE DIGIT PLAN NUMBER: 002 3. COMMITTEE MEMBERS(4): Francis J. Elenio, Bradley Hughes, Robert E. Wetzel 4. DEFINITIONS: a. COMPENSATION for allocation purposes: i Will be determined over the following applicable period (select only one): (a)[X]the Plan Year (b)[ ]the period of Plan participation during the Plan Year (c)[ ]a consecutive 12 month period commencing on _________________and ending with, or within, the Plan Year. ii [ ]If selected, Compensation will include Employer contributions made pursuant to a Salary Reduction Agreement, or other arrangement, which are not includible in the gross income of the Employee under Sections 125, 402(e)(3), 402(h)(1)(B) Or 403(b) of the Internal Revenue Code. iii Shall NOT include (select as many as desired): (a)[X]Bonuses (b)[ ]Commissions (c)[X]Taxable fringe benefits identified below: Car allowances (d)[ ]Other items of remuneration identified below: _____________________ iv Shall be limited to $____, which shall be the maximum amount of compensation considered for plan allocation purposes (but not for testing purposes), and may not be an amount in excess of the Internal - ------- (4) Committee members direct the day to day operation of the Plan. Committee members serve at the pleasure of the Employer. See Section 11.4 for changes in Committee membership. If no Committee members are specified, the Employer shall assume responsibility for the operations of the Plan. PAGE 2 3 Revenue Code Section 401(a)(17) limit in effect for the Plan Year(5). If no amount is specified, Compensation shall be limited to the Internal Revenue Code Section 401(a)(17) amount, as adjusted by the Secretary of the Treasury from time to time. b. EARLY RETIREMENT DATE: i [ ] is not applicable to this Plan ii [X] is the latter of the date on which the Participant attains age 55 (not less than 55) and the date on which the Participant completes 10 Years of Service. c. HOUR OF SERVICE shall be determined on the basis of the method selected below. Only one method may be selected. The method shall be applied to all Employees covered under the Plan as follows (select only one): i [X] On the basis of actual hours for which an Employee is paid, or entitled to be paid. ii [ ] On the basis of days worked. An Employee shall be credited with ten (10) Hours of Service if under Section 1.1(U) of the Plan such Employee would be credited with at least one (1) Hour of Service during the day. iii [ ] On the basis of weeks worked. An Employee shall be credited with forty-five (45) Hours of Service if under Section 1.1(U) of the Plan such Employee would be credited with at least one (1) Hour of Service during the week. iv [ ] On the basis of semi-monthly payroll periods. An Employee shall be credited with ninety-five (95) Hours of Service if under Section 1.1(U) of the Plan such Employee would be credited with at least one (1) Hour of Service during the semi-monthly payroll period. v [ ] On the basis of months worked. An Employee shall be credited with one hundred ninety (190) Hours of Service if under Section 1.1(U) of the Plan such Employee would be credited with at least one (1) Hour of Service during the month. d. LIMITATION YEAR shall mean the 12 month period commencing on January 1 and ending on December 31. - -------- (5) If no amount is specified, the maximum amount of Compensation allowed under Code Section 401(a)(17) (THE "$150,000 limit" ("$200,000 limit" prior to the Plan Year beginning before January 1, 1994)), as adjusted from time to time, shall be used. PAGE 3 4 e. NORMAL RETIREMENT DATE for each Participant shall mean (select one): i [X] the date the Participant attains age: 65 (not to exceed 65) ii [ ] the latter of the date the Participant attains age (not to exceed 65) or the (not to exceed 5th) anniversary of the participation commencement date. If for the Plan Years beginning before January 1, 1988, Normal Retirement Date was determined with reference to the anniversary of the participation commencement date (more than 5 but not to exceed 10 years), the anniversary date for Participants who first commenced participation under the Plan before the first Plan Year beginning on or after January 1, 1988 shall be the earlier of (A) the tenth anniversary of the date the Participant commenced participation in the Plan (or such anniversary as had been elected by the employer, if less than 10) or (B) the fifth anniversary of the first day of the first Plan Year beginning on or after January 1, 1988. Notwithstanding any other provisions of the Plan, the participant commencement date is the first day of the first Plan Year in which the Participant commenced participation in the Plan. f. PERMITTED DISPARITY LEVEL, for purposes of allocating Employer Contributions, shall mean (select only one): i [X] Not applicable - the Plan does not use permitted disparity. ii [ ] The Taxable Wage Base, which is the contribution and benefit base under section 230 of the Social Security Act at the beginning of the year. iii [ ] _______% (not greater than 100%) of the Taxable Wage Base as defined in B(4)(f)(ii) above. iv [ ] $______, provided that the amount does not exceed the Taxable Wage Base as defined in B(4)(f)(ii) above. g. PLAN YEAR shall mean (select and complete only one of the following): i [X] the 12-consecutive month period which coincides with the Limitation Year. The first Plan Year shall be the period commencing on the Effective Date and ending on the last day of the Limitation Year. ii [ ] the 12-consecutive month period commencing on , 19 , and each annual anniversary thereof. iii [ ] the calendar year (January 1 through December 31). PAGE 4 5 h. QUALIFIED DISTRIBUTION DATE, for purposes of making distributions under the provisions of a Qualified Domestic Relations Order (as defined in Internal Revenue Code Section 414(p)), [X] SHALL [ ] SHALL NOT be the date the order is determined to be qualified. If SHALL is selected, the Alternate Payee will be entitled to an immediate distribution of benefits as directed by the Qualified Domestic Relations Order. If SHALL NOT is selected, the Alternate Payee may only take a distribution on the earliest date that the Participant is entitled to a distribution. i. SPOUSE: [ ] If selected, Spouse shall mean only that person who has actually been the Participant's spouse for at least one year. j. YEAR OF SERVICE shall mean: i For ELIGIBILITY purposes (select one of the following): (a) [X] the 12 consecutive months during which an Employee is credited with 1000 (not more than 1000) Hours of Service. (b) [ ] a Period of Service (using the elapsed time method of counting Service, as described in Section 1.1(N)(3) of the Plan). ii For ALLOCATION accrual purposes (select one of the following): (a) [X] the 12 consecutive months during which an Employee is credited with 1000 (not more than 1000) Hours of Service. (b) [ ] a Period of Service (using the elapsed time method of counting Service, as described in Section 1.1(N)(3) of the Plan). iii For VESTING service purposes (select one of the following): (a) [X] the 12 consecutive months during which an Employee is credited with 1000 (not more than 1000) Hours of Service. (b) [ ] a Period of Service (using the elapsed time method of counting Service, as described in Section 1.1(N)(3) of the Plan). PAGE 5 6 iv For purpose of computing Years of Service in plans where Year of Service is defined in terms of Hours of Service), the consecutive 12 month period shall be: (a)For ELIGIBILITY purposes, the first Year of Service shall be computed using the 12 month period commencing on the Employee's date of hire and ending on the first annual anniversary of the Employee's date of hire (the "Initial Computation Period"). In the event an employee does not complete an eligibility Year of Service during this initial computation period, the computation period shall be (select only one): (1) [ ] the period commencing on each annual anniversary of the Employee's date of hire and ending on the next annual anniversary of the Employee's date of hire. (2) [X] the Plan Year, commencing with the Plan Year in which the Initial Computation Period ends. (b)For VESTING purposes, Years of Service shall be computed on the basis of: (1) [ ] the period commencing on each annual anniversary of the Employee's date of hire and ending on the next annual anniversary of the Employee's date of hire. (2) [X] the Plan Year, commencing with the first Plan Year an Employee completes an Hour of Service. (c)For ALLOCATION accrual purposes, Year of Service shall be computed on the basis of the Plan Year. v [X] For ELIGIBILITY purposes, Years of Service with the following Predecessor Employers shall count in fulfilling the eligibility requirements for this Plan: K T I Holdings, Inc. vi [ ] For VESTING purposes, Years of Service with the following Predecessor Employers shall count for purposes of determining the nonforfeitable amount of a Participant's account: K T I Holdings, Inc. 5. COVERAGE: PAGE 6 7 This Plan is extended by the Employer to the following Employees who have met the eligibility requirements (select as many as appropriate): i [ ] All Employees ii [ ] Salaried Employees iii [ ] Sales Employees iv [ ] Hourly Employees v [ ] Leased Employees vi [X] All Employees except (select as applicable): (a) [X] those who are members of a unit of Employees covered by a collective bargaining agreement between the Employer and Employee representatives, if retirement benefits were the subject of good faith bargaining and if two percent or less of the Employees who are covered pursuant to that agreement are professionals as defined in Section 1.410(b)-9 of the Regulations. For this purpose, the term "Employee representative" does not include any organization more than half of whose members are Employees who are owners, officers, or executives of the Employer. (b) [X] those who are nonresident aliens (within the meaning of Internal Revenue Code Section 7701(b)(1)(B)) and who receive no earned income (within the meaning of Internal Revenue Code Section 911(d)(2)) from the Employer which constitutes income from sources within the United States (within the meaning of Internal Revenue Code Section 861(a)(3)). vii [ ] Union Employees (who are members of the following unions or union affiliates: viii [ ] Other Employees, described as follows: 6. ELIGIBILITY: An Employee covered by the Plan may become a Participant upon completion of the following eligibility requirements: PAGE 7 8 a. SERVICE(6): i [ ] There shall be no minimum service requirement for an Employee to become a Participant. ii [X] The Employee must complete 1 year of Service (not more than 2 years) to be a Participant for purposes of receiving allocations of Employer Profit Sharing Contributions. b. AGE: i [ ] There shall be no minimum age requirement for an Employee to become a Participant. ii [X] The Employee must attain age 21 (not more than 21) to be a Participant in the Plan. c. WAIVER OF AGE AND SERVICE REQUIREMENTS: i [ ] Notwithstanding the provisions of Items B(6)(a) and (b), Employees who have not satisfied the age and service requirements, but would otherwise be eligible to participate in the plan, shall be eligible to participate on the Effective Date. ii [ ] For new Plans, notwithstanding the provisions of Items B(6)(a) and (b), Employees who have not satisfied the age and service requirements, but would otherwise be eligible to participate in the plan, shall be eligible to participate on the Effective Date. d. ENTRY DATES: Upon completion of the eligibility requirements, an Employee shall commence participation in the Plan (select only one): i [ ] As soon as practicable under the payroll practices utilized by the Employer, and consistently applied to all Employees, or if earlier, the first day of the Plan Year(7). ii [ ] As of the first day of the month following the completion of the eligibility requirements. - ---------------- 6 If a fractional year is elected, the elapsed time method of computing service shall be used for the fractional year. Eligibility provisions for optional cash or deferred arrangements are contained in Item C of this Adoption Agreement. 7 Notwithstanding the foregoing, an Employee who has met the eligibility requirements may not enter the Plan later than six months following the date on which the Employee first completes the eligibility requirements. PAGE 8 9 iii [X] As of the earliest of the first day of the Plan Year, fourth, seventh or tenth month of the Plan Year next following completion of the eligibility requirements. iv [ ] As of the earliest of the first day of the Plan Year or seventh month of the Plan Year next following completion of the eligibility requirements. v [ ] As of the first day of the Plan Year next following completion of the eligibility requirements (may only be selected if the eligibility year of service requirement is 6 months or less). 7. VESTING: a. The percentage of a Participant's Employer Contribution Account (attributable to Employer Profit Sharing Contributions) to be vested in him or her upon termination of employment prior to attainment of the Plan's Normal Retirement Date shall be(8): COMPLETED YEARS OF SERVICE 1 2 3 4 5 6 7 --- --- --- --- --- --- --- i [ ] 100% --- --- ii [ ] 100% --- --- --- iii [ ] 20% 40% 60% 80% 100% --- --- --- --- --- --- iv [ ] 20% 40% 60% 80% 100% --- --- --- --- --- --- --- v [ ] 10% 20% 30% 40% 60% 80% 100% --- --- --- --- --- --- --- vi [X] 20% 40% 60% 80% 100% --- --- --- --- --- --- --- vii [ ] 100% --- --- --- --- --- --- --- vii [ ] Full and immediate vesting upon entry into the Plan(9) Notwithstanding anything to the contrary in the Plan, the amount inserted in the blanks above shall not exceed the limits specified in Code Section 411(a)(2). b. For purposes of computing a Participant's vested account balance. Years of Service for vesting purposes [X] SHALL [ ] SHALL NOT include Years of Service before the Employer maintained this Plan or any predecessor plan, and [ ] SHALL [X] SHALL NOT include Years of Service before the Employee attained age 18. - ----------- 8 Notwithstanding the selection made in this Item B(7)(a), a Participant shall be fully vested in his or her Employer Contribution Accounts if the Participant dies or becomes Disabled while in the employ of the Employer. 9 If more than one Year of Service is an eligibility requirement, Item viii must be selected. PAGE 9 10 c. Notwithstanding the provisions of this Item B(7)(c) of the Adoption Agreement, a Participant shall become fully vested in his Participant's Employer Contribution if:(10) i [ ] the Participant's job is eliminated without the Participant being offered a comparable position elsewhere with the Employer. ii [ ] for such reason as is described below: 8. EMPLOYER PROFIT SHARING CONTRIBUTIONS: a. CONTRIBUTIONS: i [X] In its discretion, the Employer may contribute Employer Profit Sharing Contributions to the Plan. ii [ ] The Employer shall contribute Employer Profit Sharing Contributions to the Plan in the amount of % of the Compensation of all Eligible Participants under the Plan. iii [X] If selected, the Employer may make Employer Profit Sharing Contributions without regard to current or accumulated Net Profits of the Employer for the taxable year ending with, or within the Plan Year. iv [ ] If selected, the Employer may designate all or any part of the Employer Profit Sharing Contributions as Qualified Nonelective Contributions, provided, however, that contributions so designated will be subject to the same vesting, distribution, and withdrawal restrictions as Before Tax Contributions(11). b. ALLOCATIONS: Employer Profit Sharing Contributions shall be allocated to the accounts of eligible Participants according to the following selected allocation formula: i [ ] The Employer Profit Sharing Contributions shall be allocated to each eligible Participant's account in the ratio which the Participant's Compensation bears to the Compensation of all eligible Participants. Employer Profit Sharing Plan Contributions, shall be allocated to the accounts of - ------------- 10 The provisions of this section will be administered by the Employer on a consistent and nondiscriminatory basis. 11 Amounts designated as Qualified Nonelective Contributions will be allocated pursuant to Section 3.1(A)(14) of the Basic Plan Document. PAGE 10 11 Participants who have completed a Year of Service(12) (select one): (a) [ ] as of the last day of the month preceding the month in which the contribution was made. (b) [ ] as of the last day of the Plan quarter preceding the quarter in which the contribution was made. (c) [X] as of the last day of the Plan Year. ii [ ] The Employer Profit Sharing Contributions shall be allocated in accordance with the following formula: (a)If the Plan is Top-Heavy, the contribution shall be first credited to each eligible Participant's Account in the ratio which the Participant's Compensation bears to the total Compensation of all eligible Participants, up to 3% of each Participant's Compensation. (b)If the Plan is Top-Heavy, any Employer Profit Sharing Contribution remaining after the allocation in (a) above shall be credited to each eligible Participant's account in the ratio which the Participant's Excess Compensation(13) bears to the total Excess Compensation of all eligible Participants, up to 3% of each eligible Participant's Excess Compensation. (c)Any contributions remaining after the allocation in (b) above shall be credited to each eligible Participant's account in the ratio which the sum of the Participant's total Compensation and Excess Compensation bears to the sum of the total Compensation and Excess Compensation of all eligible Participants, up to an amount equal to the maximum Excess Percentage times the sum of the Participant's Compensation and Excess Compensation. If the Plan is Top-Heavy, the maximum Excess Percentage is N/A% (insert percentage). If the Plan is not Top-Heavy, the maximum Excess Percentage is N/A% (insert percentage, which shall not exceed the prior Excess Percentage limitation specified by more than 3). - ----------------- 12 In the event contributions are allocated on a basis other than a full plan year, the Year of Service shall be based on the elapsed time method of calculation, and a Participant shall be deemed to have completed an appropriate Period of Service for allocation purposes if the Participant has completed a pro-rata Period of Service corresponding to the interval on which contributions are allocated. 13 Excess Compensation means a Participant's Compensation in excess of the Permitted Disparity Level specified in the Definitions section of this Adoption Agreement. PAGE 11 12 NOTE: If the Permitted Disparity Level defined at Item B(4)(f) is the Taxable Wage Base (which is the contribution and benefit base under section 230 of the Social Security Act at the beginning of the year), then the maximum Excess Percentage should be 2.7% if the Plan is Top-Heavy and 5.7% if the Plan is not Top-Heavy. If the Permitted Disparity Level defined at Item B(4)(f) is greater than 80% but less than 100% of the Taxable Wage Base, then the maximum Excess Percentage should be 2.4% if the Plan is Top-Heavy and 5.4% if the Plan is not Top-Heavy. If the Permitted Disparity Level defined at Item B(4)(f) is greater than the greater of $10,000 or 20% of the Taxable Wage Base, but not more than 80%, then the maximum Excess Percentage should be 1.3% if the Plan is Top-Heavy and 4.3% if the Plan is not Top-Heavy. (d)Any remaining Employer Profit Sharing Contribution shall be allocated among eligible Participants' accounts in the ratio which the Participant's Compensation bears to the total Compensation of all Participants. iii [X] If selected, and the Employer has elected to allocate Employer Profit Sharing Plan Contributions as of the last day of the Plan Year, a Participant must be employed by the Employer on the last day of the Plan Year in order to receive an allocation(14). iv [X] A Participant who terminates before the end of the period for which contributions are allocated shall share in the allocation of Employer Profit Sharing Contributions if termination of employment was the result of (select all that apply): (a) [X] retirement (b) [X] disability (c) [X] death (d) [ ] other, as specified below: 9. ROLLOVER & TRANSFER CONTRIBUTIONS (SELECT ONE): - --------------- 14 This option shall only be effective if Item 8(b)(i)(c) has been selected. Even if this Item is selected, the provisions of Section 4.8 of the Basic Plan Document may supersede this requirement if necessary to satisfy Code Sections 401(a)(26) and 410(b). PAGE 12 13 a. [X] Subject to policies, applied in a consistent and nondiscriminatory manner, adopted by the Committee, each Employee, who would otherwise be eligible to participate in the Plan except that such Employee has not yet met the eligibility requirements, and each Participant may make a Rollover Contribution as described in Internal Revenue Code Sections 402(a)(5), 403(a)(4) or 408(d)(3). b. [ ] Subject to policies, applied in a consistent and nondiscriminatory manner, adopted by the Committee, each Participant may make a Rollover Contribution as described in Internal Revenue Code Sections 402(a)(5), 403(a)(4) or 408(d)(3). c. [ ] No Employee shall make Rollover Contributions to the Plan. 10. DISTRIBUTIONS: a. DISTRIBUTIONS UPON SEPARATION FROM SERVICE: The Normal Form of Benefit under the Plan shall be a single lump sum distribution, made [X] (if selected) as soon as administratively practical after receipt of a distribution request from a Participant entitled to a distribution or [ ] (if selected) upon the Participant's attainment of the Plan's Early Retirement Date or the Plan's Normal Retirement Date, whichever is earlier. In addition to the Normal Form of Benefit, the Participant shall be entitled to select from among the following optional forms of benefit specified by the employer (select as many as apply): i [X] Installment payments ii [ ] Such other forms as may be specified below: b. IN-SERVICE DISTRIBUTIONS (SELECT AS MAY BE APPROPRIATE): i [X] There shall be no in-service distribution of Participant account balances derived from Employer Profit Sharing Contributions. ii [ ] Participants may request an in-service distribution of their account balance attributable to Employer Profit Sharing Contributions, for the following reasons: (a) [ ] For purposes of satisfying a financial hardship, as determined in accordance with the uniform nondiscriminatory policy of the Committee; PAGE 13 14 (b) [ ] Attainment of age 59-1/2 by the Participant; or (c) [ ] Attainment of the Plan's Normal Retirement Date by the Participant. 11. FORFEITURES: a. Forfeitures of amounts attributable to Employer Profit Sharing Contributions shall be reallocated as of: i [ ] the last day of the Plan Year in which the Forfeiture occurred. ii [X] the last day of the Plan Year following the Plan Year in which the Forfeiture occurred. iii [ ] the last day of the Plan Year in which the Participant suffering the Forfeiture has incurred five consecutive One Year Breaks in Service. b. Forfeitures of Employer Profit Sharing Contributions shall be reallocated as follows: i [ ] Not applicable as Employer Profit Sharing Contributions are always 100% vested and nonforfeitable. ii [ ] Used first to pay the expenses of administering the Plan, and then allocated pursuant to one of the following two options(15): iii [ ] Forfeitures shall be allocated to Participant's accounts in the same manner as Employer Profit Sharing Contributions, Employer Matching Contributions, Qualified Nonelective Contributions or Qualified Matching Contributions, in the discretion of the Employer, for the year in which the Forfeiture arose. iv [X] Forfeitures shall be applied to reduce the Employer Profit Sharing Contributions, Employer Matching Contributions, Qualified Nonelective Contributions or Qualified Matching Contributions, in the discretion of the Employer, for the Plan Year following the Plan Year in which the Forfeiture arose. 12. LIMITATIONS ON ALLOCATIONS: - --------------- 15 If this option is selected, iii or iv must be selected to reallocate Forfeitures of Employer Profit Sharing Contributions remaining after expenses of administering the Plan have been paid. PAGE 14 15 If the Employer maintains or ever maintained another qualified retirement plan in which any Participant in this Plan is (or was) a participant, or could possibly become a participant, the Employer must complete the following: a. If the Participant is covered under another qualified defined contribution plan maintained by the Employer other than a Master or Prototype Plan: i [ ] The provisions of this Plan shall apply as if the other plan were a Master or Prototype plan; or, ii [ ] The following provisions will be effective to limit the total Annual Additions to the Maximum Permissible Amount, and will properly reduce any Excess Amounts, in a manner that precludes Employer discretion: b. If the Participant is or ever has been a participant in a qualified defined benefit plan maintained by the Employer, the following provisions will be effective to satisfy the 1.0 limitation of Internal Revenue Code Section 415(e), in a manner that precludes Employer discretion: 13. INTERNAL REVENUE CODE SECTION 411(d)(6) PROTECTED BENEFITS: [ ] If selected, the Plan has Internal Revenue Code Section 411(d)(6) Protected Benefits from a prior plan that this Plan amends, that must be protected. 14. TOP-HEAVY PLAN PROVISIONS: For each Plan Year in which the Plan is a Top-Heavy Plan the following provisions will apply: a. The percentage of a Participant's Employer Contribution Account to be vested in him upon termination of employment prior to retirement shall be: i [ ] a percentage determined in accordance with the following schedule: YEARS OF SERVICE PERCENTAGE ---------------- ---------- Less than two 0 Two but less than three 20 Three but less than four 40 Four but less than five 60 Five but less than six 80 Six or more 100; PAGE 15 16 ii [ ] 100% vesting after (not to exceed 3) Years of Service; provided, however, that Years of Service may not exceed two (2) if the service requirement for eligibility exceeds 1 year; or iii [X] computed in accordance with the vesting schedule selected by the Employer in Items B(7)(a) or C(4)(d), as long as the benefits under the vesting schedule in Items B(7)(a) or C(4)(d) vest at least as rapidly as the two options specified in this Item B(14)(a), above. If the vesting schedule under the Plan shifts in or out of the schedules above for any Plan Year because of the Plan's Top-Heavy status, such shift is an amendment to the vesting schedule and the election in Section 2.2 of the Basic Plan Document applies. b. For purposes of minimum Top-Heavy allocations, contributions and forfeitures equal to 3.0% (not less than 3%) of each Non-key Employee's Compensation will be allocated to each Participant's Contribution Account when the Plan is a Top-Heavy Plan, except as otherwise provided in the Basic Plan Document. This Item 14 will not apply to any Participant to the extent the Participant is covered under any other plan or plans of the Employer and the Employer completes the following: (Insert the name of the plan or plans which will meet the minimum allocation or benefit requirement applicable to Top-Heavy plans.) c. The Valuation Date as of which account balances or accrued benefits are valued for purposes of computing the Top-Heavy Ratio shall be the last day of each Plan Year. d. If the Employer maintains or has ever maintained one or more defined benefit plans which have covered or could cover a Participant in this Plan, complete the following: Present Value: For purposes of establishing Present Value to compute the Top-Heavy Ratio, any benefit shall be discounted only for mortality and interest based on the following: Interest rate ______% Mortality table _____ 15. INVESTMENTS: a. Investments made pursuant to the investment direction provisions of the Basic Plan Document shall be made into any appropriate Investment Fund as selected by the Employer. In addition, investment of Plan assets is expressly authorized, as required by Revenue Ruling 81-100, in each of the PAGE 16 17 following common or collective funds sponsored by the Trustee, or an affiliate of the Trustee(16): SOCIETY NATIONAL BANK EB MANAGED GUARANTEED INCOME CONTRACT FUND, THE SOCIETY NATIONAL BANK MULTIPLE INVESTMENT TRUST FOR EMPLOYEE BENEFIT TRUSTS, AND OTHER COLLECTIVE TRUSTS EXEMPT FROM TAX UNDER IRC SECTION 501 AND AS DESCRIBED IN REV. RUL. 81-100. b. [X] If selected, an Employer Stock Fund shall be available as an Investment Fund pursuant to the terms of the Basic Plan Document. [X] If selected, and an Employer Stock Fund is available as an Investment Fund, Participants will have the right, notwithstanding any other provisions of the Plan, to direct that a portion of the Plan assets held for their benefit and invested in the Employer Stock Fund be diversified pursuant to the provisions of Section 10.7(F) of the Basic Plan Document. c. Participants may make changes of existing account balances and future contributions from among the Investment Funds offered: i [X] Once during each business day that the Trustee and the New York Stock Exchange are open. ii [ ] Once during each calendar month. iii [ ] Once during each quarter of the Plan Year. iv [ ] Once during each rolling day period. d. [ ] If selected, the Participant shall be restricted in making changes of existing account balances from any Investment Fund, as specified in the terms or conditions of such Investment Fund, and the Employer shall attach an addendum specifying such restriction. e. The Participant will designate into which Investment Funds all contributions to their accounts are made, EXCEPT the following: i [ ] Employer Profit Sharing Contributions ii [ ] Employer Mandatory Matching Contributions iii [ ] Employer Discretionary Matching Contributions iv [ ] Qualified Matching Contributions v [ ] Qualified Nonelective Contributions - ------------------- 16 This Item is for use in identifying collective trust funds, which, pursuant to Revenue Ruling 81-100 must be specifically referenced in the Plan. Actual Investment Funds are referenced on the Investment Fund Designation form attached to this Adoption Agreement. PAGE 17 18 f. [ ] If selected, and to the extent a selection is made above, the Employer shall attach an Investment Direction Addendum specifying how the contributions so specified shall be invested among the Investment Fund. g. [ ] If selected, the Participant shall be restricted in the use of the Employer Stock Fund as an Investment Fund for designating the investment of contributions in the Participant's account, as follows: i [ ] The Participant may not direct the investment of Plan assets held in their account into the Employer Stock Fund. ii [ ] The Participant may direct % of the following contributions into the Employer Stock Fund: (a) [ ] Employer Profit Sharing Contributions (b) [ ] Employer Mandatory Matching Contributions (c) [ ] Employer Discretionary Matching Contributions (d) [ ] Qualified Matching Contributions (e) [ ] Qualified Nonelective Contributions iii [ ] % of the following contributions will be invested into the Employer Stock Fund, with the balance invested among: (a) [ ] the other Investment Funds, including the Employer Stock Fund (b) [ ] the other Investment Funds, NOT including the Employer Stock Fund 16. LOANS (SELECT ONE): a. [X] Loans may be made from the Plan in accordance with the Basic Plan Document and such policies and procedures as the Committee may adopt and apply on a consistent and nondiscriminatory basis(17). b. [ ] No loans shall be made from the Plan. 17. TRUSTEE: - ------------- 17 If this option is selected, the Employer must establish appropriate procedures for implementation of the Plan's loan program. PAGE 18 19 The Trustee of this Plan shall be Key Trust Company (a bank or trust company affiliated with KeyCorp within the meaning of Internal Revenue Code Section 1504). 18. EFFECTIVE DATE ADDENDUM: [ ] If selected, the following provisions shall have the specified effective dates (which are different from the date specified in Item B(1)): PAGE 19 20 C. SECTION 401(K) PLAN PROVISIONS: 1. SERVICE: An Eligible Employee shall be required to fulfill the following eligibility service requirements in order to participate in the Plan through a salary reduction agreement and for purposes of receiving an allocation of Employer Matching Contributions: a. [X] The Employee must complete 1 Year of Service (not more than 1 year) to be a Participant for purposes of receiving allocations of Employer Matching Contributions. b. [X] The Employee must complete 1 Year of Service (not more than 1 year) to be a Participant for purposes of entering into a Salary Reduction Agreement and having Employee Before Tax Contributions or Employee After Tax Contributions contributed to the Plan on the Employee's behalf. 2. EMPLOYEE SALARY DEFERRALS: a. [X] Participants shall be entitled to enter into a Salary Reduction Agreement providing for Before Tax Contributions to be made to the Plan. i The minimum Before Tax Contribution shall be 1% of the Participant's Compensation. ii The maximum Before Tax Contribution shall be 15% of the Participant's Compensation. b. [ ] Participants shall be entitled to enter into a Salary Reduction Agreement providing for After Tax Contributions to be made to the Plan. i The minimum After Tax Contribution shall be % of the Participant's Compensation. ii The maximum After Tax Contribution shall be % of the Participant's Compensation. iii [ ] If selected, notwithstanding the above, a Participant shall not be able to enter into a Salary Reduction Agreement providing for After Tax Contributions to be made to the Plan unless the Participant has entered into a Salary Reduction Agreement that provides for Before Tax Contributions to be made to PAGE 20 21 the Plan in an amount of at least % of the Participant's Compensation. c. [ ] If selected, a Participant shall be entitled to enter into a Salary Reduction Agreement providing that any extraordinary item of compensation, not yet payable (including bonuses), be withheld from the Participant's Compensation and contributed to the Plan as either a Before Tax Contribution, or After Tax Contribution (provided such contributions are authorized above, and to the extent that such contribution, when aggregated with either the Participants other Before Tax Contributions or After Tax Contributions do not exceed the limitations specified above, on an annual basis). 3. CONTRIBUTION CHANGES: a. Participants may increase or decrease the amount of contributions made to the Plan pursuant to a Salary Reduction Agreement once each: i [ ] Plan Year ii [ ] Semi-annual period, based on the Plan Year iii [X] Quarter, based on the Plan Year iv [ ] Month v [ ] Other, as specified below (provided that it is at least once per year): b. Claims for returns of Excess Before Tax Contributions for the Participant's preceding taxable year must be made in writing, and submitted to the Committee by March 15 (specify a date between March 1 and April 15).(18) 4. EMPLOYER MATCHING CONTRIBUTIONS(19): a. MANDATORY MATCHING CONTRIBUTIONS: The Employer shall make contributions to the Plan, in an amount as specified below: i [X] An amount, equal to 75% of each Participant's Before Tax Contributions, however, no match shall be made on - ------------ 18 The date specified is for the refund of amount deferred in excess of the Code Section 402(g) limit (the $7,000 limit) for the Participant's taxable year. 19 The Employer shall have the right to designate all, or any portion of Employer Matching Contributions as Qualified Matching Contributions, which shall then be subject to the same vesting, distribution, and withdrawal restrictions as Before Tax Contributions. PAGE 21 22 Participant's Before Tax Contributions in excess of 5% (or $_____) of the Participant's Compensation. ii [ ] An amount, equal to _____% of each Participant's After Tax Contributions, but not to exceed _____% of the Participant's Compensation, or $_____. iii [ ] An amount, equal to _____% of each Participant's contributions made pursuant to a Salary Reduction Agreement (including both Before Tax Contributions and After Tax Contributions), but only if the Participant has entered into a Salary Reduction Agreement providing for Before Tax Contributions of at least _____% of the Participant's Compensation, but not to exceed _____% of the Participant's Compensation, or $_____. iv [ ] An amount equal to the sum of the following: (a) _____% of the first ______% of the Participant's Compensation deferred pursuant to a Salary Reduction Agreement; plus, (b) _____% of the next _____% of the Participant's Compensation deferred pursuant to a Salary Reduction Agreement; plus, (c) _____% of the next _____% of the Participant's Compensation deferred pursuant to a Salary Reduction Agreement, but not to exceed _____% of the Participant's Compensation, or $_____. v [ ] An amount equal to $_____, for each Participant who enters into a Salary Reduction Agreement providing for [ ] Before Tax Contributions, [ ] After Tax Contributions, or [ ] either Before Tax Contributions or After Tax Contributions (or a combination of both) equal to or exceeding _____% of the Participant's Compensation. Such contributions shall be made and allocated: (a) [ ] only during the first Plan Year the Plan is in effect, or if a restatement, for the first Plan Year beginning with, or containing the restatement Effective Date. (b) [ ] each Plan Year that a Participant has in force a Salary Reduction Agreement meeting the criteria specified above. (c) [ ] during the first Plan Year that the Participant participates through a Salary Reduction Agreement meeting the criteria specified above. PAGE 22 23 b. DISCRETIONARY MATCHING CONTRIBUTIONS: [ ] The Employer shall make contributions to the Plan, in an amount determined by resolution of the Board of Directors on an annual basis. The Board resolution shall provide for the percentage and/or amount of Before Tax Contributions and/or After Tax Contributions to be matched and the maximum percentage and/or amount of Before Tax Contributions and/or After Tax Contributions eligible for matching. c. ALLOCATION OF MATCHING CONTRIBUTIONS: Employer Matching Contributions shall be allocated pursuant to the terms of the Basic Plan Document, notwithstanding the foregoing: i [X] A Participant who terminates before the end of the period for which contributions are allocated shall share in the allocation of Employer Matching Contributions if termination of employment was the result of (select all that apply): (a) [X] retirement (b) [X] disability (c) [X] death (d) [ ] other, as specified below: ii [X] Employer Matching Contributions shall be allocated to the accounts of Participants (select one): (a) [ ] as of each pay period for which a contribution was made pursuant to a Salary Reduction Agreement. (b) [ ] semi-monthly. (c) [ ] as of the last day of the month preceding the month in which the contribution was made. (d) [ ] as of the last day of the Plan quarter preceding the quarter in which the contribution was made. (e) [X] as of the last day of the Plan year. PAGE 23 24 iii [X] If selected, the Employer may make Employer Matching Contributions without regard to current or accumulated Net Profits of the Employer for the taxable year ending with, or within the Plan Year(20). d. The percentage of a Participant's Employer Matching Contribution Account(21) (attributable to Employer Matching Contributions) to be vested in him or her upon termination of employment prior to attainment of the Plan's Normal Retirement Date shall be(22): COMPLETED YEARS OF SERVICE 1 2 3 4 5 6 7 --- --- --- --- --- --- --- i [ ] 100% --- --- ii [ ] 100% --- --- --- iii [ ] 20% 40% 60% 80% 100% --- --- --- --- --- --- iv [ ] 20% 40% 60% 80% 100% --- --- --- --- --- --- --- v [ ] 10% 20% 30% 40% 60% 80% 100% --- --- --- --- --- --- --- vi [X] 20% 40% 60% 80% 100% --- --- --- --- --- vii [ ] 100% --- --- --- --- --- --- --- vii [ ] Full and immediate vesting upon entry into the Plan Notwithstanding anything to the contrary in the Plan, the amount inserted in the blanks above shall not exceed the limits specified in Code Section 411(a)(2). e. Notwithstanding the provisions of this Item C(4)(e) of the Adoption Agreement, a Participant shall become fully vested in his Participant's Employer Matching Contribution Account if(23): i [ ] the Participant's job is eliminated without the Participant being offered a comparable position elsewhere with the Employer. ii [ ] for such reason as is described below: - --------------- 20 Net Profits will never be required for the contribution of Before Tax Contributions, After Tax Contributions, Qualified Nonelective Contributions or Qualified Matching Contributions. 21 Notwithstanding anything in the Adoption Agreement to the contrary, amounts in a Participant's account attributable to Before Tax Contributions, Qualified Nonelective Contributions, and Qualified Matching Contributions shall be 100% vested and nonforfeitable at all time. 22 Notwithstanding the selection made in this Item B(7)(b), a Participant shall be fully vested in his or her Employer Contribution Accounts if the Participant dies or becomes Disabled while in the employ of the Employer. 23 The provisions of this section will be administered by the Employer on a consistent and nondiscriminatory basis. PAGE 24 25 f. CORRECTIVE CONTRIBUTIONS: i [X] If selected, the Employer shall be authorized to make Qualified Matching Contributions, subject to the terms of the Basic Plan Document, in an amount determined by resolution of the Board of Directors on an annual basis. ii [X] If selected, the Employer shall be authorized to make Qualified Nonelective Contributions, subject to the terms of the Basic Plan Document, in an amount determined by resolution of the Board of Directors on an annual basis. 5. GAP EARNINGS: [ ] If selected, Gap Earnings, as defined in Section 3.2(G)(1) of the Basic Plan Document, will be calculated for Excess Elective Deferrals, Excess Contributions and Excess Aggregate Contributions, and refunded to the Participant as provided for in Article III of the Basic Plan Document. 6. FORFEITURES: a. Forfeitures of amounts attributable to Employer Matching Contributions shall be reallocated as of: i [ ] the last day of the Plan Year in which the Forfeiture occurred. ii [X] the last day of the Plan Year following the Plan Year in which the Forfeiture occurred. iii [ ] the last day of the Plan Year in which the Participant suffering the Forfeiture has incurred the fifth consecutive One Year Break in Service. b. Forfeitures of Employer Matching Contributions shall be reallocated as follows: i [ ] Not applicable as Employer Matching Contributions are always 100% vested and nonforfeitable. ii [ ] Used first to pay the expenses of administering the Plan, and then allocated pursuant to one of the following two options: iii [ ] Forfeitures shall be allocated to Participant's accounts in the same manner as Employer Profit Sharing Contributions, Employer Matching Contributions, Qualified Nonelective Contributions or Qualified Matching Contributions, in the PAGE 25 26 discretion of the Employer, for the year in which the Forfeiture arose. iv [X] Forfeitures shall be applied to reduce the Employer Profit Sharing Contributions, Employer Matching Contributions, Qualified Nonelective Contributions or Qualified Matching Contributions, in the discretion of the Employer, for the Plan Year following the Plan Year in which the Forfeiture arose. c. Forfeitures of Excess Aggregate Contributions shall be: i [X] Applied to reduce Employer contributions for the Plan Year in which the excess arose, but allocated as below, to the extent the excess exceeds Employer contributions for the Plan Year, or the Employer has already contributed for such Plan Year. ii [ ] Allocated after all other forfeitures under the Plan: (a) [ ] to the Matching Contribution account of each Non-highly Compensated Participant who made Before Tax Contributions or After Tax Contributions in the ratio which each such Participant's Compensation for the Plan Year bears to the total Compensation of all such Participants for the Plan Year; or, (b) [X] to the Matching Contribution account of each Non-highly Compensated Eligible Participant in the ratio which each Eligible Participant's Compensation for the Plan Year bears to the total Compensation of all Eligible Participants for the Plan Year. 7. IN-SERVICE DISTRIBUTIONS (SELECT AS MAY BE APPROPRIATE): a. [ ] There shall be no in-service distribution of Participant account balances derived from Before Tax Contributions (including Qualified Nonelective Contributions and Qualified Matching Contributions treated as Before Tax Contributions under the terms of the Basic Plan Document), or Employer Matching Contributions. b. [ ] Participants may request an in-service distribution of their account balance attributable to Employer Matching Contributions, for the following reasons: PAGE 26 27 i [ ] For purposes of satisfying a financial hardship, as determined in accordance with the uniform nondiscriminatory policy of the Committee; ii [ ] Attainment of age 59-1/2 by the Participant; or iii [ ] Attainment of the Plan's Normal Retirement Date by the Participant. c. [X] Participants may request an in-service distribution of their account balance attributable to Employee Before Tax Contributions, for the following reasons: i [ ] For purposes of satisfying a financial hardship, as determined by the facts and circumstances of an Employee's situation, in accordance with the provisions of Section 3.9 of the Basic Plan Document; ii [X] For purposes of satisfying a financial hardship, using the "safe harbor" provisions of Section 3.9 of the Basic Plan Document. iii [ ] Attainment of age 59-1/2 by the Participant; or iv [ ] Attainment of the Plan's Normal Retirement Date by the Participant. PAGE 27 28 NOTICE: The adopting Employer may not rely on an opinion letter issued by the National Office of the Internal Revenue Service as evidence that the Plan is qualified under the provisions of Section 401 of the Internal Revenue Code. In order to obtain reliance with respect to the Plan's qualification, the Employer must apply to the Key District Office of the Internal Revenue Service for a determination letter. This Adoption Agreement may only be used in conjunction with Basic Plan Document # 05. This Plan document may only be used under the express authority of KeyCorp, its subsidiaries and affiliates, and is not effective as completed until executed by a duly authorized officer of KeyCorp, one of its subsidiaries or affiliates, and approved by KeyCorp's counsel. KeyCorp, as sponsor, may amend or discontinue this prototype plan document upon proper notification to all adopting Employers pursuant to Revenue Ruling 89-13. Failure to properly fill out an Adoption Agreement may result in disqualification of the Plan, and adverse tax consequences to the Employer and Plan Participants. This Plan is sponsored by: KeyCorp, on behalf of its operating subsidiaries, banking and trust company affiliates 127 Public Square Cleveland, Ohio 44114 (800) 982-3811 PAGE 28 29 IN WITNESS WHEREOF, the Employer and the Trustee, by their respective duly authorized officers, have caused this Adoption Agreement to be executed on this _____ day of _____, 19__. EMPLOYER: KTI, Inc. By:__________________________________________ Title:_______________________________________ TRUSTEE: Key Trust Company By:__________________________________________ Title:_______________________________________ and By:__________________________________________ Title:_______________________________________ APPROVED ON BEHALF OF TRUSTEE: Initials: _________________ Date:____________ PAGE 29 30 INVESTMENT FUND DESIGNATION KTI, Inc. (the "Named Fiduciary"), as an independent fiduciary with respect to the KTI, Inc. 401(k) Savings and Investment Plan (the "Plan"), an employee pension benefit plan covered by the applicable provisions of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") and its employees who participate therein (the "Participants"), hereby designates the following investment funds from among the investment fund options available for adopting employers of the PRISM(R) PROTOTYPE RETIREMENT PLAN & TRUST (as defined in Section 10.7 of the Plan), available for selection by Participants for the investment of Plan assets held for their benefit: (a) E.B. Money Market Fund (b) The Bond Fund of America (c) The George Putnam Fund of Boston (d) The Victory Stock Index Fund (e) The Victory Growth Fund (f) Putnam Vista Fund (g) _____ (h) _____ [X] In addition, if selected, an Employer Stock Fund will also be available. In making the selection of Investment Funds, the Named Fiduciary hereby confirms and acknowledges that: - The Named Fiduciary has had made available to it copies of the prospectuses (to the extent required under applicable federal securities law and regulation) for each investment fund available for selection by adopting employers of the PRISM(R) PROTOTYPE RETIREMENT PLAN & TRUST, and has received copies of each such prospectus for the Investment Funds selected; - The Named Fiduciary acknowledges that the Trustee of the Plan may receive certain fees for services provide to, or on behalf of an Investment Fund, or the sponsors or distributors thereof, pursuant to plans of distribution adopted by the fund under the provisions of Rule 12b-1 of the Investment Company Act of 1940, and further acknowledges that (i) such fee, if paid, is appropriate for services rendered to the fund, and when aggregated with other fees for service payable to the Trustee constitutes reasonable compensation for the Trustee's services to the Plan; and (ii) the Plan will be able to redeem its interest in any such Investment Fund on reasonably short notice without penalty; - The Named Fiduciary further acknowledges that it has selected the Investment Funds on its determination, after due inquiry, that the Investment Funds are appropriate vehicles for the investment of Plan assets pursuant to the terms of the Plan, considering all relevant facts and circumstances, including but not limited to (i) the investment policy and philosophy of the Named Fiduciary developed pursuant to ERISA Section 404; (ii) the ability of Participants, using an appropriate mix of Investment Funds, to diversify the investment of Plan as- PAGE 30 31 sets held for their benefit; and, (iii) the ability of Participants to, utilizing an appropriate mix of Investment Funds, to structure an investment portfolio within their account in the Plan with risk and return characteristics within the normal range of risk and return characteristics for individuals with similar investment backgrounds, experience and expectations; and, - The Named Fiduciary acknowledges that it has not relied on any representations or recommendations from the Trustee or any of its employees in selecting the Investment Funds. The Trustee agrees to follow the Named Fiduciary's direction with respect to offering the Investment Funds available for selection by the Participants in the Plan for the investment of Plan assets held for their benefit: IN WITNESS WHEREOF, the Employer, by its duly authorized representative, has executed this document in connection with adoption of the Plan utilizing the PRISM(R) PROTOTYPE RETIREMENT PLAN & TRUST documents, as provided by the Trustee. NAMED FIDUCIARY: KTI, Inc. By:___________________________________________ Title:________________________________________ Seen and accepted by the Trustee, who shall provide the Investment Funds selected by the Employer pursuant to the terms of this document, and pursuant to the Plan. TRUSTEE: Key Trust Company By:___________________________________________ Title:________________________________________ PAGE 31 EX-10.41 6 OPTION AND CONSULTING AGREEMENT 1 EXHIBIT 10.41 OPTION AND CONSULTING AGREEMENT AGREEMENT, dated as of June 1, 1996, by and between KTI, Inc., a New Jersey corporation ("KTI") and L.T. Lawrence & Co., Inc., having its principal offices at Three New York Plaza, New York, New York 10004 ("Consultant"). WHEREAS, KTI has retained Consultant to provide certain advisory and other services (collectively, "Consultation Services"), as more particularly set forth in Section 12 hereof; and WHEREAS, KTI desires to grant Consultant the right to acquire shares of its common stock, n o part value ("Common Stock"), upon the terms hereinafter provided. NOW THEREFORE, in consideration of the mutual covenants hereinafter set forth and for other good and valuable consideration, the parties hereto agree as follows: 1. Letter of Intent. The Letter of Intent, dated March 27, 1996, between KTI and Consultant (the "Letter of Intent"), is hereby terminated and canceled and of no further force or effect and neither KTI nor the Consultant shall have any rights or obligations thereunder from and after the date hereof. 2. Engagement. KTI agrees to engage Consultant and Consultant agrees to provide Consultation Services as more particularly set forth herein subject to applicable rules, regulations and policies of the National Association of Securities Dealers, Inc. ("NASD") and the Securities and Exchange Commission (the "Commission"). 3. Consultation Services. (a) In consideration of the Option granted hereunder and the other compensation contemplated by Section 4(a) hereof, the Consultant shall perform the Consultation Services for a term commencing on the date hereof and ending on June 1, 1999 (the "Term"). The Consultation Services shall consist of providing consulting advice in respect of financial and corporate finance matters, public and private securities markets consultation and advice regarding corporate and other acquisitions, including but not limited to, purchases or sales of assets and/or securities, mergers, acquisitions or joint ventures (any of the foregoing, a "Transaction") and the preparation of analysts' reports on KTI and its subsidiaries. Notwithstanding anything to the contrary contained herein, the issuance of the Option and the vesting and exercise thereof and the other compensation payable pursuant to Section 4(a) hereof is not contingent on KTI's satisfaction with the Consulting Services. KTI specifically acknowledges and agrees, however, that the Consultation Services to be rendered by the Consultant shall be conducted on a "best-efforts" basis and Consultant has not, cannot and does not guarantee that Consultant's efforts will have any impact on KTI's business or that any subsequent financial improvement will result from Consultant's efforts. (b) All Consultation Services to be performed hereunder shall be subject to Consultant's reasonable availability for such performance, in view of the nature of the requested service and the amount of notice provided by KTI. Consultant shall devote such time and effort to the performance of the Consultation Services as it shall determine is reasonably necessary for 2 such performance. KTI shall furnish to Consultant all information relevant to the performance by Consultant of the Consultation Services under this agreement, so as to permit Consultant to know all the facts material to the Consultation Services to be rendered, and all material or other information reasonably requested by Consultant. (c) Anything to the contrary herein notwithstanding, it is agreed that Consultant's services will not include any services that constituted the rendering of legal opinions or performance of work that is in the ordinary purview of a certified public accountant or any work that is in the ordinary purview of a registered broker/dealer or in connection with or related to the offer or sale of securities of KTI in a capital raising transaction. 4. Compensation and Expenses. (a) In consideration for the Consultation Services rendered by Consultant hereunder, KTI shall pay to Consultant on the first day of each month the sum of Six Thousand ($6,000) Dollars per month during the Term (as hereinafter defined). KTI shall receive a credit of Twenty-Five Thousand Dollars ($25,000) towards any amounts due hereunder, in consideration of KTI's previous payment to Consultant of Twenty-Five Thousand Dollars ($25,000) under the Letter of Intent. Accordingly, the first payment due under this Section 4 shall be made on October 1, 1996 in the amount of $5,000. (b) KTI shall reimburse Consultant for any and all reasonable expenses incurred by Consultant in the performance of its duties hereunder upon submission of reasonably satisfactory documentation to KTI of such cost or expense. 5. Grant of Option; Reservation of Shares. In further consideration of the Consulting Services, KTI hereby grants to the Consultant the continuing right and option (the "Option") to purchase from KTI, at any time or form time to time during the Exercise Period (as defined below), up to an aggregate of TWO HUNDRED THOUSAND (200,000) shares of Common Stock (the "Option Shares") upon the terms and conditions herein set forth, as adjusted pursuant to Appendix A hereto. KTI shall at all times during the Exercise Period keep reserved and available for issuance upon exercise of the Option and total number of Option Shares then subject to the Options. 6. Exercise Price. The Option shall be exercisable with respect to the TWO HUNDRED THOUSAND (200,000) Option Shares issuable upon exercise of the Option for an exercise price equal to $7.50 per Option Share as adjusted pursuant to Appendix A hereto. The Option Shares, when issued upon payment of the applicable exercise price (the "Exercise Price"), shall be validly issued fully paid and non-assessable and free from all liens, charges, taxes or other encumbrances. 7. Term of Option. The Option shall be exercisable in whole or in part during the period (the "Exercise Period") commencing on the date hereof and ending on June 1, 2001. Upon expiration of the Option, the Option shall be of no further force and effect. 8. Mechanics of Exercise. To exercise the Option, Consultant shall, at any time or form time to time during the Exercise Period, deliver to KTI: (I) a written notice of exercise (each an "Exercise Note") stating the number of Option Shares with respect to which the Option is then being exercised, which number shall not be less than 10,000 Option Shares, provided, however, that an Option Notice which effects an exercise with respect to the then remaining 3 Option Shares if less than 10,000 may state a number that is less than 10,000 Option Shares; and (ii) the Exercise Price payable in respect of the Option Shares which are the subject of such Exercise Notice. The Option shall be deemed to be exercised with respect to the Option Shares stated in an Exercise Notice, and such Option Shares shall be deemed to be issued (whether or not a certificate representing such Shares has been delivered to Consultant), at the time such Option Notice and Exercise Price is received by KTI. 9. Non-Transferability. The Option and the rights attendant thereto may be assigned, pledged, hypothecated or otherwise transferred by Consultant in its sole discretion at any time, in whole or in part. 10. Dilution Protection. The Exercise Price, and the number of Option Shares (or other securities or property) issuable upon exercise of the Option shall be subject to adjustment from time to time upon the occurrence of certain events, as provided in Appendix A attached to this Agreement. 11. Registration; Registration Rights. KTI hereby covenants and agrees that Consultant shall have the right to cause KTI to register under the Securities Act of 1993, as amended (the "Securities Act") the offer and sale of the Option Shares issuable upon the exercise of the Option in accordance with the procedures set forth in Appendix B attached hereto. 12. Right of First Refusal. In addition to Consultant's other rights hereunder, Consultant shall have a right of first refusal to underwrite or place any public or private sale for cash of debt or equity securities (excluding (I) sales to employees and borrowings from banks or other financial institutions for ordinary working capital purposes, (ii) any project finance transaction and (iii) financing for the DataFocus transaction) of KTI or any subsidiary or successor of KTI during the two-year period following the date hereof, except for securities that may be issued by KTI in connection with (a) the closing of the Company's $2,003,314 private placement (the "Private Placement") of short-term notes due not earlier than July 31, 1996 and 333,882 five-year warrants exercisable at $6.00 per share, (b) the transactions referenced under the heading "Recent Developments") in the Company's Registration Statement on Form S-1 declared effective by the Securities and Exchange Commission on February 14, 1996 (Registration No. 33-80087) and (c) the additional transactions and events referred to on Appendix C hereto. If Consultant elects to exercise the right of first refusal, KTI shall have the right to require Consultant to act as the non-lead co-manager of any such underwriting or placement (with al allotment in such offering or placement in an amount reasonably acceptable to Consultant but not less than 30% of the total amount of securities offered) but KTI's right to effect such requirement shall apply only if the lead manager thereof is one of the "21 major bracket" underwriting firms. It is understood that any such proposed financing shall be offered to Consultant in writing and Consultant shall have 30 days in which to determine whether or not to accept such offer. If Consultant refuses on two occasions, and provided that such financings are consummated (I) upon substantially the same terms and conditions as those offered to Consultant, and (ii) within 12 months after the end of the aforesaid 30-day period, then this right of first refusal shall terminate. 13. Finder Services. KTI hereby agrees that KTI shall for a period of three (3) years from the date hereof pay to Consultant a fee as follows based on the consideration paid or received by KTI or any subsidiary or successor of KTI or stockholder thereof in any Transaction, 4 except as provided in the last sentence of this Section 13, such fee to be paid in cash at the closing of the Transaction to which it relates: 5% of the fist $1 million of consideration; 4% of the second $1 million of consideration; 3% of the third $1 million of consideration; and 2% of the consideration in excess of $4 million. The amount of consideration paid in a Transaction shall include, for the purposes of calculating such fee, all forms of consideration paid by KTI or any subsidiary or Penobscot Energy Recovery Company ("PERC"), or received by KTI, its stockholders, or any subsidiary of KTI or PERC including, but not limited to, cash, stock or evidence or indebtedness, or any combination thereof. In addition, if KTI shall within two years immediately following the third anniversary of the date hereof, consummate a Transaction with any party introduced by Consultant to KTI prior to the third anniversary of the date hereof, KTI shall pay to Consultant a fee with respect to such Transaction calculated in accordance with this Section 13. Notwithstanding the foregoing, Consultant shall not be entitled to receive a fee pursuant to this Section 13 for any Transaction unless (I) Consultant introduces KTI to the other party to the Transaction in question, or (ii) KTI requests in writing Consultant to serve as its financial consultant in such Transaction, in consideration for the fee set forth above. 14. Non-Exclusive Services. KTI understands that Consultant is currently providing certain advisory and financial consulting services to other individuals and entities and agrees that Consultant is not prevented or barred from rendering services of the same nature or a similar nature to any other individuals or entities and acknowledges that such Services may from time to time conflict with the timing of and the rendering of Consultant's services. In addition, Consultant understands and agrees that KTI shall not be prevented or barred from retaining other persons or entities to provide services of the same or similar nature as those provided by Consultant. 15. Consultant Not an Agent or Employee. Consultant's obligations under this Agreement consist solely of the services described herein. In no event shall Consultant be considered to be acting as an employee or agent of KTI or otherwise representing or binding KTI. For the purposes of this Agreement, Consultant is an independent contractor. All final decisions with respect opt acts of KTI or its affiliates, whether or not made pursuant to or in reliance on information or advice furnished by Consultant hereunder, shall be those of KTI or such affiliates and Consultant shall, under no circumstances, be liable for any expenses incurred or losses suffered by KTI as a consequent of such actions. Consultant agrees that all of his work product relating to the Services to be rendered pursuant to this agreement, shall become the exclusive property of KTI. The parties acknowledge that the Consultation Services provided by the Consultant hereunder are not in connection with any offering or sale of securities of KTI in a capital raising transaction. 16. Liability of Consultant. In furnishing KTI with management advice and other services as herein provided, Consultant shall not be liable to KTI or its creditors for errors of judgment or for anything except malfeasance or gross negligence e in the performance of his duties or reckless disregard of his obligations and duties under the terms of this Agreement. 5 It is further understood and agreed that Consultant may rely upon information furnished to it reasonably believed to be accurate and reliable and that, except as set forth herein in the first paragraph of this Section 16, Consultant shall not be accountable for any loss suffered by KTI by reason of KTI's action or non-action on the basis of any advice, recommendation or approval of Consultant. The parties further acknowledge that Consultant undertakes no responsibility for the accuracy of any statements to be made by management contained in press releases or other communications, including, but not limited to, filings with the commission and the NASD. 17. Indemnification. (a) KTI agrees to indemnify and hold harmless the Consultant form and against any and all losses, claims, damages, liabilities and expenses (including, without limitation reasonable attorneys' fees and costs incurred in the investigation, defense and settlement of the matter) suffered or incurred by Consultant which arises out of this Agreement or otherwise out of the performance by the Consultant of its obligations hereunder (collectively, "Damages"), unless, any of such Damages are found by a final determination of a court of competent jurisdiction to have arisen out of bad faith, gross negligence or malfeasance of the Consultant in performing his services hereunder (pending any such final determination, the indemnification and reimbursement provision of this Agreement shall apply and KTI shall be obligated to reimburse the consultant for his expenses provided, however, that the Consultant shall reimburse KTI for any such expenses if it is ultimately determined that the Consultant was not entitled to indemnification hereunder). If for any reason the foregoing indemnification is unavailable to the Consultant, or insufficient to hold him harmless, then KTI shall contribute to the amount paid or payable by the Consultant as a result of such Damages in such proportion as is appropriate to reflect not only the relative benefits received by KTI on the one hand and the Consultant on the other hand, but also the relative fault of KTI and the Consultant, as well as any other relevant equitable considerations. The reimbursement, indemnity and contribution obligations of KTI under this paragraph shall be in addition to any liability which KTI may otherwise have and shall be binding and inure to the benefit of any respective successors, assigns, heirs and personal representatives of KTI and the Consultant. (b) If any action is brought against Consultant or any of its officers, directors, partners, employees, agents, or counsel, or any controlling persons of such person (an "indemnified party") in respect of which indemnity may be sought against KTI pursuant to the foregoing paragraph, such indemnified party or parties shall promptly notify KTI in writing of the institution of such action (but the failure so to notify shall not relieve KTI from any liability other than pursuant to this Section 17(b)) and KTI shall promptly assume the defense of such action including the employment of counsel (reasonably satisfactory to such indemnified party or parties) provided that the indemnified party shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such indemnified party or parties unless the employment of such counsel shall have been authorized in writing by KTI in connection with the defense of such action or KTI shall not have promptly employed counsel reasonably satisfactory to such indemnified party or parties to have charge of the defense of such action or such indemnified party or parties shall have reasonably concluded that there may be one or more legal defenses available to it or them or to other indemnified parties which are different from or additional to those available to KTI, in any of which events such fees and expenses shall be borne by KTI and KTI shall not have the right to direct the defense of such 6 action on behalf of the indemnified party or parties. Anything in this Section 17 to the contrary notwithstanding, KTI shall not be liable for any settlement of any such claim or action effected without its written consent, which shall not be unreasonably withheld. KTI shall not, without the prior written consent of each indemnified party that is not released as described in this sentence, settle or compromise any action, or permit a default or consent to the entry of judgment in or otherwise seek to terminate any pending or threatened action, in respect of which indemnity may be south hereunder (whether or not any indemnified party is a party thereto) unless such settlement, compromise, consent, or termination includes an unconditional release of each indemnified party from all liability in respect of such action. KTI agrees promptly to notify Consultant of the commencement of any litigation or proceedings against KTI or any of its officers or directors in connection with the sale of any Option Shares or any preliminary prospectus, prospectus, registration statement, or amendment or supplement thereto, or any application relating to any sale of any Option Shares. 18. Notices. All notices and other communications provided for or permitted hereunder shall be made in writing and delivered by hand delivery, registered first-class mail, telex, or telecopier, addressed as follows: If to KTI: KTI, Inc. 7000 Boulevard East Guttenberg, New Jersey 07093 Attention: Nicholas Menonna, Jr.., Chairman of the Board and Chief Executive Officer Telephone No. (201) 854-7777 Telecopier No. (201) 854-1771 with a copy to: Brian Hoffman, Esq. McDermott, Will & Emery 1211 Avenue of the Americas New York, New York 10036 If to Consultant: L.T. Lawrence & Co., Inc. Three New York Plaza New York, New York 10004 Attention: Lawrence Principato and Todd Roberti Telephone No. (212) 361-6037 Telecopier No. (212) 361-6280 with a copy to: Eric M. Lerner, Esq. Rosenman & Colin LLP 575 Madison Avenue New York, New York 10022 Telephone No. (212) 940-7157 7 Telecopier No. (212) 94-8776 All such notices and communications shall be deemed to have been received: upon delivery if delivered by hand; two business days after being deposited in the mail, postage prepaid, if mailed; when answered back if telexed; and when receipt is acknowledged if telecopied. 19. Severability. In the event that any provision of this Agreement shall be deemed unenforceable or invalid under any applicable law or be so held by applicable court decision, such unenforceability or invalidity will not render this Agreement unenforceable or invalid as a whole, and, in such event, such provision will be changed and interpreted so as to accomplish the objectives of such provision within the limited of applicable law or applicable court decision. 20. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York, without reference to New York's principles of conflicts of law. 21. Counterparts. This Agreement may be executed in counterparts, each of which shall constitute an original and all of which when taken together shall constitute one agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. KTI, INC. By: _______________________________ Nicholas Menonna, r. Chairman of the Board and Chief Executive Officer L.T. LAWRENCE & CO., INC. By: _______________________________ 8 APPENDIX A DILUTION PROTECTION a. Adjustments Generally. The Exercise Price, and the number of Option Shares (or other securities or property) issuable upon exercise of the Option shall be subject to adjustment from time to time upon the occurrence of certain events, as provided in this Appendix A. b. Common Stock Reorganization. If KTI shall subdivided its outstanding shares of Common Stock into a small number of shares (any such event being called a "Common Stock Reorganization"), then (a) the Exercise Price shall be adjusted, effective immediately after the record date at which the holders of shares of Common Stock are determined for purposes of such Common Stock Reorganization, to a price determined by multiplying the Exercise Price in effect immediately prior to such record date by a fraction, the numerator of which hall be the number of shares of Common Stock outstanding on such record date before giving effect to such Common Stock Reorganization and the denominator of which shall be the number of shares of Common Stock outstanding after giving effect to such Common Stock Reorganization, and (b) the number of Option Shares subject to purchase upon exercise of the Option shall be adjusted, effective at such time, to a number determined by multiplying the number of Option Shares immediately before such Common Stock Reorganization by a fraction, the numerator of which shall be the number of shares outstanding after giving effect to such Common Stock Reorganization and the denominator of which shall be the number of shares of Common Stock outstanding immediately before such Common Stock Reorganization. c. Special Dividends. If KTI shall issue or distribute to all or substantially all holders of shares of Common Stock evidences in indebtedness, any other securities of KTI or any cash, property or other assets, and if such issuance or distribution does not constitute a regular cash dividend out of surplus or net profits legally available therefor (determined in accordance with generally accepted accounting principles, consistently applied) or a Common Stock Reorganization (any such nonexcluded event being herein called a "Special Dividend"), (a) the number of Option Shares issuable upon exercise of the Option shall be increased but not decreased), effective immediately after the record date at which the holders of shares of Common Stock are determined for purposes of such Special Dividend, to the number determined by multiplying the number of Option Shares issuable upon exercise immediately before such Special Dividend by a fraction, the numerator of which shall be the Fair Market Value per share of outstanding Common Stock on such record date and the denominator of which shall be the Fair Market Value per share of outstanding Common Stock of KTI on such record date less the then Fair Market Value of the evidences of indebtedness, securities, cash, or property or other assets issued or distributed in such Special Dividend with respect to one share of Common Stock, and (b) the Exercise Price shall be decreased (but not increased) to a price determined by multiplying the Exerciser Price then in effect by a fraction, the numerator of which shall be the number of Option Shares issuable upon exercise of the Option immediately before such Special Dividend and the denominator of which shall be the number of Option Shares issuable upon exercise of the Option immediately after such Special Dividend. d. Capital Reorganization, If there shall be any consolidation or merger to which KTI is a party, other than a consolidation or a merger in which KTI is a continuing corporation 9 and which does not result in any reclassification of, or change (other than a Common stock Reorganization or a change in par value), in, outstanding shares of Common Stock, or any sale or conveyance of the property of KTI as an entirety or substantially as an entirety (any such event being called a "Capital Reorganization"), then, effective upon the effective date of such Capital Reorganization, Consultant shall have the right to purchase, upon exercise of the Option, the kind and amount of shares of stock and other securities and property (including cash, but if all cash, then the Option must be exercised within 30 days after such effective date, as the end of which period the Option shall terminate) which Consultant would have owned or have been entitled to receive after such Capital Reorganization if the Option had been exercised immediately prior to such Capital Reorganization, assuming Consultant (i) is not a person with which KTI consolidated or into which KTI merged or which merged into KTI or to which such sale or conveyance was made, as the case may be ("constituent person"), or an affiliate of a constituent person and (ii) failed to exercise its rights of election, if any, as to the kind or amount of securities, cash or other property receivable upon such Capital Reorganization (provided that if the kind or amount of securities, cash or other property receivable upon such Capital Reorganization is not the same for each share of Common Stock held immediately prior to such consolidated, merger, sale or conveyance by other than a constituent person or an affiliate thereof and in respect of which such rights of election shall not have been exercise ("non-electing share"), then for the purposes of this Appendix A the kind and amount of shares of stock and other securities or other property (including cash) receivable upon such Capital Reorganization shall be deemed to be the kind and amount so receivable per share by a plurality of the non-electing shares). As a condition to effecting any Capital Reorganization, KTI or the successor or surviving corporation thereto, as the case may be, shall execute and deliver to Consultant an agreement as to Consultant's rights in accordance with this Section (d), providing for subsequent adjustments as nearly equivalent as may be practicable to the adjustments provided for in this Appendix A. The provisions of this Section (d) shall similarly apply to successive Capital Reorganizations. e. Adjustment Rules. (1) Any adjustments pursuant to this Appendix A shall be made successively whenever an event referred to herein shall occur. (2) If KTI shall set a record date to determine the holders of shares of Common Stock for purposes of a Common Stock Reorganization, Special Dividend or Capital Reorganization, and shall legally abandon such action prior to effecting such action, then no adjustment shall be made pursuant to this Appendix A in respect of such action. (3) No adjustment in the number of Option Shares issuable upon exercise of the option or in the Exercise Price shall be made hereunder unless such adjustment increase or decreases such amount or price by one percent or more, but any such lesser adjustment shall be carried forward and shall be made at the time and together with the next subsequent adjustment which together with any adjustments so carried forward shall serve to adjust such amount or price by one percent or more. (4) "Fair Market Value" means the fair market value of the business or property in question, as determined in good faith by the Board of Directors of KTI; provided, however, that the Fair Market Value of any security for which a Closing Price (as defined below) is available shall be the Market Price (as defined below) of such security. The Fair Market Value of KTI shall be the Fair Market Value of KTI (including subsidiaries) as a going concern. Notwithstanding the foregoing, if, at any date of determination of the Fair market Value of KTI, the securities of any 10 cash shall then be publicly traded, the Fair Market Value of KTI on such date shall be the Market Value of KTI, the securities of any class shall then be publicly traded, the Fair Market Value of KTI on such date shall be the Market Price on such date multiplied by the number of securities then outstanding. "Closing Price" with respect to any security on any day means (a) if such security is listed or admitted for trading on a national securities exchange, the reported last sales price regular way or, if no such reported sale occurs on such day, the average of the closing bid and asked prices regular way on such day, in each case as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which such class of security is listed or admitted to trading, or (b) if such security is not listed or admitted to trading on any national securities exchange, the last quoted sales price, or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market on such day as reported by The National Association of Securities Dealers, Inc. Automated Quotation System or any comparable system then in use or, if not so reported, as reported by any New York Stock Exchange member firm reasonably selected by KTI for such purpose. "Market Price" with respect to any security on any day means the average of the daily Closing Prices of a share or unit of such security for the 10 consecutive business days ending on the most recent business day for which a Closing Price is available; provided, however, that in the event that the Market Price is determined during a period following the announcement by KTI of (A) a dividend or distribution, or (B) any subdivision, combination or reclassification of its securities and prior to the expiration of 20 business days after the ex-dividend date for such dividend or distribution, or the record date for such subdivision, combination or reclassification, then, and in each such case, the Market Price shall be appropriately adjusted to reflect the current market price per share equivalent of its securities. Upon each determination of Fair Market Value hereunder, KTI shall promptly give written notice thereof to Consultant, setting forth in reasonable detail the calculation of such Fair Market Value and the method and basis of determination thereof, as the case may be. If, at any date of determination of the Fair Market Value of KTI, the securities of any class shall not then be publicly traded, and if Consultant shall disagree with such determination and shall, by written notice to KTI given within 15 days after KTI's notice of such determination, elect to dispute such determination, such dispute shall be resolved in accordance with this Section (e)4. In the event that a determination of Fair Market Value is disputed, such dispute shall be submitted, at KTI's choice and expense, to a nationally recognized independent investment banking firm that has not provided investment banking services to KTI within two years of the selection date; and the determination by such firm of Fair Market Value shall be binding on KTI and Consultant (the "Appraisal Procedure"). (5) All references in this Appendix A to the "Exercise Price" shall, for purpose of making any required adjustments hereto pursuant to this Appendix A, mean each Exercise Price set forth in Section 2 of the Agreement to which this Appendix A is attached (as each such Exercise Price may be adjusted from time t time pursuant to the provisions of this Appendix A) applicable to Option Shares which are, at the time of any such adjustment, subject to issuance upon exercise of the Option. f. Proceedings Prior to Any Action Requiring Adjustment. As a condition precedent to the taking of any action which would require any adjustment pursuant to this Appendix A, KTI shall take any action which may be necessary in order that KTI may thereafter validly and legally 11 issue as fully paid and nonassessable all Option Shares which Consultant is entitled to receive upon exercise of the Option. g. Notice of Adjustment. Not less than 10 nor more than 60 days prior to the record date or effective date, as the case may be, of any action which requires or might require an adjustment or readjustment pursuant to this Appendix A, KTI shall give notice to Consultant or such event, describing such event in reasonable detail and specifying the record date or effective date, as the case may be, and, if determinable, the required adjustment and the computation thereof. If the required adjustment is not determinable at the time of such notice, KTI shall give notice to Consultant of such adjustment and computation promptly after such adjustment becomes determinable. 12 APPENDIX B REGISTRATION PROCEDURES 1. Registration. a. Demand Registration. Consultant may at any time, on any two separate occasions, from the date hereof until June 1, 2003, request that KTI, at KTI's sole cost and expense (other than the fees and disbursements of counsel for Consultant and the underwriting discounts, if any, payable in respect of the Option Shares sold by Consultant) with respect to the first such request and at Consultant's sole cost and expense with respect to the second such request, register the sale of all or part of the Option Shares. Upon receipt of any such request, KTI shall, as promptly as practicable,. prepare and file with the Commission a registration statements sufficient to permit the public offering and sale of the Option Shares through the facilities of all appropriate securities exchanges and the other-the-counter market, and will use its good faith best efforts through its officers, directors, auditors, and counsel to cause such registration statement to become effective as promptly as practicable. b. Piggyback Registration. In addition to KTI's obligations under Section 1.a. of this Appendix B and not in limitation thereof, KTI shall give Consultant at least 30 days' prior written notice of each filing by KTI of a registration statement (other than a registration statement on Form S-4 or Form S-8 or on any successor form thereto) with the Commission. If requested by Consultant in writing at any time and from time to time, from the date hereof until June 1, 2003, within 20 days after receipt of any such notice, KTI shall, at KTI's sole expense (other than the fees and disbursements of counsel for Consultant, and the underwriting discounts, if any, payable in respect of the Option Shares sold by Consultant), register all or, at Consultant's option, any portion of the Option Shares, concurrently with the registration of such other securities, all to the extent requisite to permit the public offering and sale of the Option Shares through the facilities of the Nasdaq National Market or any other securities exchange, if any, on which the Common Stock is being sold or on the over-the-counter market, and will use its reasonable best efforts through its officers, directors, auditors, and counsel to cause such registration statement to become effective as promptly as practicable. For purposes of this Appendix B, "Options Shares" shall not include Option Shares which have been previously sold pursuant to a registration statement or Rule 144 promulgated under the Securities Act. If the managing underwriter of any such offering shall determine and advise KTI that, in its opinion, the distribution of all or a portion of the Option Shares requested to be included in the registration concurrently with the securities being registered by KTI would materially adversely affect the distribution of such securities by KTI then KTI will include in such registration first, the securities that KTI purposes to sell and second, the Option Shares requested to be included in such registration, to the extent permitted by the managing underwriter. In the event KTI is advised by the staff of the Commission, NASDAQ, self-regulatory or state securities agency that the inclusion of the Option Shares will prevent, preclude or materially delay the effectiveness of a registration statement filed, KTI, in good faith, may amend such registration statement to exclude the Option Shares. c. In the event of a registration pursuant to the provisions of this Appendix B, KTI shall use its reasonable best efforts to cause the option Shares so registered to be registered or qualified for sale under these securities or blue sky laws of such jurisdictions as Consultant may 13 reasonably request; provided, however, that KTI shall not be required to qualify to do business in any state by reason of this paragraph d. in which it is not otherwise required to quality to do business. d. KTI shall keep effective any registration or qualification contemplated by this Appendix B and shall from time to time amend or supplement each applicable registration statement, preliminary prospectus, final prospectus, application, document and communication until the earlier of (i) one year from the effective date thereof and (ii) the date on which all Option Shares issuable upon the exercise of the Option covered by such registration statement shall have been sold. e. In the event of a registration pursuant to the provisions of this Appendix B, KTI shall furnish to Consultant such reasonable number of copies of the registration statement and of each amendment and supplement thereto (in each case, including all exhibits), of each prospectus contained in such registration statement and each supplement or amendment thereto (including each preliminary prospectus), all of which shall conform to the requirements of the Securities Act and the rules and regulations thereunder, and such other documents, as Consultant may reasonably request to facilitate the disposition of the Option Shares included in such registration. f. KTI shall notify Consultant promptly when such registration statement has become effective or a supplement to any prospectus forming a part of such registration statement has been filed. g. KTI shall advise Consultant, promptly after it shall receive notice or obtain knowledge of the issuance of any stop order by the Commission suspending the effectiveness of such registration statement, or the initiation or threatening of any proceeding from that purpose and promptly use its reasonable best efforts to prevent the issuance of any stop order or to obtain its withdrawal if such stop order should be issued. h. KTI shall promptly notify Consultant at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, would include an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing, and at the reasonable requirement of Consultant prepare and furnish to it such number of copies of a supplement to or an amendment to such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such Option Shares or securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made. i. If requested by the underwriter for any underwritten offering of Option Shares, KTI and Consultant will enter into an underwriting agreement with such underwriter for such offering, which shall be reasonably satisfactory in substance and form to KTI, KTI's counsel, Consultant, Consultant's counsel and the underwriter, and such agreement shall contain such representations and warranties by KTI and Consultant and such other terms and provisions as are customarily contained in an underwriting agreement with respect to secondary distributions solely 14 by selling stockholders, including, without limitation, indemnities substantially to the effect and to the extent provided in Section 2 of this Appendix B. j. If requested by the underwriter for any underwritten offering of Option Shares, Consultant shall execute "lock-up" agreements with respect thereto, on substantially the same terms and conditions as lock-up agreements executed by the other selling shareholder in such underwritten offering; provided, however, that in no event shall Consultant be obligated to execute a lock-up agreement for a term of greater that 120 days,. k. KTI agrees that until all the Option Shares have been sold under a registration statement or pursuant to Rule 144 promulgated under the Securities Act, it shall, upon becoming subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), use its reasonable best efforts to keep current in filing all reports, statements and other materials required to be filed with the Commission to permit KTI to maintain its eligibility to use a Form S-3 registration statement and to permit Consultant to sell the Option Shares under Rule 144. l. KTI shall furnish to Consultant and to each underwriter, if any, a signed counterpart, addressed to Consultant or each underwriter, of (i) an opinion of counsel to KTI; dated the effective dated of such registration statements (and, if such registration includes an underwritten public offering, an opinion dated the date of the closing under the underwriting agreement), and (ii) a "cold comfort" letter dated the effective date of such registration statement (and, if such registration includes an underwritten public offering, a letter dated the date of the closing under the underwriting agreement) signed by the independent public accountants who have issued report on KTI's financial statements included in such registration statement, in each case covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of such accountants' letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer's counsel and in accountants' letters delivered to underwriters in underwritten public offerings of securities provided, however, that the terms of this subparagraph k shall not apply if the Option Shares are registered in a "piggyback" registration pursuant to Section 1(b) of this Appendix B in which the party seeking registration does not receive an opinion of counsel or a "cold comfort letter." m. Consultant understands that KTI makes no representations of any kind concerning its intent or ability to offer or sell any of the Option Shares in the public offering or otherwise and that its sole right to have the Options Shares registered under the Securities Act is contained in this Agreement. 2. Indemnification. a. Subject to the conditions set forth below, KTI agrees to indemnify and hold harmless Consultant, its officer, directors, partners, employees, agents, and counsel, and each person, if any, who controls any such person within the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act from and against any and all loss, liability, charge, claim, damage, and expense whatsoever (which shall include, for all purposes of this Section 2, but not be limited to, attorneys' fees and any and all reasonable expenses whatsoever incurred in investigating, preparing, or defending against any litigation, commenced or threatened, or any 15 claim whatsoever, and any and all amounts paid in settlement of any claim or litigation) as and when incurred, arising out of, based upon, or in connection with(i) any untrue statement or alleged untrue statement of a material fact contained (A) in any registration statement, preliminary prospectus, or final prospectus (as from time to time amended and supplemented) or any amendment or supplement thereto, relating to the sale of any of the Option Shares or (B) in any application or other document or communication (in this Section 2 collectively called a "application") executed by KTI or based upon written information furnished by or on behalf of KTI filed in any jurisdiction in order to register or qualify any of the Option Shares under the securities or blue sky laws thereof or filed with the Commission or any securities exchange; or any omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements made therein not misleading, unless (x) such statement or omission was made in reliance upon and in conformity with written information furnished to KTI with respect to Consultant by or on behalf of Consultant expressly for inclusion in any registration statement, preliminary prospectus, or final prospectus, or any amendment or supplement thereto, or in any application, as the case may be, or (y) such loss, liability, charge, claim, damage or expense arises out of Consultant's failure to comply with the terms and provisions of this Agreement, or (ii) any breech of any representation, warranty, covenant, or agreement of KTI contained in this Agreement. The foregoing agreement to indemnify shall be in addition to any liability KTI may otherwise have, including liabilities arising under this Agreement. If any action is brought against Consultant or any of its officers, directors, partners, employees, agents, or counsel, or any controlling persons of such person (an "indemnified party") in respect of which indemnity may be sought against KTI pursuant to the foregoing paragraph, such indemnified party or parties shall promptly notify KTI in writing of the institution of such action (but the failure so to notify shall not relive KTI from any liability other than pursuant to this Section 2(a)) and KTI shall promptly assume the defense of such action, including the employment of counsel (reasonably satisfactory to such indemnified party or parties) provided that the indemnified party shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such indemnified party or parties unless the employment of such counsel shall have been authorized in writing by KTI in connection with the defense of such action or KTI shall not have promptly employed counsel reasonably satisfactory to such indemnified party or parties to have charge of the defense of such action or such indemnified party or parties shall have reasonably concluded that there may be one or more legal defenses available to it or them or to other indemnified parties which are different from or additional to those available to KTI, in any of which events such fees and expenses shall be borne by KTI and KTI shall not have the right to direct the defense of such action on behalf of the indemnified party or parties. Anything in this Section n2 to the contrary notwithstanding, KTI shall not be liable for any settlement of any such claim or action effected without its written consent, which shall not be unreasonably withheld. KTI shall not, without the prior written consent of each indemnified party that is not released as described in this sentence, settle or compromise any action, or permit a default or consent to the entry of judgment in or otherwise seek to terminate any pending or threatened action in respect of which indemnity may be sought hereunder (whether or not any indemnified party is a party thereto) unless such settlement, compromise, consent, or termination includes an unconditional release of each indemnified party from all liability in respect of such action. KTI agrees promptly to notify Consultant of the commencement of any litigation or proceedings against KTI or any of its officers or directors in connection with the sale of any Option Shares or any preliminary 16 prospectus, prospectus, registration statement, or amendment or supplement thereto, or any application relating to any sale of any Option Shares. b. Consultant agrees to indemnify and hold harmless KTI, each director of KTI, each officer of KTI who shall have signed any registration statement covering Option Shares held by Consultant, each other person, if any, who controls KTI within the meaning of Section n15 of the Securities Act or Section 20(a) of the Exchange Act, and its or their respective counsel, to the same extent as the foregoing indemnity from KTI to Consultant in Section 2(a) but only with respect to statements or omissions, if any, made in any registration statement, preliminary prospectus, or final prospectus (as from time to time amended and supplemented) or any amended or supplement thereto, or in any application, in reliance upon and in conformity with written information furnished to KTI with respect to Consultant by or on behalf of Consultant, expressly for inclusion in any such registration statement, preliminary prospectus, or final prospectus, or any amended or supplement thereto, or in any application, as the case may be. If any action shall be brought against KTI or any other person so indemnified based on any such registration statement, preliminary prospectus, or final prospectus or any amendment or supplement thereto, or in any application, and in respect of which indemnity may be sought against Consultant pursuant to this Section 2(b) Consultant shall have the rights and duties given to KTI, and KTI and each other person so indemnified shall have the rights and duties given to the indemnified parties, by the provisions of Section n2(a). c. To provide for just and equitable contribution, if (i() an indemnified party makes a claim for indemnification pursuant to Section 2(a) or 2 (b) (subject to the limitations thereof) but it is found in a final judicial determination, not subject to further appeal, that such indemnification may not be enforced in such case, even though this Agreement expressly provides for indemnification in such case, or (ii) any indemnified or indemnifying party seeks contribution under the Securities Act, the Exchange Act or otherwise, then KTI (including for this purpose any contribution made by or on behalf of any director of KTI, any officer of KTI who signed any such registration statement, any controlling person of KTI, and its or their respective counsel) as one entity, and Consultant (including for this purpose any contribution by or on behalf of an indemnified party) as a second entity, shall contribute to the losses, liabilities, claims, damages, and expense whatsoever to which any of them may be subject, on the basis of relevant equitable considerations such as the relative fault of KTI and Consultant in connection with the facts which results in such losses, liabilities, claims, damages and expenses. The relative fault, in the case of an untrue statement, alleged untrue statement, omission, or alleged omission shall be determined by, among other things, whether such statement, alleged statement, omission or alleged omission relates to information supplied by KTI or by Consultant, and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement, alleged statement, omission, or alleged omission. KTI and Consultant agree that it would be unjust and inequitable if the respective obligations of KTI and Consultant for contribution were determined by pro rata or per capita allocation of the aggregate losses, liabilities, claims, damages, and expenses (even if Consultant and the other indemnified parties were treated as one entity for such purpose) or by any other method of allocation that does not reflect the equitable considerations referred to in this Section 2(c). No person guilty of a fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. For purposes of this Section n2(c) each person, if any, who controls Consultant within the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act and each officer, director, partner, employee, agent and 17 counsel of Consultant or control person shall have the same rights to contribution as Consultant or control person and each person, if any, who controls KTI within the meaning of Section 15 of the Securities Act or Section n20(a) of the Exchange Act, each officer of KTI who shall have signed any such registration statement, each director of KTI, and its or their respective counsel shall have the same rights to contribution as KTI, subject to each case to the provisions of this Section 2(c). Anything in this Section 2(c) to the contrary notwithstanding, no party shall be liable for contribution with respect to the settlement of any claim or action effected without its written consent. This Section 2(c) is intended to supersedes any right to contribution under the Securities Act, the Exchange Act or otherwise. 18 APPENDIX C 1. Closing of the sale of Maine Energy Recovery Company's available power generation capacity and the related restructuring of the Central Maine Purchase Agreement, dated January 12, 1984. 2. Closing of the purchase of the first tranche of CNA Financial Corporation's interest in Maine Energy Recovery Company. 3. Closing of the purchase of the second tranche of CNA Financial Corporation's interest in Maine Energy Recovery Company. 4. Acquisition of any interest in the stock, securities or assets of Environmental Waste Technology, Inc. 5. Acquisition of any partnership interest in PERC from Prudential Power Funding. 6. Acquisition of any interest in the stock, securities or assets of Paper Chase Exchange, Inc. and the acquisitions of any warrants to purchase stock, options to purchase stock, stock or assets of Prins Recycling Corp. 7. Acquisition of any interest in the stock, securities or assets of Polymeric, Inc. or of TriMax, Inc. 8. Acquisition of any interest in the stock, securities or assets of Power Sources, Inc. 9. Acquisition of any interest in the stock, securities or assets of Timber Energy Investment, Inc. or of any of its subsidiaries. 10. Offering of approximately $500,000 in short term notes and warrants to purchase shares of KTI, Inc. common stock at a price of $6.00 per share. 11. Sale of DataFocus. EX-10.42 7 FIRST AMENDMENT TO OPTION AND CONSULTING AGREEMENT 1 EXHIBIT 10.42 FIRST AMENDMENT TO OPTION AND CONSULTING AGREEMENT This First Amendment, dated as of December 18, 1996 to an Option and Consulting Agreement dated as of June 1, 1996, by and among KTI, Inc., a New Jersey corporation ("KTI") and L.T. Lawrence & Co., Inc., a New York corporation (the "Consultant"). Whereas, KTI retained the Consultant to provide certain advisory and other services (collectively, Consulting Services') as set forth in such Option and Consulting Agreement; and Whereas, the Consultant has the right to one demand registration at the expense of KTI pursuant to Section 1. a. of APPENDIX B to such Option and Consulting Agreement; and Whereas, the Consultant has made a written demand to KTI to file a registration statement pursuant to such provision; Now therefore, KTI and the Consultant hereby agree as follows: 1. Section 3. of the Option and Consulting Agreement is amended by changing the end of the Term from June 1, 1999 to June 1, 1997. 2. Section 4. (a) is amended by deleting the phrase "during the Term (as hereinafter defined)" and by inserting "until June 1, 1997" in lieu thereof. 3. Section 4. (b) is amended by inserting the phrase "prior to October 16, 1996" immediately after the word "Consultant" on line two thereof. 4. Section 7. is amended by changing the Term of the Option from June 1, 2001 to June 1, 1999. 5. Section 12. is hereby deleted in its entirety and the words "Intentionally left blank" inserted in lieu thereof. 6. Section 13. is hereby deleted in its entirety and the words "Intentionally left blank" inserted in lieu thereof. 7. Section 17 is hereby amended by inserting "prior to October 16, 1996" in line eight immediately after the word "hereunder". 8. APPENDIX A, 1. a., line four is amended by inserting " until June 1, 1999" immediately after the phrase "from time to time". 9. APPENDIX B, 1. a., line three is amended by deleting "2003" and by inserting "2001" in lieu thereof. 2 10. KTI shall file a registration statement not later than February 15, 1997 including the KTI common stock covered by the Consultant's warrants and shall keep such registration statement effective for not less than one year. Upon such filing, KTI shall have satisfied its obligations to file one registration at KTI's sole expense. 11. KTI shall pay $23,000.0 to the Consultant in satisfaction of all fees and expenses due under the Option and Consulting Agreement. IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be duly executed as of the date first above written. KTI, Inc. L.T.Lawrence and Co., Inc. By:____________________ By:______________ Nicholas Menonna, Jr. Todd Roberti Chairman of the Board and Chief Executive Officer EX-10.43 8 WARRANT TO PURCHASE 1 EXHIBIT 10.43 Warrant No. D-6 Right to Purchase Common Shares THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE. THIS WARRANT HAS BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO DISTRIBUTION OR RESALE, AND MAY NOT BE SOLD, ASSIGNED, MADE SUBJECT TO A SECURITY INTEREST, PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND APPLICABLE STATE LAWS OR PURSUANT TO AN EXEMPTION THEREFROM IF THE CORPORATION RECEIVES AN OPINION OF COUNSEL (WHICH COUNSEL AND OPINION (IN FORM, SCOPE, AND SUBSTANCE) SHALL BE REASONABLY ACCEPTABLE TO THE CORPORATION) THAT SUCH REGISTRATION IS NOT REQUIRED AS TO SUCH SALE OR OFFER. KTI, INC. A NEW JERSEY CORPORATION WARRANT TO PURCHASE COMMON STOCK Registered Owner: L. T. Lawrence & Co., Inc. Three New York Plaza New York, New York 10004 For Value Received, KTI, Inc., a New Jersey corporation (the "Corporation") grants the following rights to the registered owner of this Warrant (the "Holder") and the Holder hereby acknowledges and agrees that: 1. Issue. Upon tender of this Warrant to the Corporation, the Corporation shall issue to the registered owner hereof the number of shares specified in paragraph 2 hereof of fully paid and nonassessable shares of common stock of the Corporation, no par value (the "Common Stock"), that the registered owner is otherwise entitled to purchase. 2. Number of Shares. Subject to the provisions of paragraph 8, the number of shares of Common Stock that the registered owner of this Warrant is entitled to receive upon exercise of this Warrant is 200,000 shares of Common Stock. The Corporation shall, at all times, authorize and reserve for issuance such number of shares of Common Stock as shall be issuable upon the exercise of this Warrant. The Corporation covenants and agrees that all shares of Common Stock that may be issued upon the exercise of this Warrant shall, upon payment and issuance therefore, be duly and validly issued, fully paid and nonassessable, and free from all taxes, liens and charges with respect to the purchase and the issuance of such shares. 3. Exercise Price. The price at which the shares of Common Stock may purchased upon exercise of this Warrant is Seven and 50/100 Dollars ($7.50) per share (the "Exercise Price"). The Exercise Price of this Warrant is subject to adjustment pursuant to Section 8 hereof. Page 1 2 4. Exercise. This Warrant shall be exercisable on and after December 18, 1996 and shall become void unless it is exercised and payment of the Exercise Price is received by the Corporation prior to June 1, 1999 (the "Expiration Date"); provided that in case of dissolution of the Corporation, but subject to the provisions of paragraph 8(b), this Warrant shall become void on the date of such dissolution. 5. Tender. The exercise of this Warrant must be accomplished by actual delivery of the Exercise Price in cash, certified check, or official bank draft in lawful money of the United States of America, and by actual delivery of a duly executed exercise form, a copy of which is attached to this Warrant as "Exhibit A", properly executed by the registered owner of the Warrant, and by surrender of this Warrant. The payment and exercise form must be delivered, personally or by mail, to the offices of the Corporation at 7000 Boulevard East, Guttenberg, New Jersey 07093 or such other address or addresses as the Corporation shall notify the Holder including the address of a stock transfer agent, authorized by the Company. Documents sent by mail shall be deemed to be delivered when they are received by the Corporation. If this Warrant should be exercised in part only, the Corporation shall, upon surrender of this Warrant for cancellation, execute and deliver a new Warrant evidencing the rights of the Holder thereof to purchase the balance of the shares of Common Stock purchasable hereunder. Upon receipt by the Corporation of an exercise form properly executed, payment of the Exercise Price, and this Warrant at its office, or by the authorized stock transfer agent of the Corporation at its office, in proper form for exercise, the Holder shall be deemed to be the holder of record of the shares of Common Stock issuable upon such exercise, notwithstanding that the stock transfer books of the Corporation shall then be closed or that certificates representing such shares of Common Stock shall not then be physically delivered to the Holder. 6. Recognition of the Registered Owner. Prior to due presentment for registration of transfer of this Warrant, the Corporation may deem and treat the registered Holder or Holders of this Warrant as its absolute owner or owners for all purposes, as the person or persons exclusively entitled to receive notices concerning this Warrant, and as the person or persons otherwise entitled to exercise rights under this Warrant. 7. Restricted Securities. The Holder, by acquiring this Warrant, hereby covenants and agrees that: (a) the Holder will not offer for sale or sell this Warrant or the shares of Common Stock issuable upon the exercise of this Warrant unless pursuant to: i. an effective registration statement under the Securities Act ("Registration Statement") filed by the Company covering such offer and sale; or ii. an exemption from registration under the Securities Act; provided that prior to any such proposed transfer, the Holder shall give five (5) days' written notice to the Company of the Holder's intentions to affect such transfer, which notice shall be accompanied by such evidence (including the provision of an opinion of counsel (which counsel and opinion (in form scope, and substance) shall be reasonably acceptable to the Corporation) that such registration is not required as to such sale or offer as may be Page 2 3 reasonably satisfactory to the Company that the proposed transfer may be effected without registration under the Securities Act. (b) The certificates representing the shares of Common Stock issued upon exercise hereof, unless the same are registered under the Securities Act prior to exercise of this Warrant, shall be stamped or otherwise imprinted with a legend in substantially the following form: "The shares of common stock represented by this certificate have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), or the securities laws of any state. The shares of common stock have been acquired for investment and not with a view to distribution or resale, and may not be sold, assigned, made subject to a security interest, pledged, hypothecated, or otherwise transferred except pursuant to an effective registration statement under the Securities Act and applicable state laws or pursuant to an exemption therefrom if the Company receives an opinion of counsel (which counsel and opinion (in form, scope and substance, shall be reasonably acceptable to the Corporation) that such registration is not required as to such sale or offer." (c) Any offer or sale of this Warrant or the shares of Common Stock issued upon exercise hereof shall be made in accordance with the federal and state securities laws of applicable jurisdictions (including the prospectus delivery requirements of the Securities Act), and any other applicable law. 8. Adjustment of Exercise Price and Shares. After each adjustment of the Exercise Price pursuant to this Section 8, the number of shares of Common Stock purchasable on the exercise of this Warrant shall be the number derived by dividing such adjusted pertinent Exercise Price into the original Exercise Price. The Exercise Price shall be subject to adjustment as follows: (a) In the event, prior to the termination of this Warrant by exercise thereof or by its terms, the Corporation shall issue any shares of its Common Stock as a share dividend or shall declare a stock split or otherwise subdivide the number of outstanding shares of Common Stock into a greater number of shares, then, in either of such events (referred to hereinafter as an "Adjustment Event"), the Exercise Price per share of Common Stock that may be purchased pursuant to this Warrant in effect at the time of such action shall be reduced proportionately and the number of shares of Common Stock that may be purchased pursuant to this Warrant shall be increased proportionately to the nearest full amount so as to ensure that the Holder hereof is in the same economic position as such Holder was in prior to such share dividend or subdivision. Conversely, in the event the Corporation shall reduce the number of shares of its outstanding Common Stock by declaring a reverse stock split or otherwise combining such shares into a smaller number of shares, then, in such event, the Exercise Price per share that may be purchased pursuant to this Warrant in effect at the time of such action shall be increased proportionately and the number of shares of Common Stock at that time purchasable pursuant to this Warrant shall be decreased proportionately to the nearest full amount so as to ensure that the Holder hereof is in the same economic position as such Holder was in prior to such share combination. Any dividend paid or distributed on the Common Stock in shares of any other class of capital stock of the Corporation or securities convertible into shares of Common Stock shall be treated as a dividend paid in Common Stock to the extent that shares of Common Stock are issuable on the conversion thereof. An adjustment in the Exercise Price or the number of shares of Common Page 3 4 Stock to be received upon exercise of this Warrant made pursuant to this Section 8(a) shall become effective immediately after the effective date of such Adjustment Event retroactive to the record date, if any, for such Adjustment Event. (b) In the event the Corporation, at any time while this Warrant shall remain unexpired and unexercised, shall (i) effect a reorganization, (ii) consolidate with or merge into any person, (iii) transfer or sell all or substantially all of its property, or (iv) dissolve, liquidate or wind up its affairs (a "Reorganization Event"), the Corporation will take prompt action to ensure that proportionate, equitable, lawful and adequate provision shall be made as part of the terms of any such Reorganization Event such that the Holder of this Warrant may thereafter receive, on exercise thereof, in lieu of each share of Common Stock which such Holder would have been entitled to receive, the same kind and amount of any share, securities, or assets as may be issuable, distributable or payable pursuant to such Reorganization Event with respect to each share of Common Stock which the Holder would have been entitled to receive if such Holder had exercised this Warrant immediately prior to such Reorganization Event. Upon any Reorganization Event referred to in this paragraph 8(b), this Warrant shall continue in full force and effect and the terms hereof shall be applicable to all securities and other property receivable on the exercise of this Warrant after the consummation of such Reorganization Event; and shall be binding upon the issuer of any such securities or other property, including, in the case of any such transfer, the person acquiring all or substantially all of the properties or assets of the Corporation, whether or not such person shall have expressly assumed the terms of this Warrant. (c) Notwithstanding the provisions of this Section 8, no adjustment of the Exercise Price or the shares of Common Stock to be received upon exercise of the Warrant shall be made unless Exercise Price is the aggregate of such adjustments to the Exercise Price equals or exceeds $0.005. (d) In the event, prior to the expiration of this Warrant by exercise thereof or by its terms, the Corporation shall determine to take a record of the holders of its Common Stock for the purpose of determining shareholders entitled to receive any share dividend or other right which will cause any change or adjustment in the number, amount, price or nature of the shares of Common Stock or other securities or assets deliverable on exercise of this Warrant pursuant to the foregoing provisions, the Corporation shall give to the registered Holder of this Warrant at such Holder's address as may appear on the books of the Corporation at least fifteen (15) days' prior written notice to the effect that it intends to take such a record. Such notice shall specify the date as of which such record is to be taken, and the number, amount, price and nature of the Common Stock or other shares, securities or assets which will be deliverable on exercise of this Warrant after the action for which such record will be taken has been completed. Without limiting the obligation of the Corporation to provide notice to the registered Holder of this Warrant of any corporate action hereunder, the failure of the Corporation to give notice shall not invalidate such corporate action of the Corporation. (e) No adjustment of the Exercise Price pursuant to this Section 8 or Section 9 shall be made as a result of or in connection with (i) the issuance of Common Stock pursuant to options, warrants and share purchase agreements outstanding or in effect on the date hereof, (ii) the establishment of additional stock option or other benefit plans of the Corporation, the modification, renewal or extension of any stock option or other benefit plan now in effect or hereafter created, or the issuance of Common Stock on exercise of any options pursuant to such stock option or other benefit plans, or (iii) the issuance of Common Stock in connection with an acquisition or merger of any type (the antidilution provision of this Section 8 will not apply in the event a merger or acquisition is undertaken by the Corporation as long as the Corporation is the survivor thereof), and (iv) in connection with compensation arrangements for present or former Page 4 5 officers, direct employees or agents of the Corporation or any indirect or direct subsidiary of the Corporation, and the like. 9. Other Adjustments to Purchase Price and Number of Securities. (a) Computation of Adjusted Purchase Price. Except as hereinafter provided, in case the Corporation shall at any time after the date of this Warrant issue or sell any shares of Common Stock (other than an issuance or sale referred to in paragraph 8(e)) for a consideration per share less than the then current fair market value of a share of the Common Stock ("fair market value" of the Common Stock to mean the average closing price of the Common Stock on the immediately preceding ten (10) days on which such shares of Common Stock may be traded in the NASDAQ National Market or other securities exchange) then immediately upon such issuance or sale, the Exercise Price shall (until another such issuance or sale) be reduced to the price (calculated to the nearest full cent) equal to the Exercise Price in effect prior to such issuance or sale multiplied by the quotient derived by dividing (A) an amount equal to the sum of (X) the then current fair market value per share of Common Stock immediately prior to such issuance or sale multiplied by the total number of shares of Common Stock outstanding immediately prior to such issuance or sale, plus (Y) the aggregate of the amount of all consideration, if any, to be received by the Corporation upon such issuance or sale, by (B) the then current fair market value per share of Common Stock immediately prior to such issuance or sale multiplied by the total number of shares of Common Stock outstanding immediately after such issuance or sale; provided that: i. In case of the issuance or sale of shares of Common Stock for a consideration part or all of which shall be cash, the amount of the cash consideration therefor shall be deemed to be the amount of cash received by the Corporation for such shares (or, if shares of Common Stock are offered by the Corporation for subscription, the subscription price, or, if either of such securities shall be sold to underwriters or dealers for public offering without a subscription offering, the initial public offering price for such shares) before deducting therefrom any compensation paid or discount allowed in the sale, underwriting or purchase thereof by underwriters or dealers or others performing similar services, or any expenses incurred in connection therewith. ii. In case of the issuance or sale (otherwise than as a dividend or other distribution on any capital stock of the Corporation) of shares of Common Stock for a consideration part or all of which shall be other than cash, the amount of the consideration therefor other than cash shall be deemed to be the value of such consideration as determined in good faith by the Board of Directors of the Corporation. iii. The reclassification of securities of the Corporation other than shares of Common Stock into securities including shares of Common Stock shall be deemed to involve the issuance of such shares of Common Stock for a consideration other than cash immediately prior to the close of business on the date fixed for the determination of security holders entitled to receive such shares, and the value of the consideration allocable to such shares of Common Stock shall be determined in good faith by the Board of Directors of the Corporation. Page 5 6 iv. The number of shares of Common Stock at any one time outstanding shall include the aggregate number of shares issued or issuable (subject to readjustment upon the actual issuance thereof) upon the exercise of options, rights, and warrants and upon the conversion or exchange of convertible or exchangeable securities. (b) Options, Rights, Warrants and Convertible and Exchangeable Securities. Except as hereinafter provided, in case the Corporation shall at any time after the date hereof issue or sell options, rights or warrants to subscribe for shares of Common Stock, or issue any securities convertible into or exchangeable for shares of Common Stock (other than the issuances or sales referred to in paragraph 9(c)), for a consideration per share less than the then current fair market value of the share of the Common Stock immediately prior to the issuance of such options, rights or Warrants, or such convertible or exchangeable securities, or without consideration, the Exercise Price shall (until another such issuance or sale) be reduced to the price (calculated to the nearest full cent) equal to the Exercise Price in effect prior to such issuance or sale multiplied by the quotient derived by dividing (A) an amount equal to the sum of (X) the then current fair market value per share of Common Stock immediately prior to such issuance or sale multiplied by the total number of shares of Common Stock outstanding immediately prior to such issuance or sale, plus (Y) the aggregate of the amount of all consideration, if any, to be received by the Corporation upon the exercise of such convertible or exchangeable securities, by (B) the then current fair market value per share of Common Stock immediately prior to such issuance or sale multiplied by the total number of shares of Common Stock that would be outstanding immediately after the exercise of such convertible or exchangeable securities provided that: i. The aggregate maximum number of shares of Common Stock, as the case may be, issuable under such options, rights or warrants shall be deemed to be issued and outstanding at the time such options, rights or warrants were issued, and for a consideration equal to the minimum purchase price per share provided for in such options, rights or warrants at the time of issuance, plus the consideration (determined in the same manner as consideration received on the issue or sale of shares in accordance with the terms of this Warrant), if any, received by the Corporation for such options, rights or warrants. ii. The aggregate maximum number of shares of Common Stock issuable upon conversion or exchange of any convertible or exchangeable securities shall be deemed to be issued and outstanding at the time of issuance of such securities, and for a consideration equal to the consideration (determined in the same manner as consideration received on the issue or sale of shares of Common Stock in accordance with the terms of this Warrant) received by the Corporation for such securities, plus the minimum consideration, if any, receivable by the Corporation upon the conversion or exchange thereof. iii. If any change shall occur in the price per share provided for in any of the options, rights, or warrants or convertible or exchangeable securities referred to in this subsection (b) of this paragraph 9, such options, rights or warrants or conversion or exchange rights, as the case may be, shall be deemed to have expired or terminated on the date when such price change became effective in respect of shares not theretofore issued and the Corporation shall be deemed to have issued upon such date new options, Page 6 7 rights or warrants or convertible or exchangeable securities at the new price per share in respect of the number of shares issuable upon the exercise of such options, rights or warrants or the conversion or exchange of such convertible or exchangeable securities. (c) Exclusions. The provisions of subsection 9(b) above shall not apply to any options issued pursuant to stock option plans of the Corporation in effect on the date hereof, to renewals of any existing options, rights or warrants or to any options, rights or warrants issued to employees of the Corporation or any of its subsidiaries on the date hereof. Moreover, the provisions of subsection 9(b) shall terminate at such time as there is in effect a registration statement filed with the Securities and Exchange Commission with respect to the shares of Common Stock underlying the Warrant. (d) Adjustment in Number of Securities. Upon each adjustment of the Exercise Price pursuant to the provisions of this paragraph 9, the number of shares of Common Stock issuable upon the exercise of this Warrant shall be adjusted to the nearest full amount by multiplying a number equal to the Exercise Price in effect immediately prior to such adjustment by the number of shares of Common Stock issuable upon exercise of this Warrant immediately prior to such adjustment and dividing the product so obtained by the adjusted Exercise Price. 10. Fractional Shares. No fractional shares or script representing fractional shares of Common Stock shall be issued upon the exercise of this Warrant. No adjustment to the shares of Common Stock that may be purchased upon the exercise of this Warrant will result in any fractional shares to be issued to the Holders hereof. 11. Rights of the Holder. The Holder shall not, by virtue hereof, be entitled to any rights of a shareholder in the Corporation, either at law or equity, and the rights of the Holder are limited to those expressed in this Warrant and are not enforceable against the Corporation except to the extent set forth herein. 12. Notices of Record Date, Etc. In case: (a) the Corporation shall take a record of the holders of its Common Stock (or other securities at the time receivable upon the exercise of the Warrant) for the purpose of entitling them to receive any dividend (other than a cash dividend payable out of earned surplus) or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities, or to receive any other right; or (b) of any capital reorganization of the Corporation (other than a stock split or reverse stock split), any reclassification of the capital stock of the Corporation, any consolidation or merger of the Corporation with or into another corporation (other than a merger for purposes of change of domicile) or any conveyance of all or substantially all of the assets of the Corporation to another corporation; or (c) of any voluntary or involuntary dissolution, liquidation or winding-up of the Corporation; then, in each such case, the corporation shall mail or cause to be mailed to the Holder at the time outstanding a notice specifying, as the case may be, (i) the date on which Page 7 8 a record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, or (ii) the date on which such reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding-up is to take place, and the time, if any, to be fixed as to which the holders of record of Common Stock (or such other securities at the time receivable upon the exercise of the Warrant) shall be entitled to exchange their shares of Common Stock (or such other securities) for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding-up. Such notice shall be mailed at least twenty (20) days prior to the date therein specified and this Warrant may be exercised prior to said date during the term of the Warrant no later than five (5) days prior to said date. 13. No Impairment. The Corporation will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder of this Warrant. Without limiting the generality of the foregoing, the Corporation (a) will not increase the par value of any shares of Common Stock receivable on the exercise of the Warrant above the amount payable therefor on such exercise, and (b) will take all such action as may be necessary or appropriate in order that the Corporation may validly and legally issue fully paid and nonassessable shares of Common Stock on the exercise of this Warrant from time to time outstanding. 14. Replacement of Warrant. On receipt of evidence reasonably satisfactory to the Corporation of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction of this Warrant, on delivery of any indemnity agreement or security reasonably satisfactory in form and amount to the Corporation or, in the case of any such mutilation, on surrender and cancellation of such Warrant, the Corporation at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. IN WITNESS WHEREOF, the Corporation has signed this Warrant by its duly authorized officer this eighteen day of December, 1996. KTI, INC. By: --------------------------------------------- Name: Nicholas Menonna, Jr. Title: Chairman of the Board of Directors and Chief Executive Officer Page 8 9 EXHIBIT A EXERCISE FORM To Be Executed Upon Exercise of Warrant The undersigned record holder of the within Warrant hereby irrevocably elects to exercise the rights to purchase ______ shares of Common Stock of KTI, Inc. by exercise of the within Warrant, according to the terms and conditions therein and payment of the Exercise Price in full. The undersigned requests that certificates for such shares of Common Stock shall be issued in the name set forth below. Dated: , 199__ --------------------------- Signature --------------------------- Print Name of Signatory Address: --------------------------- --------------------------- Social Security No. or other identifying number: --------------------------- If said number of shares of Common Stock and Warrants shall not be all the shares under the within Warrant, the undersigned requests that a new Warrant for the unexercised portion shall be registered in the name of: --------------------------- (Please print) Address: --------------------------- --------------------------- Social Security No. or other identifying number: --------------------------- Signature: --------------------------- --------------------------- Print Name of Signatory Page 9 EX-10.44 9 WARRANT TO PURCHASE 1 EXHIBIT 10.44 Warrant No. D-1 Right to Purchase Common Shares THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE. THIS WARRANT HAS BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO DISTRIBUTION OR RESALE, AND MAY NOT BE SOLD, ASSIGNED, MADE SUBJECT TO A SECURITY INTEREST, PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND APPLICABLE STATE LAWS OR PURSUANT TO AN EXEMPTION THEREFROM IF THE CORPORATION RECEIVES AN OPINION OF COUNSEL (WHICH COUNSEL AND OPINION (IN FORM, SCOPE, AND SUBSTANCE) SHALL BE REASONABLY ACCEPTABLE TO THE CORPORATION) THAT SUCH REGISTRATION IS NOT REQUIRED AS TO SUCH SALE OR OFFER. KTI, INC. A NEW JERSEY CORPORATION WARRANT TO PURCHASE COMMON STOCK Registered Owner: Thomas E. Schulze 124 Hewes Street North Barrington, Illinois 60010 For Value Received, KTI, Inc., a New Jersey corporation (the "Corporation") grants the following rights to the registered owner of this Warrant (the "Holder") and the Holder hereby acknowledges and agrees that: 1. Issue. Upon tender of this Warrant to the Corporation, the Corporation shall issue to the registered owner hereof the number of shares specified in paragraph 2 hereof of fully paid and nonassessable shares of common stock of the Corporation, no par value (the "Common Stock"), that the registered owner is otherwise entitled to purchase. 2. Number of Shares. Subject to the provisions of paragraph 8, the number of shares of Common Stock that the registered owner of this Warrant is entitled to receive upon exercise of this Warrant is 6,000 shares of Common Stock. The Corporation shall, at all times, authorize and reserve for issuance such number of shares of Common Stock as shall be issuable upon the exercise of this Warrant. The Corporation covenants and agrees that all shares of Common Stock that may be issued upon the exercise of this Warrant shall, upon payment and issuance therefore, be duly and validly issued, fully paid and nonassessable, and free from all taxes, liens and charges with respect to the purchase and the issuance of such shares. 3. Exercise Price. The price at which the shares of Common Stock may purchased upon exercise of this Warrant is Eight and 50/100 Dollars ($8.50) per share (the "Exercise Price"). The Exercise Price of this Warrant is subject to adjustment pursuant to Section 8 hereof. Page 1 2 4. Exercise. This Warrant shall be exercisable on and after January 1, 1997 and shall become void unless it is exercised and payment of the Exercise Price is received by the Corporation prior to December 31, 1999 (the "Expiration Date"); provided that in case of dissolution of the Corporation, but subject to the provisions of paragraph 8(b), this Warrant shall become void on the date of such dissolution. 5. Tender. The exercise of this Warrant must be accomplished by actual delivery of the Exercise Price in cash, certified check, or official bank draft in lawful money of the United States of America, and by actual delivery of a duly executed exercise form, a copy of which is attached to this Warrant as "Exhibit A", properly executed by the registered owner of the Warrant, and by surrender of this Warrant. The payment and exercise form must be delivered, personally or by mail, to the offices of the Corporation at 7000 Boulevard East, Guttenberg, New Jersey 07093 or such other address or addresses as the Corporation shall notify the Holder including the address of a stock transfer agent, authorized by the Company. Documents sent by mail shall be deemed to be delivered when they are received by the Corporation. If this Warrant should be exercised in part only, the Corporation shall, upon surrender of this Warrant for cancellation, execute and deliver a new Warrant evidencing the rights of the Holder thereof to purchase the balance of the shares of Common Stock purchasable hereunder. Upon receipt by the Corporation of an exercise form properly executed, payment of the Exercise Price, and this Warrant at its office, or by the authorized stock transfer agent of the Corporation at its office, in proper form for exercise, the Holder shall be deemed to be the holder of record of the shares of Common Stock issuable upon such exercise, notwithstanding that the stock transfer books of the Corporation shall then be closed or that certificates representing such shares of Common Stock shall not then be physically delivered to the Holder. 6. Recognition of the Registered Owner. Prior to due presentment for registration of transfer of this Warrant, the Corporation may deem and treat the registered Holder or Holders of this Warrant as its absolute owner or owners for all purposes, as the person or persons exclusively entitled to receive notices concerning this Warrant, and as the person or persons otherwise entitled to exercise rights under this Warrant. 7. Restricted Securities. The Holder, by acquiring this Warrant, hereby covenants and agrees that: (a) the Holder will not offer for sale or sell this Warrant or the shares of Common Stock issuable upon the exercise of this Warrant unless pursuant to: i. an effective registration statement under the Securities Act ("Registration Statement") filed by the Company covering such offer and sale; or ii. an exemption from registration under the Securities Act; provided that prior to any such proposed transfer, the Holder shall give five (5) days' written notice to the Company of the Holder's intentions to affect such transfer, which notice shall be accompanied by such evidence (including the provision of an opinion of counsel (which counsel and opinion (in form scope, and substance) shall be reasonably acceptable to the Corporation) that such registration is not required as to such sale or offer as may be Page 2 3 reasonably satisfactory to the Company that the proposed transfer may be effected without registration under the Securities Act. (b) The certificates representing the shares of Common Stock issued upon exercise hereof, unless the same are registered under the Securities Act prior to exercise of this Warrant, shall be stamped or otherwise imprinted with a legend in substantially the following form: "The shares of common stock represented by this certificate have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), or the securities laws of any state. The shares of common stock have been acquired for investment and not with a view to distribution or resale, and may not be sold, assigned, made subject to a security interest, pledged, hypothecated, or otherwise transferred except pursuant to an effective registration statement under the Securities Act and applicable state laws or pursuant to an exemption therefrom if the Company receives an opinion of counsel (which counsel and opinion (in form, scope and substance, shall be reasonably acceptable to the Corporation) that such registration is not required as to such sale or offer." (c) Any offer or sale of this Warrant or the shares of Common Stock issued upon exercise hereof shall be made in accordance with the federal and state securities laws of applicable jurisdictions (including the prospectus delivery requirements of the Securities Act), and any other applicable law. 8. Adjustment of Exercise Price and Shares. After each adjustment of the Exercise Price pursuant to this Section 8, the number of shares of Common Stock purchasable on the exercise of this Warrant shall be the number derived by dividing such adjusted pertinent Exercise Price into the original Exercise Price. The Exercise Price shall be subject to adjustment as follows: (a) In the event, prior to the termination of this Warrant by exercise thereof or by its terms, the Corporation shall issue any shares of its Common Stock as a share dividend or shall declare a stock split or otherwise subdivide the number of outstanding shares of Common Stock into a greater number of shares, then, in either of such events (referred to hereinafter as an "Adjustment Event"), the Exercise Price per share of Common Stock that may be purchased pursuant to this Warrant in effect at the time of such action shall be reduced proportionately and the number of shares of Common Stock that may be purchased pursuant to this Warrant shall be increased proportionately to the nearest full amount so as to ensure that the Holder hereof is in the same economic position as such Holder was in prior to such share dividend or subdivision. Conversely, in the event the Corporation shall reduce the number of shares of its outstanding Common Stock by declaring a reverse stock split or otherwise combining such shares into a smaller number of shares, then, in such event, the Exercise Price per share that may be purchased pursuant to this Warrant in effect at the time of such action shall be increased proportionately and the number of shares of Common Stock at that time purchasable pursuant to this Warrant shall be decreased proportionately to the nearest full amount so as to ensure that the Holder hereof is in the same economic position as such Holder was in prior to such share combination. Any dividend paid or distributed on the Common Stock in shares of any other class of capital stock of the Corporation or securities convertible into shares of Common Stock shall be treated as a dividend paid in Common Stock to the extent that shares of Common Stock are issuable on the conversion thereof. An adjustment in the Exercise Price or the number of shares of Common Page 3 4 Stock to be received upon exercise of this Warrant made pursuant to this Section 8(a) shall become effective immediately after the effective date of such Adjustment Event retroactive to the record date, if any, for such Adjustment Event. (b) In the event the Corporation, at any time while this Warrant shall remain unexpired and unexercised, shall (i) effect a reorganization, (ii) consolidate with or merge into any person, (iii) transfer or sell all or substantially all of its property, or (iv) dissolve, liquidate or wind up its affairs (a "Reorganization Event"), the Corporation will take prompt action to ensure that proportionate, equitable, lawful and adequate provision shall be made as part of the terms of any such Reorganization Event such that the Holder of this Warrant may thereafter receive, on exercise thereof, in lieu of each share of Common Stock which such Holder would have been entitled to receive, the same kind and amount of any share, securities, or assets as may be issuable, distributable or payable pursuant to such Reorganization Event with respect to each share of Common Stock which the Holder would have been entitled to receive if such Holder had exercised this Warrant immediately prior to such Reorganization Event. Upon any Reorganization Event referred to in this paragraph 8(b), this Warrant shall continue in full force and effect and the terms hereof shall be applicable to all securities and other property receivable on the exercise of this Warrant after the consummation of such Reorganization Event; and shall be binding upon the issuer of any such securities or other property, including, in the case of any such transfer, the person acquiring all or substantially all of the properties or assets of the Corporation, whether or not such person shall have expressly assumed the terms of this Warrant. (c) Notwithstanding the provisions of this Section 8, no adjustment of the Exercise Price or the shares of Common Stock to be received upon exercise of the Warrant shall be made unless Exercise Price is the aggregate of such adjustments to the Exercise Price equals or exceeds $0.005. (d) In the event, prior to the expiration of this Warrant by exercise thereof or by its terms, the Corporation shall determine to take a record of the holders of its Common Stock for the purpose of determining shareholders entitled to receive any share dividend or other right which will cause any change or adjustment in the number, amount, price or nature of the shares of Common Stock or other securities or assets deliverable on exercise of this Warrant pursuant to the foregoing provisions, the Corporation shall give to the registered Holder of this Warrant at such Holder's address as may appear on the books of the Corporation at least fifteen (15) days' prior written notice to the effect that it intends to take such a record. Such notice shall specify the date as of which such record is to be taken, and the number, amount, price and nature of the Common Stock or other shares, securities or assets which will be deliverable on exercise of this Warrant after the action for which such record will be taken has been completed. Without limiting the obligation of the Corporation to provide notice to the registered Holder of this Warrant of any corporate action hereunder, the failure of the Corporation to give notice shall not invalidate such corporate action of the Corporation. (e) No adjustment of the Exercise Price pursuant to this Section 8 or Section 9 shall be made as a result of or in connection with (i) the issuance of Common Stock pursuant to options, warrants and share purchase agreements outstanding or in effect on the date hereof, (ii) the establishment of additional stock option or other benefit plans of the Corporation, the modification, renewal or extension of any stock option or other benefit plan now in effect or hereafter created, or the issuance of Common Stock on exercise of any options pursuant to such stock option or other benefit plans, or (iii) the issuance of Common Stock in connection with an acquisition or merger of any type (the antidilution provision of this Section 8 will not apply in the event a merger or acquisition is undertaken by the Corporation as long as the Corporation is the survivor thereof), and (iv) in connection with compensation arrangements for present or former Page 4 5 officers, direct employees or agents of the Corporation or any indirect or direct subsidiary of the Corporation, and the like. 9. Other Adjustments to Purchase Price and Number of Securities. (a) Computation of Adjusted Purchase Price. Except as hereinafter provided, in case the Corporation shall at any time after the date of this Warrant issue or sell any shares of Common Stock (other than an issuance or sale referred to in paragraph 8(e)) for a consideration per share less than the then current fair market value of a share of the Common Stock ("fair market value" of the Common Stock to mean the average closing price of the Common Stock on the immediately preceding ten (10) days on which such shares of Common Stock may be traded in the NASDAQ National Market or other securities exchange) then immediately upon such issuance or sale, the Exercise Price shall (until another such issuance or sale) be reduced to the price (calculated to the nearest full cent) equal to the Exercise Price in effect prior to such issuance or sale multiplied by the quotient derived by dividing (A) an amount equal to the sum of (X) the then current fair market value per share of Common Stock immediately prior to such issuance or sale multiplied by the total number of shares of Common Stock outstanding immediately prior to such issuance or sale, plus (Y) the aggregate of the amount of all consideration, if any, to be received by the Corporation upon such issuance or sale, by (B) the then current fair market value per share of Common Stock immediately prior to such issuance or sale multiplied by the total number of shares of Common Stock outstanding immediately after such issuance or sale; provided that: i. In case of the issuance or sale of shares of Common Stock for a consideration part or all of which shall be cash, the amount of the cash consideration therefor shall be deemed to be the amount of cash received by the Corporation for such shares (or, if shares of Common Stock are offered by the Corporation for subscription, the subscription price, or, if either of such securities shall be sold to underwriters or dealers for public offering without a subscription offering, the initial public offering price for such shares) before deducting therefrom any compensation paid or discount allowed in the sale, underwriting or purchase thereof by underwriters or dealers or others performing similar services, or any expenses incurred in connection therewith. ii. In case of the issuance or sale (otherwise than as a dividend or other distribution on any capital stock of the Corporation) of shares of Common Stock for a consideration part or all of which shall be other than cash, the amount of the consideration therefor other than cash shall be deemed to be the value of such consideration as determined in good faith by the Board of Directors of the Corporation. iii. The reclassification of securities of the Corporation other than shares of Common Stock into securities including shares of Common Stock shall be deemed to involve the issuance of such shares of Common Stock for a consideration other than cash immediately prior to the close of business on the date fixed for the determination of security holders entitled to receive such shares, and the value of the consideration allocable to such shares of Common Stock shall be determined in good faith by the Board of Directors of the Corporation. Page 5 6 iv. The number of shares of Common Stock at any one time outstanding shall include the aggregate number of shares issued or issuable (subject to readjustment upon the actual issuance thereof) upon the exercise of options, rights, and warrants and upon the conversion or exchange of convertible or exchangeable securities. (b) Options, Rights, Warrants and Convertible and Exchangeable Securities. Except as hereinafter provided, in case the Corporation shall at any time after the date hereof issue or sell options, rights or warrants to subscribe for shares of Common Stock, or issue any securities convertible into or exchangeable for shares of Common Stock (other than the issuances or sales referred to in paragraph 9(c)), for a consideration per share less than the then current fair market value of the share of the Common Stock immediately prior to the issuance of such options, rights or Warrants, or such convertible or exchangeable securities, or without consideration, the Exercise Price shall (until another such issuance or sale) be reduced to the price (calculated to the nearest full cent) equal to the Exercise Price in effect prior to such issuance or sale multiplied by the quotient derived by dividing (A) an amount equal to the sum of (X) the then current fair market value per share of Common Stock immediately prior to such issuance or sale multiplied by the total number of shares of Common Stock outstanding immediately prior to such issuance or sale, plus (Y) the aggregate of the amount of all consideration, if any, to be received by the Corporation upon the exercise of such convertible or exchangeable securities, by (B) the then current fair market value per share of Common Stock immediately prior to such issuance or sale multiplied by the total number of shares of Common Stock that would be outstanding immediately after the exercise of such convertible or exchangeable securities provided that: i. The aggregate maximum number of shares of Common Stock, as the case may be, issuable under such options, rights or warrants shall be deemed to be issued and outstanding at the time such options, rights or warrants were issued, and for a consideration equal to the minimum purchase price per share provided for in such options, rights or warrants at the time of issuance, plus the consideration (determined in the same manner as consideration received on the issue or sale of shares in accordance with the terms of this Warrant), if any, received by the Corporation for such options, rights or warrants. ii. The aggregate maximum number of shares of Common Stock issuable upon conversion or exchange of any convertible or exchangeable securities shall be deemed to be issued and outstanding at the time of issuance of such securities, and for a consideration equal to the consideration (determined in the same manner as consideration received on the issue or sale of shares of Common Stock in accordance with the terms of this Warrant) received by the Corporation for such securities, plus the minimum consideration, if any, receivable by the Corporation upon the conversion or exchange thereof. iii. If any change shall occur in the price per share provided for in any of the options, rights, or warrants or convertible or exchangeable securities referred to in this subsection (b) of this paragraph 9, such options, rights or warrants or conversion or exchange rights, as the case may be, shall be deemed to have expired or terminated on the date when such price change became effective in respect of shares not theretofore issued and the Corporation shall be deemed to have issued upon such date new options, Page 6 7 rights or warrants or convertible or exchangeable securities at the new price per share in respect of the number of shares issuable upon the exercise of such options, rights or warrants or the conversion or exchange of such convertible or exchangeable securities. (c) Exclusions. The provisions of subsection 9(b) above shall not apply to any options issued pursuant to stock option plans of the Corporation in effect on the date hereof, to renewals of any existing options, rights or warrants or to any options, rights or warrants issued to employees of the Corporation or any of its subsidiaries on the date hereof. Moreover, the provisions of subsection 9(b) shall terminate at such time as there is in effect a registration statement filed with the Securities and Exchange Commission with respect to the shares of Common Stock underlying the Warrant. (d) Adjustment in Number of Securities. Upon each adjustment of the Exercise Price pursuant to the provisions of this paragraph 9, the number of shares of Common Stock issuable upon the exercise of this Warrant shall be adjusted to the nearest full amount by multiplying a number equal to the Exercise Price in effect immediately prior to such adjustment by the number of shares of Common Stock issuable upon exercise of this Warrant immediately prior to such adjustment and dividing the product so obtained by the adjusted Exercise Price. 10. Fractional Shares. No fractional shares or script representing fractional shares of Common Stock shall be issued upon the exercise of this Warrant. No adjustment to the shares of Common Stock that may be purchased upon the exercise of this Warrant will result in any fractional shares to be issued to the Holders hereof. 11. Rights of the Holder. The Holder shall not, by virtue hereof, be entitled to any rights of a shareholder in the Corporation, either at law or equity, and the rights of the Holder are limited to those expressed in this Warrant and are not enforceable against the Corporation except to the extent set forth herein. 12. Notices of Record Date, Etc. In case: (a) the Corporation shall take a record of the holders of its Common Stock (or other securities at the time receivable upon the exercise of the Warrant) for the purpose of entitling them to receive any dividend (other than a cash dividend payable out of earned surplus) or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities, or to receive any other right; or (b) of any capital reorganization of the Corporation (other than a stock split or reverse stock split), any reclassification of the capital stock of the Corporation, any consolidation or merger of the Corporation with or into another corporation (other than a merger for purposes of change of domicile) or any conveyance of all or substantially all of the assets of the Corporation to another corporation; or (c) of any voluntary or involuntary dissolution, liquidation or winding-up of the Corporation; then, in each such case, the corporation shall mail or cause to be mailed to the Holder at the time outstanding a notice specifying, as the case may be, (i) the date on which Page 7 8 a record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, or (ii) the date on which such reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding-up is to take place, and the time, if any, to be fixed as to which the holders of record of Common Stock (or such other securities at the time receivable upon the exercise of the Warrant) shall be entitled to exchange their shares of Common Stock (or such other securities) for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding-up. Such notice shall be mailed at least twenty (20) days prior to the date therein specified and this Warrant may be exercised prior to said date during the term of the Warrant no later than five (5) days prior to said date. 13. No Impairment. The Corporation will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder of this Warrant. Without limiting the generality of the foregoing, the Corporation (a) will not increase the par value of any shares of Common Stock receivable on the exercise of the Warrant above the amount payable therefor on such exercise, and (b) will take all such action as may be necessary or appropriate in order that the Corporation may validly and legally issue fully paid and nonassessable shares of Common Stock on the exercise of this Warrant from time to time outstanding. 14. Replacement of Warrant. On receipt of evidence reasonably satisfactory to the Corporation of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction of this Warrant, on delivery of any indemnity agreement or security reasonably satisfactory in form and amount to the Corporation or, in the case of any such mutilation, on surrender and cancellation of such Warrant, the Corporation at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. IN WITNESS WHEREOF, the Corporation has signed this Warrant by its duly authorized officer this second day of January, 1997. KTI, INC. By: Name: Nicholas Menonna, Jr. Title: Chairman of the Board of Directors and Chief Executive Officer Page 8 9 EXHIBIT A EXERCISE FORM To Be Executed Upon Exercise of Warrant The undersigned record holder of the within Warrant hereby irrevocably elects to exercise the rights to purchase ______ shares of Common Stock of KTI, Inc. by exercise of the within Warrant, according to the terms and conditions therein and payment of the Exercise Price in full. The undersigned requests that certificates for such shares of Common Stock shall be issued in the name set forth below. Dated: , 199__ _____________________________ Signature _____________________________ Print Name of Signatory Address: _____________________________ _____________________________ Social Security No. or other identifying number: _____________________ If said number of shares of Common Stock and Warrants shall not be all the shares under the within Warrant, the undersigned requests that a new Warrant for the unexercised portion shall be registered in the name of: _____________________________ (Please print) Address: _____________________________ Social Security No. or other identifying number: _____________________ Signature: ___________________________ _____________________________ Print Name of Signatory Page 9 EX-10.45 10 WARRANT TO PURCHASE 1 EXHIBIT 10.45 Warrant No. D-2 Right to Purchase Common Shares THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE. THIS WARRANT HAS BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO DISTRIBUTION OR RESALE, AND MAY NOT BE SOLD, ASSIGNED, MADE SUBJECT TO A SECURITY INTEREST, PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND APPLICABLE STATE LAWS OR PURSUANT TO AN EXEMPTION THEREFROM IF THE CORPORATION RECEIVES AN OPINION OF COUNSEL (WHICH COUNSEL AND OPINION (IN FORM, SCOPE, AND SUBSTANCE) SHALL BE REASONABLY ACCEPTABLE TO THE CORPORATION) THAT SUCH REGISTRATION IS NOT REQUIRED AS TO SUCH SALE OR OFFER. KTI, INC. A NEW JERSEY CORPORATION WARRANT TO PURCHASE COMMON STOCK Registered Owner: John E. Turner 400 West Hickory Street Hinsdale, Illinois 60521 For Value Received, KTI, Inc., a New Jersey corporation (the "Corporation") grants the following rights to the registered owner of this Warrant (the "Holder") and the Holder hereby acknowledges and agrees that: 1. Issue. Upon tender of this Warrant to the Corporation, the Corporation shall issue to the registered owner hereof the number of shares specified in paragraph 2 hereof of fully paid and nonassessable shares of common stock of the Corporation, no par value (the "Common Stock"), that the registered owner is otherwise entitled to purchase. 2. Number of Shares. Subject to the provisions of paragraph 8, the number of shares of Common Stock that the registered owner of this Warrant is entitled to receive upon exercise of this Warrant is 3,000 shares of Common Stock. The Corporation shall, at all times, authorize and reserve for issuance such number of shares of Common Stock as shall be issuable upon the exercise of this Warrant. The Corporation covenants and agrees that all shares of Common Stock that may be issued upon the exercise of this Warrant shall, upon payment and issuance therefore, be duly and validly issued, fully paid and nonassessable, and free from all taxes, liens and charges with respect to the purchase and the issuance of such shares. 3. Exercise Price. The price at which the shares of Common Stock may purchased upon exercise of this Warrant is Eight and 50/100 Dollars ($8.50) per share (the "Exercise Price"). The Exercise Price of this Warrant is subject to adjustment pursuant to Section 8 hereof. Page 1 2 4. Exercise. This Warrant shall be exercisable on and after January 1, 1997 and shall become void unless it is exercised and payment of the Exercise Price is received by the Corporation prior to December 31, 1999 (the "Expiration Date"); provided that in case of dissolution of the Corporation, but subject to the provisions of paragraph 8(b), this Warrant shall become void on the date of such dissolution. 5. Tender. The exercise of this Warrant must be accomplished by actual delivery of the Exercise Price in cash, certified check, or official bank draft in lawful money of the United States of America, and by actual delivery of a duly executed exercise form, a copy of which is attached to this Warrant as "Exhibit A", properly executed by the registered owner of the Warrant, and by surrender of this Warrant. The payment and exercise form must be delivered, personally or by mail, to the offices of the Corporation at 7000 Boulevard East, Guttenberg, New Jersey 07093 or such other address or addresses as the Corporation shall notify the Holder including the address of a stock transfer agent, authorized by the Company. Documents sent by mail shall be deemed to be delivered when they are received by the Corporation. If this Warrant should be exercised in part only, the Corporation shall, upon surrender of this Warrant for cancellation, execute and deliver a new Warrant evidencing the rights of the Holder thereof to purchase the balance of the shares of Common Stock purchasable hereunder. Upon receipt by the Corporation of an exercise form properly executed, payment of the Exercise Price, and this Warrant at its office, or by the authorized stock transfer agent of the Corporation at its office, in proper form for exercise, the Holder shall be deemed to be the holder of record of the shares of Common Stock issuable upon such exercise, notwithstanding that the stock transfer books of the Corporation shall then be closed or that certificates representing such shares of Common Stock shall not then be physically delivered to the Holder. 6. Recognition of the Registered Owner. Prior to due presentment for registration of transfer of this Warrant, the Corporation may deem and treat the registered Holder or Holders of this Warrant as its absolute owner or owners for all purposes, as the person or persons exclusively entitled to receive notices concerning this Warrant, and as the person or persons otherwise entitled to exercise rights under this Warrant. 7. Restricted Securities. The Holder, by acquiring this Warrant, hereby covenants and agrees that: (a) the Holder will not offer for sale or sell this Warrant or the shares of Common Stock issuable upon the exercise of this Warrant unless pursuant to: i. an effective registration statement under the Securities Act ("Registration Statement") filed by the Company covering such offer and sale; or ii. an exemption from registration under the Securities Act; provided that prior to any such proposed transfer, the Holder shall give five (5) days' written notice to the Company of the Holder's intentions to affect such transfer, which notice shall be accompanied by such evidence (including the provision of an opinion of counsel (which counsel and opinion (in form scope, and substance) shall be reasonably acceptable to the Corporation) that such registration is not required as to such sale or offer as may be Page 2 3 reasonably satisfactory to the Company that the proposed transfer may be effected without registration under the Securities Act. (b) The certificates representing the shares of Common Stock issued upon exercise hereof, unless the same are registered under the Securities Act prior to exercise of this Warrant, shall be stamped or otherwise imprinted with a legend in substantially the following form: "The shares of common stock represented by this certificate have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), or the securities laws of any state. The shares of common stock have been acquired for investment and not with a view to distribution or resale, and may not be sold, assigned, made subject to a security interest, pledged, hypothecated, or otherwise transferred except pursuant to an effective registration statement under the Securities Act and applicable state laws or pursuant to an exemption therefrom if the Company receives an opinion of counsel (which counsel and opinion (in form, scope and substance, shall be reasonably acceptable to the Corporation) that such registration is not required as to such sale or offer." (c) Any offer or sale of this Warrant or the shares of Common Stock issued upon exercise hereof shall be made in accordance with the federal and state securities laws of applicable jurisdictions (including the prospectus delivery requirements of the Securities Act), and any other applicable law. 8. Adjustment of Exercise Price and Shares. After each adjustment of the Exercise Price pursuant to this Section 8, the number of shares of Common Stock purchasable on the exercise of this Warrant shall be the number derived by dividing such adjusted pertinent Exercise Price into the original Exercise Price. The Exercise Price shall be subject to adjustment as follows: (a) In the event, prior to the termination of this Warrant by exercise thereof or by its terms, the Corporation shall issue any shares of its Common Stock as a share dividend or shall declare a stock split or otherwise subdivide the number of outstanding shares of Common Stock into a greater number of shares, then, in either of such events (referred to hereinafter as an "Adjustment Event"), the Exercise Price per share of Common Stock that may be purchased pursuant to this Warrant in effect at the time of such action shall be reduced proportionately and the number of shares of Common Stock that may be purchased pursuant to this Warrant shall be increased proportionately to the nearest full amount so as to ensure that the Holder hereof is in the same economic position as such Holder was in prior to such share dividend or subdivision. Conversely, in the event the Corporation shall reduce the number of shares of its outstanding Common Stock by declaring a reverse stock split or otherwise combining such shares into a smaller number of shares, then, in such event, the Exercise Price per share that may be purchased pursuant to this Warrant in effect at the time of such action shall be increased proportionately and the number of shares of Common Stock at that time purchasable pursuant to this Warrant shall be decreased proportionately to the nearest full amount so as to ensure that the Holder hereof is in the same economic position as such Holder was in prior to such share combination. Any dividend paid or distributed on the Common Stock in shares of any other class of capital stock of the Corporation or securities convertible into shares of Common Stock shall be treated as a dividend paid in Common Stock to the extent that shares of Common Stock are issuable on the conversion thereof. An adjustment in the Exercise Price or the number of shares of Common Page 3 4 Stock to be received upon exercise of this Warrant made pursuant to this Section 8(a) shall become effective immediately after the effective date of such Adjustment Event retroactive to the record date, if any, for such Adjustment Event. (b) In the event the Corporation, at any time while this Warrant shall remain unexpired and unexercised, shall (i) effect a reorganization, (ii) consolidate with or merge into any person, (iii) transfer or sell all or substantially all of its property, or (iv) dissolve, liquidate or wind up its affairs (a "Reorganization Event"), the Corporation will take prompt action to ensure that proportionate, equitable, lawful and adequate provision shall be made as part of the terms of any such Reorganization Event such that the Holder of this Warrant may thereafter receive, on exercise thereof, in lieu of each share of Common Stock which such Holder would have been entitled to receive, the same kind and amount of any share, securities, or assets as may be issuable, distributable or payable pursuant to such Reorganization Event with respect to each share of Common Stock which the Holder would have been entitled to receive if such Holder had exercised this Warrant immediately prior to such Reorganization Event. Upon any Reorganization Event referred to in this paragraph 8(b), this Warrant shall continue in full force and effect and the terms hereof shall be applicable to all securities and other property receivable on the exercise of this Warrant after the consummation of such Reorganization Event; and shall be binding upon the issuer of any such securities or other property, including, in the case of any such transfer, the person acquiring all or substantially all of the properties or assets of the Corporation, whether or not such person shall have expressly assumed the terms of this Warrant. (c) Notwithstanding the provisions of this Section 8, no adjustment of the Exercise Price or the shares of Common Stock to be received upon exercise of the Warrant shall be made unless Exercise Price is the aggregate of such adjustments to the Exercise Price equals or exceeds $0.005. (d) In the event, prior to the expiration of this Warrant by exercise thereof or by its terms, the Corporation shall determine to take a record of the holders of its Common Stock for the purpose of determining shareholders entitled to receive any share dividend or other right which will cause any change or adjustment in the number, amount, price or nature of the shares of Common Stock or other securities or assets deliverable on exercise of this Warrant pursuant to the foregoing provisions, the Corporation shall give to the registered Holder of this Warrant at such Holder's address as may appear on the books of the Corporation at least fifteen (15) days' prior written notice to the effect that it intends to take such a record. Such notice shall specify the date as of which such record is to be taken, and the number, amount, price and nature of the Common Stock or other shares, securities or assets which will be deliverable on exercise of this Warrant after the action for which such record will be taken has been completed. Without limiting the obligation of the Corporation to provide notice to the registered Holder of this Warrant of any corporate action hereunder, the failure of the Corporation to give notice shall not invalidate such corporate action of the Corporation. (e) No adjustment of the Exercise Price pursuant to this Section 8 or Section 9 shall be made as a result of or in connection with (i) the issuance of Common Stock pursuant to options, warrants and share purchase agreements outstanding or in effect on the date hereof, (ii) the establishment of additional stock option or other benefit plans of the Corporation, the modification, renewal or extension of any stock option or other benefit plan now in effect or hereafter created, or the issuance of Common Stock on exercise of any options pursuant to such stock option or other benefit plans, or (iii) the issuance of Common Stock in connection with an acquisition or merger of any type (the antidilution provision of this Section 8 will not apply in the event a merger or acquisition is undertaken by the Corporation as long as the Corporation is the survivor thereof), and (iv) in connection with compensation arrangements for present or former Page 4 5 officers, direct employees or agents of the Corporation or any indirect or direct subsidiary of the Corporation, and the like. 9. Other Adjustments to Purchase Price and Number of Securities. (a) Computation of Adjusted Purchase Price. Except as hereinafter provided, in case the Corporation shall at any time after the date of this Warrant issue or sell any shares of Common Stock (other than an issuance or sale referred to in paragraph 8(e)) for a consideration per share less than the then current fair market value of a share of the Common Stock ("fair market value" of the Common Stock to mean the average closing price of the Common Stock on the immediately preceding ten (10) days on which such shares of Common Stock may be traded in the NASDAQ National Market or other securities exchange) then immediately upon such issuance or sale, the Exercise Price shall (until another such issuance or sale) be reduced to the price (calculated to the nearest full cent) equal to the Exercise Price in effect prior to such issuance or sale multiplied by the quotient derived by dividing (A) an amount equal to the sum of (X) the then current fair market value per share of Common Stock immediately prior to such issuance or sale multiplied by the total number of shares of Common Stock outstanding immediately prior to such issuance or sale, plus (Y) the aggregate of the amount of all consideration, if any, to be received by the Corporation upon such issuance or sale, by (B) the then current fair market value per share of Common Stock immediately prior to such issuance or sale multiplied by the total number of shares of Common Stock outstanding immediately after such issuance or sale; provided that: i. In case of the issuance or sale of shares of Common Stock for a consideration part or all of which shall be cash, the amount of the cash consideration therefor shall be deemed to be the amount of cash received by the Corporation for such shares (or, if shares of Common Stock are offered by the Corporation for subscription, the subscription price, or, if either of such securities shall be sold to underwriters or dealers for public offering without a subscription offering, the initial public offering price for such shares) before deducting therefrom any compensation paid or discount allowed in the sale, underwriting or purchase thereof by underwriters or dealers or others performing similar services, or any expenses incurred in connection therewith. ii. In case of the issuance or sale (otherwise than as a dividend or other distribution on any capital stock of the Corporation) of shares of Common Stock for a consideration part or all of which shall be other than cash, the amount of the consideration therefor other than cash shall be deemed to be the value of such consideration as determined in good faith by the Board of Directors of the Corporation. iii. The reclassification of securities of the Corporation other than shares of Common Stock into securities including shares of Common Stock shall be deemed to involve the issuance of such shares of Common Stock for a consideration other than cash immediately prior to the close of business on the date fixed for the determination of security holders entitled to receive such shares, and the value of the consideration allocable to such shares of Common Stock shall be determined in good faith by the Board of Directors of the Corporation. Page 5 6 iv. The number of shares of Common Stock at any one time outstanding shall include the aggregate number of shares issued or issuable (subject to readjustment upon the actual issuance thereof) upon the exercise of options, rights, and warrants and upon the conversion or exchange of convertible or exchangeable securities. (b) Options, Rights, Warrants and Convertible and Exchangeable Securities. Except as hereinafter provided, in case the Corporation shall at any time after the date hereof issue or sell options, rights or warrants to subscribe for shares of Common Stock, or issue any securities convertible into or exchangeable for shares of Common Stock (other than the issuances or sales referred to in paragraph 9(c)), for a consideration per share less than the then current fair market value of the share of the Common Stock immediately prior to the issuance of such options, rights or Warrants, or such convertible or exchangeable securities, or without consideration, the Exercise Price shall (until another such issuance or sale) be reduced to the price (calculated to the nearest full cent) equal to the Exercise Price in effect prior to such issuance or sale multiplied by the quotient derived by dividing (A) an amount equal to the sum of (X) the then current fair market value per share of Common Stock immediately prior to such issuance or sale multiplied by the total number of shares of Common Stock outstanding immediately prior to such issuance or sale, plus (Y) the aggregate of the amount of all consideration, if any, to be received by the Corporation upon the exercise of such convertible or exchangeable securities, by (B) the then current fair market value per share of Common Stock immediately prior to such issuance or sale multiplied by the total number of shares of Common Stock that would be outstanding immediately after the exercise of such convertible or exchangeable securities provided that: i. The aggregate maximum number of shares of Common Stock, as the case may be, issuable under such options, rights or warrants shall be deemed to be issued and outstanding at the time such options, rights or warrants were issued, and for a consideration equal to the minimum purchase price per share provided for in such options, rights or warrants at the time of issuance, plus the consideration (determined in the same manner as consideration received on the issue or sale of shares in accordance with the terms of this Warrant), if any, received by the Corporation for such options, rights or warrants. ii. The aggregate maximum number of shares of Common Stock issuable upon conversion or exchange of any convertible or exchangeable securities shall be deemed to be issued and outstanding at the time of issuance of such securities, and for a consideration equal to the consideration (determined in the same manner as consideration received on the issue or sale of shares of Common Stock in accordance with the terms of this Warrant) received by the Corporation for such securities, plus the minimum consideration, if any, receivable by the Corporation upon the conversion or exchange thereof. iii. If any change shall occur in the price per share provided for in any of the options, rights, or warrants or convertible or exchangeable securities referred to in this subsection (b) of this paragraph 9, such options, rights or warrants or conversion or exchange rights, as the case may be, shall be deemed to have expired or terminated on the date when such price change became effective in respect of shares not theretofore issued and the Corporation shall be deemed to have issued upon such date new options, Page 6 7 rights or warrants or convertible or exchangeable securities at the new price per share in respect of the number of shares issuable upon the exercise of such options, rights or warrants or the conversion or exchange of such convertible or exchangeable securities. (c) Exclusions. The provisions of subsection 9(b) above shall not apply to any options issued pursuant to stock option plans of the Corporation in effect on the date hereof, to renewals of any existing options, rights or warrants or to any options, rights or warrants issued to employees of the Corporation or any of its subsidiaries on the date hereof. Moreover, the provisions of subsection 9(b) shall terminate at such time as there is in effect a registration statement filed with the Securities and Exchange Commission with respect to the shares of Common Stock underlying the Warrant. (d) Adjustment in Number of Securities. Upon each adjustment of the Exercise Price pursuant to the provisions of this paragraph 9, the number of shares of Common Stock issuable upon the exercise of this Warrant shall be adjusted to the nearest full amount by multiplying a number equal to the Exercise Price in effect immediately prior to such adjustment by the number of shares of Common Stock issuable upon exercise of this Warrant immediately prior to such adjustment and dividing the product so obtained by the adjusted Exercise Price. 10. Fractional Shares. No fractional shares or script representing fractional shares of Common Stock shall be issued upon the exercise of this Warrant. No adjustment to the shares of Common Stock that may be purchased upon the exercise of this Warrant will result in any fractional shares to be issued to the Holders hereof. 11. Rights of the Holder. The Holder shall not, by virtue hereof, be entitled to any rights of a shareholder in the Corporation, either at law or equity, and the rights of the Holder are limited to those expressed in this Warrant and are not enforceable against the Corporation except to the extent set forth herein. 12. Notices of Record Date, Etc. In case: (a) the Corporation shall take a record of the holders of its Common Stock (or other securities at the time receivable upon the exercise of the Warrant) for the purpose of entitling them to receive any dividend (other than a cash dividend payable out of earned surplus) or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities, or to receive any other right; or (b) of any capital reorganization of the Corporation (other than a stock split or reverse stock split), any reclassification of the capital stock of the Corporation, any consolidation or merger of the Corporation with or into another corporation (other than a merger for purposes of change of domicile) or any conveyance of all or substantially all of the assets of the Corporation to another corporation; or (c) of any voluntary or involuntary dissolution, liquidation or winding-up of the Corporation; then, in each such case, the corporation shall mail or cause to be mailed to the Holder at the time outstanding a notice specifying, as the case may be, (i) the date on which Page 7 8 a record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, or (ii) the date on which such reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding-up is to take place, and the time, if any, to be fixed as to which the holders of record of Common Stock (or such other securities at the time receivable upon the exercise of the Warrant) shall be entitled to exchange their shares of Common Stock (or such other securities) for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding-up. Such notice shall be mailed at least twenty (20) days prior to the date therein specified and this Warrant may be exercised prior to said date during the term of the Warrant no later than five (5) days prior to said date. 13. No Impairment. The Corporation will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder of this Warrant. Without limiting the generality of the foregoing, the Corporation (a) will not increase the par value of any shares of Common Stock receivable on the exercise of the Warrant above the amount payable therefor on such exercise, and (b) will take all such action as may be necessary or appropriate in order that the Corporation may validly and legally issue fully paid and nonassessable shares of Common Stock on the exercise of this Warrant from time to time outstanding. 14. Replacement of Warrant. On receipt of evidence reasonably satisfactory to the Corporation of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction of this Warrant, on delivery of any indemnity agreement or security reasonably satisfactory in form and amount to the Corporation or, in the case of any such mutilation, on surrender and cancellation of such Warrant, the Corporation at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. IN WITNESS WHEREOF, the Corporation has signed this Warrant by its duly authorized officer this second day of January, 1997. KTI, INC. By:________________________________________________ Name: Nicholas Menonna, Jr. Title: Chairman of the Board of Directors and Chief Executive Officer Page 8 9 EXHIBIT A EXERCISE FORM To Be Executed Upon Exercise of Warrant The undersigned record holder of the within Warrant hereby irrevocably elects to exercise the rights to purchase ______ shares of Common Stock of KTI, Inc. by exercise of the within Warrant, according to the terms and conditions therein and payment of the Exercise Price in full. The undersigned requests that certificates for such shares of Common Stock shall be issued in the name set forth below. Dated: , 199__ ______________________________ Signature ______________________________ Print Name of Signatory Address:_______________________________ ________________________________ Social Security No. or other identifying number:____________________ If said number of shares of Common Stock and Warrants shall not be all the shares under the within Warrant, the undersigned requests that a new Warrant for the unexercised portion shall be registered in the name of: ______________________________ (Please print) Address:_______________________________ ________________________________ Social Security No. or other identifying number:____________________ Signature:_____________________________ _____________________________ Print Name of Signatory Page 9 EX-10.46 11 WARRANT TO PURCHASE 1 EXHIBIT 10.46 Warrant No. D-3 Right to Purchase Common Shares THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE. THIS WARRANT HAS BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO DISTRIBUTION OR RESALE, AND MAY NOT BE SOLD, ASSIGNED, MADE SUBJECT TO A SECURITY INTEREST, PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND APPLICABLE STATE LAWS OR PURSUANT TO AN EXEMPTION THEREFROM IF THE CORPORATION RECEIVES AN OPINION OF COUNSEL (WHICH COUNSEL AND OPINION (IN FORM, SCOPE, AND SUBSTANCE) SHALL BE REASONABLY ACCEPTABLE TO THE CORPORATION) THAT SUCH REGISTRATION IS NOT REQUIRED AS TO SUCH SALE OR OFFER. KTI, INC. A NEW JERSEY CORPORATION WARRANT TO PURCHASE COMMON STOCK Registered Owner: Robert E. Wetzel 20 Braeburn Lane Barrington Hills, Illinois 60010-9802 For Value Received, KTI, Inc., a New Jersey corporation (the "Corporation") grants the following rights to the registered owner of this Warrant (the "Holder") and the Holder hereby acknowledges and agrees that: 1. Issue. Upon tender of this Warrant to the Corporation, the Corporation shall issue to the registered owner hereof the number of shares specified in paragraph 2 hereof of fully paid and nonassessable shares of common stock of the Corporation, no par value (the "Common Stock"), that the registered owner is otherwise entitled to purchase. 2. Number of Shares. Subject to the provisions of paragraph 8, the number of shares of Common Stock that the registered owner of this Warrant is entitled to receive upon exercise of this Warrant is 6,000 shares of Common Stock. The Corporation shall, at all times, authorize and reserve for issuance such number of shares of Common Stock as shall be issuable upon the exercise of this Warrant. The Corporation covenants and agrees that all shares of Common Stock that may be issued upon the exercise of this Warrant shall, upon payment and issuance therefore, be duly and validly issued, fully paid and nonassessable, and free from all taxes, liens and charges with respect to the purchase and the issuance of such shares. 3. Exercise Price. The price at which the shares of Common Stock may purchased upon exercise of this Warrant is Eight and 50/100 Dollars ($8.50) per share (the "Exercise Price"). The Exercise Price of this Warrant is subject to adjustment pursuant to Section 8 hereof. Page 1 2 4. Exercise. This Warrant shall be exercisable on and after January 1, 1997 and shall become void unless it is exercised and payment of the Exercise Price is received by the Corporation prior to December 31, 1999 (the "Expiration Date"); provided that in case of dissolution of the Corporation, but subject to the provisions of paragraph 8(b), this Warrant shall become void on the date of such dissolution. 5. Tender. The exercise of this Warrant must be accomplished by actual delivery of the Exercise Price in cash, certified check, or official bank draft in lawful money of the United States of America, and by actual delivery of a duly executed exercise form, a copy of which is attached to this Warrant as "Exhibit A", properly executed by the registered owner of the Warrant, and by surrender of this Warrant. The payment and exercise form must be delivered, personally or by mail, to the offices of the Corporation at 7000 Boulevard East, Guttenberg, New Jersey 07093 or such other address or addresses as the Corporation shall notify the Holder including the address of a stock transfer agent, authorized by the Company. Documents sent by mail shall be deemed to be delivered when they are received by the Corporation. If this Warrant should be exercised in part only, the Corporation shall, upon surrender of this Warrant for cancellation, execute and deliver a new Warrant evidencing the rights of the Holder thereof to purchase the balance of the shares of Common Stock purchasable hereunder. Upon receipt by the Corporation of an exercise form properly executed, payment of the Exercise Price, and this Warrant at its office, or by the authorized stock transfer agent of the Corporation at its office, in proper form for exercise, the Holder shall be deemed to be the holder of record of the shares of Common Stock issuable upon such exercise, notwithstanding that the stock transfer books of the Corporation shall then be closed or that certificates representing such shares of Common Stock shall not then be physically delivered to the Holder. 6. Recognition of the Registered Owner. Prior to due presentment for registration of transfer of this Warrant, the Corporation may deem and treat the registered Holder or Holders of this Warrant as its absolute owner or owners for all purposes, as the person or persons exclusively entitled to receive notices concerning this Warrant, and as the person or persons otherwise entitled to exercise rights under this Warrant. 7. Restricted Securities. The Holder, by acquiring this Warrant, hereby covenants and agrees that: (a) the Holder will not offer for sale or sell this Warrant or the shares of Common Stock issuable upon the exercise of this Warrant unless pursuant to: i. an effective registration statement under the Securities Act ("Registration Statement") filed by the Company covering such offer and sale; or ii. an exemption from registration under the Securities Act; provided that prior to any such proposed transfer, the Holder shall give five (5) days' written notice to the Company of the Holder's intentions to affect such transfer, which notice shall be accompanied by such evidence (including the provision of an opinion of counsel (which counsel and opinion (in form scope, and substance) shall be reasonably acceptable to the Corporation) that such registration is not required as to such sale or offer as may be Page 2 3 reasonably satisfactory to the Company that the proposed transfer may be effected without registration under the Securities Act. (b) The certificates representing the shares of Common Stock issued upon exercise hereof, unless the same are registered under the Securities Act prior to exercise of this Warrant, shall be stamped or otherwise imprinted with a legend in substantially the following form: "The shares of common stock represented by this certificate have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), or the securities laws of any state. The shares of common stock have been acquired for investment and not with a view to distribution or resale, and may not be sold, assigned, made subject to a security interest, pledged, hypothecated, or otherwise transferred except pursuant to an effective registration statement under the Securities Act and applicable state laws or pursuant to an exemption therefrom if the Company receives an opinion of counsel (which counsel and opinion (in form, scope and substance, shall be reasonably acceptable to the Corporation) that such registration is not required as to such sale or offer." (c) Any offer or sale of this Warrant or the shares of Common Stock issued upon exercise hereof shall be made in accordance with the federal and state securities laws of applicable jurisdictions (including the prospectus delivery requirements of the Securities Act), and any other applicable law. 8. Adjustment of Exercise Price and Shares. After each adjustment of the Exercise Price pursuant to this Section 8, the number of shares of Common Stock purchasable on the exercise of this Warrant shall be the number derived by dividing such adjusted pertinent Exercise Price into the original Exercise Price. The Exercise Price shall be subject to adjustment as follows: (a) In the event, prior to the termination of this Warrant by exercise thereof or by its terms, the Corporation shall issue any shares of its Common Stock as a share dividend or shall declare a stock split or otherwise subdivide the number of outstanding shares of Common Stock into a greater number of shares, then, in either of such events (referred to hereinafter as an "Adjustment Event"), the Exercise Price per share of Common Stock that may be purchased pursuant to this Warrant in effect at the time of such action shall be reduced proportionately and the number of shares of Common Stock that may be purchased pursuant to this Warrant shall be increased proportionately to the nearest full amount so as to ensure that the Holder hereof is in the same economic position as such Holder was in prior to such share dividend or subdivision. Conversely, in the event the Corporation shall reduce the number of shares of its outstanding Common Stock by declaring a reverse stock split or otherwise combining such shares into a smaller number of shares, then, in such event, the Exercise Price per share that may be purchased pursuant to this Warrant in effect at the time of such action shall be increased proportionately and the number of shares of Common Stock at that time purchasable pursuant to this Warrant shall be decreased proportionately to the nearest full amount so as to ensure that the Holder hereof is in the same economic position as such Holder was in prior to such share combination. Any dividend paid or distributed on the Common Stock in shares of any other class of capital stock of the Corporation or securities convertible into shares of Common Stock shall be treated as a dividend paid in Common Stock to the extent that shares of Common Stock are issuable on the conversion thereof. An adjustment in the Exercise Price or the number of shares of Common Page 3 4 Stock to be received upon exercise of this Warrant made pursuant to this Section 8(a) shall become effective immediately after the effective date of such Adjustment Event retroactive to the record date, if any, for such Adjustment Event. (b) In the event the Corporation, at any time while this Warrant shall remain unexpired and unexercised, shall (i) effect a reorganization, (ii) consolidate with or merge into any person, (iii) transfer or sell all or substantially all of its property, or (iv) dissolve, liquidate or wind up its affairs (a "Reorganization Event"), the Corporation will take prompt action to ensure that proportionate, equitable, lawful and adequate provision shall be made as part of the terms of any such Reorganization Event such that the Holder of this Warrant may thereafter receive, on exercise thereof, in lieu of each share of Common Stock which such Holder would have been entitled to receive, the same kind and amount of any share, securities, or assets as may be issuable, distributable or payable pursuant to such Reorganization Event with respect to each share of Common Stock which the Holder would have been entitled to receive if such Holder had exercised this Warrant immediately prior to such Reorganization Event. Upon any Reorganization Event referred to in this paragraph 8(b), this Warrant shall continue in full force and effect and the terms hereof shall be applicable to all securities and other property receivable on the exercise of this Warrant after the consummation of such Reorganization Event; and shall be binding upon the issuer of any such securities or other property, including, in the case of any such transfer, the person acquiring all or substantially all of the properties or assets of the Corporation, whether or not such person shall have expressly assumed the terms of this Warrant. (c) Notwithstanding the provisions of this Section 8, no adjustment of the Exercise Price or the shares of Common Stock to be received upon exercise of the Warrant shall be made unless Exercise Price is the aggregate of such adjustments to the Exercise Price equals or exceeds $0.005. (d) In the event, prior to the expiration of this Warrant by exercise thereof or by its terms, the Corporation shall determine to take a record of the holders of its Common Stock for the purpose of determining shareholders entitled to receive any share dividend or other right which will cause any change or adjustment in the number, amount, price or nature of the shares of Common Stock or other securities or assets deliverable on exercise of this Warrant pursuant to the foregoing provisions, the Corporation shall give to the registered Holder of this Warrant at such Holder's address as may appear on the books of the Corporation at least fifteen (15) days' prior written notice to the effect that it intends to take such a record. Such notice shall specify the date as of which such record is to be taken, and the number, amount, price and nature of the Common Stock or other shares, securities or assets which will be deliverable on exercise of this Warrant after the action for which such record will be taken has been completed. Without limiting the obligation of the Corporation to provide notice to the registered Holder of this Warrant of any corporate action hereunder, the failure of the Corporation to give notice shall not invalidate such corporate action of the Corporation. (e) No adjustment of the Exercise Price pursuant to this Section 8 or Section 9 shall be made as a result of or in connection with (i) the issuance of Common Stock pursuant to options, warrants and share purchase agreements outstanding or in effect on the date hereof, (ii) the establishment of additional stock option or other benefit plans of the Corporation, the modification, renewal or extension of any stock option or other benefit plan now in effect or hereafter created, or the issuance of Common Stock on exercise of any options pursuant to such stock option or other benefit plans, or (iii) the issuance of Common Stock in connection with an acquisition or merger of any type (the antidilution provision of this Section 8 will not apply in the event a merger or acquisition is undertaken by the Corporation as long as the Corporation is the survivor thereof), and (iv) in connection with compensation arrangements for present or former Page 4 5 officers, direct employees or agents of the Corporation or any indirect or direct subsidiary of the Corporation, and the like. 9. Other Adjustments to Purchase Price and Number of Securities. (a) Computation of Adjusted Purchase Price. Except as hereinafter provided, in case the Corporation shall at any time after the date of this Warrant issue or sell any shares of Common Stock (other than an issuance or sale referred to in paragraph 8(e)) for a consideration per share less than the then current fair market value of a share of the Common Stock ("fair market value" of the Common Stock to mean the average closing price of the Common Stock on the immediately preceding ten (10) days on which such shares of Common Stock may be traded in the NASDAQ National Market or other securities exchange) then immediately upon such issuance or sale, the Exercise Price shall (until another such issuance or sale) be reduced to the price (calculated to the nearest full cent) equal to the Exercise Price in effect prior to such issuance or sale multiplied by the quotient derived by dividing (A) an amount equal to the sum of (X) the then current fair market value per share of Common Stock immediately prior to such issuance or sale multiplied by the total number of shares of Common Stock outstanding immediately prior to such issuance or sale, plus (Y) the aggregate of the amount of all consideration, if any, to be received by the Corporation upon such issuance or sale, by (B) the then current fair market value per share of Common Stock immediately prior to such issuance or sale multiplied by the total number of shares of Common Stock outstanding immediately after such issuance or sale; provided that: i. In case of the issuance or sale of shares of Common Stock for a consideration part or all of which shall be cash, the amount of the cash consideration therefor shall be deemed to be the amount of cash received by the Corporation for such shares (or, if shares of Common Stock are offered by the Corporation for subscription, the subscription price, or, if either of such securities shall be sold to underwriters or dealers for public offering without a subscription offering, the initial public offering price for such shares) before deducting therefrom any compensation paid or discount allowed in the sale, underwriting or purchase thereof by underwriters or dealers or others performing similar services, or any expenses incurred in connection therewith. ii. In case of the issuance or sale (otherwise than as a dividend or other distribution on any capital stock of the Corporation) of shares of Common Stock for a consideration part or all of which shall be other than cash, the amount of the consideration therefor other than cash shall be deemed to be the value of such consideration as determined in good faith by the Board of Directors of the Corporation. iii. The reclassification of securities of the Corporation other than shares of Common Stock into securities including shares of Common Stock shall be deemed to involve the issuance of such shares of Common Stock for a consideration other than cash immediately prior to the close of business on the date fixed for the determination of security holders entitled to receive such shares, and the value of the consideration allocable to such shares of Common Stock shall be determined in good faith by the Board of Directors of the Corporation. Page 5 6 iv. The number of shares of Common Stock at any one time outstanding shall include the aggregate number of shares issued or issuable (subject to readjustment upon the actual issuance thereof) upon the exercise of options, rights, and warrants and upon the conversion or exchange of convertible or exchangeable securities. (b) Options, Rights, Warrants and Convertible and Exchangeable Securities. Except as hereinafter provided, in case the Corporation shall at any time after the date hereof issue or sell options, rights or warrants to subscribe for shares of Common Stock, or issue any securities convertible into or exchangeable for shares of Common Stock (other than the issuances or sales referred to in paragraph 9(c)), for a consideration per share less than the then current fair market value of the share of the Common Stock immediately prior to the issuance of such options, rights or Warrants, or such convertible or exchangeable securities, or without consideration, the Exercise Price shall (until another such issuance or sale) be reduced to the price (calculated to the nearest full cent) equal to the Exercise Price in effect prior to such issuance or sale multiplied by the quotient derived by dividing (A) an amount equal to the sum of (X) the then current fair market value per share of Common Stock immediately prior to such issuance or sale multiplied by the total number of shares of Common Stock outstanding immediately prior to such issuance or sale, plus (Y) the aggregate of the amount of all consideration, if any, to be received by the Corporation upon the exercise of such convertible or exchangeable securities, by (B) the then current fair market value per share of Common Stock immediately prior to such issuance or sale multiplied by the total number of shares of Common Stock that would be outstanding immediately after the exercise of such convertible or exchangeable securities provided that: i. The aggregate maximum number of shares of Common Stock, as the case may be, issuable under such options, rights or warrants shall be deemed to be issued and outstanding at the time such options, rights or warrants were issued, and for a consideration equal to the minimum purchase price per share provided for in such options, rights or warrants at the time of issuance, plus the consideration (determined in the same manner as consideration received on the issue or sale of shares in accordance with the terms of this Warrant), if any, received by the Corporation for such options, rights or warrants. ii. The aggregate maximum number of shares of Common Stock issuable upon conversion or exchange of any convertible or exchangeable securities shall be deemed to be issued and outstanding at the time of issuance of such securities, and for a consideration equal to the consideration (determined in the same manner as consideration received on the issue or sale of shares of Common Stock in accordance with the terms of this Warrant) received by the Corporation for such securities, plus the minimum consideration, if any, receivable by the Corporation upon the conversion or exchange thereof. iii. If any change shall occur in the price per share provided for in any of the options, rights, or warrants or convertible or exchangeable securities referred to in this subsection (b) of this paragraph 9, such options, rights or warrants or conversion or exchange rights, as the case may be, shall be deemed to have expired or terminated on the date when such price change became effective in respect of shares not theretofore issued and the Corporation shall be deemed to have issued upon such date new options, Page 6 7 rights or warrants or convertible or exchangeable securities at the new price per share in respect of the number of shares issuable upon the exercise of such options, rights or warrants or the conversion or exchange of such convertible or exchangeable securities. (c) Exclusions. The provisions of subsection 9(b) above shall not apply to any options issued pursuant to stock option plans of the Corporation in effect on the date hereof, to renewals of any existing options, rights or warrants or to any options, rights or warrants issued to employees of the Corporation or any of its subsidiaries on the date hereof. Moreover, the provisions of subsection 9(b) shall terminate at such time as there is in effect a registration statement filed with the Securities and Exchange Commission with respect to the shares of Common Stock underlying the Warrant. (d) Adjustment in Number of Securities. Upon each adjustment of the Exercise Price pursuant to the provisions of this paragraph 9, the number of shares of Common Stock issuable upon the exercise of this Warrant shall be adjusted to the nearest full amount by multiplying a number equal to the Exercise Price in effect immediately prior to such adjustment by the number of shares of Common Stock issuable upon exercise of this Warrant immediately prior to such adjustment and dividing the product so obtained by the adjusted Exercise Price. 10. Fractional Shares. No fractional shares or script representing fractional shares of Common Stock shall be issued upon the exercise of this Warrant. No adjustment to the shares of Common Stock that may be purchased upon the exercise of this Warrant will result in any fractional shares to be issued to the Holders hereof. 11. Rights of the Holder. The Holder shall not, by virtue hereof, be entitled to any rights of a shareholder in the Corporation, either at law or equity, and the rights of the Holder are limited to those expressed in this Warrant and are not enforceable against the Corporation except to the extent set forth herein. 12. Notices of Record Date, Etc. In case: (a) the Corporation shall take a record of the holders of its Common Stock (or other securities at the time receivable upon the exercise of the Warrant) for the purpose of entitling them to receive any dividend (other than a cash dividend payable out of earned surplus) or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities, or to receive any other right; or (b) of any capital reorganization of the Corporation (other than a stock split or reverse stock split), any reclassification of the capital stock of the Corporation, any consolidation or merger of the Corporation with or into another corporation (other than a merger for purposes of change of domicile) or any conveyance of all or substantially all of the assets of the Corporation to another corporation; or (c) of any voluntary or involuntary dissolution, liquidation or winding-up of the Corporation; then, in each such case, the corporation shall mail or cause to be mailed to the Holder at the time outstanding a notice specifying, as the case may be, (i) the date on which Page 7 8 a record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, or (ii) the date on which such reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding-up is to take place, and the time, if any, to be fixed as to which the holders of record of Common Stock (or such other securities at the time receivable upon the exercise of the Warrant) shall be entitled to exchange their shares of Common Stock (or such other securities) for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding-up. Such notice shall be mailed at least twenty (20) days prior to the date therein specified and this Warrant may be exercised prior to said date during the term of the Warrant no later than five (5) days prior to said date. 13. No Impairment. The Corporation will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder of this Warrant. Without limiting the generality of the foregoing, the Corporation (a) will not increase the par value of any shares of Common Stock receivable on the exercise of the Warrant above the amount payable therefor on such exercise, and (b) will take all such action as may be necessary or appropriate in order that the Corporation may validly and legally issue fully paid and nonassessable shares of Common Stock on the exercise of this Warrant from time to time outstanding. 14. Replacement of Warrant. On receipt of evidence reasonably satisfactory to the Corporation of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction of this Warrant, on delivery of any indemnity agreement or security reasonably satisfactory in form and amount to the Corporation or, in the case of any such mutilation, on surrender and cancellation of such Warrant, the Corporation at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. IN WITNESS WHEREOF, the Corporation has signed this Warrant by its duly authorized officer this second day of January, 1997. KTI, INC. By:________________________________________________ Name: Nicholas Menonna, Jr. Title: Chairman of the Board of Directors and Chief Executive Officer Page 8 9 EXHIBIT A EXERCISE FORM To Be Executed Upon Exercise of Warrant The undersigned record holder of the within Warrant hereby irrevocably elects to exercise the rights to purchase ______ shares of Common Stock of KTI, Inc. by exercise of the within Warrant, according to the terms and conditions therein and payment of the Exercise Price in full. The undersigned requests that certificates for such shares of Common Stock shall be issued in the name set forth below. Dated: , 199__ ______________________________ Signature ______________________________ Print Name of Signatory Address:_______________________________ ________________________________ Social Security No. or other identifying number:____________________ If said number of shares of Common Stock and Warrants shall not be all the shares under the within Warrant, the undersigned requests that a new Warrant for the unexercised portion shall be registered in the name of: ______________________________ (Please print) Address:_______________________________ ________________________________ Social Security No. or other identifying number:____________________ Signature:_____________________________ _____________________________ Print Name of Signatory Page 9 EX-10.47 12 WARRANT TO PURCHASE 1 EXHIBIT 10.47 Warrant No. D-4 Right to Purchase Common Shares THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE. THIS WARRANT HAS BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO DISTRIBUTION OR RESALE, AND MAY NOT BE SOLD, ASSIGNED, MADE SUBJECT TO A SECURITY INTEREST, PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND APPLICABLE STATE LAWS OR PURSUANT TO AN EXEMPTION THEREFROM IF THE CORPORATION RECEIVES AN OPINION OF COUNSEL (WHICH COUNSEL AND OPINION (IN FORM, SCOPE, AND SUBSTANCE) SHALL BE REASONABLY ACCEPTABLE TO THE CORPORATION) THAT SUCH REGISTRATION IS NOT REQUIRED AS TO SUCH SALE OR OFFER. KTI, INC. A NEW JERSEY CORPORATION WARRANT TO PURCHASE COMMON STOCK Registered Owner: The Baldwin & Clarke Companies Coldstream Park 116B South River Road Bedford, New Hampshire 03110 For Value Received, KTI, Inc., a New Jersey corporation (the "Corporation") grants the following rights to the registered owner of this Warrant (the "Holder") and the Holder hereby acknowledges and agrees that: 1. Issue. Upon tender of this Warrant to the Corporation, the Corporation shall issue to the registered owner hereof the number of shares specified in paragraph 2 hereof of fully paid and nonassessable shares of common stock of the Corporation, no par value (the "Common Stock"), that the registered owner is otherwise entitled to purchase. 2. Number of Shares. Subject to the provisions of paragraph 8, the number of shares of Common Stock that the registered owner of this Warrant is entitled to receive upon exercise of this Warrant is 15,000 shares of Common Stock. The Corporation shall, at all times, authorize and reserve for issuance such number of shares of Common Stock as shall be issuable upon the exercise of this Warrant. The Corporation covenants and agrees that all shares of Common Stock that may be issued upon the exercise of this Warrant shall, upon payment and issuance therefore, be duly and validly issued, fully paid and nonassessable, and free from all taxes, liens and charges with respect to the purchase and the issuance of such shares. 3. Exercise Price. The price at which the shares of Common Stock may purchased upon exercise of this Warrant is Six and no/100 Dollars ($6.00) per share (the "Exercise Price"). The Exercise Price of this Warrant is subject to adjustment pursuant to Section 8 hereof. Page 1 2 4. Exercise. This Warrant shall be exercisable on and after January 1, 1997 and shall become void unless it is exercised and payment of the Exercise Price is received by the Corporation prior to April 30, 2001 (the "Expiration Date"); provided that in case of dissolution of the Corporation, but subject to the provisions of paragraph 8(b), this Warrant shall become void on the date of such dissolution. 5. Tender. The exercise of this Warrant must be accomplished by actual delivery of the Exercise Price in cash, certified check, or official bank draft in lawful money of the United States of America, and by actual delivery of a duly executed exercise form, a copy of which is attached to this Warrant as "Exhibit A", properly executed by the registered owner of the Warrant, and by surrender of this Warrant. The payment and exercise form must be delivered, personally or by mail, to the offices of the Corporation at 7000 Boulevard East, Guttenberg, New Jersey 07093 or such other address or addresses as the Corporation shall notify the Holder including the address of a stock transfer agent, authorized by the Company. Documents sent by mail shall be deemed to be delivered when they are received by the Corporation. If this Warrant should be exercised in part only, the Corporation shall, upon surrender of this Warrant for cancellation, execute and deliver a new Warrant evidencing the rights of the Holder thereof to purchase the balance of the shares of Common Stock purchasable hereunder. Upon receipt by the Corporation of an exercise form properly executed, payment of the Exercise Price, and this Warrant at its office, or by the authorized stock transfer agent of the Corporation at its office, in proper form for exercise, the Holder shall be deemed to be the holder of record of the shares of Common Stock issuable upon such exercise, notwithstanding that the stock transfer books of the Corporation shall then be closed or that certificates representing such shares of Common Stock shall not then be physically delivered to the Holder. 6. Recognition of the Registered Owner. Prior to due presentment for registration of transfer of this Warrant, the Corporation may deem and treat the registered Holder or Holders of this Warrant as its absolute owner or owners for all purposes, as the person or persons exclusively entitled to receive notices concerning this Warrant, and as the person or persons otherwise entitled to exercise rights under this Warrant. 7. Restricted Securities. The Holder, by acquiring this Warrant, hereby covenants and agrees that: (a) the Holder will not offer for sale or sell this Warrant or the shares of Common Stock issuable upon the exercise of this Warrant unless pursuant to: i. an effective registration statement under the Securities Act ("Registration Statement") filed by the Company covering such offer and sale; or ii. an exemption from registration under the Securities Act; provided that prior to any such proposed transfer, the Holder shall give five (5) days' written notice to the Company of the Holder's intentions to affect such transfer, which notice shall be accompanied by such evidence (including the provision of an opinion of counsel (which counsel and opinion (in form scope, and substance) shall be reasonably acceptable to the Corporation) that such registration is not required as to such sale or offer as may be Page 2 3 reasonably satisfactory to the Company that the proposed transfer may be effected without registration under the Securities Act. (b) The certificates representing the shares of Common Stock issued upon exercise hereof, unless the same are registered under the Securities Act prior to exercise of this Warrant, shall be stamped or otherwise imprinted with a legend in substantially the following form: "The shares of common stock represented by this certificate have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), or the securities laws of any state. The shares of common stock have been acquired for investment and not with a view to distribution or resale, and may not be sold, assigned, made subject to a security interest, pledged, hypothecated, or otherwise transferred except pursuant to an effective registration statement under the Securities Act and applicable state laws or pursuant to an exemption therefrom if the Company receives an opinion of counsel (which counsel and opinion (in form, scope and substance, shall be reasonably acceptable to the Corporation) that such registration is not required as to such sale or offer." (c) Any offer or sale of this Warrant or the shares of Common Stock issued upon exercise hereof shall be made in accordance with the federal and state securities laws of applicable jurisdictions (including the prospectus delivery requirements of the Securities Act), and any other applicable law. 8. Adjustment of Exercise Price and Shares. After each adjustment of the Exercise Price pursuant to this Section 8, the number of shares of Common Stock purchasable on the exercise of this Warrant shall be the number derived by dividing such adjusted pertinent Exercise Price into the original Exercise Price. The Exercise Price shall be subject to adjustment as follows: (a) In the event, prior to the termination of this Warrant by exercise thereof or by its terms, the Corporation shall issue any shares of its Common Stock as a share dividend or shall declare a stock split or otherwise subdivide the number of outstanding shares of Common Stock into a greater number of shares, then, in either of such events (referred to hereinafter as an "Adjustment Event"), the Exercise Price per share of Common Stock that may be purchased pursuant to this Warrant in effect at the time of such action shall be reduced proportionately and the number of shares of Common Stock that may be purchased pursuant to this Warrant shall be increased proportionately to the nearest full amount so as to ensure that the Holder hereof is in the same economic position as such Holder was in prior to such share dividend or subdivision. Conversely, in the event the Corporation shall reduce the number of shares of its outstanding Common Stock by declaring a reverse stock split or otherwise combining such shares into a smaller number of shares, then, in such event, the Exercise Price per share that may be purchased pursuant to this Warrant in effect at the time of such action shall be increased proportionately and the number of shares of Common Stock at that time purchasable pursuant to this Warrant shall be decreased proportionately to the nearest full amount so as to ensure that the Holder hereof is in the same economic position as such Holder was in prior to such share combination. Any dividend paid or distributed on the Common Stock in shares of any other class of capital stock of the Corporation or securities convertible into shares of Common Stock shall be treated as a dividend paid in Common Stock to the extent that shares of Common Stock are issuable on the conversion thereof. An adjustment in the Exercise Price or the number of shares of Common Page 3 4 Stock to be received upon exercise of this Warrant made pursuant to this Section 8(a) shall become effective immediately after the effective date of such Adjustment Event retroactive to the record date, if any, for such Adjustment Event. (b) In the event the Corporation, at any time while this Warrant shall remain unexpired and unexercised, shall (i) effect a reorganization, (ii) consolidate with or merge into any person, (iii) transfer or sell all or substantially all of its property, or (iv) dissolve, liquidate or wind up its affairs (a "Reorganization Event"), the Corporation will take prompt action to ensure that proportionate, equitable, lawful and adequate provision shall be made as part of the terms of any such Reorganization Event such that the Holder of this Warrant may thereafter receive, on exercise thereof, in lieu of each share of Common Stock which such Holder would have been entitled to receive, the same kind and amount of any share, securities, or assets as may be issuable, distributable or payable pursuant to such Reorganization Event with respect to each share of Common Stock which the Holder would have been entitled to receive if such Holder had exercised this Warrant immediately prior to such Reorganization Event. Upon any Reorganization Event referred to in this paragraph 8(b), this Warrant shall continue in full force and effect and the terms hereof shall be applicable to all securities and other property receivable on the exercise of this Warrant after the consummation of such Reorganization Event; and shall be binding upon the issuer of any such securities or other property, including, in the case of any such transfer, the person acquiring all or substantially all of the properties or assets of the Corporation, whether or not such person shall have expressly assumed the terms of this Warrant. (c) Notwithstanding the provisions of this Section 8, no adjustment of the Exercise Price or the shares of Common Stock to be received upon exercise of the Warrant shall be made unless Exercise Price is the aggregate of such adjustments to the Exercise Price equals or exceeds $0.005. (d) In the event, prior to the expiration of this Warrant by exercise thereof or by its terms, the Corporation shall determine to take a record of the holders of its Common Stock for the purpose of determining shareholders entitled to receive any share dividend or other right which will cause any change or adjustment in the number, amount, price or nature of the shares of Common Stock or other securities or assets deliverable on exercise of this Warrant pursuant to the foregoing provisions, the Corporation shall give to the registered Holder of this Warrant at such Holder's address as may appear on the books of the Corporation at least fifteen (15) days' prior written notice to the effect that it intends to take such a record. Such notice shall specify the date as of which such record is to be taken, and the number, amount, price and nature of the Common Stock or other shares, securities or assets which will be deliverable on exercise of this Warrant after the action for which such record will be taken has been completed. Without limiting the obligation of the Corporation to provide notice to the registered Holder of this Warrant of any corporate action hereunder, the failure of the Corporation to give notice shall not invalidate such corporate action of the Corporation. (e) No adjustment of the Exercise Price pursuant to this Section 8 or Section 9 shall be made as a result of or in connection with (i) the issuance of Common Stock pursuant to options, warrants and share purchase agreements outstanding or in effect on the date hereof, (ii) the establishment of additional stock option or other benefit plans of the Corporation, the modification, renewal or extension of any stock option or other benefit plan now in effect or hereafter created, or the issuance of Common Stock on exercise of any options pursuant to such stock option or other benefit plans, or (iii) the issuance of Common Stock in connection with an acquisition or merger of any type (the antidilution provision of this Section 8 will not apply in the event a merger or acquisition is undertaken by the Corporation as long as the Corporation is the survivor thereof), and (iv) in connection with compensation arrangements for present or former Page 4 5 officers, direct employees or agents of the Corporation or any indirect or direct subsidiary of the Corporation, and the like. 9. Other Adjustments to Purchase Price and Number of Securities. (a) Computation of Adjusted Purchase Price. Except as hereinafter provided, in case the Corporation shall at any time after the date of this Warrant issue or sell any shares of Common Stock (other than an issuance or sale referred to in paragraph 8(e)) for a consideration per share less than the then current fair market value of a share of the Common Stock ("fair market value" of the Common Stock to mean the average closing price of the Common Stock on the immediately preceding ten (10) days on which such shares of Common Stock may be traded in the NASDAQ National Market or other securities exchange) then immediately upon such issuance or sale, the Exercise Price shall (until another such issuance or sale) be reduced to the price (calculated to the nearest full cent) equal to the Exercise Price in effect prior to such issuance or sale multiplied by the quotient derived by dividing (A) an amount equal to the sum of (X) the then current fair market value per share of Common Stock immediately prior to such issuance or sale multiplied by the total number of shares of Common Stock outstanding immediately prior to such issuance or sale, plus (Y) the aggregate of the amount of all consideration, if any, to be received by the Corporation upon such issuance or sale, by (B) the then current fair market value per share of Common Stock immediately prior to such issuance or sale multiplied by the total number of shares of Common Stock outstanding immediately after such issuance or sale; provided that: i. In case of the issuance or sale of shares of Common Stock for a consideration part or all of which shall be cash, the amount of the cash consideration therefor shall be deemed to be the amount of cash received by the Corporation for such shares (or, if shares of Common Stock are offered by the Corporation for subscription, the subscription price, or, if either of such securities shall be sold to underwriters or dealers for public offering without a subscription offering, the initial public offering price for such shares) before deducting therefrom any compensation paid or discount allowed in the sale, underwriting or purchase thereof by underwriters or dealers or others performing similar services, or any expenses incurred in connection therewith. ii. In case of the issuance or sale (otherwise than as a dividend or other distribution on any capital stock of the Corporation) of shares of Common Stock for a consideration part or all of which shall be other than cash, the amount of the consideration therefor other than cash shall be deemed to be the value of such consideration as determined in good faith by the Board of Directors of the Corporation. iii. The reclassification of securities of the Corporation other than shares of Common Stock into securities including shares of Common Stock shall be deemed to involve the issuance of such shares of Common Stock for a consideration other than cash immediately prior to the close of business on the date fixed for the determination of security holders entitled to receive such shares, and the value of the consideration allocable to such shares of Common Stock shall be determined in good faith by the Board of Directors of the Corporation. Page 5 6 iv. The number of shares of Common Stock at any one time outstanding shall include the aggregate number of shares issued or issuable (subject to readjustment upon the actual issuance thereof) upon the exercise of options, rights, and warrants and upon the conversion or exchange of convertible or exchangeable securities. (b) Options, Rights, Warrants and Convertible and Exchangeable Securities. Except as hereinafter provided, in case the Corporation shall at any time after the date hereof issue or sell options, rights or warrants to subscribe for shares of Common Stock, or issue any securities convertible into or exchangeable for shares of Common Stock (other than the issuances or sales referred to in paragraph 9(c)), for a consideration per share less than the then current fair market value of the share of the Common Stock immediately prior to the issuance of such options, rights or Warrants, or such convertible or exchangeable securities, or without consideration, the Exercise Price shall (until another such issuance or sale) be reduced to the price (calculated to the nearest full cent) equal to the Exercise Price in effect prior to such issuance or sale multiplied by the quotient derived by dividing (A) an amount equal to the sum of (X) the then current fair market value per share of Common Stock immediately prior to such issuance or sale multiplied by the total number of shares of Common Stock outstanding immediately prior to such issuance or sale, plus (Y) the aggregate of the amount of all consideration, if any, to be received by the Corporation upon the exercise of such convertible or exchangeable securities, by (B) the then current fair market value per share of Common Stock immediately prior to such issuance or sale multiplied by the total number of shares of Common Stock that would be outstanding immediately after the exercise of such convertible or exchangeable securities provided that: i. The aggregate maximum number of shares of Common Stock, as the case may be, issuable under such options, rights or warrants shall be deemed to be issued and outstanding at the time such options, rights or warrants were issued, and for a consideration equal to the minimum purchase price per share provided for in such options, rights or warrants at the time of issuance, plus the consideration (determined in the same manner as consideration received on the issue or sale of shares in accordance with the terms of this Warrant), if any, received by the Corporation for such options, rights or warrants. ii. The aggregate maximum number of shares of Common Stock issuable upon conversion or exchange of any convertible or exchangeable securities shall be deemed to be issued and outstanding at the time of issuance of such securities, and for a consideration equal to the consideration (determined in the same manner as consideration received on the issue or sale of shares of Common Stock in accordance with the terms of this Warrant) received by the Corporation for such securities, plus the minimum consideration, if any, receivable by the Corporation upon the conversion or exchange thereof. iii. If any change shall occur in the price per share provided for in any of the options, rights, or warrants or convertible or exchangeable securities referred to in this subsection (b) of this paragraph 9, such options, rights or warrants or conversion or exchange rights, as the case may be, shall be deemed to have expired or terminated on the date when such price change became effective in respect of shares not theretofore issued and the Corporation shall be deemed to have issued upon such date new options, Page 6 7 rights or warrants or convertible or exchangeable securities at the new price per share in respect of the number of shares issuable upon the exercise of such options, rights or warrants or the conversion or exchange of such convertible or exchangeable securities. (c) Exclusions. The provisions of subsection 9(b) above shall not apply to any options issued pursuant to stock option plans of the Corporation in effect on the date hereof, to renewals of any existing options, rights or warrants or to any options, rights or warrants issued to employees of the Corporation or any of its subsidiaries on the date hereof. Moreover, the provisions of subsection 9(b) shall terminate at such time as there is in effect a registration statement filed with the Securities and Exchange Commission with respect to the shares of Common Stock underlying the Warrant. (d) Adjustment in Number of Securities. Upon each adjustment of the Exercise Price pursuant to the provisions of this paragraph 9, the number of shares of Common Stock issuable upon the exercise of this Warrant shall be adjusted to the nearest full amount by multiplying a number equal to the Exercise Price in effect immediately prior to such adjustment by the number of shares of Common Stock issuable upon exercise of this Warrant immediately prior to such adjustment and dividing the product so obtained by the adjusted Exercise Price. 10. Fractional Shares. No fractional shares or script representing fractional shares of Common Stock shall be issued upon the exercise of this Warrant. No adjustment to the shares of Common Stock that may be purchased upon the exercise of this Warrant will result in any fractional shares to be issued to the Holders hereof. 11. Rights of the Holder. The Holder shall not, by virtue hereof, be entitled to any rights of a shareholder in the Corporation, either at law or equity, and the rights of the Holder are limited to those expressed in this Warrant and are not enforceable against the Corporation except to the extent set forth herein. 12. Notices of Record Date, Etc. In case: (a) the Corporation shall take a record of the holders of its Common Stock (or other securities at the time receivable upon the exercise of the Warrant) for the purpose of entitling them to receive any dividend (other than a cash dividend payable out of earned surplus) or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities, or to receive any other right; or (b) of any capital reorganization of the Corporation (other than a stock split or reverse stock split), any reclassification of the capital stock of the Corporation, any consolidation or merger of the Corporation with or into another corporation (other than a merger for purposes of change of domicile) or any conveyance of all or substantially all of the assets of the Corporation to another corporation; or (c) of any voluntary or involuntary dissolution, liquidation or winding-up of the Corporation; then, in each such case, the corporation shall mail or cause to be mailed to the Holder at the time outstanding a notice specifying, as the case may be, (i) the date on which Page 7 8 a record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, or (ii) the date on which such reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding-up is to take place, and the time, if any, to be fixed as to which the holders of record of Common Stock (or such other securities at the time receivable upon the exercise of the Warrant) shall be entitled to exchange their shares of Common Stock (or such other securities) for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding-up. Such notice shall be mailed at least twenty (20) days prior to the date therein specified and this Warrant may be exercised prior to said date during the term of the Warrant no later than five (5) days prior to said date. 13. No Impairment. The Corporation will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder of this Warrant. Without limiting the generality of the foregoing, the Corporation (a) will not increase the par value of any shares of Common Stock receivable on the exercise of the Warrant above the amount payable therefor on such exercise, and (b) will take all such action as may be necessary or appropriate in order that the Corporation may validly and legally issue fully paid and nonassessable shares of Common Stock on the exercise of this Warrant from time to time outstanding. 14. Replacement of Warrant. On receipt of evidence reasonably satisfactory to the Corporation of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction of this Warrant, on delivery of any indemnity agreement or security reasonably satisfactory in form and amount to the Corporation or, in the case of any such mutilation, on surrender and cancellation of such Warrant, the Corporation at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. IN WITNESS WHEREOF, the Corporation has signed this Warrant by its duly authorized officer this second day of January, 1997. KTI, INC. By:________________________________________________ Name: Nicholas Menonna, Jr. Title: Chairman of the Board of Directors and Chief Executive Officer Page 8 9 EXHIBIT A EXERCISE FORM To Be Executed Upon Exercise of Warrant The undersigned record holder of the within Warrant hereby irrevocably elects to exercise the rights to purchase ______ shares of Common Stock of KTI, Inc. by exercise of the within Warrant, according to the terms and conditions therein and payment of the Exercise Price in full. The undersigned requests that certificates for such shares of Common Stock shall be issued in the name set forth below. Dated: , 199__ ______________________________ Signature ______________________________ Print Name of Signatory Address:_______________________________ ________________________________ Social Security No. or other identifying number:____________________ If said number of shares of Common Stock and Warrants shall not be all the shares under the within Warrant, the undersigned requests that a new Warrant for the unexercised portion shall be registered in the name of: ______________________________ (Please print) Address:_______________________________ ________________________________ Social Security No. or other identifying number:____________________ Signature:_____________________________ _____________________________ Print Name of Signatory Page 9 EX-10.48 13 WARRANT TO PURCHASE 1 EXHIBIT 10.48 Warrant No. D-5 Right to Purchase Common Shares THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE. THIS WARRANT HAS BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO DISTRIBUTION OR RESALE, AND MAY NOT BE SOLD, ASSIGNED, MADE SUBJECT TO A SECURITY INTEREST, PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND APPLICABLE STATE LAWS OR PURSUANT TO AN EXEMPTION THEREFROM IF THE CORPORATION RECEIVES AN OPINION OF COUNSEL (WHICH COUNSEL AND OPINION (IN FORM, SCOPE, AND SUBSTANCE) SHALL BE REASONABLY ACCEPTABLE TO THE CORPORATION) THAT SUCH REGISTRATION IS NOT REQUIRED AS TO SUCH SALE OR OFFER. KTI, INC. A NEW JERSEY CORPORATION WARRANT TO PURCHASE COMMON STOCK Registered Owner: The Baldwin & Clarke Companies Coldstream Park 116B South River Road Bedford, New Hampshire 03110 For Value Received, KTI, Inc., a New Jersey corporation (the "Corporation") grants the following rights to the registered owner of this Warrant (the "Holder") and the Holder hereby acknowledges and agrees that: 1. Issue. Upon tender of this Warrant to the Corporation, the Corporation shall issue to the registered owner hereof the number of shares specified in paragraph 2 hereof of fully paid and nonassessable shares of common stock of the Corporation, no par value (the "Common Stock"), that the registered owner is otherwise entitled to purchase. 2. Number of Shares. Subject to the provisions of paragraph 8, the number of shares of Common Stock that the registered owner of this Warrant is entitled to receive upon exercise of this Warrant is 15,000 shares of Common Stock. The Corporation shall, at all times, authorize and reserve for issuance such number of shares of Common Stock as shall be issuable upon the exercise of this Warrant. The Corporation covenants and agrees that all shares of Common Stock that may be issued upon the exercise of this Warrant shall, upon payment and issuance therefore, be duly and validly issued, fully paid and nonassessable, and free from all taxes, liens and charges with respect to the purchase and the issuance of such shares. 3. Exercise Price. The price at which the shares of Common Stock may purchased upon exercise of this Warrant is Seven and no/100 Dollars ($7.00) per share (the "Exercise Price"). The Exercise Price of this Warrant is subject to adjustment pursuant to Section 8 hereof. Page 1 2 4. Exercise. This Warrant shall be exercisable on and after January 1, 1997 and shall become void unless it is exercised and payment of the Exercise Price is received by the Corporation prior to April 30, 2001 (the "Expiration Date"); provided that in case of dissolution of the Corporation, but subject to the provisions of paragraph 8(b), this Warrant shall become void on the date of such dissolution. 5. Tender. The exercise of this Warrant must be accomplished by actual delivery of the Exercise Price in cash, certified check, or official bank draft in lawful money of the United States of America, and by actual delivery of a duly executed exercise form, a copy of which is attached to this Warrant as "Exhibit A", properly executed by the registered owner of the Warrant, and by surrender of this Warrant. The payment and exercise form must be delivered, personally or by mail, to the offices of the Corporation at 7000 Boulevard East, Guttenberg, New Jersey 07093 or such other address or addresses as the Corporation shall notify the Holder including the address of a stock transfer agent, authorized by the Company. Documents sent by mail shall be deemed to be delivered when they are received by the Corporation. If this Warrant should be exercised in part only, the Corporation shall, upon surrender of this Warrant for cancellation, execute and deliver a new Warrant evidencing the rights of the Holder thereof to purchase the balance of the shares of Common Stock purchasable hereunder. Upon receipt by the Corporation of an exercise form properly executed, payment of the Exercise Price, and this Warrant at its office, or by the authorized stock transfer agent of the Corporation at its office, in proper form for exercise, the Holder shall be deemed to be the holder of record of the shares of Common Stock issuable upon such exercise, notwithstanding that the stock transfer books of the Corporation shall then be closed or that certificates representing such shares of Common Stock shall not then be physically delivered to the Holder. 6. Recognition of the Registered Owner. Prior to due presentment for registration of transfer of this Warrant, the Corporation may deem and treat the registered Holder or Holders of this Warrant as its absolute owner or owners for all purposes, as the person or persons exclusively entitled to receive notices concerning this Warrant, and as the person or persons otherwise entitled to exercise rights under this Warrant. 7. Restricted Securities. The Holder, by acquiring this Warrant, hereby covenants and agrees that: (a) the Holder will not offer for sale or sell this Warrant or the shares of Common Stock issuable upon the exercise of this Warrant unless pursuant to: i. an effective registration statement under the Securities Act ("Registration Statement") filed by the Company covering such offer and sale; or ii. an exemption from registration under the Securities Act; provided that prior to any such proposed transfer, the Holder shall give five (5) days' written notice to the Company of the Holder's intentions to affect such transfer, which notice shall be accompanied by such evidence (including the provision of an opinion of counsel (which counsel and opinion (in form scope, and substance) shall be reasonably acceptable to the Corporation) that such registration is not required as to such sale or offer as may be Page 2 3 reasonably satisfactory to the Company that the proposed transfer may be effected without registration under the Securities Act. (b) The certificates representing the shares of Common Stock issued upon exercise hereof, unless the same are registered under the Securities Act prior to exercise of this Warrant, shall be stamped or otherwise imprinted with a legend in substantially the following form: "The shares of common stock represented by this certificate have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), or the securities laws of any state. The shares of common stock have been acquired for investment and not with a view to distribution or resale, and may not be sold, assigned, made subject to a security interest, pledged, hypothecated, or otherwise transferred except pursuant to an effective registration statement under the Securities Act and applicable state laws or pursuant to an exemption therefrom if the Company receives an opinion of counsel (which counsel and opinion (in form, scope and substance, shall be reasonably acceptable to the Corporation) that such registration is not required as to such sale or offer." (c) Any offer or sale of this Warrant or the shares of Common Stock issued upon exercise hereof shall be made in accordance with the federal and state securities laws of applicable jurisdictions (including the prospectus delivery requirements of the Securities Act), and any other applicable law. 8. Adjustment of Exercise Price and Shares. After each adjustment of the Exercise Price pursuant to this Section 8, the number of shares of Common Stock purchasable on the exercise of this Warrant shall be the number derived by dividing such adjusted pertinent Exercise Price into the original Exercise Price. The Exercise Price shall be subject to adjustment as follows: (a) In the event, prior to the termination of this Warrant by exercise thereof or by its terms, the Corporation shall issue any shares of its Common Stock as a share dividend or shall declare a stock split or otherwise subdivide the number of outstanding shares of Common Stock into a greater number of shares, then, in either of such events (referred to hereinafter as an "Adjustment Event"), the Exercise Price per share of Common Stock that may be purchased pursuant to this Warrant in effect at the time of such action shall be reduced proportionately and the number of shares of Common Stock that may be purchased pursuant to this Warrant shall be increased proportionately to the nearest full amount so as to ensure that the Holder hereof is in the same economic position as such Holder was in prior to such share dividend or subdivision. Conversely, in the event the Corporation shall reduce the number of shares of its outstanding Common Stock by declaring a reverse stock split or otherwise combining such shares into a smaller number of shares, then, in such event, the Exercise Price per share that may be purchased pursuant to this Warrant in effect at the time of such action shall be increased proportionately and the number of shares of Common Stock at that time purchasable pursuant to this Warrant shall be decreased proportionately to the nearest full amount so as to ensure that the Holder hereof is in the same economic position as such Holder was in prior to such share combination. Any dividend paid or distributed on the Common Stock in shares of any other class of capital stock of the Corporation or securities convertible into shares of Common Stock shall be treated as a dividend paid in Common Stock to the extent that shares of Common Stock are issuable on the conversion thereof. An adjustment in the Exercise Price or the number of shares of Common Page 3 4 Stock to be received upon exercise of this Warrant made pursuant to this Section 8(a) shall become effective immediately after the effective date of such Adjustment Event retroactive to the record date, if any, for such Adjustment Event. (b) In the event the Corporation, at any time while this Warrant shall remain unexpired and unexercised, shall (i) effect a reorganization, (ii) consolidate with or merge into any person, (iii) transfer or sell all or substantially all of its property, or (iv) dissolve, liquidate or wind up its affairs (a "Reorganization Event"), the Corporation will take prompt action to ensure that proportionate, equitable, lawful and adequate provision shall be made as part of the terms of any such Reorganization Event such that the Holder of this Warrant may thereafter receive, on exercise thereof, in lieu of each share of Common Stock which such Holder would have been entitled to receive, the same kind and amount of any share, securities, or assets as may be issuable, distributable or payable pursuant to such Reorganization Event with respect to each share of Common Stock which the Holder would have been entitled to receive if such Holder had exercised this Warrant immediately prior to such Reorganization Event. Upon any Reorganization Event referred to in this paragraph 8(b), this Warrant shall continue in full force and effect and the terms hereof shall be applicable to all securities and other property receivable on the exercise of this Warrant after the consummation of such Reorganization Event; and shall be binding upon the issuer of any such securities or other property, including, in the case of any such transfer, the person acquiring all or substantially all of the properties or assets of the Corporation, whether or not such person shall have expressly assumed the terms of this Warrant. (c) Notwithstanding the provisions of this Section 8, no adjustment of the Exercise Price or the shares of Common Stock to be received upon exercise of the Warrant shall be made unless Exercise Price is the aggregate of such adjustments to the Exercise Price equals or exceeds $0.005. (d) In the event, prior to the expiration of this Warrant by exercise thereof or by its terms, the Corporation shall determine to take a record of the holders of its Common Stock for the purpose of determining shareholders entitled to receive any share dividend or other right which will cause any change or adjustment in the number, amount, price or nature of the shares of Common Stock or other securities or assets deliverable on exercise of this Warrant pursuant to the foregoing provisions, the Corporation shall give to the registered Holder of this Warrant at such Holder's address as may appear on the books of the Corporation at least fifteen (15) days' prior written notice to the effect that it intends to take such a record. Such notice shall specify the date as of which such record is to be taken, and the number, amount, price and nature of the Common Stock or other shares, securities or assets which will be deliverable on exercise of this Warrant after the action for which such record will be taken has been completed. Without limiting the obligation of the Corporation to provide notice to the registered Holder of this Warrant of any corporate action hereunder, the failure of the Corporation to give notice shall not invalidate such corporate action of the Corporation. (e) No adjustment of the Exercise Price pursuant to this Section 8 or Section 9 shall be made as a result of or in connection with (i) the issuance of Common Stock pursuant to options, warrants and share purchase agreements outstanding or in effect on the date hereof, (ii) the establishment of additional stock option or other benefit plans of the Corporation, the modification, renewal or extension of any stock option or other benefit plan now in effect or hereafter created, or the issuance of Common Stock on exercise of any options pursuant to such stock option or other benefit plans, or (iii) the issuance of Common Stock in connection with an acquisition or merger of any type (the antidilution provision of this Section 8 will not apply in the event a merger or acquisition is undertaken by the Corporation as long as the Corporation is the survivor thereof), and (iv) in connection with compensation arrangements for present or former Page 4 5 officers, direct employees or agents of the Corporation or any indirect or direct subsidiary of the Corporation, and the like. 9. Other Adjustments to Purchase Price and Number of Securities. (a) Computation of Adjusted Purchase Price. Except as hereinafter provided, in case the Corporation shall at any time after the date of this Warrant issue or sell any shares of Common Stock (other than an issuance or sale referred to in paragraph 8(e)) for a consideration per share less than the then current fair market value of a share of the Common Stock ("fair market value" of the Common Stock to mean the average closing price of the Common Stock on the immediately preceding ten (10) days on which such shares of Common Stock may be traded in the NASDAQ National Market or other securities exchange) then immediately upon such issuance or sale, the Exercise Price shall (until another such issuance or sale) be reduced to the price (calculated to the nearest full cent) equal to the Exercise Price in effect prior to such issuance or sale multiplied by the quotient derived by dividing (A) an amount equal to the sum of (X) the then current fair market value per share of Common Stock immediately prior to such issuance or sale multiplied by the total number of shares of Common Stock outstanding immediately prior to such issuance or sale, plus (Y) the aggregate of the amount of all consideration, if any, to be received by the Corporation upon such issuance or sale, by (B) the then current fair market value per share of Common Stock immediately prior to such issuance or sale multiplied by the total number of shares of Common Stock outstanding immediately after such issuance or sale; provided that: i. In case of the issuance or sale of shares of Common Stock for a consideration part or all of which shall be cash, the amount of the cash consideration therefor shall be deemed to be the amount of cash received by the Corporation for such shares (or, if shares of Common Stock are offered by the Corporation for subscription, the subscription price, or, if either of such securities shall be sold to underwriters or dealers for public offering without a subscription offering, the initial public offering price for such shares) before deducting therefrom any compensation paid or discount allowed in the sale, underwriting or purchase thereof by underwriters or dealers or others performing similar services, or any expenses incurred in connection therewith. ii. In case of the issuance or sale (otherwise than as a dividend or other distribution on any capital stock of the Corporation) of shares of Common Stock for a consideration part or all of which shall be other than cash, the amount of the consideration therefor other than cash shall be deemed to be the value of such consideration as determined in good faith by the Board of Directors of the Corporation. iii. The reclassification of securities of the Corporation other than shares of Common Stock into securities including shares of Common Stock shall be deemed to involve the issuance of such shares of Common Stock for a consideration other than cash immediately prior to the close of business on the date fixed for the determination of security holders entitled to receive such shares, and the value of the consideration allocable to such shares of Common Stock shall be determined in good faith by the Board of Directors of the Corporation. Page 5 6 iv. The number of shares of Common Stock at any one time outstanding shall include the aggregate number of shares issued or issuable (subject to readjustment upon the actual issuance thereof) upon the exercise of options, rights, and warrants and upon the conversion or exchange of convertible or exchangeable securities. (b) Options, Rights, Warrants and Convertible and Exchangeable Securities. Except as hereinafter provided, in case the Corporation shall at any time after the date hereof issue or sell options, rights or warrants to subscribe for shares of Common Stock, or issue any securities convertible into or exchangeable for shares of Common Stock (other than the issuances or sales referred to in paragraph 9(c)), for a consideration per share less than the then current fair market value of the share of the Common Stock immediately prior to the issuance of such options, rights or Warrants, or such convertible or exchangeable securities, or without consideration, the Exercise Price shall (until another such issuance or sale) be reduced to the price (calculated to the nearest full cent) equal to the Exercise Price in effect prior to such issuance or sale multiplied by the quotient derived by dividing (A) an amount equal to the sum of (X) the then current fair market value per share of Common Stock immediately prior to such issuance or sale multiplied by the total number of shares of Common Stock outstanding immediately prior to such issuance or sale, plus (Y) the aggregate of the amount of all consideration, if any, to be received by the Corporation upon the exercise of such convertible or exchangeable securities, by (B) the then current fair market value per share of Common Stock immediately prior to such issuance or sale multiplied by the total number of shares of Common Stock that would be outstanding immediately after the exercise of such convertible or exchangeable securities provided that: i. The aggregate maximum number of shares of Common Stock, as the case may be, issuable under such options, rights or warrants shall be deemed to be issued and outstanding at the time such options, rights or warrants were issued, and for a consideration equal to the minimum purchase price per share provided for in such options, rights or warrants at the time of issuance, plus the consideration (determined in the same manner as consideration received on the issue or sale of shares in accordance with the terms of this Warrant), if any, received by the Corporation for such options, rights or warrants. ii. The aggregate maximum number of shares of Common Stock issuable upon conversion or exchange of any convertible or exchangeable securities shall be deemed to be issued and outstanding at the time of issuance of such securities, and for a consideration equal to the consideration (determined in the same manner as consideration received on the issue or sale of shares of Common Stock in accordance with the terms of this Warrant) received by the Corporation for such securities, plus the minimum consideration, if any, receivable by the Corporation upon the conversion or exchange thereof. iii. If any change shall occur in the price per share provided for in any of the options, rights, or warrants or convertible or exchangeable securities referred to in this subsection (b) of this paragraph 9, such options, rights or warrants or conversion or exchange rights, as the case may be, shall be deemed to have expired or terminated on the date when such price change became effective in respect of shares not theretofore issued and the Corporation shall be deemed to have issued upon such date new options, Page 6 7 rights or warrants or convertible or exchangeable securities at the new price per share in respect of the number of shares issuable upon the exercise of such options, rights or warrants or the conversion or exchange of such convertible or exchangeable securities. (c) Exclusions. The provisions of subsection 9(b) above shall not apply to any options issued pursuant to stock option plans of the Corporation in effect on the date hereof, to renewals of any existing options, rights or warrants or to any options, rights or warrants issued to employees of the Corporation or any of its subsidiaries on the date hereof. Moreover, the provisions of subsection 9(b) shall terminate at such time as there is in effect a registration statement filed with the Securities and Exchange Commission with respect to the shares of Common Stock underlying the Warrant. (d) Adjustment in Number of Securities. Upon each adjustment of the Exercise Price pursuant to the provisions of this paragraph 9, the number of shares of Common Stock issuable upon the exercise of this Warrant shall be adjusted to the nearest full amount by multiplying a number equal to the Exercise Price in effect immediately prior to such adjustment by the number of shares of Common Stock issuable upon exercise of this Warrant immediately prior to such adjustment and dividing the product so obtained by the adjusted Exercise Price. 10. Fractional Shares. No fractional shares or script representing fractional shares of Common Stock shall be issued upon the exercise of this Warrant. No adjustment to the shares of Common Stock that may be purchased upon the exercise of this Warrant will result in any fractional shares to be issued to the Holders hereof. 11. Rights of the Holder. The Holder shall not, by virtue hereof, be entitled to any rights of a shareholder in the Corporation, either at law or equity, and the rights of the Holder are limited to those expressed in this Warrant and are not enforceable against the Corporation except to the extent set forth herein. 12. Notices of Record Date, Etc. In case: (a) the Corporation shall take a record of the holders of its Common Stock (or other securities at the time receivable upon the exercise of the Warrant) for the purpose of entitling them to receive any dividend (other than a cash dividend payable out of earned surplus) or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities, or to receive any other right; or (b) of any capital reorganization of the Corporation (other than a stock split or reverse stock split), any reclassification of the capital stock of the Corporation, any consolidation or merger of the Corporation with or into another corporation (other than a merger for purposes of change of domicile) or any conveyance of all or substantially all of the assets of the Corporation to another corporation; or (c) of any voluntary or involuntary dissolution, liquidation or winding-up of the Corporation; then, in each such case, the corporation shall mail or cause to be mailed to the Holder at the time outstanding a notice specifying, as the case may be, (i) the date on which Page 7 8 a record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, or (ii) the date on which such reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding-up is to take place, and the time, if any, to be fixed as to which the holders of record of Common Stock (or such other securities at the time receivable upon the exercise of the Warrant) shall be entitled to exchange their shares of Common Stock (or such other securities) for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding-up. Such notice shall be mailed at least twenty (20) days prior to the date therein specified and this Warrant may be exercised prior to said date during the term of the Warrant no later than five (5) days prior to said date. 13. No Impairment. The Corporation will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder of this Warrant. Without limiting the generality of the foregoing, the Corporation (a) will not increase the par value of any shares of Common Stock receivable on the exercise of the Warrant above the amount payable therefor on such exercise, and (b) will take all such action as may be necessary or appropriate in order that the Corporation may validly and legally issue fully paid and nonassessable shares of Common Stock on the exercise of this Warrant from time to time outstanding. 14. Replacement of Warrant. On receipt of evidence reasonably satisfactory to the Corporation of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction of this Warrant, on delivery of any indemnity agreement or security reasonably satisfactory in form and amount to the Corporation or, in the case of any such mutilation, on surrender and cancellation of such Warrant, the Corporation at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. IN WITNESS WHEREOF, the Corporation has signed this Warrant by its duly authorized officer this second day of January, 1997. KTI, INC. By:________________________________________________ Name: Nicholas Menonna, Jr. Title: Chairman of the Board of Directors and Chief Executive Officer Page 8 9 EXHIBIT A EXERCISE FORM To Be Executed Upon Exercise of Warrant The undersigned record holder of the within Warrant hereby irrevocably elects to exercise the rights to purchase ______ shares of Common Stock of KTI, Inc. by exercise of the within Warrant, according to the terms and conditions therein and payment of the Exercise Price in full. The undersigned requests that certificates for such shares of Common Stock shall be issued in the name set forth below. Dated: , 199__ ______________________________ Signature ______________________________ Print Name of Signatory Address:_______________________________ ________________________________ Social Security No. or other identifying number:____________________ If said number of shares of Common Stock and Warrants shall not be all the shares under the within Warrant, the undersigned requests that a new Warrant for the unexercised portion shall be registered in the name of: ______________________________ (Please print) Address:_______________________________ ________________________________ Social Security No. or other identifying number:____________________ Signature:_____________________________ _____________________________ Print Name of Signatory Page 9 EX-10.49 14 3RD AMENDMENT TO 2ND AMENDED AND RESTATED CERT. 1 EXHIBIT 10.49 THIRD AMENDMENT TO SECOND AMENDED AND RESTATED CERTIFICATE AND AGREEMENT OF LIMITED PARTNERSHIP OF FTI LIMITED PARTNERSHIP This Third Amendment to the Second Amended and Restated Certificate and Agreement of Limited Partnership of FTI Limited Partnership (the "Third Amendment") dated as of January 23, 1997, is entered into by and between KTI Management of Maine, Inc., a Maine corporation ("KMM") and Maine Woodchips Associates, a Maine partnership ("Woodchips"), witnesseth that: Whereas, Woodchips wishes to sell its 25% interest as a limited partner in FTI Limited Partnership, a Maine limited partnership ("FTI"); Whereas, KMM wishes to purchase such 25% interest as a limited partner in FTI; Now therefore, it is hereby agreed as follows: 1. Woodchips hereby sells, assigns and transfers all of its right, title, interest and obligations in and to FTI to KMM. KMM hereby purchases all of Woodchips' right, title, interest and obligations in and to FTI from Woodchips. 2. Purchase Price: (a) KMM shall deliver 10,000 shares of KTI, Inc. common stock and a warrant to purchase 2,000 shares of KTI, Inc. common stock at a price of $8.50 per share. The warrant will expire three years after the date of closing. The stock certificate evidencing such shares and the warrant shall bear customary restrictive legends indicating that such shares, the warrant and the shares underlying the warrant are unregistered. (b) KTI, Inc. and Woodchips shall have executed and exchanged duplicate originals of a Registration Rights Agreement with each other. The Registration Rights Agreement shall be in the form of Exhibit I hereto. 3. Woodchips hereby represents and warrants to KMM that: (a) it has all requisite power and authority to sell the 25% interest as a limited partner in FTI that it owns. This Third Amendment is, and when executed and delivered, will be, the legal, valid and binding obligation of Woodchips, enforceable in accordance with its terms. (b) The execution and delivery of this Third Amendment by Woodchips and the consummation of the transactions contemplated hereby will not violate any statute or law or any judgment, decree, order, regulation or rule of any domestic or foreign court or governmental authority applicable to Woodchips. 2 (c) No person has been authorized by Woodchips, or by anyone acting on its behalf, to act as a broker, finder or in any other similar capacity in connection with the transactions contemplated by this Third Amendment. (d) Woodchips has no present intention to sell any of the shares of KTI common stock to be delivered upon execution of this Third Amendment. Woodchips further agrees that it will not sell the shares so received, except in compliance with the securities laws of the United States of America or any state thereof, or any exemption thereto. (e) No representation or warranty made by Woodchips in this Third Amendment nor any statement, certificate or other document attached as an exhibit hereto, nor any other document delivered by Woodchips to KMM or any of its representatives in connection with this Third Amendment, is false or misleading in any material respect or contains any material misstatement of fact or omits to state any fact necessary to be stated make the statements made in any such representation or warranty false or misleading in any material respect. 4. KMM represents and warrants to Woodchips as follows: (a) KMM is a corporation duly formed, validly existing and in good standing under the laws of the State of Maine and has all requisite power and authority to carry on its business as it is now being conducted and to own, lease and operate its properties and assets as and in the places where such business is now conducted and where such properties and assets are now owned, leased or operated. (b) KMM has all requisite power and authority to execute, deliver and perform its obligations under this Third Amendment. This Third Amendment is valid and binding upon KMM, enforceable in accordance with its terms. (c) Neither the execution and delivery of this Amendment by KMM nor the consummation of the transactions contemplated hereby by KMM will violate any provisions of the Certificate of Incorporation of KMM, or be in conflict with, or constitute a default (or an event which, with or without notice, lapse of time or both, would constitute a default) under, or result in the termination or invalidity of, or accelerate the performance required by, or cause the acceleration of the maturity of any debt or obligation pursuant to, any agreement or commitment to which KMM is a party or by which KMM is bound, or violate any statute or law or any judgment, decree, order, regulation or rule of any court or governmental authority. 5. Woodchips' assignment of its rights, title, interest and obligations as a limited partner in FTI is hereby approved and agreed to in all respects. 6. All references to Woodchips in the Agreement, as amended, shall be deemed to refer to KMM. 7. The limited partnership interest of Woodchips shall be deemed to have been converted to a general partnership interest in FTI upon execution and delivery of this Third Amendment. 3 In witness whereof, the parties have executed this Third Amendment to the Second Amended and Restated Certificate and Agreement of Limited Partnership of FTI Limited Partnership as of the day and date first written above. KTI Management of Maine, Inc. Maine Woodchips Associates - ------------------------------ ------------------------------ Its Chairman and Chief Its Partner Executive Officer 4 County of Hudson ) )ss. State of New Jersey ) On the 27th day of January, 1997, before me, the undersigned Notary Public, personally appeared Nicholas Menonna, Jr., the Chairman of the Board of Directors and Chief Executive Officer of KTI Management of Maine, Inc.., known to me to be the person whose name is subscribed to the within instrument, who, being duly sworn, declared that the foregoing is true, that the execution hereof was his free act and deed and the free act and deed of the said corporation and that the execution hereof was made for the purposes herein contained. IN WITNESS WHEREOF, I hereunto set my hand and official seal. - ----------------------- Notary Public My commission expires: 5 ) )ss. ) On the day of January 1997, before me, the undersigned Notary Public, personally appeared , a partner of Maine Woodchips Associates, known to me to be the person whose name is subscribed to the within instrument, who, being duly sworn, is declared that the foregoing is true, that the execution hereof was h__ free act and deed and the free act and deed of the said entity and that the execution hereof was made for the purposes herein contained. IN WITNESS WHEREOF, I hereunto set my hand and official seal. - ----------------------------- Notary Public My commission expires: EX-10.50 15 WARRANT TO PURCHASE 1 EXHIBIT 10.50 Warrant No. D-7 Right to Purchase Common Shares THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE. THIS WARRANT HAS BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO DISTRIBUTION OR RESALE, AND MAY NOT BE SOLD, ASSIGNED, MADE SUBJECT TO A SECURITY INTEREST, PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND APPLICABLE STATE LAWS OR PURSUANT TO AN EXEMPTION THEREFROM IF THE CORPORATION RECEIVES AN OPINION OF COUNSEL (WHICH COUNSEL AND OPINION (IN FORM, SCOPE, AND SUBSTANCE) SHALL BE REASONABLY ACCEPTABLE TO THE CORPORATION) THAT SUCH REGISTRATION IS NOT REQUIRED AS TO SUCH SALE OR OFFER. KTI, INC. A NEW JERSEY CORPORATION WARRANT TO PURCHASE COMMON STOCK Registered Owner: Maine Woodchips Associates c/o James R. Beers Beers & Cutler 1250 Connecticut Avenue N Fourth Floor Washington, DC For Value Received, KTI, Inc., a New Jersey corporation (the "Corporation") grants the following rights to the registered owner of this Warrant (the "Holder") and the Holder hereby acknowledges and agrees that: 1. Issue. Upon tender of this Warrant to the Corporation, the Corporation shall issue to the registered owner hereof the number of shares specified in paragraph 2 hereof of fully paid and nonassessable shares of common stock of the Corporation, no par value (the "Common Stock"), that the registered owner is otherwise entitled to purchase. 2. Number of Shares. Subject to the provisions of paragraph 8, the number of shares of Common Stock that the registered owner of this Warrant is entitled to receive upon exercise of this Warrant is 2,000 shares of Common Stock. The Corporation shall, at all times, authorize and reserve for issuance such number of shares of Common Stock as shall be issuable upon the exercise of this Warrant. The Corporation covenants and agrees that all shares of Common Stock that may be issued upon the exercise of this Warrant shall, upon payment and issuance therefore, be duly and validly issued, fully paid and nonassessable, and free from all taxes, liens and charges with respect to the purchase and the issuance of such shares. 3. Exercise Price. Page 1 2 The price at which the shares of Common Stock may purchased upon exercise of this Warrant is Eight and 50/100 Dollars ($8.50) per share (the "Exercise Price"). The Exercise Price of this Warrant is subject to adjustment pursuant to Section 8 hereof. 4. Exercise. This Warrant shall be exercisable on and after January 23, 1997 and shall become void unless it is exercised and payment of the Exercise Price is received by the Corporation prior to January 31, 2000 (the "Expiration Date"); provided that in case of dissolution of the Corporation, but subject to the provisions of paragraph 8(b), this Warrant shall become void on the date of such dissolution. 5. Tender. The exercise of this Warrant must be accomplished by actual delivery of the Exercise Price in cash, certified check, or official bank draft in lawful money of the United States of America, and by actual delivery of a duly executed exercise form, a copy of which is attached to this Warrant as "Exhibit A", properly executed by the registered owner of the Warrant, and by surrender of this Warrant. The payment and exercise form must be delivered, personally or by mail, to the offices of the Corporation at 7000 Boulevard East, Guttenberg, New Jersey 07093 or such other address or addresses as the Corporation shall notify the Holder including the address of a stock transfer agent, authorized by the Company. Documents sent by mail shall be deemed to be delivered when they are received by the Corporation. If this Warrant should be exercised in part only, the Corporation shall, upon surrender of this Warrant for cancellation, execute and deliver a new Warrant evidencing the rights of the Holder thereof to purchase the balance of the shares of Common Stock purchasable hereunder. Upon receipt by the Corporation of an exercise form properly executed, payment of the Exercise Price, and this Warrant at its office, or by the authorized stock transfer agent of the Corporation at its office, in proper form for exercise, the Holder shall be deemed to be the holder of record of the shares of Common Stock issuable upon such exercise, notwithstanding that the stock transfer books of the Corporation shall then be closed or that certificates representing such shares of Common Stock shall not then be physically delivered to the Holder. 6. Recognition of the Registered Owner. Prior to due presentment for registration of transfer of this Warrant, the Corporation may deem and treat the registered Holder or Holders of this Warrant as its absolute owner or owners for all purposes, as the person or persons exclusively entitled to receive notices concerning this Warrant, and as the person or persons otherwise entitled to exercise rights under this Warrant. 7. Restricted Securities. The Holder, by acquiring this Warrant, hereby covenants and agrees that: (a) the Holder will not offer for sale or sell this Warrant or the shares of Common Stock issuable upon the exercise of this Warrant unless pursuant to: i. an effective registration statement under the Securities Act ("Registration Statement") filed by the Company covering such offer and sale; or ii. an exemption from registration under the Securities Act; provided that prior to any such proposed transfer, the Holder shall give five (5) days' Page 2 3 written notice to the Company of the Holder's intentions to affect such transfer, which notice shall be accompanied by such evidence (including the provision of an opinion of counsel (which counsel and opinion (in form scope, and substance) shall be reasonably acceptable to the Corporation) that such registration is not required as to such sale or offer as may be reasonably satisfactory to the Company that the proposed transfer may be effected without registration under the Securities Act. (b) The certificates representing the shares of Common Stock issued upon exercise hereof, unless the same are registered under the Securities Act prior to exercise of this Warrant, shall be stamped or otherwise imprinted with a legend in substantially the following form: "The shares of common stock represented by this certificate have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), or the securities laws of any state. The shares of common stock have been acquired for investment and not with a view to distribution or resale, and may not be sold, assigned, made subject to a security interest, pledged, hypothecated, or otherwise transferred except pursuant to an effective registration statement under the Securities Act and applicable state laws or pursuant to an exemption therefrom if the Company receives an opinion of counsel (which counsel and opinion (in form, scope and substance, shall be reasonably acceptable to the Corporation) that such registration is not required as to such sale or offer." (c) Any offer or sale of this Warrant or the shares of Common Stock issued upon exercise hereof shall be made in accordance with the federal and state securities laws of applicable jurisdictions (including the prospectus delivery requirements of the Securities Act), and any other applicable law. 8. Adjustment of Exercise Price and Shares. After each adjustment of the Exercise Price pursuant to this Section 8, the number of shares of Common Stock purchasable on the exercise of this Warrant shall be the number derived by dividing such adjusted pertinent Exercise Price into the original Exercise Price. The Exercise Price shall be subject to adjustment as follows: (a) In the event, prior to the termination of this Warrant by exercise thereof or by its terms, the Corporation shall issue any shares of its Common Stock as a share dividend or shall declare a stock split or otherwise subdivide the number of outstanding shares of Common Stock into a greater number of shares, then, in either of such events (referred to hereinafter as an "Adjustment Event"), the Exercise Price per share of Common Stock that may be purchased pursuant to this Warrant in effect at the time of such action shall be reduced proportionately and the number of shares of Common Stock that may be purchased pursuant to this Warrant shall be increased proportionately to the nearest full amount so as to ensure that the Holder hereof is in the same economic position as such Holder was in prior to such share dividend or subdivision. Conversely, in the event the Corporation shall reduce the number of shares of its outstanding Common Stock by declaring a reverse stock split or otherwise combining such shares into a smaller number of shares, then, in such event, the Exercise Price per share that may be purchased pursuant to this Warrant in effect at the time of such action shall be increased proportionately and the number of shares of Common Stock at that time purchasable pursuant to this Warrant shall be decreased proportionately to the nearest full amount so as to ensure that the Holder Page 3 4 hereof is in the same economic position as such Holder was in prior to such share combination. Any dividend paid or distributed on the Common Stock in shares of any other class of capital stock of the Corporation or securities convertible into shares of Common Stock shall be treated as a dividend paid in Common Stock to the extent that shares of Common Stock are issuable on the conversion thereof. An adjustment in the Exercise Price or the number of shares of Common Stock to be received upon exercise of this Warrant made pursuant to this Section 8(a) shall become effective immediately after the effective date of such Adjustment Event retroactive to the record date, if any, for such Adjustment Event. (b) In the event the Corporation, at any time while this Warrant shall remain unexpired and unexercised, shall (i) effect a reorganization, (ii) consolidate with or merge into any person, (iii) transfer or sell all or substantially all of its property, or (iv) dissolve, liquidate or wind up its affairs (a "Reorganization Event"), the Corporation will take prompt action to ensure that proportionate, equitable, lawful and adequate provision shall be made as part of the terms of any such Reorganization Event such that the Holder of this Warrant may thereafter receive, on exercise thereof, in lieu of each share of Common Stock which such Holder would have been entitled to receive, the same kind and amount of any share, securities, or assets as may be issuable, distributable or payable pursuant to such Reorganization Event with respect to each share of Common Stock which the Holder would have been entitled to receive if such Holder had exercised this Warrant immediately prior to such Reorganization Event. Upon any Reorganization Event referred to in this paragraph 8(b), this Warrant shall continue in full force and effect and the terms hereof shall be applicable to all securities and other property receivable on the exercise of this Warrant after the consummation of such Reorganization Event; and shall be binding upon the issuer of any such securities or other property, including, in the case of any such transfer, the person acquiring all or substantially all of the properties or assets of the Corporation, whether or not such person shall have expressly assumed the terms of this Warrant. (c) Notwithstanding the provisions of this Section 8, no adjustment of the Exercise Price or the shares of Common Stock to be received upon exercise of the Warrant shall be made unless Exercise Price is the aggregate of such adjustments to the Exercise Price equals or exceeds $0.005. (d) In the event, prior to the expiration of this Warrant by exercise thereof or by its terms, the Corporation shall determine to take a record of the holders of its Common Stock for the purpose of determining shareholders entitled to receive any share dividend or other right which will cause any change or adjustment in the number, amount, price or nature of the shares of Common Stock or other securities or assets deliverable on exercise of this Warrant pursuant to the foregoing provisions, the Corporation shall give to the registered Holder of this Warrant at such Holder's address as may appear on the books of the Corporation at least fifteen (15) days' prior written notice to the effect that it intends to take such a record. Such notice shall specify the date as of which such record is to be taken, and the number, amount, price and nature of the Common Stock or other shares, securities or assets which will be deliverable on exercise of this Warrant after the action for which such record will be taken has been completed. Without limiting the obligation of the Corporation to provide notice to the registered Holder of this Warrant of any corporate action hereunder, the failure of the Corporation to give notice shall not invalidate such corporate action of the Corporation. (e) No adjustment of the Exercise Price pursuant to this Section 8 or Section 9 shall be made as a result of or in connection with (i) the issuance of Common Stock pursuant to options, warrants and share purchase agreements outstanding or in effect on the date hereof, (ii) the establishment of additional stock option or other benefit plans of the Corporation, the modification, renewal or extension of any stock option or other benefit plan now in effect or hereafter created, or the issuance of Common Stock on exercise of any options pursuant to such Page 4 5 stock option or other benefit plans, or (iii) the issuance of Common Stock in connection with an acquisition or merger of any type (the antidilution provision of this Section 8 will not apply in the event a merger or acquisition is undertaken by the Corporation as long as the Corporation is the survivor thereof), and (iv) in connection with compensation arrangements for present or former officers, direct employees or agents of the Corporation or any indirect or direct subsidiary of the Corporation, and the like. 9. Other Adjustments to Purchase Price and Number of Securities. (a) Computation of Adjusted Purchase Price. Except as hereinafter provided, in case the Corporation shall at any time after the date of this Warrant issue or sell any shares of Common Stock (other than an issuance or sale referred to in paragraph 8(e)) for a consideration per share less than the then current fair market value of a share of the Common Stock ("fair market value" of the Common Stock to mean the average closing price of the Common Stock on the immediately preceding ten (10) days on which such shares of Common Stock may be traded in the NASDAQ National Market or other securities exchange) then immediately upon such issuance or sale, the Exercise Price shall (until another such issuance or sale) be reduced to the price (calculated to the nearest full cent) equal to the Exercise Price in effect prior to such issuance or sale multiplied by the quotient derived by dividing (A) an amount equal to the sum of (X) the then current fair market value per share of Common Stock immediately prior to such issuance or sale multiplied by the total number of shares of Common Stock outstanding immediately prior to such issuance or sale, plus (Y) the aggregate of the amount of all consideration, if any, to be received by the Corporation upon such issuance or sale, by (B) the then current fair market value per share of Common Stock immediately prior to such issuance or sale multiplied by the total number of shares of Common Stock outstanding immediately after such issuance or sale; provided that: i. In case of the issuance or sale of shares of Common Stock for a consideration part or all of which shall be cash, the amount of the cash consideration therefor shall be deemed to be the amount of cash received by the Corporation for such shares (or, if shares of Common Stock are offered by the Corporation for subscription, the subscription price, or, if either of such securities shall be sold to underwriters or dealers for public offering without a subscription offering, the initial public offering price for such shares) before deducting therefrom any compensation paid or discount allowed in the sale, underwriting or purchase thereof by underwriters or dealers or others performing similar services, or any expenses incurred in connection therewith. ii. In case of the issuance or sale (otherwise than as a dividend or other distribution on any capital stock of the Corporation) of shares of Common Stock for a consideration part or all of which shall be other than cash, the amount of the consideration therefor other than cash shall be deemed to be the value of such consideration as determined in good faith by the Board of Directors of the Corporation. iii. The reclassification of securities of the Corporation other than shares of Common Stock into securities including shares of Common Stock shall be deemed to involve the issuance of such shares of Common Stock for a consideration other than cash immediately prior to the close of business on the date fixed for the determination of security holders entitled to receive such shares, and the value of the consideration allocable to such shares of Page 5 6 Common Stock shall be determined in good faith by the Board of Directors of the Corporation. iv. The number of shares of Common Stock at any one time outstanding shall include the aggregate number of shares issued or issuable (subject to readjustment upon the actual issuance thereof) upon the exercise of options, rights, and warrants and upon the conversion or exchange of convertible or exchangeable securities. (b) Options, Rights, Warrants and Convertible and Exchangeable Securities. Except as hereinafter provided, in case the Corporation shall at any time after the date hereof issue or sell options, rights or warrants to subscribe for shares of Common Stock, or issue any securities convertible into or exchangeable for shares of Common Stock (other than the issuances or sales referred to in paragraph 9(c)), for a consideration per share less than the then current fair market value of the share of the Common Stock immediately prior to the issuance of such options, rights or Warrants, or such convertible or exchangeable securities, or without consideration, the Exercise Price shall (until another such issuance or sale) be reduced to the price (calculated to the nearest full cent) equal to the Exercise Price in effect prior to such issuance or sale multiplied by the quotient derived by dividing (A) an amount equal to the sum of (X) the then current fair market value per share of Common Stock immediately prior to such issuance or sale multiplied by the total number of shares of Common Stock outstanding immediately prior to such issuance or sale, plus (Y) the aggregate of the amount of all consideration, if any, to be received by the Corporation upon the exercise of such convertible or exchangeable securities, by (B) the then current fair market value per share of Common Stock immediately prior to such issuance or sale multiplied by the total number of shares of Common Stock that would be outstanding immediately after the exercise of such convertible or exchangeable securities provided that: i. The aggregate maximum number of shares of Common Stock, as the case may be, issuable under such options, rights or warrants shall be deemed to be issued and outstanding at the time such options, rights or warrants were issued, and for a consideration equal to the minimum purchase price per share provided for in such options, rights or warrants at the time of issuance, plus the consideration (determined in the same manner as consideration received on the issue or sale of shares in accordance with the terms of this Warrant), if any, received by the Corporation for such options, rights or warrants. ii. The aggregate maximum number of shares of Common Stock issuable upon conversion or exchange of any convertible or exchangeable securities shall be deemed to be issued and outstanding at the time of issuance of such securities, and for a consideration equal to the consideration (determined in the same manner as consideration received on the issue or sale of shares of Common Stock in accordance with the terms of this Warrant) received by the Corporation for such securities, plus the minimum consideration, if any, receivable by the Corporation upon the conversion or exchange thereof. iii. If any change shall occur in the price per share provided for in any of the options, rights, or warrants or convertible or exchangeable securities referred to in this subsection (b) of this paragraph 9, such options, rights or warrants or conversion or exchange rights, as the case may be, shall be Page 6 7 deemed to have expired or terminated on the date when such price change became effective in respect of shares not theretofore issued and the Corporation shall be deemed to have issued upon such date new options, rights or warrants or convertible or exchangeable securities at the new price per share in respect of the number of shares issuable upon the exercise of such options, rights or warrants or the conversion or exchange of such convertible or exchangeable securities. (c) Exclusions. The provisions of subsection 9(b) above shall not apply to any options issued pursuant to stock option plans of the Corporation in effect on the date hereof, to renewals of any existing options, rights or warrants or to any options, rights or warrants issued to employees of the Corporation or any of its subsidiaries on the date hereof. Moreover, the provisions of subsection 9(b) shall terminate at such time as there is in effect a registration statement filed with the Securities and Exchange Commission with respect to the shares of Common Stock underlying the Warrant. (d) Adjustment in Number of Securities. Upon each adjustment of the Exercise Price pursuant to the provisions of this paragraph 9, the number of shares of Common Stock issuable upon the exercise of this Warrant shall be adjusted to the nearest full amount by multiplying a number equal to the Exercise Price in effect immediately prior to such adjustment by the number of shares of Common Stock issuable upon exercise of this Warrant immediately prior to such adjustment and dividing the product so obtained by the adjusted Exercise Price. 10. Fractional Shares. No fractional shares or script representing fractional shares of Common Stock shall be issued upon the exercise of this Warrant. No adjustment to the shares of Common Stock that may be purchased upon the exercise of this Warrant will result in any fractional shares to be issued to the Holders hereof. 11. Rights of the Holder. The Holder shall not, by virtue hereof, be entitled to any rights of a shareholder in the Corporation, either at law or equity, and the rights of the Holder are limited to those expressed in this Warrant and are not enforceable against the Corporation except to the extent set forth herein. 12. Notices of Record Date, Etc. In case: (a) the Corporation shall take a record of the holders of its Common Stock (or other securities at the time receivable upon the exercise of the Warrant) for the purpose of entitling them to receive any dividend (other than a cash dividend payable out of earned surplus) or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities, or to receive any other right; or (b) of any capital reorganization of the Corporation (other than a stock split or reverse stock split), any reclassification of the capital stock of the Corporation, any consolidation or merger of the Corporation with or into another corporation (other than a merger for purposes of change of domicile) or any conveyance of all or substantially all of the assets of the Corporation to another corporation; or (c) of any voluntary or involuntary dissolution, liquidation or winding-up of the Corporation; Page 7 8 then, in each such case, the corporation shall mail or cause to be mailed to the Holder at the time outstanding a notice specifying, as the case may be, (i) the date on which a record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, or (ii) the date on which such reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding-up is to take place, and the time, if any, to be fixed as to which the holders of record of Common Stock (or such other securities at the time receivable upon the exercise of the Warrant) shall be entitled to exchange their shares of Common Stock (or such other securities) for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding-up. Such notice shall be mailed at least twenty (20) days prior to the date therein specified and this Warrant may be exercised prior to said date during the term of the Warrant no later than five (5) days prior to said date. 13. No Impairment. The Corporation will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder of this Warrant. Without limiting the generality of the foregoing, the Corporation (a) will not increase the par value of any shares of Common Stock receivable on the exercise of the Warrant above the amount payable therefor on such exercise, and (b) will take all such action as may be necessary or appropriate in order that the Corporation may validly and legally issue fully paid and nonassessable shares of Common Stock on the exercise of this Warrant from time to time outstanding. 14. Replacement of Warrant. On receipt of evidence reasonably satisfactory to the Corporation of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction of this Warrant, on delivery of any indemnity agreement or security reasonably satisfactory in form and amount to the Corporation or, in the case of any such mutilation, on surrender and cancellation of such Warrant, the Corporation at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. IN WITNESS WHEREOF, the Corporation has signed this Warrant by its duly authorized officer this eighteen day of December, 1996. KTI, INC. By: ---------------------------------------------- Name: Nicholas Menonna, Jr. Title: Chairman of the Board of Directors and Chief Executive Officer Page 8 9 EXHIBIT A EXERCISE FORM To Be Executed Upon Exercise of Warrant The undersigned record holder of the within Warrant hereby irrevocably elects to exercise the rights to purchase ______ shares of Common Stock of KTI, Inc. by exercise of the within Warrant, according to the terms and conditions therein and payment of the Exercise Price in full. The undersigned requests that certificates for such shares of Common Stock shall be issued in the name set forth below. Dated: , 199__ ------------------------------ Signature ------------------------------ Print Name of Signatory Address: ------------------------------ ------------------------------ Social Security No. or other identifying number: ----------------------------- If said number of shares of Common Stock and Warrants shall not be all the shares under the within Warrant, the undersigned requests that a new Warrant for the unexercised portion shall be registered in the name of: ------------------------------ (Please print) Address: ------------------------------ ------------------------------ Social Security No. or other identifying number: ------------------------------ Signature: ------------------------------ ------------------------------ Print Name of Signatory Page 9 EX-10.51 16 REGISTRATION RIGHTS AGREEMENT 1 EXHIBIT 10.51 REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (this "Agreement") is made and entered into as of the 23rd day of January, 1997, by and between KTI, Inc., a New Jersey corporation (the "Company"), and Maine Woodchips Associates (the "Holder"). The parties hereby agree as follows: 1. Securities Subject to this Agreement. (a) Subject Securities. The securities entitled to the benefits of this Agreement are the Registrable Securities, as defined below. (b) Holders of Registrable Securities. A Person is deemed to be a holder (a "Holder") of Registrable Securities whenever such Person owns Registrable Securities or has the present right to acquire such Registrable Securities, whether or not such acquisition has actually been effected. (c) Selling Holders. A Holder is deemed to be a "Selling Holder" of Registrable Securities whenever such Holder exercises its rights to register its Registrable Securities pursuant to this Agreement. 2. Demand Registration (a) Demand. At any time after February 1, 1998 upon the written request (a "Demand") by the Holders of a majority of the Registrable Securities, the Company will, subject to the terms of this Agreement, use its reasonable best efforts to register as soon as practicable under the Securities Act for public sale in accordance with the method or methods of disposition specified in the Demand, the number of shares of Registrable Securities specified in the Demand (a "Demand Registration"). Subject to the foregoing, the Holders shall be entitled to a Demand Registration of the shares of Common Stock issuable upon exercise of the Purchase and sell such shares pursuant to an effective registration filed pursuant to this Agreement without exercising such Purchase any earlier than the time for the sale of such shares of Common Stock pursuant to such Demand Registration. The Company shall be obligated to register Registrable Securities pursuant to this Section on one (1) occasion only. Within ten (10) days after receipt of any Demand, the Company shall give written notice of such Demand to all other Holders of Registrable Securities and will also include in any such registration all Registrable Securities with respect to which the Company has received a Demand from any of such Holders for inclusion 1 2 therein (which Demand shall specify the intended method or methods of disposition) within twenty (20) days after the date of such notice. Notwithstanding anything to the contrary contained herein, the Company shall be entitled, at its election, to join in any such registration with respect to securities to be offered by it. The Company may postpone for a reasonable period of time, not to exceed one hundred twenty (120) days, the filing or effectiveness of any registration statement hereunder, or the undertaking of any work by the Company with respect to the preparation of any such registration statement, if the Board of Directors of the Company in good faith determines that such filing or registration might have a material adverse effect on any plan or proposal by the Company with respect to any financing, acquisition, recapitalization, reorganization or other material transaction. Such right of delay may not be exercised more than once in any one-year period. (b) Other Registrations. Except for registration statements on Form S-4, Form S-8 (or Form S-3, if such registration covers an offering of the type contemplated by Form S-8) or any successor forms thereto, the Company will not file with the Commission any other registration statement with respect to its Common Stock or other equity security (together with its Common Stock, the Company's "Equity Securities"), whether for its own account or that of others, from the date of receipt of a Demand until the completion of the period of distribution of the Demand Registration contemplated thereby if, and only if, such Demand relates to an underwritten offering. (c) Registration Statement Form. Demand Registrations under this Section shall be on such appropriate registration form of the Commission (i) as shall be selected by the Company and (ii) as shall permit the disposition of such Registrable Securities in accordance with the intended method or methods of disposition specified in the Demand or Demands. In addition to the required information, the Company agrees to include in any such registration statement all information with respect to the Company which the Holders participating in such Demand Registration shall reasonably request from time to time in writing and which is customarily found in registration statements; provided that the inclusion of such information does not create an undue burden to the Company. Each of the Holders participating in such Demand Registration shall provide (x) such information required for the preparation of such registration statement with respect to each such Holder and (y) the intended method or methods of distribution of its Registrable Securities and shall otherwise cooperate in such manner as the Company shall reasonably request from time to time in writing. (d) Underwritten Offerings. If the Holders participating in such Demand Registration intend to distribute Registrable Securities by means of an underwriting, they shall so advise the Company in the Demand and the Company shall include such information in the written notice to other Holders referred to in Section 2(a). The right of any Holder to registration pursuant to this Section 2 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent requested. Any underwriter or underwriters thereof shall be selected by the majority of Holders participating in such underwriting, subject to the approval of the Company, which 2 3 approval shall not be unreasonably withheld. Upon request of the underwriters, the Company shall (together with all Holders proposing to distribute their Registrable Securities through such underwriting) enter into an underwriting agreement in customary form with the underwriter or underwriters selected by the Holders sending the Demand, subject to the approval of the Company, which approval shall not be unreasonably withheld. The following provisions shall apply to any such underwriting: (i) Notwithstanding any other provision of this Section , if the managing underwriter of such underwritten offering determines that marketing factors require a limitation of the number of shares to be underwritten and so advises the Company in writing, then the Company shall so advise all Selling Holders of the number of shares of Registrable Securities that, according to the managing underwriter, may be included in the registration, and the underwriting shall be allocated among all such Selling Holders in proportion, as nearly as practicable, to the respective amounts of Registrable Securities owned by such Holders at the time of filing of the registration statement. No Registrable Securities excluded from the underwriting by reason of the managing underwriter's marketing limitation shall be included in such registration. (ii) If any Holder disapproves of the terms of the underwriting, such Holder may elect to withdraw therefrom by written notice to the Company and the managing underwriter. The Registrable Securities so withdrawn from such underwriting shall also be withdrawn from such registration. (iii) If the managing underwriter has not limited the number of shares of Registrable Securities to be underwritten, the Company may include shares of Common Stock for its own account or the account of others in such registration in accordance with Section 2(a) if the managing underwriter so agrees and if the number of shares of Registrable Securities which would otherwise have been included in such registration and underwriting will not thereby be limited. (iv) Notwithstanding the foregoing, if the Company is to offer its own shares of Equity Securities in an underwritten offering and if the managing underwriter limits the number of shares of Registrable Securities and the Company's shares of Equity Securities to be underwritten, then in connection with such underwriting the number of shares of Equity Securities and Registrable Securities that may be included in such underwriting shall be allocated first to the Selling Holders as set forth in subdivision (i) above and, if additional shares may be sold, such additional shares shall be allocated to the Company. (e) Expenses. The Company shall, whether or not any Demand Registration shall become effective under the Securities Act, pay all Registration Expenses incident to its performance of or compliance with this Section , including, without limitation, all registration and filing fees, fees and expenses of compliance with securities or "blue sky" laws, printing expenses, messenger and delivery expenses, fees and disbursements of counsel for the Company and all independent public accountants (including the expenses of any audit or "cold comfort" letter required hereby) and other Persons retained by the Company and any fees and disbursements of 3 4 underwriters customarily paid by issuers or sellers of securities (excluding any underwriting commissions and discounts). In all cases, any allocation of Company personnel or other general overhead expenses of the Company or other expenses for the preparation of financial statements or other data normally prepared by the Company in the ordinary course of its business shall be borne by the Company. (f) Effective Registration Statement. A Demand Registration shall be deemed to have been effected and the Company's obligation under this Section satisfied if a registration statement has become effective and such registration statement shall have been continuously effective for one hundred twenty (120) days or until all Registrable Securities covered thereby have been sold, if earlier; provided that a Demand Registration which does not become effective after the Company has commenced preparation of a registration statement by reason of the withdrawal from such registration, prior to effectiveness, by Holders of a majority of the Registrable Securities participating in such registration (other than a withdrawal based upon the advice of counsel relating to a matter primarily with respect to disclosure relating to the Company) shall be deemed to have been effected by the Company upon the Demand of such Holders unless such Holders shall have elected to pay all Registration Expenses in connection with such registration. Notwithstanding the foregoing, a Demand Registration shall not be deemed to have been effected (i) if the offering is prevented by any stop order, injunction or other order or requirement of the Commission or other governmental agency or court for any reason other than by reason of some act or omission of any Holder of Registrable Securities participating in such Demand Registration or (ii) if the conditions to closing agreed to by the Company specified in the Subscription Agreement or an underwriting agreement, if any, entered into in connection with such Demand Registration are not satisfied by reason of a breach by the Company of its covenants contained therein. 3. Incidental Registration (a) Right to Include Registrable Securities. If at any time after the date of this Agreement and up to and including the third anniversary of such date the Company at any time proposes to register for sale for cash any shares of its Equity Securities under the Securities Act, whether for its own account or for the account of other security holders or both, on any form other than Form S-4, Form S-8 (or Form S-3, if such registration covers an offering of the type contemplated by Form S-8) or any successor or similar forms and other than by a registration pursuant to an agreement which, by its terms, would prohibit the inclusion of Registrable Securities, unless such prohibition is waived, it will give written notice (a "Registration Notice") to each Holder of Registrable Securities of its intention to do so and whether such registration relates to an underwritten offering. Upon the written request of any Holder of Registrable Securities made within twenty (20) business days after the receipt of any Registration Notice (which request shall specify the Registrable Securities intended to be disposed of by such Holders and, if the offering by the Company is not an underwritten offering, the intended method or methods of disposition thereof), the Company will, subject to the terms of this Agreement, use its reasonable best efforts to effect the registration under the Securities Act of all Registrable 4 5 Securities which the Company has been so requested to register by such Holders, to the extent requisite to permit the disposition (if not an underwritten offering, in accordance with the intended method or methods thereof as aforesaid to the extent permitted by the registration form being used by the Company) of the Registrable Securities so to be registered, by inclusion of such Registrable Securities in the registration statement that covers the Equity Securities which the Company proposes to register (an "Incidental Registration"); provided that the provisions of this Section 3(a) are subject in all respects to the provisions of Section 3(c) regarding underwritten offerings. No registration effected under this Section 3 shall relieve the Company of its obligation to effect any Demand Registration under Section 2. Each Holder participating in an Incidental Registration hereunder shall provide such information with respect to it for inclusion in such offering in such manner as the Company shall reasonably request from time to time in writing. Notwithstanding anything to the contrary contained herein, the Company shall have no obligation to include Registrable Securities in any Incidental Registration pursuant to the provisions hereof unless so requested by such Holder after delivery of a Registration Notice as provided in this paragraph 3(a). (b) Delay or Cancellation of Registration. If, at any time after delivery of a Registration Notice and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason either not to register or to delay registration of its Equity Securities, the Company may, at its election, give written notice of such determination to each Holder of Registrable Securities, and thereupon (i) in the case of a determination not to register its Equity Securities, shall be relieved of its obligation to register any Registrable Securities in connection with such registration (but not from its obligation to pay any Registration Expenses otherwise required to be paid by it in connection therewith), without prejudice, however, to the rights of a majority of the Holders of Registrable Securities to request that such registration be effected as a Demand Registration under Section 2, and (ii) in the case of a determination to delay such registration, shall be permitted to delay registering any Registrable Securities for any period it deems necessary. (c) Underwritten Offerings. If the Company at any time proposes to register any of its Equity Securities under the Securities Act as contemplated by this Section 3 and such securities are to be distributed by or through one or more underwriters, the Company will, subject to subdivision 3(c)(i) below, use reasonable efforts to arrange for such underwriters (it being understood that the Selling Holders shall not be entitled to use any other underwriters) to include all the Registrable Securities to be offered and sold by such underwriters. Upon request of the Company or the underwriters, each of such Selling Holders shall be a party to the underwriting agreement between the Company and the underwriters and any or all of the conditions precedent to the obligations of such underwriters under such underwriting agreement may be conditions precedent to the obligations of such Holders. No Holder of Registrable Securities shall be required to make any representations or warranties to or agreements with the Company or the underwriters other than representations, warranties or agreements regarding such Selling Holder, its Registrable Securities, and any other representations, warranties or agreements reasonably requested by the Company or the underwriters and customarily made in underwritten offerings, 5 6 and any other representation or warranty required by law. The following provisions shall apply to any such underwriting: (i) Notwithstanding any other provisions of this Section , if the managing underwriter of such underwritten offering determines that marketing factors require a limitation of the number of shares to be underwritten and so advises the Company in writing, then the Company shall so advise all of the Selling Holders of the number of shares of Registrable Securities that may be included in the registration, and the underwriting shall be allocated first to the Company and, if additional shares may be sold, subject to any agreement which by its terms would give any other Person priority over the Selling Holders relating to the inclusion of shares in such registration statement, such additional shares shall be allocated among all Selling Holders in proportion, as nearly as practicable, to the respective amounts of Registrable Securities initially sought to be registered by such Selling Holders in connection with such registration statement. No Registrable Securities excluded from the underwriting by reason of the managing underwriter's marketing limitation shall be included in such registration. (ii) The rights of the Company under this Section 3(c) shall not be deemed to limit the Company's rights not to include Registrable Securities in any such registration pursuant to the other provisions of this Section 3. (iii) If any Holder disapproves of the terms of the underwriting, such Holder may elect to withdraw therefrom by written notice to the Company and the managing underwriter. The Registrable Securities so withdrawn from such underwriting shall also be withdrawn from such registration. (d) Expenses. The Company will pay all Registration Expenses in connection with any Incidental Registration. 4. Registration Procedures. If and whenever the Company is required to use its reasonable best efforts to effect or cause the registration of any Registrable Securities under the Securities Act as provided in this Agreement, the Company shall, subject to the other provisions of this Agreement and subject to the full cooperation of the Holders of Registrable Securities requested to be included in any such registration, as expeditiously as is reasonably practicable: (i) use its reasonable best efforts to prepare and file with the Commission within sixty (60) days after receipt of a Demand for registration pursuant to Section 2(a) with respect to such Registrable Securities, a registration statement on any form for which the Company then qualifies or which counsel for the Company shall deem appropriate and which form shall be available for the sale of the Registrable Securities in accordance with the intended methods of distribution thereof, and use its reasonable best efforts to cause such registration statement to become and remain effective; provided, however, that the Company may discontinue any registration pursuant to Section 3 at any time; provided, further, that the Company shall have no obligation to cause any registration statement filed pursuant to Section 2 to remain effective 6 7 for longer than one hundred twenty (120) days; and provided, further, that before filing with the Commission a registration statement or prospectus or any amendments or supplements thereto, the Corporation will notify each Selling Holder of any stop order issued or threatened by the Commission and take all reasonable actions required to prevent the entry of such stop order or to remove it if entered; (ii) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for a period of not less than one hundred twenty (120) days or such shorter period that will terminate when all shares of the securities covered by such registration statement have been sold (but not before the expiration of the applicable prospectus delivery period referred to in Section 4(3) of the Securities Act and Rule 174, or any successor provision thereto, thereunder, if applicable) and to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement during such period in accordance with the intended methods of disposition by the Selling Holders set forth in such registration statement; (iii) furnish to each Selling Holder and each underwriter, if any, of the securities covered by such registration statement, such number of conformed copies of such registration statement, each amendment and supplement thereto (in each case including all exhibits thereto), and the prospectus used in connection therewith (including each preliminary prospectus and any summary prospectus) and any other prospectus filed under Rule 424 under the Securities Act, in conformity with the requirements of the Securities Act, and such other documents, in each case, as such Holders and the underwriters, if any, may reasonably request; (iv) use its reasonable best efforts to register or qualify all Registrable Securities included in such registration statement under such other securities laws or "blue sky" laws of such reasonable number of United States jurisdictions as any Selling Holder or any underwriter, if any, of the Registrable Securities being sold by such Holders shall reasonably request, and to use reasonable best efforts to keep such registrations or qualifications in effect for so long as such registration statement remains in effect, and to do any and all other things that may be reasonably necessary or advisable to enable such Holders and each underwriter, if any, to consummate the disposition in such jurisdictions of the Registrable Securities owned by such Holders; provided that the Company shall not for any such purpose be required to (A) qualify generally to do business as a foreign corporation in any jurisdiction where it would not otherwise be required to qualify but for the requirements of this subdivision (iv), (B) subject itself to taxation in any such jurisdiction, or (C) consent to general service of process in any such jurisdiction; (v) use its reasonable best efforts to cause the Registrable Securities covered by such registration statement to be registered with or approved by such other governmental agencies or authorities as may be necessary by virtue of the business and operations of the 7 8 Company to enable the Holders thereof to consummate the disposition of such Registrable Securities. (vi) use its reasonable best efforts to furnish to each Selling Holder a signed counterpart, addressed to each such Holder (and the underwriters, if any) of (A) an opinion of counsel for the Company customary for transactions similar to the transactions contemplated by this Agreement, dated the effective date of such registration statement (or, if such registration includes an underwritten public offering, an opinion dated the date of the closing under the underwriting agreement), reasonably satisfactory to the Holders of a majority of the Registrable Securities being sold, and (B) a "comfort letter," dated the effective date of such registration statement (and, if such registration includes an underwritten public offering, a comfort letter dated the date of the closing under the underwriting agreement), signed by the independent public accountants who have certified the Company's financial statements included in such registration statement, reasonably satisfactory to the Holders of a majority of the Registrable Securities being sold, and covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of the accountants' letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in "comfort letters" of issuer's accountants delivered to the underwriters in underwritten public offerings of securities; immediately notify each Selling Holder, during any time when a registration statement relating thereto is effective under the Securities Act, of the happening of any event which comes to the Company's attention if as a result of such event the prospectus included in such registration statement, as then in effect, contains any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (and each Selling Holder agrees to promptly advise the Company at any time that it learns of any of the foregoing), and as soon as reasonably practicable the Company shall prepare and file with the Commission and furnish to such Selling Holders and each underwriter, if any, a reasonable number of copies of a supplement to or any amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; (vii) enter into such customary agreements (including an underwriting agreement in customary form) and take all such other actions as the Selling Holders of a majority (by number of shares) of the Registrable Securities being sold or the underwriters, if any, reasonably request in order to expedite or facilitate the disposition of such shares, including indemnification in the form set forth in Section 7 hereof; (viii) make available for inspection by any Selling Holder, any underwriter participating in any disposition pursuant to such registration statement, and any attorney, 8 9 accountant or other agent retained by any such Selling Holder or underwriter, all financial and other records, pertinent corporate documents and properties of the Company and its subsidiaries, if any, as shall be reasonably necessary to enable them to exercise their due diligence responsibility, and cause the Company and its subsidiaries' officers, directors and employees to supply all information and respond to all inquiries reasonably requested by any such Person in connection wit such registration statement; (ix) use its reasonable best efforts to list all Registrable Securities covered by such registration statement on any securities exchange on which any of the securities of the same class as the Registrable Securities are then listed; and (x) otherwise use its reasonable best efforts to comply with all applicable rules and regulation of the Commission, and make generally available to its security holders, as soon as reasonably practicable, an earnings statement covering a period of at least twelve (12) months, but not more than eighteen (18) months, beginning with the first day of the Company's first full fiscal quarter ending after the effective date of such registration statement (as the term "effective date" is defined in Rule 158(c) under the Securities Act), which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158, or any successor provision thereto, thereunder. Each Selling Holder agrees that, upon receipt of any notice from the Company of the occurrence of any event of the kind described in subdivision (vii) of this Section 4 (or should it otherwise learn of any such occurrence), it will forthwith discontinue its offer and sale or other dispositions of Registrable Securities pursuant to the registration statement relating to such Registrable Securities until it has been advised by the Company that it is permissible to recommence such offer, sale or other disposition and until it has received the copies of the supplemented or amended prospectus contemplated by subdivision (vii) of this Section 4 and, if so directed by the Company, will deliver to the Company all copies, other than permanent file copies, then in its possession of the prospectus relating to such Registrable Securities that is current at the time of receipt of such notice. In the event the Company shall give any such notice, the period mentioned in subdivision (ii) of this Section 4 shall be extended by the length of the period from and including the date when each Selling Holder of any Registrable Securities covered by such registration statement shall have received such notice to the date on which each such Selling Holder has received the copies of the supplemented or amended prospectus contemplated by subdivision (vii) of this Section 4. 5. Holdback Agreements. (a) Holders. If any registration pursuant to this Agreement shall be in connection with an underwritten public offering, the Holders agree, if so reasonably required by the managing underwriter in connection with such underwritten offering, not to effect any public sale or distribution, including any sale pursuant to Rule 144 or Rule 144A, or any successor provisions, under the Securities Act, of any Equity Security of the Company or of any security 9 10 convertible into or exchangeable or exercisable for any Equity Security of the Company (in each case, other than as part of such underwritten offering), during such period prior to and after the effective date of any registration as may be reasonably required by the managing underwriter in connection with such underwritten offering (except as part of such registration); provided, however, that in no case shall such period prior to and after the effective date of any such registration exceed seven (7) days and one hundred eighty (180) days, respectively; and provided, further, that if the agreement by the Holders pursuant to this paragraph shall apply to Registrable Securities covered by such registration statement, the Company shall use its best efforts to cause such registration statement to remain effective through the period ending at least thirty (30) days after the expiration of the period during which the Holders shall not be permitted to effect any sale or distribution of such Registrable Securities. (b) The Company. If any registration pursuant to this Agreement shall be in connection with an underwritten public offering, the Company agrees, if so reasonably required by the managing underwriter in connection with such underwritten offering, not to effect any public sale or distribution, including any sale pursuant to Rule 144 or Rule 144A, or any successor provisions, under the Securities Act, of any Equity Security of the Company or of any security convertible into or exchangeable or exercisable for any Equity Security of the Company (in each case, other than as part of such underwritten offering), during such period prior to and after the effective date of any underwritten registration as may be reasonably required by the managing underwriter in connection with such underwritten offering (provided, however, that in no case shall such period prior to and after the effective date of any such registration exceed seven (7) days and one hundred eighty (180) days, respectively) except (i) as part of such registration or (ii) pursuant to registrations in connection with (A) any merger or consolidation by the Company or any of its subsidiaries, (B) the acquisition by the Company or any of its subsidiaries of the capital stock or substantially all of the assets of another Person, or (C) any employee stock option or other benefit plan. 6. Preparation: Reasonable Investigation. In connection with the preparation and filing of each registration statement under the Securities Act pursuant to this Agreement, the Company will give the representative of the Selling Holders, such Selling Holders' underwriters, if any, and such Selling Holders' and such underwriters' respective counsel and accountants, the reasonable opportunity to participate in the preparation of such registration statement, each prospectus included therein or filed with the Commission, and each amendment thereof or supplement thereto, and will give each of them such access to its books and records and such opportunities to discuss the business of the Company with its officers and the independent public accountants who have certified its financial statements as shall be necessary, in the opinion of such Holders' and such underwriters' respective counsel, to conduct a reasonable investigation within the meaning of the Securities Act (provided that the Company shall be required to afford such access only after the receipt of confidentiality agreements containing customary provisions in form and substance which are reasonably acceptable to the Company). 7. Indemnification. 10 11 (a) Indemnification by the Company. In the event of any registration of any securities of the Company under the Securities Act pursuant to this Agreement, the Company will indemnify and hold harmless in the case of any registration statement filed pursuant to this Agreement each Holder of Registrable Securities, its directors and officers, each other Person who participates as an underwriter in the offering or sale of such securities and each other Person, if any, who controls such Holder or any such underwriter within the meaning of Section 15 of the Securities Act against any and all losses, claims, damages or liabilities, joint or several, including reasonable costs of investigation, to which they or any of them may become subject under the Securities Act or any other statute or law, including any amount paid in settlement of any litigation, commenced or threatened, if such settlement is effected with the consent of the Company, and to reimburse them for any legal or other expenses incurred by them in connection with investigating any claims and defending any actions (subject to Section 7(c) below), insofar as such losses, claims, damages or liabilities (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of a material fact contained in the registration statement, or any post-effective amendment thereof, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (ii) any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus, if used before the effective date of such registration statement, or contained in the prospectus as amended or supplemented if the Company files any amendment thereof or supplement thereto with the Commission, if used within the period during which the Company is required to keep the registration statement to which such prospectus relates current pursuant to the terms hereof, or the omission or alleged omission to state therein a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, and subject to the provisions of Section 7(c), the Company will reimburse such Holder and each such director, officer, underwriter and controlling person for any legal or any other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, liability, action or proceeding; provided that (x) the Company shall not be liable to such Holder in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, any such preliminary prospectus, final prospectus, summary prospectus, amendment or supplement in reliance upon and in conformity with written information furnished to the Company through an instrument executed by such Holder specifically stating that it is for use in the preparation thereof and (y) the Company shall not be liable to any underwriter or Person controlling such underwriter in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, any such preliminary prospectus, final prospectus, summary prospectus, amendment or supplement in reliance upon and in conformity with written information furnished to the Company through an instrument executed by such underwriter specifically stating that it is for use in preparation thereof; provided, further, that the Company shall not be liable to any Person who participates as 11 12 an underwriter in the offering or sale of Registrable Securities or to any other Person, if any, who controls such underwriter within the meaning of Section 15 of the Securities Act, in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of such Person's failure to send or give a copy of the final prospectus, as the same may be then supplemented or amended, to the Person asserting an untrue statement or alleged untrue statement or omission or alleged omission at or prior to the written confirmation of the sale of Registrable Securities to such Person if such statement or omission was corrected in such final prospectus. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Holder or any such director, officer, underwriter or controlling person and shall survive the transfer of such securities by such Holder. (b) Indemnification by the Holders of Registrable Securities. The Company may require, as a condition to including any Registrable Securities in any registration statement filed pursuant to this Agreement, that the Company shall have received an undertaking satisfactory to it from each Holder of Registrable Securities participating in the registration to indemnify and hold harmless (in the same manner and to the same extent as set forth in Section 7(a)) the Company, each Person who participates as an underwriter in the offering or sale of such securities, and each other Person, if any, who controls the Company or any such underwriter within the meaning of Section 15 of the Securities Act, and their directors and officers, with respect to any statement or alleged statement in or omission or alleged omission from such registration statement, or any post-effective amendment thereof, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, if such statement or alleged statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company or any such underwriter through an instrument executed by such Holder (or such other Person) specifically stating that it is for use in the preparation of such registration statement, or any post-effective amendment thereof, preliminary prospectus, final prospectus, or summary prospectus, or any amendment or supplement thereto: provided that such Holder shall not be liable to any Person who participates as an underwriter in the offering or sale of Registrable Securities or to any other Person, if any, who controls such underwriter within the meaning of Section 15 of the Securities Act, in any such case to the extent that any such loss, claim, damage, liability (or investigation, action or proceeding in respect thereof) or expense arises out of such Person's failure to send or give a copy of the final prospectus, as the same may be then supplemented or amended, to the Person asserting an untrue statement or alleged untrue statement or omission or alleged omission at or prior to the written confirmation of the sale of Registrable Securities to such Person if such statement or omission was corrected in such final prospectus. Such indemnity shall remain in full force and effect, regardless of any investigation made by or on behalf of the Company, each underwriter, any controlling persons thereof, and each director or officer thereof, and shall survive the transfer of such securities by such Holder. (c) Notices of Claims, etc. Promptly after receipt by a party entitled to indemnity under this Section 7 (an "indemnified party") of notice of a claim, a threat of litigation or the commencement of any action or proceeding or threat of claim involving a claim referred to 12 13 in the preceding subdivisions of this Section 7, such indemnified party will, if a claim in respect thereof is to be made against another party against whom indemnity may be sought pursuant to this Section 7 (an "indemnifying party"), give written notice to the indemnifying party of the commencement of such action or threat of claim; provided that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under the preceding subdivisions of this Section 7, except to the extent that the indemnifying party is materially prejudiced in its ability to defend against or settle such action by such failure to give notice. In addition, any failure to give such notice shall not relieve the indemnifying party from any other liability that it may have to such indemnified party. Notice given within ten (10) days of commencement of the action shall be conclusively presumed not to adversely affect the indemnifying party's ability to defend or settle the action. In case any such action is brought against an indemnified party, unless and except to the extent that in the reasonable judgment of the indemnified party and the indemnifying party, based on advise of their respective counsel, a conflict of interest between such indemnified and indemnifying parties exists in respect of such claim, the indemnifying party shall be entitled to participate in and to assume the defense thereof, jointly with any other indemnifying party similarly notified, to the extent that the indemnifying party may wish, with counsel reasonably satisfactory to such indemnified party and, after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof and acknowledgement in writing by the indemnifying party that the claim in question is one for which the indemnifying party is obligated to indemnify the indemnified party, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof other than reasonable costs of investigation made at the request of the indemnifying party; provided, however, that if such indemnified party has a reasonable basis to believe, and does believe, that its interests in such action conflict with those of the indemnifying party, the indemnified party may so notify such indemnifying party and the indemnifying party will remain liable to such indemnified party for all fees, costs and expenses incurred by such indemnified party in retaining one separate counsel to participate in the defense of such action. No indemnified party shall consent to entry of any judgment or enter into any settlement of any such action the defense of which has been assumed by an indemnifying party without the consent of such indemnifying party, which consent shall not be unreasonably withheld. (d) Other Indemnification. Indemnification similar to that specified in the preceding subdivisions of this Section 7 (with appropriate modifications) shall be given by the Company and the Selling Holders with respect to any required registration or other qualification of securities under any Federal or state law or regulation of any governmental authority, other than the Securities Act. (e) Contribution. If the indemnification provided for in this Section 7 is unavailable to the indemnified parties for any reason, then each such indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the aggregate amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or expenses as between the Company on the one hand and each Holder of Registrable Securities on the other, in 13 14 such proportions as are appropriate to reflect the relative fault of the Company and each such Holder in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative fault of the Company on the one hand and each Holder of Registrable Securities on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by such party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Holders of Registrable Securities agree that it would not be just and equitable if contribution pursuant to this Section 7(e) were determined by pro rata allocation or by any other method of allocation which does not take into account the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any expenses reasonably incurred by such indemnified party in connection with investigating any such action or claim. Notwithstanding the foregoing provisions of this Section 7(e), (i) no Holder of Registrable Securities shall be required to contribute any amount in excess of the amount by which the total price at which the Registrable Securities of such Holder were offered to the public exceeds the amount of any damages which such Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission, and (ii) no person guilty of fraudulent misrepresentations (within the meaning of Section 11 of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 7, each Person, if any, who controls the Holders of Registrable Securities or the Company within the meaning of Section 15 of the Securities Act, each officer of the Company who shall have signed the registration statement, and each officer of the Holders or the Company shall have the same rights to contribution as the Holders or the Company subject in each case to the provisions of subdivision (ii) of the preceding sentence. Any party entitled to contribution will, promptly after receipt of notice of commencement of any action, suit or proceeding against such party in respect to which a claim for contribution may be made against another party or parties under this Section 7, notify such party from whom contribution may be sought, and such notice shall be a condition precedent to the other party's liability under this Section 7 or otherwise. 8. Definitions. As used herein, unless the context otherwise requires, the following terms have the following respective meanings: "NASD": The National Association of Securities Dealers, Inc. "Registrable Securities": Any share of Common Stock or other Equity Security sold pursuant to a Subscription Agreement or private placement or issued or issuable upon exercise of the Purchase, and any securities issued or issuable with respect to any such securities by way of stock dividend or stock split or in connection with a combination of shares, recapitalization, 14 15 merger, consolidation, reorganization or other such event. As to any particular Registrable Securities, once issued such securities shall cease to be Registrable Securities when (a) a registration statement with respect to the sale of such securities shall have become effective under the Securities Act and such securities shall have been disposed of in accordance with such registration statement, (b) they shall have been distributed to the public pursuant to Rule 144, or any successor provision, under the Securities Act, (c) they shall have been otherwise transferred, new certificates for them not bearing a legend restricting further transfer shall have been delivered by the Company and subsequent disposition of them shall not require registration or qualification of them under the Securities Act or any similar state law then in force, (d) they shall have ceased to be outstanding, or (e) in the written opinion of counsel to the Company, they may be freely transferred without registration or qualification under the Securities Act or any similar state law then in force (provided, however, that, in such event, the Company shall remove the restrictive legend upon presentation of the stock certificates for such purpose). "Registration Expenses": All expenses incident to the Company's performance of or compliance with the registration provisions of this Agreement, including, without limitation, all registration, filing and NASD fees, all fees and expenses of complying with securities or "blue sky" laws, all word processing, duplicating and printing expenses of the Company, the fees and disbursements of counsel for the Company and of its independent public accountants, including the expenses of any "cold comfort" letters required by or incident to such performance and compliance, the fees and disbursements of not more than one firm of legal counsel retained by the Selling Holders chosen by the majority of such Holders, and any fees and disbursements of underwriters customarily paid by issuers or sellers of securities, but excluding underwriting discounts and commissions and transfer taxes, if any. 9. Miscellaneous. (a) The Company agrees to use its reasonable best efforts to file with the Commission in a timely manner all reports and other documents required by the Company under the Securities Act and the Exchange Act at any time it is subject to such reporting requirements and to furnish to a holder of Registrable Securities upon request a written statement of the Company as to its compliance with the reporting requirements of Rule 144 and of the Securities Act and the Exchange Act (at any time it is subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents so filed as the holder may reasonably request solely for the purpose of availing itself of any rule or regulation of the Commission allowing the holder to sell any such Registrable Securities without registration. (b) THIS AGREEMENT AND ANY TERM HEREOF MAY BE CHANGED, WAIVED, DISCHARGED OR TERMINATED ONLY BY AN INSTRUMENT IN WRITING SIGNED BY THE PARTY AGAINST WHICH ENFORCEMENT OF SUCH CHANGE, WAIVER, DISCHARGE OR TERMINATION IS SOUGHT. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN 15 16 ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW JERSEY. THE SECTION HEADINGS IN THIS AGREEMENT ARE FOR PURPOSES OF CONVENIENCE ONLY AND SHALL NOT CONSTITUTE A PART HEREOF. 10. Notices. To be effective, all notices and demands under this Agreement must be in writing and must be given (a) by depositing the same in the United States mail, postage prepaid, certified or registered, return receipt requested, or (b) by delivering the same in person and receiving a signed receipt therefor, or (c) by telefacsimile. Notices to a Holder shall be directed to the most recent address or telefacsimile number given by such Holder to the Company, which addresses and numbers initially are, with respect to the Holders, set forth on the signature page hereto; notices to the Company shall be directed to KTI, Inc., 7000 Boulevard East, Guttenberg, New Jersey 07093, telefax number: (201) 854-1771, Attention: Nicholas Menonna, Jr., with a copy to McDermott, Will & Emery, 1211 Avenue of the Americas, New York, New York 10036-8701, telefax number: (212) 547-5444, Attention: Brian Hoffmann, Esq. Notices mailed in accordance with the foregoing shall be deemed to have been given and made five (5) days following the date so mailed. Any party may designate a different address to which notices or demands shall thereafter be directed and such designation shall be made by written notice given in the manner hereinabove required. 11. Owner of Registrable Securities. The Company will maintain, or will cause its registrar and transfer agent to maintain, a stock book with respect to the Common Stock or other Equity Securities of the Company, in which all transfers of Registrable Securities of which the Company has received notice will be recorded. The Company may deem and treat the person in whose name Registrable Securities are registered in the stock book of the Company as the owner thereof for all purposes, including, without limitation, the giving of notices under this Agreement. 12. Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties, including assignees of the Common Stock or the Purchase rights of the Holders of Registrable Securities; provided that no Holder of Registrable Securities may assign its rights hereunder to any Person unless such Person agrees in writing to be bound by and to perform all of the terms and conditions of this Agreement. [ Remainder of page intentionally left blank ] 16 17 IN WITNESS WHEREOF, the undersigned have caused this Agreement to be executed as of the year and date first above written. KTI, INC., a New Jersey corporation By: ______________________________ Name: Nicholas Menonna, Jr. Title: Chairman of the Board of Directors and Chief Executive Officer MAINE WOODCHIPS ASSOCIATES, a Maine Partnership By: ______________________________ Name: Title: Partner address: c/o James R. Beers Beers & Cutler 1250 Connecticut Avenue N Fourth Floor Washington, DC 20036 telephone number 202-331-0300 telefacsimile number: 202-778-0259 17 EX-21 17 LIST OF SUBSIDIARIES OF THE COMPANY 1 EXHIBIT 21 Subsidiaries of the Registrant: American Ash Recycling of New England, Limited Partners, a Florida Limited Partnership (60% owned) American Ash Recycling of Tennessee, Limited Partners, a Florida Limited Partnership (60% owned) EWM Holdings, L.P., a Delaware Limited Partnership (50% owned) Eastern Waste Management Corp., a New York Corporation (a 95% owned subsidiary of EWM Holdings, L.P.) RILCO Group, Inc., a New York Corporation (a 95% owned subsidiary of EWM Holdings, L.P.) KTI Ash Recycling, Inc., a Delaware Corporation KTI Bio Fuels, Inc., a Maine Corporation (100% owned subsidiary of Kuhr) KTI Environmental Group, Inc., a New Jersey Corporation KTI Limited Partners, Inc., a Delaware Corporation KTI Operations, Inc., a Delaware Corporation KTI Recycling, Inc., a Delaware Corporation KTI Specialty Waste Services, Inc., a Maine Corporation KTI Transportation Services, Inc., a Maine Corporation Kuhr Technologies, Inc., a New Jersey Corporation ("Kuhr") (83% owned) Maine Energy Recovery Company Limited Partnership, a Maine Limited Partnership (a 10% owned subsidiary of Kuhr and a 64.15% owned subsidiary of the Registrant) Manner Resins, Inc., a Maryland Corporation PERC, Inc., a Delaware Corporation (a 100% owned subsidiary of Kuhr) PERC Management Company, a Maine Limited Partnership (a 59.7% owned subsidiary of Kuhr and a 40.3% owned subsidiary of the Registrant) Power Ship Transport, Inc., a Delaware Corporation Timber Energy Investments, Inc., a Delaware Corporation Timber Energy Plastic Recycling, Inc., a Delaware Corporation Timber Energy Resources, Inc., a Texas Corporation Specialties Environmental Management Company, a Maine limited liability company (55% owned) All subsidiaries are 100% owned, unless otherwise indicated above. EX-23 18 CONSENT OF INDEPENDENT AUDITORS 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 33-89664) pertaining to the 1986 Stock Option Plan of KTI, Inc., the Convergent Solutions, Inc. 1989 Stock Option Plan and the Non-Plan Options to Acquire Shares of KTI, Inc. Common Stock and (Form S-8 No. 33-89666) pertaining to the KTI, Inc. 1994 Long-Term Incentive Award Plan and the 1994 Datafocus Incorporated Long-Term Incentive Award Plan of our reports dated February 28, 1997 and February 7, 1997 with respect to the consolidated financial statements and schedule of KTI, Inc., and the financial statements of Penobscot Energy Recovery Company (a Limited Partnership), respectively, included in the Annual Report (Form 10-K) of KTI, Inc. for the year ended December 31, 1996. Ernst & Young LLP Hackensack, New Jersey March 28, 1997 EX-27 19 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 5,227,381 0 4,372,442 291,939 0 18,074,777 103,527,315 12,671,949 123,074,631 8,990,814 34,949,148 0 0 68,368 25,636,250 123,074,631 0 68,507,923 0 26,453,290 2,389,008 0 4,463,873 16,628,151 0 16,628,151 (714,422) (2,247,377) 0 13,666,352 2.15 2.03
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