<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 13D/A
UNDER THE SECURITIES EXCHANGE ACT OF 1934
Kafus Environmental Industries Ltd.
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(Name of Issuer)
Common Stock, without par value
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(Title of Class of Securities)
482910 10 6
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(CUSIP Number)
Julia Heintz Murray, General Counsel - Finance
Enron Capital & Trade Resources Corp.
1400 Smith Street
Houston, Texas 77002
(713) 853-4794
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(Name, Address and Telephone Number of Person Authorized to Receive Notices
and Communications)
August 21, 1998
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(Date of Event which Requires Filing of This Statement)
If the filing person has previously filed a statement on Schedule 13G to report
the acquisition which is the subject of this Schedule 13D, and is filing this
schedule because of Rule 13d-1(b)(3) or (4), check the following box [_].
NOTE: Six copies of this statement, including all exhibits, should be filed
with the Commission. See Rule 13d-1(a) for other parties to whom copies are to
be sent.
*The remainder of this cover page shall be filled out for a reporting person's
initial filing on this form with respect to the subject class of securities, and
for any subsequent amendment containing information which would alter
disclosures provided in a prior cover page.
The information required on the remainder of this cover page shall not be deemed
to be "filed" for the purpose of Section 18 of the Securities Exchange Act of
1934 ("Act") or otherwise subject to the liabilities of that section of the Act
but shall be subject to all other provisions of the Act (however, see the
Notes).
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SCHEDULE 13D
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CUSIP NO. 482910 10 6
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NAME OF REPORTING PERSON
1 S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
Enron Capital & Trade Resources Corp.
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CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP*
2 (a) [_]
N/A (b) [_]
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SEC USE ONLY
3
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SOURCE OF FUNDS*
4
WC
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CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT
TO ITEMS 2(d) or 2(e) [_]
5
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CITIZENSHIP OR PLACE OF ORGANIZATION
6
Delaware
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SOLE VOTING POWER
7
NUMBER OF
-0-
SHARES -----------------------------------------------------------
SHARED VOTING POWER
BENEFICIALLY 8
OWNED BY 10,276,652
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EACH SOLE DISPOSITIVE POWER
9
REPORTING
-0-
PERSON -----------------------------------------------------------
SHARED DISPOSITIVE POWER
WITH 10
10,276,652
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AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
11
10,276,652
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CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES*
12
[_]
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PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
13
29.54
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TYPE OF REPORTING PERSON*
14
CO
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SCHEDULE 13D
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CUSIP NO. 482910 10 6
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NAME OF REPORTING PERSON
1 S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
Enron Corp.
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CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP*
2 (a) [_]
N/A (b) [_]
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SEC USE ONLY
3
- ------------------------------------------------------------------------------
SOURCE OF FUNDS*
4
WC
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CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT
TO ITEMS 2(d) or 2(e) [_]
5
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CITIZENSHIP OR PLACE OF ORGANIZATION
6
Oregon
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SOLE VOTING POWER
7
NUMBER OF
-0-
SHARES -----------------------------------------------------------
SHARED VOTING POWER
BENEFICIALLY 8
OWNED BY 10,276,652
-----------------------------------------------------------
EACH SOLE DISPOSITIVE POWER
9
REPORTING
-0-
PERSON -----------------------------------------------------------
SHARED DISPOSITIVE POWER
WITH 10
10,276,652
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AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
11
10,276,652
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CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES*
12
[_]
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PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
13
29.54
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TYPE OF REPORTING PERSON*
14
CO
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<PAGE>
ITEM 1. SECURITY AND ISSUER.
This statement relates to the common stock, without par value (the "Common
Stock"), of Kafus Environmental Industries Ltd., a British Columbia corporation
(the "Issuer"). The address of the principal executive offices of the Issuer is
Suite 706, 1155 Robson Street, Vancouver, British Columbia, Canada V6E 1B5.
ITEM 2. IDENTITY AND BACKGROUND.
This statement is being filed by Enron Capital & Trade Resources Corp., a
Delaware corporation ("ECT"), and by Enron Corp., an Oregon corporation
("Enron"). ECT is a wholly owned subsidiary of Enron and is engaged primarily in
the business of purchasing natural gas, gas liquids and power through a variety
of contractual arrangements and marketing these energy products to local
distribution companies, electric utilities, cogenerators and both commercial and
industrial end-users. ECT also provides risk management services. Enron is an
integrated natural gas company that engages, primarily through subsidiaries, in
the gathering, transportation and wholesale marketing of natural gas, the
exploration for and the production of natural gas and crude oil, the production,
purchase, transportation and worldwide marketing and trading of natural gas
liquids, crude oil and refined petroleum products, the production and sale of
cogenerated electricity and steam and the purchasing and marketing of long-term
energy-related commitments. ECT and Enron are referred to herein as the
"Reporting Entities."
ITEM 3. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION.
On August 21, 1998, ECT acquired a convertible promissory note (the "New
Note") in the principal amount of up to U.S. $12.5 million; the source of the
funds advanced was working capital of ECT. In the event the New Note is not
repaid at maturity (February 18, 2000), the principal and
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interest under the New Note is convertible at ECT's option into shares of Common
Stock of the Issuer at a conversion price of U.S.$4.00 per share, subject to
certain anti-dilution adjustments. ECT also acquired warrants to purchase up to
a total of 1,545,000 shares of Common Stock (collectively, the "New Warrants"),
all of which warrants expire on July 31, 2008, subject to earlier expiration
upon the occurrence of certain events in the case of 750,000 of the New
Warrants. Of the New Warrants (a) warrants to purchase 750,000 shares are
currently exercisable at $4.00 per share; (b) warrants to purchase 545,000
shares are exercisable at $4.00 per share (commencing January 19, 2000); and (c)
warrants to purchase 250,000 shares are exercisable at an exercise price between
$3.50 and $4.00 (commencing April 30, 1999).
ITEM 4. PURPOSE OF TRANSACTION.
The transactions described in Item 3. above occurred as a result of
negotiations with the Issuer. The Securities purchased by ECT were acquired for
investment purposes. ECT intends to review its investment in the Issuer on an
ongoing basis and, depending upon the price of, and other market conditions
relating to, the Common Stock, subsequent developments affecting the Issuer, the
Issuer's business and prospects, other investment and business opportunities
available to ECT, general stock market and economic conditions, tax
considerations and other factors deemed relevant, may decide to increase or
decrease the size of its investment in the Issuer.
Other than as described above, neither of the Reporting Entities, nor, to
their knowledge, any person listed on Schedule I hereto, has any plan or
proposal that would result in any of the consequences listed in paragraphs
(a) - (j) of Item 4. of Schedule 13D.
ITEM 5. INTEREST IN SECURITIES OF THE ISSUER.
ECT beneficially owns and has the power to vote and dispose of 10,276,652
shares of Common Stock, representing approximately 29.54% of the shares of
Common Stock outstanding (determined in accordance with Rule 13d-3). The shares
beneficially owned consist of shares of Common Stock (including 481,652 shares
of Common Stock paid or payable to ECT as dividends
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on Series I Preference Shares held by ECT, which have been previously reported),
shares of Common Stock issuable upon conversion or exercise of the previously
reported Series I Preference Shares and Warrants, and shares of Common Stock
issuable upon exercise of the all currently exercisable Warrants.
Except as described herein, neither of the Reporting Entities, nor, to
their knowledge, any of the persons named in Schedule I hereto, has effected any
transactions in the Common1 Stock during the past sixty days.
ITEM 6. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH
RESPECT TO SECURITIES OF THE ISSUER.
The Issuer and ECT entered into a Registration Rights Agreement dated
August 21, 1998, obligating the Issuer to file a Registration Statement with the
Securities and Exchange Commission with respect to all shares of Common Stock
held by or issuable to ECT in connection with the transactions described above.
In July 1997, ECT granted to the Issuer an option to purchase up to 5,000
Preference Shares held by ECT prior to January 16, 1998 at a cash purchase price
of $1,200 per share. That option expired unexercised. On August 21, ECT executed
a comparable option in favor of Samarac Corporation, the holder of a majority of
the outstanding Common Stock of the Issuer, which expires July 16, 2000. The
option may be exercised only if the trade weighted average of prices for the
Common Stock during a period of 30 consecutive days exceeds $7.00 per share and
the Common Stock is listed on a U.S. national securities exchange or the NASDAQ
National Market.
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ITEM 7. MATERIAL TO BE FILED AS EXHIBITS
1. Securities Purchase Agreement dated August 18, 1998.
2. Convertible Promissory Note dated August 18, 1998.
3. Warrants for Shares of Common Stock (4).
4. Registraton Rights Agreement dated August 18, 1998.
5. Waiver And Amendment Agreement dated August 18, 1998.
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<PAGE>
SIGNATURE
After reasonable inquiry and to the best knowledge and belief of the
undersigned, the undersigned certify that the information set forth in this
statement is true, complete and correct.
September 4, 1998 ENRON CAPITAL & TRADE RESOURCES CORP.
By: /s/ Peggy B. Menchaca
___________________________________
Peggy B. Menchaca
Vice President and Secretary
ENRON CORP.
By: /s/ Peggy B. Menchaca
___________________________________
Peggy B. Menchaca
Vice President and Secretary
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<PAGE>
[Execution Version]
Securities Purchase Agreement
August 18, 1998
Kafus Environmental Industries Ltd.
Suite 440, 755 Burrard Street
Vancouver, BC Canada V6Z 1X6
Attn: Mr. Michael A. McCabe
Gentlemen:
Reference is made to the U.S. $12,500,000 Convertible Promissory Note dated as
of August 18, 1998 (as modified from time to time, the "Note"), made by Kafus
Environmental Industries Ltd., a British Columbia corporation (the "Company"),
and payable to the order of Enron Capital & Trade Resources Corp., a Delaware
corporation (the "Purchaser"), and the related Warrants issued in connection
therewith, including (a) the Warrant for 750,000 Shares of Common Stock of the
Company ("Common Stock") dated as of August 18, 1998 made by the Company and
issued to the Purchaser, (b) the Warrant for 250,000 Shares of Common Stock
dated as of August 18, 1998, made by the Company and issued to the Purchaser,
(c) the Warrant for 500,000 Shares of Common Stock dated as of August 18, 1998,
made by the Company and issued to the Purchaser, and (d) the Warrant for 45,000
Shares of Common Stock dated as of August 18, 1998, made by the Company and
issued to the Purchaser (such Warrants in (a) through (d) being the "Warrants").
This Securities Purchase Agreement (this "Agreement") is entered into in
connection with the execution of the Note and the Warrants, and is intended to
supplement the terms of the Note and the Warrants. In consideration of the
credit to be provided to the Company under the Note, the Company and the
Purchaser agree as follows:
Section 1. Definitions.
1.1 Terms defined herein shall have the meanings specified in their
definition, including the following terms which shall have the following
meanings:
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"Affiliate" means, as to any Person, any other Person that, directly or
indirectly, through one or more intermediaries, controls, is controlled by, or
is under common control with, such Person or any Subsidiary of such Person. The
term "control" (including the terms "controlled by" or "under common control
with") 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
ownership, by contract, or otherwise.
"Assignment Agreement" means the Assignment Agreement dated as of August
18, 1998, made by Samarac in of favor the Purchaser agreeing to assigning to the
Purchaser certain rights of Samarac under CanFibre Group Agreements, subject to
certain conditions as specified therein.
"Business Day" has the meaning specified in Section 7.3(a).
"CanFibre Group" means The CanFibre Group Ltd., an Ontario corporation.
"CanFibre Group Agreements" means the CanFibre Group Management Agreement
and the CanFibre Group Development Payment Agreement.
"CanFibre Group Management Agreement" means the Amended and Restated
Management Agreement dated as of December 1, 1994, between CanFibre Group and
Samarac providing for the payment of 10% of certain amounts to Samarac for
management services (as amended and restated in connection with this Agreement).
"CanFibre Group Development Payment Agreement" means the Amended and
Restated Development Payment Agreement dated as of December 1, 1994, between
CanFibre Group and Samarac providing for the payment of 10% of certain amounts
to Samarac for development services which have been performed (as amended and
restated in connection with this Agreement).
"Consent and Agreement" means the Consent and Agreement dated as of August
18, 1998, made by CanFibre Group in favor of the Purchaser consenting to the
security interests under the Security Agreement and the assignment under the
Assignment Agreement.
"Credit Parties" means the Company, Samarac, and CanFibre Group.
"Default" means (a) an Event of Default or (b) any event or condition which
with notice or lapse of time would, unless cured or waived, become an Event of
Default.
"Event of Default" means the occurrence of any of the events specified in
Section 6.1.
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"Financial Statements" means the March 31, 1998, financial statements of
the Company.
"Guaranty" means the Limited Recourse Guaranty dated as of August 18, 1998,
made by Samarac in favor of the Purchaser guaranteeing the Loan Obligations to
the extent of the collateral under the Security Agreement.
"Loan Documents" means this Agreement, the Note, the Structuring Fee
Agreement, the Pledge Agreement, the Guaranty, the Security Agreement, the
Assignment Agreement, the Consent and Agreement, and each other agreement,
document, or instrument now or hereafter executed which secures, supports, or
otherwise relates to the Note (other than the Warrant Documents).
"Loan Obligations" means any and all amounts now or hereafter owed by the
Company to the Purchaser in connection with the Loan Documents, including
principal, interest, fees, reimbursements, indemnifications, and other amounts,
and any increases, extensions, rearrangements, and other modifications thereof.
"Material Adverse Change" means any material adverse change in the
business, operations, financial condition, or prospects of the Company since the
date of the Financial Statements.
"Material Subsidiary" means CanFibre Group, Kenaf Industries, Ltd., a
Delaware corporation, Kafus Cement Fibre Industries, Inc., a Delaware
corporation, and Camden Agro-Systems Ltd., an Ontario corporation, and any
Subsidiary of the foregoing corporations.
"Maturity Date" has the meaning specified in the Note.
"Person" means an individual, partnership, corporation (including a
business trust), joint stock company, trust, unincorporated association, joint
venture, or other entity, or a government or any political subdivision or agency
thereof, or any trustee, receiver, custodian, or similar official.
"Pledge Agreement" means the Pledge Agreement dated as of August 18, 1998,
made by the Company in favor the Purchaser pledging 100% of the shares in Kafus
Cement Fibre Industries, Inc., a Delaware corporation, to the Purchaser as
collateral for the Loan Obligations.
"Registration Rights Agreement" means the Registration Rights Agreement
dated as of August 18, 1998, between the Company and the Purchaser providing for
the registration of the Common Stock issuable upon conversion of the Note in
accordance with Section 5.1 of the Note or upon exercise of any of the Warrants.
"Samarac" means The Samarac Corporation Ltd., an Ontario corporation.
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"Security Agreement" means the Security Agreement dated as of August 18,
1998, made by Samarac in favor the Purchaser granting the Purchaser a security
interest in the CanFibre Group Agreements to secure the Loan Obligations.
"Structuring Fee Agreement" means the letter agreement dated as of August
18, 1998, made by the Company in favor of ECT Securities Corp. providing for
certain fees payable to ECT Securities Corp. in connection with arranging the
commitment under this Agreement.
"Subsidiary" means, with respect to any Person, any other Person, a
majority of whose outstanding Voting Securities (other than directors'
qualifying shares) shall at any time be owned by such Person or one or more
Subsidiaries of such Person.
"Voting Securities" means (a) with respect to any corporation, any capital
stock of the corporation having general voting power under ordinary
circumstances to elect directors of such corporation, (b) with respect to any
partnership, any partnership interest having general voting power under ordinary
circumstances to elect the general partner or other management of the
partnership, and (c) with respect to any other Person, such ownership interests
in such Person having general voting power under ordinary circumstances to elect
the management of such Person, in each case irrespective of whether at the time
any other class of stock, partnership interests, or other ownership interest
might have special voting power or rights by reason of the happening of any
contingency.
"Warrant Documents" means the Warrants and the Registration Rights
Agreement.
"Transaction Documents" means the Loan Documents and the Warrant Documents.
1.2 All accounting terms not specifically defined in this Agreement shall
be construed in accordance with Canadian generally accepted accounting
principles applied on a consistent basis with those applied in the preparation
of the Financial Statements, and the Company shall not change and shall not
permit any change in the method of accounting employed in the preparation of
those financial statements unless required to conform to such principles or
approved in writing by the Purchaser.
1.3 All references to documents and agreements shall refer to such
documents as amended, supplemented, and otherwise modified from time to time,
unless otherwise specified.
1.4 All references to $ or Dollars shall mean U.S. Dollars unless
otherwise specified.
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<PAGE>
Section 2. The Purchase and Sale of Note and Warrants.
2.1 Sale and Purchase. Effective on the date of this Agreement, and for
the commitment to make advances under the Note as provided for herein, the
Company will issue and sell to the Purchaser and, in reliance upon the
representations and warranties of the Company contained herein and in the other
Transaction Documents, Purchaser will purchase from the Company, the Note and
the Warrants. The combined purchase price of the Note and the Warrants shall be
the amount of advances actually made under the Note, with such purchase price
being allocated for tax purposes only between the Note and the Warrants with the
Note receiving 88% of the purchase price and the Warrants receiving 12% of the
purchase price. For all other purposes, including the determination of the
outstanding principal amount of the Note and the accrual of interest thereon,
all advances of funds by the Purchaser under the Loan Documents shall be treated
as advances of principal under the Note. The sale and purchase shall be
effective upon execution and delivery of this Agreement and the first advance
under the Note. All Warrants shall be earned in full upon such sale and
purchase.
2.2 Commitment under Note. Subject to the terms and conditions set forth
herein, the Purchaser agrees to advance principal to the Company under the Note
from the date of this Agreement through the Maturity Date provided that (a) the
outstanding principal amount of the Note during any period may not exceed the
commitment limit for such period set forth below and (b) the outstanding
principal amount of the Note during any period may not exceed the face amount of
the Note.
Period U.S. $ Commitment Limit
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August 1998 $ 8,000,000
September 1998 $ 8,500,000
October 1998 $ 9,000,000
November 1998 $ 9,500,000
December 1998 $10,000,000
January 1999 $10,500,000
February 1999 $11,000,000
March 1999 $11,500,000
April 1999 $12,000,000
May 1999 through Maturity Date $12,500,000
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2.3 Advancing. Each advance of principal under the Note shall be made by
the Purchaser to the Company upon submission of a written borrowing request
provided by the Company to the Purchaser not later than five Business Days prior
to the date of such requested advance. The written borrowing request shall
certify the use for the proceeds of the advance, state that the conditions
precedent for such advance under Section 3 below have been satisfied, and be in
a form reasonably satisfactory to the Purchaser. No more than two advances may
be made during any month.
Section 3. Conditions Precedent.
3.1 First Disbursement. The Purchaser's obligation to make the first
advance of principal under the Note is subject to the satisfaction by the
Company or waiver in writing by the Purchaser of the following conditions:
(a) The Company shall have delivered or shall have caused to be
delivered the documents and other items listed in the Closing Documents List
provided in connection with this Agreement, together with any other documents
and items reasonably requested by the Purchaser to document the agreements and
intent of the Loan Documents, in each case fully executed and delivered where
applicable and in each case in form and substance satisfactory to the Purchaser,
including the following documents and other items:
(i) this Agreement, the Note, the Structuring Fee Agreement;
(ii) the Warrants, and the Registration Rights Agreement;
(iii) the Pledge Agreement, the Guaranty, the Security Agreement,
the Assignment Agreement, the Consent and Agreement, and all related share
certificates, stock powers, financing statements and other lien filings,
and lien searches;
(b) Where applicable, the financing statements and other documents
and agreements requiring filing or recording in public records shall have been
duly delivered to the appropriate offices for filing or recording and the
Purchaser shall have received confirmations of receipt thereof by the
appropriate filing or recording offices, if available, with all filing fees,
mortgage tax, and intangible tax paid by the Company, and the original copies of
all share certificates and other items requiring possession for perfection shall
have been delivered to the Purchaser in appropriate form for transfer; and
(c) The Company shall have provided direction to the Purchaser to pay
on behalf of the Company the fees contemplated by the Structuring Fee Agreement
and all legal fees and expense of counsel and local counsel for the Purchaser
incurred in connection with this Agreement.
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<PAGE>
3.2 Each Disbursement. The Purchaser's obligation to make each
advance of principal under the Note (including the first and final advance) is
subject to the following conditions precedent:
(a) The Purchaser shall have received a written borrowing request
from the Company in accordance with Section 2.3;
(b) The representations and warranties set forth in the Loan
Documents shall be true and correct as of the date of the advance, the Company
shall have performed all of its covenants and obligations under the Loan
Documents to have been performed as of the date of the advance, and no Default
or Event of Default shall have occurred and be continuing;
(c) No Material Adverse Change shall have occurred;
(d) With respect to any advance requested after September 30, 1998,
financial closing and funding of the project finance for CanFibre of Lackawanna,
Inc., shall have occurred in accordance with the commitment letter provided by
the Purchaser in connection therewith, including the funding of U.S. $87,000,000
of solid waste disposal revenue bonds for such project finance; and
(e) With respect to any advance requested after the initial advance,
the Purchaser shall have received an opinion acceptable to the Purchaser from
counsel acceptable to the Purchaser regarding the enforceability of the CanFibre
Group Management Agreement and the CanFibre Group Development Payment Agreement
and such other matters related thereto as are reasonably requested by the
Purchaser.
Section 4. Representations and Warranties. Upon the execution of this
Agreement, and with each advance of principal under the Note, the Company
represents and warrants to the Purchaser as follows:
4.1 Corporate Organization and Authority. The Company (a) is a
corporation duly incorporated and in good standing under the laws of British
Columbia and is authorized to exercise its corporate powers in such province;
(b) has all requisite corporate power and authority to own and operate its
properties and assets and to carry on its business as currently conducted and as
is currently proposed to be conducted; and (c) has been duly qualified and is in
good standing to do business as a foreign corporation in each jurisdiction where
the nature of its business and assets requires such qualification, except for
those jurisdictions where the failure to qualify would not result in a Material
Adverse Change.
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<PAGE>
4.2 Authorization. The Company has all requisite corporate power to
execute and deliver the Transaction Documents to which it is a party and to
perform its obligations thereunder. All corporate and shareholder action
necessary for the authorization, execution, and delivery by the Company of the
Transaction Documents to which it is a party and the performance by the Company
of its obligations thereunder have been taken. Each Transaction Document to
which the Company or any of its Affiliates is a party constitutes a legally
binding and valid obligation of the Company and its Affiliates, as applicable,
enforceable in accordance with its respective terms, except as enforceability
may be limited by applicable bankruptcy, insolvency, reorganization, fraudulent
conveyance, moratorium, liquidation, or similar laws relating to, or affecting
generally the enforcement of, creditors' rights or by other equitable principles
of general application.
4.3 Capitalization. As of the date of this Agreement the authorized
capital stock of the Company consists of (a) 50,000,000 Preference Shares,
without par value, of which (i) 15,000 have been designated as Series I
Preference Shares and all of which are issued and are outstanding, (ii) 5,000
have been designated as Series II Preference Shares of which 3,300 are issued
and outstanding, (iii) 3,000 have been designated as Series III Preference
Shares of which none are issued and outstanding, (iv) 1,000 have been designated
as Series IV Preference Shares of which 1,000 are issued and outstanding, (v)
75 have been designated as Series V Preference Shares of which none are issued
and outstanding, (vi) 75 have been designated as Series VI Preference Shares of
which 75 are issued and outstanding, (vii) 75 have been designated as Series
VII Preference Shares of which 38 are issued and outstanding, and (b)
100,000,000 shares of Common Stock, without par value of which 24,510,868 shares
are issued and outstanding. As of the date of this Agreement, all shares that
have been issued and are outstanding have been validly issued (including,
without limitation, issued in compliance with all applicable federal and
provincial securities laws) and are fully paid and nonassessable. As of the
date of this Agreement, there are no outstanding rights of first refusal,
preemptive rights, or other rights, warrants, options, conversion privileges,
subscriptions, contracts, or other rights or agreements obligating the Company
either directly or indirectly to issue, sell, purchase, or redeem any equity
securities of the Company or any Subsidiary of the Company other than:
(i) the Series I, II, IV, VI, and VII Preference Shares;
(ii) outstanding warrants to purchase shares of Common Stock as set forth
in the attached Schedule 4.3(ii);
(iii) outstanding options to purchase shares of Common Stock as set forth
in the attached Schedule 4.3(iii);
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(iv) the right of Purchaser to acquire Common Stock of the Company pursuant
to an Income Participation Certificate Purchase Agreement dated for reference
June 1, 1997, between the Company and Purchaser;
(v) the right of Purchaser to acquire Common Stock of the Company pursuant
to a Deferred Payment Purchase Agreement dated for reference June 1, 1997,
between the Company and Purchaser;
(vi) the right of Purchaser to acquire Common Stock of the Company pursuant
to a U.S. $11,250,000 Exchangeable Promissory Note dated as of March 31, 1998,
made by Kafus Cement Fibre Industries of Texas, Inc. and payable to the order of
the Purchaser;
(vii) Re-Con Building Products Inc. ("Re-Con") has an option to acquire
from Kafus Cement Fibre Industries of Texas ("Kafus Cement") 500 shares of Class
B Common Stock of Cement Fibreboard Industries of Texas, Inc. ("Cement
Fibreboard") for $8,000,000;
(viii) Kafus Cement has an option to acquire, under certain conditions,
from Re-Con 500 shares of Class C Common Stock of Cement Fibreboard for $10.00;
(ix) Kafus Cement Fibre Industries, Inc. has issued Preferred Stock in the
face amount of Cdn $500,000 to Re-Con which may be redeemable upon the request
of the holder thereof;
(x) Re-Con has the right to reacquire 500 shares of Class B Common Stock of
Cement Fibre Technology from Kafus Cement Fibre Industries Inc. for $10 if it
exercises its option to acquire 500 shares of Class B Common Stock of Cement
Fibreboard from Kafus Cement;
(xi) Kafus Cement Fibre Industries Inc. has the right to acquire 500 shares
of Class C Common Stock of Cement Fibre Technology from Re-Con if Kafus Cement
exercises its option to acquire 500 shares of Class C Common Stock of Cement
Fibreboard Kafus Cement;
(xii) Kenaf Industries Ltd. has issued Series C redeemable preferred stock
with an issue value of $1,250,000 in the aggregate to Kenaf International, Inc.;
and
(xiii) CanFibre of Riverside, Inc. has issued 4,000 shares of Series A
Convertible Redeemable Preferred Stock which may be redeemed by CanFibre of
Riverside for $1,000 per share. The Series A Convertible Redeemable Preferred
Stock accrues dividends payable in Series B redeemable preferred stock.
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4.4 Subsidiaries. As of the date of this Agreement, Schedule 4.4 sets
forth an accurate and complete list of all Subsidiaries of the Company, their
jurisdiction of incorporation, and the ownership by the Company and its
Subsidiaries of the equity interests of each Subsidiary. As of the date of this
Agreement, all of the issued and outstanding shares of capital stock of each
Subsidiary of the Company have been duly and validly authorized and issued and
are fully paid and non-assessable, and such shares were not issued in violation
of any preemptive or similar right and, except as set forth on such Schedule,
are owned by the Company or one of its Subsidiaries, free and clear of any Liens
(as defined below). As of the date of this Agreement, there are no outstanding
warrants, options, or other rights to purchase or acquire any shares of capital
stock of any Subsidiary of the Company, nor any outstanding securities
convertible into such shares or any outstanding warrants, options, or other
rights to acquire any such convertible securities except as set forth on such
Schedule.
4.5 Litigation. There is no pending or, to the best knowledge of the
Company, threatened action, suit, proceeding, or investigation before any court,
governmental agency, or body having jurisdiction over the Company or any of its
Subsidiaries, or before any arbitrator or mediator, that if adversely
determined, would result in a Material Adverse Change or that relates to or
could materially affect the performance by the Company of its obligations under
the Transaction Documents.
4.6 SEC Documents, Financial Statements. Since January 1, 1997, the
Company has filed all reports, schedules, forms, statements, and other documents
required to be filed by it with the Securities Exchange Commission (the "SEC")
pursuant to the reporting requirements of the Securities Exchange Act of 1934,
as amended (the "Exchange Act") (all of the foregoing filed prior to the date
hereof being hereinafter referred to herein as the "SEC Documents"). The Company
has delivered to the Purchaser true and complete copies of all SEC Documents.
As of their respective filing dates, the SEC Documents complied in all material
respects with the requirements of the Exchange Act and the rules and regulations
of the SEC promulgated thereunder and none of the SEC Documents (when read
together with all exhibits included therein and financial statement schedules
thereto and documents, other than exhibits, incorporated by reference) contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make to statements
therein, in light of the circumstances under which they were made, not
misleading. The Company, any Person authorized to represent the Company, and,
to the best knowledge of the Company, any other Person in connection with the
issuing of the Warrants, have not made, at any time, any oral communication in
connection with the issuing of the Warrants which contained any untrue statement
of a material fact or omitted to state any material fact necessary in order to
make the statements, in the light of the circumstances under which they were
made, not misleading. As of September 30, 1997, the Company was, and as of the
date hereof the Company believes that it is a "foreign private issuer" within
the meaning of Rule 3b-4 promulgated
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by the SEC under the Exchange Act and the Common Stock of the Company is
therefore exempt from the operation of Section 16 of the Exchange Act pursuant
to Rule 3a12-3(b) promulgated thereunder. As of the date of this Agreement, the
Company is not in possession of any material non-public information that if
disclosed would, or could reasonably be expected to have, an effect on the price
of the Common Stock. The financial statements of the Company included in the SEC
Documents comply as to form in all material respects with applicable accounting
requirements and the published rules and regulations of the SEC with respect
thereto. Such financial statements have been prepared in accordance with
Canadian generally accepted accounting principles applied on a consistent basis
during the periods involved and fairly present the consolidated financial
condition and results of operations, of the Company as of the dates and for the
periods presented.
4.7 No Change in Condition. Since the date of the Financial Statements,
there has not been any change in the business, properties, prospects, or
financial condition of the Company or its Subsidiaries which would constitute or
reasonably could be expected to result in a Material Adverse Change.
4.8 Taxes.
(a) The Company and each of its Subsidiaries has filed all tax returns
(provincial, federal, foreign, state, and local) required to be filed by it on
or before the date of the Warrants under the laws of all jurisdictions wherein
the location of the assets of the Company and its Subsidiaries, the nature or
transaction of their business, or other requirements subject any of them to
liability for taxes or other governmental charges ("Applicable Tax Laws"), and
all taxes which are due and payable, all assessments received by the Company or
any of its Subsidiaries, and all other taxes and installments of taxes or other
governmental charges (foreign, federal, state, provincial, and local) due and
payable by or with respect to the Company or any of its Subsidiaries under
Applicable Tax Laws on or before the date hereof have been paid.
(b) There are no agreements, waivers or other arrangements providing
for an extension of time with respect to the assessment of any tax or deficiency
against the Company or any of its Subsidiaries or their respective assets.
(c) To the Company's knowledge, there are no actions, suits,
proceedings, investigations, audits, or claims now pending against or related to
the Company or any of its Subsidiaries or their assets regarding any tax or
assessment, or any material matters under discussion with any taxing authority
relating to any taxes or assessments, or any claims for additional taxes or
assessments asserted by any such authority.
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4.9 Title to Assets. All of the assets owned by the Company and its
Subsidiaries are free and clear of all Liens except for Permitted Liens and all
assessments, covenants, restrictions, reservations, and other burdens and
charges of every kind except for those reflected in the SEC Documents and the
financial statements included therein.
4.10 Compliance with Laws and Agreements. Neither the Company nor any of
its Subsidiaries is in violation of any material term or provision of its
organizational documents or any material term or provision of any indebtedness,
mortgage, indenture, contract, agreement, or judgment or any decree, order,
statute, rule, or regulation the violation of which would, individually or in
the aggregate, constitute a Material Adverse Change. The execution, delivery,
and performance of the Transaction Documents will not result in any violation
of, be in conflict with, or constitute a default under, with or without the
passage of time or the giving of notice, any provisions of the Company's or any
of its Subsidiaries' organizational documents, or any indebtedness, mortgage,
indenture, or contract, obligation, or commitment to which the Company or any of
its Subsidiaries is a party or by which any of them is bound, or any provision
of any judgment, decree, order, statute, rule, or regulation to which the
Company or any of its Subsidiaries is a party or by which any of them is bound.
4.11 Employee Benefit Plans. All employee welfare or benefit plans
(including any stock option, stock purchase, or ownership plan) with respect to
which the Company or any Subsidiary is a sponsor are set forth in the SEC
Documents.
4.12 Environmental Matters. There has been no storage, disposal,
generation, manufacture, spill, discharge (or any threatened spill or
discharge), refinement, transportation, handling, or treatment of toxic wastes,
medical wastes, hazardous wastes, or hazardous substances by the Company or any
of its Subsidiaries (or to the knowledge of the Company, by any other Person)
at, upon or from any of the property now or previously owned or leased or under
contract for purchase by the Company or any of its Subsidiaries, in violation of
any applicable law, ordinance, rule, regulations, order, judgment, decree, or
permit or which would require remedial action under any applicable law,
ordinance, rule, regulations, order, judgment, decree, or permit; the terms
"hazardous wastes," "toxic wastes," "hazardous substances," and "medical wastes"
shall have the meanings specified in any applicable local, state, provincial,
federal, and foreign laws or regulations with respect to environmental
protection.
4.13 Consents. No consent, approval, order, or authorization of, or
registration, qualification, designation, declaration, or filing with any
federal, provincial, state, or local government authority or any other person is
required in connection with the execution, delivery, and performance by the
Company of its obligations under the Transaction Documents, except for filings
pursuant to Regulation D promulgated under the Act, Blue Sky filings, securities
filing required by
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governmental authorities in British Columbia, and any other filings that are or
may be required by the SEC or any such authority in connection with the
Registration Rights Agreement. The Purchaser acknowledges that the shares of
Common Stock issuable upon conversion of the Note or the exercise of the
Warrants will require listing approval of the American Stock Exchange prior to
being publicly traded.
4.14 Private Offering. The offer, issuance, and sale of the Note, the
Warrants, and the shares of Common Stock issuable upon conversion of the Note or
exercise of the Warrants are and will be exempt from the registration and
prospectus delivery requirements of the Securities Act of 1933 and have been
registered or qualified (or are exempt from registration and qualification)
under the registration, permit, or qualification requirements of all applicable
state securities laws.
4.15 Fees. No fees or commissions are or will be payable by the Company or
any of its Subsidiaries (or to its knowledge by any affiliate of the Company) to
advisors, consultants, brokers, finders, investment bankers, or banks with
respect to the offer, issuance, or sale of the Note, the Warrants, and the
shares of Common Stock issuable upon conversion of the Note or exercise of the
Warrants or the consummation of the transactions otherwise contemplated by the
Warrants other than under the Structuring Fee Agreement.
4.16 Transactions with Affiliates. Neither the Company nor any of its
Subsidiaries has entered into any transaction directly or indirectly with or for
the benefit of an Affiliate except (a) transactions with an Affiliate for the
leasing of property, the rendering or receipt of services, or the purchase or
sale of inventory or other assets in the ordinary course of business if the
monetary or business consideration arising from such a transaction would be
substantially as advantageous to the Company or such Subsidiary as the monetary
or business consideration which such Person would obtain in a comparable arm's
length transaction and (b) the transactions disclosed in the Company's
Information Statement dated February 6, 1998, and Form 20-F for the year ended
September 30, 1997, each as filed with the SEC.
4.17 True and Complete Disclosure.
(a) All factual information furnished by or on behalf of the Company
in writing to the Purchaser in connection with the Transaction Documents and the
transactions contemplated thereby is true and accurate in all material respects
on the date as of which such information was dated or certified and does not
contain any untrue statement of material fact or omit to state any material fact
necessary to make the statements contained therein not misleading.
(b) The Purchaser acknowledges receipt of that form of Notice attached
hereto as Schedule 4.17 regarding issuance shares of Common Stock upon
conversion of the Note. In
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addition, the Purchaser acknowledges that the Company intends to cease as soon
as practicable having its Common Stock quoted on the Canadian Dealing Network.
Section 5. Covenants. So long as the Purchaser retains any commitments
hereunder or any Loan Obligations remain outstanding or the Purchaser retains
any Warrants, the Company covenants as follows:
5.1 Use of Proceeds. The Company shall use the proceeds of the initial
advance under the Note as follows: (a) to satisfy all indebtedness of the
Company and its Subsidiaries owing to and to redeem all of the securities of the
Company and its Subsidiaries held by Olympus Securities Ltd. and NP Partners,
formerly known as Nelson Partners, (b) to redeem all of the Series VI and Series
VII Preference Shares of the Company, (c) to repay certain existing payables of
the Company and its Subsidiaries, including amounts owed to officers and
directors of the Company, and (d) for other general working capital purposes,
in each case as presented to the Purchaser with the initial borrowing request.
All other proceeds of the Note shall be used solely for working capital and
project development expenses of the Company and its Subsidiaries, in each case
as presented to the Purchaser with the applicable borrowing request.
5.2 Inspection. The Company shall, and shall cause each of its
Subsidiaries to, permit the Purchaser to visit and inspect any of the properties
of such Person, to examine all of such Person's books of account, records,
reports, and other papers, to make copies and extracts therefrom, and to discuss
their respective affairs, finances, and accounts with their respective officers,
employees, and independent public accountants all at such reasonable times and
as often as may be reasonably requested provided that the Company is given at
least one Business Day advance notice thereof and reasonable opportunity to be
present when independent public accountants or other third parties are
contacted.
5.3 Debt.
(a) As used herein, the term "Debt" means with respect to any Person,
without duplication, (a) indebtedness of such Person for borrowed money, (b)
obligations of such Person evidenced by bonds, debentures, notes, or other
similar instruments, (c) obligations of such Person to pay the deferred purchase
price of property or services (other than trade debt and normal operating
liabilities incurred in the ordinary course of business), (d) obligations of
such Person as lessee under capital leases, (e) obligations of such Person under
or relating to letters of credit, guaranties, purchase agreements, or other
creditor assurances assuring a creditor against loss in respect of indebtedness
or obligations of others of the kinds referred to in clauses (a) through (d) of
this definition, and (f) nonrecourse indebtedness or obligations of others of
the kinds referred to in clauses (a) through (e) of this definition secured by
any Lien on or in respect of any property of such
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<PAGE>
Person. For the purposes of determining the amount of any Debt, the amount of
any Debt described in clause (e) of the definition of Debt shall be valued at
the maximum amount of the contingent liability thereunder and the amount of any
Debt described in clause (f) that is not covered by clause (e) shall be valued
at the lesser of the amount of the Debt secured or the book value of the
property securing such Debt.
(b) Without the prior written approval of the Purchaser, the Company
shall not, and shall not permit any of its Subsidiaries to, create, assume,
incur, or suffer to exist any Debt, except for the following (collectively, the
"Permitted Debt"): (i) Debt in the form of the Loan Obligations and other Debt
owed to the Purchaser; (ii) Debt in the form of Debt outstanding as of the date
of and reported in the Financial Statements, but no increases, extensions, or
refinancings thereof; (iii) Debt in the form of notes payable to officers and
directors or their Affiliates incurred after the date of the Financial
Statements but before the date of this Agreement listed in Schedule 5.3(b); (iv)
Debt in the form of (A) Debt of any Subsidiary of the Company which is
nonrecourse to the Company and the other Subsidiaries of the Company incurred to
finance project developments or operations in the ordinary course of business
and (B) Debt of any Subsidiary of the Company (other than CanFibre Group and its
Subsidiaries and Kafus Cement Fibre Industries, Inc., and its Subsidiaries)
which is nonrecourse to the Company and the other Subsidiaries of the Company
not operating in the same line of business as such Subsidiary; (v) Debt in the
form of capital leases or purchase money financing for equipment not to exceed
U.S. $1,000,000 on a combined basis for the Company and its Subsidiaries; (vi)
Debt in the form of unsecured indebtedness of the Company for borrowed money not
to exceed U.S. $3,000,000; and (vii) Debt in the form of unsecured subordinated
indebtedness of the Company for borrowed money having subordination terms
reasonably acceptable to the Purchaser not to exceed U.S. $5,000,000.
(c) Without the prior written approval of the Purchaser, the Company
shall not, and shall not permit any of its Subsidiaries to, make any payment on
or with respect to, or purchase, redeem, defease, or otherwise acquire or retire
for value any amount of any Permitted Debt permitted pursuant to paragraph
(b)(ii) above prior to the stated due dates or maturities thereof. The Company
shall not, and shall not permit any of its Subsidiaries to, amend, supplement,
or otherwise modify any of the terms or conditions of any such Permitted Debt
(other than any such amendment, supplement, or modification which would extend
the maturities of or reduce the amounts of any payments of principal, interest,
fees, or other amounts, any modification which would render the terms of such
Permitted Debt less restrictive, or any non-material administrative amendment
which imposes no new restrictions).
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<PAGE>
5.4 Liens.
(a) As used herein, the term "Lien" means any mortgage, lien, pledge,
charge, deed of trust, security interest, encumbrance, or other type of
preferential arrangement to secure or provide for the payment of any obligation
of any Person, whether arising by contract, operation of law, or otherwise
(including any title retention for such purposes under any conditional sale
agreement, any capital lease, or any other title transfer or retention
agreement).
(b) Without the prior written approval of the Purchaser, the Company
shall not, and shall not permit any of its Subsidiaries to, create, assume,
incur, or suffer to exist any Lien on any of the Company's or its Subsidiaries'
real or personal property whether now owned or hereafter acquired, or assign any
right to receive its income, except for the following (collectively, the
"Permitted Liens"): (i) Liens securing the Loan Obligations and other Debt owed
to the Purchaser; (ii) [intentionally deleted]; (iii) [intentionally deleted];
(iv) Liens securing Debt permitted under Section 5.3(b)(iv)(A)), provided that
each such Lien encumbers only the assets of the Subsidiary of the Company that
incurred such Debt and Liens Securing Debt permitted under Section 5.3(b)(iv)(B)
provided that each such Lien encumbers only the assets of the Subsidiaries of
the Company which are obligated on such Debt; (v) Liens securing Debt permitted
under Section 5.3(b)(v) provided that each such Lien encumbers only the leased
or purchased assets purchased with the proceeds of such Debt; (vi)
[intentionally deleted]; and (vii) Liens arising in the ordinary course of
business which are not incurred in connection with the borrowing of money or the
obtaining of advances or credit and which do not materially detract from the
value of the Company's or any of its Subsidiaries assets or materially interfere
with the Company's or any of its Subsidiaries business, including Liens
satisfying the foregoing requirements that are (A) Liens for taxes, assessments,
or other governmental charges or levies which are not yet due and payable or
which are being contested in accordance with the terms of this Agreement; (B)
Liens in connection with worker's compensation, unemployment insurance, or other
social security, old age pension, or public liability obligations; (C) Liens in
the form of legal or equitable encumbrances deemed to exist by reason of
negative pledge covenants and other covenants or undertakings of like nature;
(D) Liens in the form of vendors', carriers', warehousemen's, repairmen's,
mechanics', workmen's, materialmen's, construction, or other like Liens arising
by operation of law in the ordinary course of business or incident to the
construction or improvement of any property in respect of obligations which are
not yet due and payable or which are being contested in accordance with this
Agreement; and (E) Liens in the form of zoning restrictions, easements,
licenses, and other restrictions on the use of real property or minor
irregularities in title thereto which do not materially impair the use of such
property in the operation of the business of the Company or the value of such
property.
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<PAGE>
(c) Without the prior written approval of the Purchaser, the Company
shall not, and shall not permit any of its Subsidiaries to, be party to any
agreement restricting the right of the Company to pledge its assets to secure
the Loan Obligations.
5.5 Other Obligations.
(a) The Company shall not, and shall not permit any of its
Subsidiaries to, create, incur, assume, or suffer to exist any obligations in
respect of unfunded vested benefits under any pension plan or deferred
compensation agreement.
(b) The Company shall not, and shall not permit any of its
Subsidiaries to, create, incur, assume, or suffer to exist any obligations in
respect of derivatives, other than derivatives used by such Person in such
Person's respective business operations in aggregate notional quantities not to
exceed the reasonably anticipated consumption of such Person of the underlying
commodity for the relevant period, but no derivatives which are speculative in
nature.
5.6 Payment of Certain Claims. The Company shall, and shall cause each
of its Subsidiaries to, pay and discharge, before the same shall become
delinquent, (a) all taxes, assessments, levies, and like charges imposed upon
such Person or upon such Person's income, profits, or property by authorities
having competent jurisdiction prior to the date on which penalties attached
thereto and (b) all trade payables and current operating liabilities, unless the
same are less than 90 days past due.
5.7 Investments. The Company shall not, and shall not permit any of its
Subsidiaries to, make or hold any direct or indirect investment in any Person,
including capital contributions to the Person, investments in the debt or equity
securities of the Person, and loans, guaranties, trade credit, or other
extensions of credit to the Person (collectively, "Investments"), except for the
following (collectively, the "Permitted Investments"): (a) (i) investments in
the Company and in Subsidiaries of the Company (whether existing or when
acquired as formed), (ii) specified limited investments in Persons other than
Subsidiaries of the Company that have been expressly approved by the Purchaser,
but no further investments therein unless such further investments have been
approved by the Purchaser, and (iii) loans, advances, and other investments in
Persons other than those described in clauses (i) and (ii) in an aggregate
outstanding amount not to exceed U.S. $500,000; (b) investments in the form of
loans, guaranties, open accounts, and other extensions of trade credit in the
ordinary course of business; (c) investments in direct obligations of the United
States or Canada, or investments in any Person which investments are guaranteed
by the full faith and credit of the United States or Canada, in either case
maturing in twelve months or less from the date of acquisition thereof and
repurchase agreements having a term of less than one year and fully
collateralized by such obligations which are entered into with banks or trust
companies described
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in clause (e) below; (d) investments in commercial paper and bankers'
acceptances maturing in twelve months or less from the date of issuance and
which, at the time of acquisition are rated A-2 or better by Standard & Poor's
Corporation and P-2 or better by Moody's Investors Services, Inc; (e)
investments in time deposits or certificates of deposit maturing within one year
from the date such investment is made, issued by a bank or trust company
organized under the laws of the United States or Canada or any state or province
thereof having capital, surplus, and undivided profits aggregating at least U.S.
$250,000,000 or a foreign branch thereof and whose long-term certificates of
deposit are, at the time of acquisition thereof, rated A-2 by Standard & Poor's
Corporation or P-2 by Moody's Investors Services, Inc.; and (f) investments in
money market funds which invest solely in the types of investments described in
paragraphs (c) through (e) above.
5.8 Corporate Transactions. Without the prior written consent of the
Purchaser, the Company shall not, and shall not permit any of its Subsidiaries
to (a) merge, consolidate, or amalgamate with another Person, or liquidate, wind
up, or dissolve itself (or take any action towards any of the foregoing), (b)
convey, sell, lease, assign, transfer, or otherwise dispose of any of its
property, businesses, or other assets outside of the ordinary course of
business, or (c) make any direct or indirect purchase or acquisition, whether in
one or more related transactions, of any Person or group of Persons or any
related group of assets, liabilities, or securities of any Person or group of
Persons (excluding purchases of inventory and equipment in the ordinary course
of business) except that:
(i) The Company or any Subsidiary of the Company may sell the stock of
Subsidiaries of the Company provided that the Subsidiaries whose stock is
sold remain Subsidiaries of the Company;
(ii) Any Subsidiary of the Company may merge, consolidate, or
amalgamate into any Subsidiary of the Company or convey, sell, lease,
assign, transfer, or otherwise dispose of any of its assets to any
Subsidiary of the Company (and if such disposition transfers all or
substantially all of the assets of transferring Subsidiary, such subsidiary
may then liquidate, wind up, or dissolve itself); provided that the
Subsidiary is the surviving or acquiring Subsidiary;
(iii) Any Subsidiary of the Company may merge, consolidate, or
amalgamate with another Person with the other Person as the surviving
entity or convey, sell, lease, assign, transfer, or otherwise dispose of
any of its assets to another Person (and if such disposition transfers all
or substantially all of the assets of transferring Subsidiary, such
Subsidiary may then liquidate, wind up, or dissolve itself) provided that
the result of such transaction would not cause the net book value of the
assets so merged out of the Subsidiaries of the Company
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or disposed of during any fiscal year of the Company to exceed 20% of the
consolidated net book value of the Company as of the end of the prior
fiscal year of the Company; and
(iv) The Company or any Subsidiary of the Company may make any
acquisition (by purchase or merger) provided that (A) the Subsidiary of the
Company is the acquiring or surviving entity, (B) the aggregate non-equity
consideration paid by the Company and its Subsidiaries in connection with
acquisitions during any fiscal year does not exceed 20% of the consolidated
net book value of the Company as of the end of the prior fiscal year of the
Company, (C) no Default or Event of Default exists and the acquisition
would not reasonably be expected to cause a Default or Event of Default,
and (D) the transaction is not hostile, as reasonably determined by the
Purchaser.
5.9 Dividends. Without the prior written approval of the Purchaser
(including the approval already given as detailed in Section 5.1) the Company
shall not (a) declare or pay any dividends other than cash dividends under the
Series IV Preference Stock of the Company and stock dividends under the
Preference Stock of the Company; (b) purchase, redeem, retire, or otherwise
acquire for value any of its capital stock now or hereafter outstanding; or make
any distribution of assets to its stockholders as such, whether in cash, assets
or in obligations of it; (c) allocate or otherwise set apart any sum for the
payment of any dividend or distribution on, or for the purchase, redemption, or
retirement of, any shares of its capital stock; or (d) make any other
distribution by reduction of capital or otherwise in respect of any shares of
its capital stock.
5.10 Insurance. The Company shall, and shall cause each of its
Subsidiaries to, maintain insurance with responsible and reputable insurance
companies or associations reasonably acceptable to the Purchaser in such amounts
and covering such risks as are usually carried by companies engaged in similar
businesses and owning similar properties in the same general areas in which such
Person operates.
5.11 Lines of Business. The Company shall not, and shall not permit its
any of its Subsidiaries to, change the character of its business as conducted on
the date of this Agreement, or engage in any type of business not reasonably
related to its business as presently and normally conducted.
5.12 Transactions with Affiliates. The Company shall not, and shall not
permit any of its Subsidiaries to, enter into any transaction directly or
indirectly with or for the benefit of an Affiliate except transactions with an
Affiliate for the leasing of property, the rendering or receipt of services, or
the purchase or sale of inventory or other assets in the ordinary course of
business if the monetary or business consideration arising from such a
transaction would be substantially as advantageous to
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the Company or such Subsidiary as the monetary or business consideration which
such Person would obtain in a comparable arm's length transaction.
5.13 Compliance with Laws. The Company shall, and shall cause each of its
Subsidiaries to, comply, in all material respects, with all federal, state, and
local laws and regulations which are applicable to its operations and property.
5.14 Validity of Shares. The Company shall reserve and keep available at
all times, free from preemptive rights, a sufficient number of shares of Common
Stock to satisfy the requirements of the Note and the Warrants. Such shares of
Common Stock: (i) will be upon issuance, free and clear of any Liens created by
the Company or, to the Company's knowledge, any other Person; (ii) have been
duly and validly authorized and when issued and paid for in accordance with the
terms of the Warrants and the Note will be duly and validly issued, fully paid,
and non-assessable; (iii) will not have been issued or sold in violation of any
preemptive or similar rights; and (iv) will not subject the Purchaser thereof to
personal liability by reason of holding the same.
5.15 Financial Reports. The Company shall deliver to the Purchaser:
(i) within sixty-five (65) days of the end of each fiscal quarter, an
unaudited balance sheet and statement of operations for the Company and its
Subsidiaries on a consolidated basis prepared in accordance with Canadian
Generally Accepted Accounting Principles consistently applied;
(ii) within one hundred eighty (180) of the end of each fiscal year
audited financial statements consisting of a balance sheet and statement of
operations and cash flows statement for the Company and its Subsidiaries on a
consolidated basis prepared in accordance with Canadian Generally Accepted
Accounting Principles consistently applied (provided that with respect to
paragraphs (i) and (ii) of this Section, provision of copies of reports and
financial statements filed with the SEC pursuant to the Company's reporting
requirements which contain such items within the time periods required hereunder
shall be deemed satisfactory delivery of the required financial statements);
(iii) copies of any management letters prepared by the Company's
auditors and the Company's responses thereto promptly after their issuance; and
(iv) notice of the occurrence of any Material Adverse Change,
promptly after its occurrence.
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5.16 Reports Under Exchange Act; Change in Status. With a view to making
available to the Purchaser the benefits of Rule 144 and any other rule or
regulation of the SEC that may at any time permit the Purchaser to sell
securities of the Company to the public without registration, the Company agrees
to: (i) make and keep public information available, as those terms are defined
in Rule 144; (ii) file with the SEC in a timely manner all reports and other
documents required of the Company under the Act and the Exchange Act, and (iii)
furnish the Purchaser, so long as the Purchaser owns the Note or any Warrants
forthwith upon request: (x) a written statement by the Company that it has
complied with the reporting requirements of Rule 144, the Act and the Exchange
Act; (y) a copy of the most recent annual or quarterly report of the Company and
such other reports and documents filed by the Company; and (z) such other
information as may be reasonably requested in availing the Purchaser of any rule
or regulation of the SEC which permits the selling of any such securities
without registration. The Company shall immediately notify the Purchaser in the
event the Company ceases to be a "foreign private issuer," as defined in Rule
3b-4 promulgated by the SEC under the Exchange Act or if holders of Common Stock
of the Company are otherwise subject to Section 16 of the Act.
5.17 HSR Act. The Company agrees that, in the event that conversion of the
Note or the exercise of any Warrants requires any filing to be made under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("HSR Act"), the Company
shall, at the request of the Purchaser and at the expense of the Company, make
all filings required by the HSR Act and shall cooperate with the Purchaser in
responding to any request for information submitted by the Department of Justice
or the Federal Trade Commission.
5.18 Future Stock Sales. The Company shall not (a) issue or sell (i)
shares of the Common Stock at a price less than 85% of the Average Price (as
defined in Section 5 of the Note) as of the date of sale or (ii) any securities
convertible into or exchangeable for Common Stock, with a conversion or exercise
price that is less than 85% of the Average Price of the Common Stock on the date
of issuance of such convertible or exchangeable securities or (b) sell more than
U.S. $10 million of Common Stock at prices less than the Average Price as of the
date of the related sale. Purchaser shall have the right in connection with any
issuance of Common Stock (or any security convertible into or exchangeable for
Common Stock) to purchase its proportionate share (based on its beneficial
ownership of the Common Stock as determined under Rule 13d-3) of the securities
proposed to be so issued, on the same terms as those pursuant to which the
Company proposes to sell such securities to other Persons. This paragraph will
not restrict the ability of the Company to offer or sell securities at or above
the Average Price of the Common Stock during the 30 days preceding the date of
sale. This Section 5.18 shall terminate on the date the Purchaser and its
Affiliates beneficially own less than 10% of the outstanding Common Stock.
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Section 6. Default and Remedies.
6.1 Events of Default. Each of the following shall be an "Event of
Default" for the purposes of this Agreement:
(a) The Company or any other Credit Party defaults in the payment when
due of any amount due under any Loan Document, including payments of principal,
interest, fees, reimbursements, or indemnifications;
(b) Any representation or warranty made by the Company or any other
Credit Party or any officer thereof in any Loan Document or any Warrant Document
proves to have been materially false or erroneous at the time it was made or
deemed made;
(c) (i) Any breach by the Company or any Credit Party of any
restrictive covenant in any Loan Document or Warrant Document or any covenant in
any Loan Document or Warrant Document for which a specific time period for
compliance is provided or (ii) any breach by the Company or any Credit Party of
any other covenant in any Loan Document or Warrant Document which breach is not
cured within 30 days after receipt of written notice from the Purchaser of such
breach;
(d) Any Loan Document or Warrant Document shall at any time and for
any reason, other than the action of the Purchaser, cease to create the Lien on
the property purported to be subject to such agreement in accordance with the
terms of such agreement, or cease to be in full force and effect, or shall be
contested by any party thereto;
(e) (i) Any principal, interest, fees, or other amounts due on any
indebtedness of the Company or any other Credit Party or any Subsidiary of the
Company is not paid when due, whether by scheduled maturity, required
prepayment, acceleration, demand, or otherwise, and the aggregate amount of all
such indebtedness so in default exceeds U.S. $5,000,000; (ii) any indebtedness
of the Company or any other Credit Party or any Subsidiary of the Company shall
be declared to be due and payable, or required to be prepaid (other than by a
regularly scheduled prepayment) prior to the stated maturity thereof, and the
aggregate amount of all such indebtedness so accelerated exceeds U.S.
$5,000,000; or (iii) any event shall occur or condition shall exist under any
agreement or instrument relating to any indebtedness of the Company or any other
Credit Party or any Subsidiary of the Company the effect of which is to
accelerate or to permit the acceleration of the maturity of any such
indebtedness, whether or not any such indebtedness is actually accelerated, and
the aggregate amount of all such indebtedness so in default exceeds U.S.
$5,000,000;
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(f) (i) There shall have been filed against the Company or any other
Credit Party or any Material Subsidiary of the Company or any of their
respective properties, without such Person's consent, any petition or other
request for relief seeking an arrangement, receivership, reorganization,
liquidation, or similar relief under bankruptcy or other laws for the relief of
debtors and such request for relief (A) remains in effect for 60 or more days,
whether or not consecutive, or (B) is approved by a final nonappealable order,
or (ii) the Company or any other Credit Party or any Material Subsidiary of the
Company consents to or files any petition or other request for relief of the
type described in clause (i) above seeking relief from creditors, makes any
assignment for the benefit of creditors or other arrangement with creditors, or
admits in writing such Person's inability to pay its debts as they become due
(the occurrence of any Event of Default under clause (i) or (ii) being a
"Bankruptcy Event of Default");
(g) A judgment in excess of U.S. $5,000,000 is rendered against the
Company or any other Credit Party or any Subsidiary of the Company and such
judgment is not discharged or stayed pending appeal within 30 days following its
entry; or
(h) (a) There shall occur the direct or indirect acquisition after the
date hereof by any Person or related Persons constituting a group of (i)
beneficial ownership of issued and outstanding shares of Voting Securities of
the Company, the result of which acquisition is that such Person or such group
possesses 20% or more of the combined voting power of all then-issued and
outstanding Voting Securities of the Company or (ii) the power to elect,
appoint, or cause the election or appointment of at least a majority of the
members of the board of directors of the Company, or (b) the individuals who, at
the beginning of any period of 12 consecutive months, constitute the Company's
board of directors (together with any new director whose election by the
Company's board of directors or whose nomination for election by the Company's
stockholders entitled to vote thereon was approved by a vote of at least a
majority of the directors then still in office who either were directors at the
beginning of such period or whose election or nomination for election was
previously so approved) cease for any reason (other than death or disability) to
constitute a majority of the Company's board of directors then in office.
6.2 Remedies.
(a) During the continuation of any Event of Default, the Purchaser may
(i) declare by written notice to the Company all of its commitments under the
Loan Documents terminated, whereupon such commitments shall terminate (provided
that upon the occurrence of any Bankruptcy Event of Default, all such
commitments of the Purchaser shall terminate immediately and automatically), and
(ii) declare by written notice to the Company all Loan Obligations to be
immediately due and payable, whereupon such amounts shall become immediately due
and payable (provided that upon the occurrence of any Bankruptcy Event of
Default, all Loan Obligations shall
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immediately and automatically become due and payable). Except as expressly
provided for in the Loan Documents, the Company waives notice of any default or
event of default (however denominated), notice of intent to accelerate, notice
of acceleration, presentment, demand, notice of dishonor, notice of setoff,
notice of the initiation of any suit, notice of any action against any credit
support or collateral, and notice of any other action or remedy.
(b) During the continuation of any Event of Default, the Purchaser may
declare by written notice to the Company that the Loan Obligations specified in
such notice shall bear interest beginning on the date specified in such notice
(which may be at any time on or after receipt of such notice) until paid in full
at the lesser of 17.00% per annum, calculated based upon a 365/366 day year for
the actual number of days elapsed, or the Highest Lawful Rate (as defined
below), whereupon such interest shall begin to accrue and the Company shall pay
such interest to the Purchaser upon demand.
(c) During the continuation of an Event of Default, the Purchaser is
authorized at any time, to the fullest extent permitted by law, to setoff and
apply any indebtedness owed by the Purchaser to the Company against any and all
of the obligations of the Company under the Loan Documents, irrespective of
whether or not the Purchaser shall have made any demand under the Loan
Documents and although such obligations may be contingent and unmatured.
(d) During the continuation of an Event of Default, the Purchaser may
exercise all of its rights under the Loan Documents and all other rights at law
or in equity.
(e) During the continuation of an Event of Default, all payments
received in respect of obligations under the Loan Documents shall be applied in
the order determined by the Purchaser.
No right, power, or remedy conferred to the Purchaser in the Loan Documents or
in any documents securing or supporting the Loan Documents or now or hereafter
existing at law, in equity, by statute, or otherwise shall be exclusive, and
each such right, power, or remedy shall to the full extent permitted by law be
cumulative and in addition to every other such right, power or remedy. No
course of dealing and no delay in exercising any right, power, or remedy
conferred to the Purchaser shall operate as a waiver of or otherwise prejudice
any such right, power, or remedy. No notice to or demand upon the Company shall
entitle the Company to similar notices or demands in the future.
Section 7. Miscellaneous.
7.1 Expenses. The Company shall pay directly or reimburse the Purchaser
for all reasonable expenses of the Purchaser, including reasonable charges and
disbursements of legal
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<PAGE>
counsel for the Purchaser, in connection with the amendment, modification,
waiver, or interpretation of the Transaction Documents, and the preservation or
enforcement of any rights of the Purchaser under the Transaction Documents,
including the expenses of the Purchaser prior to the execution of this
Agreement. The amount and nature of any expense of the Purchaser hereunder shall
be fully established by a certificate of any officer of the Purchaser. The
provisions of this paragraph shall survive any purported termination of this
Agreement that does not expressly reference this paragraph.
7.2 Indemnification of Purchaser. The Company agrees to protect, defend,
indemnify, and hold harmless the Purchaser and its stockholders, directors,
officers, employees, agents, affiliates, successors, and assigns, and their
respective stockholders, directors, officers, employees, and agents (for the
purposes of this Section 7.2, collectively, the "Indemnified Parties"), from and
against all demands, claims, actions, suits, damages, judgments, fines,
penalties, liabilities, and out-of-pocket costs and expenses, including
reasonable costs of attorneys and related costs of experts such as accountants
(collectively, the "Indemnified Liabilities"), actually incurred by any
Indemnified Party which are related to (a) any breach of any representation,
warranty, or covenant of the Company under the Transaction Documents and (b) any
litigation or proceeding relating to the Transaction Documents or the
transactions contemplated thereunder, INCLUDING ANY INDEMNIFIED LIABILITIES
CAUSED BY ANY INDEMNIFIED PARTY'S OWN NEGLIGENCE, but not Indemnified
Liabilities which are a result of any Indemnified Party's gross negligence or
willful misconduct. The amount and nature of any indemnification claim under
this Section shall be presumptively established by a certificate from the
applicable Indemnified Party. The provisions of this paragraph shall survive
any purported termination of this Agreement that does not expressly reference
this paragraph.
7.3 Certain Provisions Regarding Payments.
(a) Unless otherwise specified, the Company shall make all payments
required under the Transaction Documents not later than 1:00 p.m., Houston,
Texas, time on any date when due in lawful money of the United States of America
to the Purchaser at such location as is specified by the Purchaser in writing in
immediately available funds. Whenever any payment to be made under the
Transaction Documents shall be stated to be due on a day other than a day on
which the banks in Vancouver, British Columbia, and Houston, Texas, are required
to be open ("Business Day"), such payment shall be due and payable on the next
succeeding Business Day. If the date for payment of any obligation is not
specified in the Transaction Documents, such obligation shall be payable upon
demand.
(b) Any and all payments by the Company under the Transaction
Documents shall be made free and clear of and without deduction for any and all
present or future taxes, levies,
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<PAGE>
imposts, deductions, charges, or withholdings, and all liabilities with respect
thereto, other than taxes imposed on the income of and franchise taxes imposed
on the Purchaser by any jurisdiction in which the Purchaser is a citizen or
resident or any political subdivision of such jurisdiction (all such non-
excluded taxes, levies, imposts, deductions, charges, withholdings, and
liabilities being hereinafter referred to as "Taxes"). If the Company shall be
required by law to deduct any Taxes from any sum payable to the Purchaser (i)
the sum payable shall be increased as may be necessary so that, after making all
required deductions (including deductions applicable to additional sums payable
under this paragraph), the Purchaser receives an amount equal to the sum it
would have received had no such deductions been made; (ii) the Company shall
make such deductions; and (iii) the Company shall pay the full amount deducted
to the relevant taxation authority or other authority in accordance with
applicable law.
(c) The Company agrees to pay any present or future stamp or
documentary taxes or any other excise or property taxes, charges, or similar
levies which arise from any payment made with respect to, or from the execution,
delivery, filing, or registration of, the Transaction Documents.
(d) If any sum due from the Company under the Transaction Documents or
any order or judgment given in relation hereto has to be converted from the
currency in which the same is payable hereunder or under such order or judgment
(the "first currency") into another currency (the "second currency") for the
purpose of (i) making or filing a claim or proof against the Company with any
governmental authority or in any court, tribunal, or arbitration panel or (ii)
enforcing any order or judgment given in relation hereto, the Company shall
indemnify the Purchaser against any loss incurred as a result of any discrepancy
between (A) the rate of exchange used when restating the amount in question from
the first currency into the second currency and (B) the rate or rates of
exchange at which the Purchaser purchased the first currency with the second
currency after receipt of a sum paid to it in the second currency in
satisfaction, in whole or in part, of any such sum due or order or judgment.
The foregoing indemnity shall constitute a separate obligation of the Company
distinct from any other obligations and shall survive the giving or making of
any judgment or order in relation to all or any of such other obligations.
7.4 Waiver, Amendment, and Survival.
(a) Performance under the Loan Documents to which the Company is a
party may be waived only in a writing signed by the party against whom
enforcement is sought, and such a waiver shall be effective only for the
purposes and only to the extent stated in that writing. The terms of the Loan
Documents to which the Company is a party may be amended, supplemented, and
otherwise modified only in a writing signed by the party against whom
enforcement is sought, and such an amendment, supplement, or other modification
shall be effective only for the purposes and only to the extent stated in that
writing. All representations, warranties, and covenants of the
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<PAGE>
Company in the Loan Documents shall survive the execution of this Agreement and
any other document or agreement.
(b) The provisions in the Warrant Documents shall control waiver and
amendment of the Warrant Documents. No holder of Warrants that is not the
holder of the Note shall have any rights with respect to the waiver or amendment
of the Loan Documents.
7.5 Successors and Assigns.
(a) The Loan Documents shall bind and inure to the benefit of the
Company and the Purchaser and their respective successors and assigns. The
Company may not assign its rights or delegate its duties under the Loan
Documents. The Purchaser may not assign or participate its rights and delegate
its duties under the Loan Documents without the consent of the Company, which
consent shall not be unreasonably withheld; provided that, during the
continuation of an Event of Default, the Purchaser may assign or participate its
rights and delegate its duties under the Loan Documents without the consent of
the Company, following notice thereof to the Company. Notwithstanding any other
provision of this Agreement, the Purchaser may, at any time, assign its rights
and duties under the Loan Documents to an affiliate of the Purchaser.
(b) The provisions in the Warrant Documents shall control the rights
and duties of the parties to the Warrant Documents and their successors and
assigns. No holder of Warrants that is not the holder of the Note shall have
any rights or obligations under the Loan Documents, but the holder of the Note
shall be entitled to the benefit of the provisions of the Loan Documents with
respect to any Warrants held by the holder of the Note.
7.6 Notice.
(a) Unless otherwise specified, all notices and other communications
provided for between the Company and the Purchaser in the Loan Documents shall
be in writing, including telecopy, and delivered or transmitted to the addresses
set forth below, or to such other address as shall be designated by the Company
or the Purchaser in written notice to the other party. Notice sent by telecopy
shall be deemed to be given and received when receipt of such transmission is
acknowledged, and delivered notice shall be deemed to be given and received when
receipted for by, or actually received by, an authorized officer of the Company
or the Purchaser, as the case may be.
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<PAGE>
Kafus Environmental Industries Ltd.
270 Bridge Street
Dedham MA 02026
Attn: Mr. Michael A. McCabe
telephone: 781-326-5001
telecopier: 781-326-5105
Enron Capital & Trade Resources Corp.
Attn: Tony A. Valentine
1400 Smith Street
Houston, Texas 77002
telephone: 713-853-6903
telecopier: 713-646-2654
(b) The provisions in the Warrant Documents shall control the rights
and duties of the parties to the Warrant Documents with respect to notice
obligations.
7.7 Choice of Law.
(a) Except as otherwise specified in another Loan Document, the Loan
Documents shall be governed by and construed and enforced in accordance with the
laws of Texas and the applicable laws of the United States, without regard to
conflicts of law principles which would select another law.
(b) The provisions in the Warrant Documents shall control the choice
of law elections under the Warrant Documents.
7.8 Arbitration.
(a) Disputes arising under the Loan Documents shall be settled by one
arbitrator pursuant to the rules of the American Arbitration Association (the
"AAA") for Commercial Arbitration (the "Rules"). Such arbitration shall be held
in New York, New York, or at such other location as mutually agreed to by the
parties to the dispute. Subject to any applicable limitations contained in this
Agreement, arbitration may be commenced at any time by any party giving notice
to the other party that a dispute has been referred to arbitration under this
paragraph (a). The arbitrator shall be selected by the joint agreement of the
parties hereto, but if they do not so agree within twenty (20) days after the
date of the notice referred to above, the selection shall be made pursuant to
the Rules from the panel of arbitrators maintained by the AAA. Any award of the
arbitrator shall be accompanied by a written opinion giving the reasons for the
award. The expense
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<PAGE>
of the arbitration shall be borne by the parties in the manner determined in
writing by the arbitrator. This arbitration provision shall be specifically
enforceable by the parties. The determination of the arbitrator pursuant to this
Section shall be final and binding on the parties and may be entered for
enforcement before any court of competent jurisdiction.
(b) The provisions in the Warrant Documents shall control the dispute
resolution elections under the Warrant Documents.
7.9 Prevention of Usury. As used herein, the term "Highest Lawful Rate"
means the maximum lawful interest rate, if any, that at any time or from time to
time may be contracted for, charged, or received under the laws applicable to
the Purchaser which are presently in effect or, to the extent allowed by law,
under such applicable laws which may hereafter be in effect and which allow a
higher maximum nonusurious interest rate than applicable laws now allow.
NOTWITHSTANDING the foregoing or any other term in the Transaction Documents to
the contrary, it is the intention of the Purchaser and the Company to conform
strictly to any applicable usury laws. Accordingly, if the Purchaser contracts
for, charges, or receives any consideration in connection with the Transaction
Documents which constitutes interest in excess of the Highest Lawful Rate, then
any such excess shall be canceled automatically and, if previously paid, shall
at the Purchaser's option be applied to the outstanding amount of the loans made
hereunder or be refunded to the Company. In determining whether any interest
exceeds the Highest Lawful Rate, such interest shall, to the extent permitted by
applicable law, be amortized, prorated, allocated, and spread in equal parts
throughout the term of the Transaction Documents.
7.10 Counterparts. This Agreement may be executed in multiple counterparts
which together shall constitute one and the same instrument.
[the remainder of this page is intentionally blank]
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<PAGE>
7.11 No Further Agreements. THIS WRITTEN AGREEMENT AND THE OTHER LOAN
DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
EXECUTED as of the date first above written.
Very truly yours,
ENRON CAPITAL & TRADE RESOURCES
CORP.
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
AGREED TO AND ACCEPTED
as of the date first
above written.
KAFUS ENVIRONMENTAL INDUSTRIES LTD.
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
[Securities Purchase Agreement]
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<PAGE>
[Execution Version]
CONVERTIBLE PROMISSORY NOTE
THIS CONVERTIBLE PROMISSORY NOTE AND THE SHARES OF CAPITAL STOCK ISSUABLE UPON
CONVERSION HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), OR ANY STATE SECURITIES OR BLUE SKY LAWS AND MAY NOT BE
SOLD, PLEDGED, OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE ACT OR IN RELIANCE ON AN AVAILABLE EXEMPTION
FROM THE REGISTRATION PROVISIONS OF THE ACT AND ANY APPLICABLE STATE SECURITIES
OR BLUE SKY LAWS.
U.S. $12,500,000 Houston, Texas August 18, 1998
KAFUS ENVIRONMENTAL INDUSTRIES LTD., a British Columbia corporation (the
"Borrower"), for value received, hereby promises to pay to the order of ENRON
CAPITAL & TRADE RESOURCES CORP., a Delaware corporation (the "Lender"), the
principal sum of TWELVE MILLION FIVE HUNDRED THOUSAND AND NO/100 UNITED STATES
DOLLARS (U.S. $12,500,000) or, if less, the outstanding principal amount of the
loans advanced hereunder in accordance with the terms of this Convertible
Promissory Note (this "Note").
1. Principal.
Principal shall be advanced as requested by the Borrower in accordance with
the terms of the Letter Loan Agreement dated as of August 18, 1998 (as modified
from time to time, the "Loan Agreement"), between the Borrower and the Lender
providing the lending commitment for this Note.
The Borrower may not prepay the outstanding principal balance of this Note
without the advance written consent of the Lender. Prepayments permitted by the
Lender shall be applied first to accrued but unpaid interest and then to the
outstanding principal balance of this Note.
Unless the outstanding principal amount of this Note has been converted
pursuant to Section 5 below, the Borrower shall pay to the Lender the
outstanding principal amount of this Note on February 18, 2000 (the "Maturity
Date").
<PAGE>
2. Interest.
The outstanding principal amount of this Note shall bear interest at 14.00%
per annum, calculated based upon a 365/366 day year for the actual number of
days elapsed. The Borrower shall pay to the Lender all accrued but unpaid
interest on this Note on the Maturity Date.
3. Payments Generally.
The Lender shall record in its records all advances and payments of
principal and interest on this Note. Any failure of the Lender to make such
recordings, however, shall not affect the Borrower's repayment obligations. The
Lender's records shall be presumptive evidence of the principal and interest
owed by the Borrower.
The Borrower shall make all payments required under this Note not later
than 1:00 p.m., Houston, Texas, time on any date when due in lawful money of the
United States of America to the Lender at such location as is specified by the
Lender in writing in immediately available funds. Whenever any payment to be
made under this Note shall be stated to be due on a day other than a day on
which the banks in Vancouver, British Columbia, and Houston, Texas, are required
to be open (a "Business Day"), such payment shall be due and payable on the next
succeeding Business Day. If the date for payment of any obligation is not
specified in this Note, such obligation shall be payable upon demand.
Any and all payments by the Borrower shall be made free and clear of and
without deduction for any and all present or future taxes, levies, imposts,
deductions, charges, or withholdings, and all liabilities with respect thereto,
other than taxes imposed on the income of and franchise taxes imposed on the
Lender in each case by any jurisdiction in which the Lender is a citizen or
resident or any political subdivision of such jurisdiction (all such non
excluded taxes, levies, imposts, deductions, charges, withholdings, and
liabilities being hereinafter referred to as "Taxes"). If the Borrower shall be
required by law to deduct any Taxes from any sum payable to the Lender (i) the
sum payable shall be increased as may be necessary so that, after making all
required deductions (including deductions applicable to additional sums payable
under this paragraph), the Lender receives an amount equal to the sum it would
have received had no such deductions been made; (ii) the Borrower shall make
such deductions; and (iii) the Borrower shall pay the full amount deducted to
the relevant taxation authority or other authority in accordance with applicable
law.
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<PAGE>
The Borrower agrees to pay any present or future stamp or documentary taxes
or any other excise or property taxes, charges, or similar levies which arise
from any payment made with respect to, or from the execution, delivery, filing,
or registration of, this Note or any documents securing or supporting this Note.
If any sum due from the Borrower under this Note or any order or judgment
given in relation hereto has to be converted from the currency in which the same
is payable hereunder or under such order or judgment (the "first currency") into
another currency (the "second currency") for the purpose of (i) making or filing
a claim or proof against the Borrower with any governmental authority or in any
court, tribunal, or arbitration panel or (ii) enforcing any order or judgment
given in relation hereto, the Borrower shall indemnify the Lender against any
loss incurred as a result of any discrepancy between (A) the rate of exchange
used when restating the amount in question from the first currency into the
second currency and (B) the rate or rates of exchange at which the Lender
purchased the first currency with the second currency after receipt of a sum
paid to it in the second currency in satisfaction, in whole or in part, of any
such sum due or order or judgment. The foregoing indemnity shall constitute a
separate obligation of the Borrower distinct from its other obligations
hereunder and shall survive the giving or making of any judgment or order in
relation to all or any of such other obligations.
4. Default and Remedies.
It shall be an "Event of Default" under this Note if the Borrower fails to
pay when due any amount due under this Note, including payments of principal,
interest, fees, reimbursements, or indemnifications. It shall also be an "Event
of Default" under this Note to the extent the Loan Agreement or any other
security documents, credit support documents, or other loan documents securing,
supporting, or related to this Note (collectively, the "Loan Documents") so
provide.
During the continuation of any Event of Default, the Lender may (i) declare
by written notice to the Borrower all of its commitments related to this Note
terminated, whereupon such commitments shall terminate, and (ii) declare by
written notice to the Borrower all amounts payable by the Borrower under this
Note to be immediately due and payable, whereupon such amounts shall become
immediately due and payable. Except as expressly provided for in the Loan
Documents, the Borrower waives notice of any default or event of default
(however denominated), notice of intent to accelerate, notice of acceleration,
presentment, demand, notice of dishonor, notice of setoff, notice of the
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<PAGE>
initiation of any suit, notice of any action against any credit support or
collateral, and notice of any other action or remedy.
If the Borrower fails to pay when due any amount payable under this Note,
the amount not paid when due shall bear interest beginning on the date due until
paid in full at the lesser of 17.00% per annum, calculated based upon a 365/366
day year for the actual number of days elapsed, or the Highest Lawful Rate (as
defined below). As used herein, the term "Highest Lawful Rate" means the maximum
lawful interest rate, if any, that at any time or from time to time may be
contracted for, charged, or received under the laws applicable to the Lender
which are presently in effect or, to the extent allowed by law, under such
applicable laws which may hereafter be in effect and which allow a higher
maximum nonusurious interest rate than applicable laws now allow.
NOTWITHSTANDING the foregoing or any other term in this Note to the contrary, it
is the intention of the Lender and the Borrower to conform strictly to any
applicable usury laws. Accordingly, if the Lender contracts for, charges, or
receives any consideration in connection with this Note which constitutes
interest in excess of the Highest Lawful Rate, then any such excess shall be
canceled automatically and, if previously paid, shall at the Lender's option be
applied to the outstanding amount of the loans made hereunder or be refunded to
the Borrower. In determining whether any interest exceeds the Highest Lawful
Rate, such interest shall, to the extent permitted by applicable law, be
amortized, prorated, allocated, and spread in equal parts throughout the term of
this Note.
During the continuation of an Event of Default, the Lender is authorized at
any time, to the fullest extent permitted by law, to setoff and apply any
indebtedness owed by the Lender to the Borrower against any and all of the
obligations of the Borrower under this Note, irrespective of whether or not the
Lender shall have made any demand under this Note and although such obligations
may be contingent and unmatured.
During the continuation of an Event of Default, the Lender may exercise all
of its rights under the Loan Documents and all other rights at law or in equity.
During the continuation of an Event of Default, the Lender may exercise the
conversion feature of this Note as set forth below.
During the continuation of an Event of Default, all payments received in
respect of obligations under this Note shall be applied in the order determined
by the Lender.
4
<PAGE>
No right, power, or remedy conferred to the Lender in this Note or in any
documents securing or supporting this Note or now or hereafter existing at law,
in equity, by statute, or otherwise shall be exclusive, and each such right,
power, or remedy shall to the full extent permitted by law be cumulative and in
addition to every other such right, power or remedy. No course of dealing and
no delay in exercising any right, power, or remedy conferred to the Lender shall
operate as a waiver of or otherwise prejudice any such right, power, or remedy.
No notice to or demand upon the Borrower shall entitle the Borrower to similar
notices or demands in the future. Without limiting the generality of this
paragraph, no description of the right to accelerate this Note, charge default
interest under this Note, or otherwise exercise remedies under this Note shall
limit the right of the Lender to take such actions with respect to such Note
under any other Loan Document.
5. Conversion.
5.1 Certain Definitions. As used in this Section 5, the following terms
shall have the following meanings:
"Common Stock" means the Borrower's Common Stock, no par value ("Common
Stock")
"Conversion Price" means U.S. $4.00, subject to adjustment as provided in
this Section 5.
"Average Price" with respect to Common Stock means, on any day, the trade
weighted average of the sales prices for such shares as reported on Bloomberg
News Services (i) on the American Stock Exchange or (ii) if such shares are not
so listed, then on the largest national securities exchange (based on the
aggregate dollar value of securities listed) on which such shares are listed or
traded or (iii) if such shares are not listed on any national securities
exchange, then the prices at which transactions are effected through the NASDAQ
National Market as reported by NASDAQ or, (iv) if such shares shall not be
listed thereon, the trade weighted average of all transactions in Common Stock
in an over-the-counter market.
5.2 Conversion Right and Conversion Price. If on the Maturity Date the
Borrower does not fully repay the outstanding principal amount of this Note and
all accrued but unpaid interest thereon, then at any time thereafter the Lender
may convert all (but not less than all) of the outstanding principal amount of
this Note and accrued but unpaid interest
5
<PAGE>
thereon into that number of fully paid and non-assessable shares of Common Stock
obtained by dividing the then outstanding principal amount of this Note and
accrued but unpaid interest thereon by the Conversion Price. The Conversion
Price is subject to adjustment in certain instances, as hereinafter provided.
This Note may be converted by surrender of this Note to the Borrower at its
office in Dedham, Massachusetts, accompanied by a duly executed notice of
conversion and a written instrument or instruments of transfer duly executed by
the Lender or the Lender's attorney-in-fact duly authorized in writing. The
Lender shall have no obligation to convert this Note.
5.3 Issuance of Common Stock on Conversion. As promptly as practicable
after the surrender of this Note for conversion, the Borrower shall deliver or
cause to be delivered to the Lender certificates representing the number of
fully paid and nonassessable shares of Common Stock into which this Note may be
converted in accordance with the provisions of this Section 5. Such conversion
shall be deemed to have been made at the close of business on the date that this
Note shall have been surrendered for conversion so that the rights of the Lender
shall cease at such time and, subject to the following provisions of this
Section 5.3, the Lender shall be treated for all purposes as having become the
record holder of such Common Stock at such time and such conversion shall be at
the Conversion Price in effect at such time; provided, however, that no such
surrender on any date when the stock transfer books of the Borrower shall be
closed shall be effective to constitute the Lender as the record holder of such
Common Stock on such date, but such surrender shall be effective to constitute
the Lender as the record holder for all purposes at the close of business on the
next succeeding day on which such stock transfer books are open; and, in that
event such conversion shall be at the Conversion Price in effect on the date
that this Note shall have been surrendered for conversion, as if the stock
transfer books of the Borrower had not been closed. If the last day for the
exercise of the conversion right shall not be a Business Day, then such
conversion right may be exercised on the next succeeding Business Day.
No fractional shares of Common Stock shall be issued upon conversion of
this Note. Instead of any fractional shares of Common Stock which would
otherwise be issuable upon conversion of this Note, the Borrower shall pay a
cash adjustment in respect of such fraction in an amount equal to such fraction
of a share multiplied by the Conversion Price.
5.4 Antidilution Adjustments. The number and kind of securities issuable
upon the conversion of the Note shall be subject to adjustment from time to time
upon the happening of certain events occurring on or after the date of original
issue of the Note as follows:
6
<PAGE>
(i) In case of any reclassification or change of Common Stock (other
than a change in par value, or from par value to no par value, or from no
par value to par value or as a result of a subdivision or combination), or
in case of any consolidation or merger of the Borrower with or into another
corporation (other than a merger with another corporation in which the
Borrower is the surviving corporation and which does not result in any
reclassification or change -- other than a change in par value, or from par
value to no par value, or from no par value to par value, or as a result of
a subdivision or combination -- of shares of Common Stock issuable upon
exercise of these conversion rights), or in the case of a sale or
conveyance in a single transaction or in a series of related transactions
with the same purchaser or affiliates thereof of all or substantially all
the assets of the Borrower as an entirety, or a statutory share exchange in
which all shares of Common Stock are exchanged for shares of another
corporation or entity, the Lender shall have, and the Borrower, or such
successor entity or purchaser, shall covenant in the constituent documents
effecting any of the foregoing transactions that the Lender has, the right
to obtain upon the exercise of these conversion rights, in lieu of each
share of Common Stock theretofore issuable upon exercise of these
conversion rights, the kind and amount of shares of stock, other
securities, money, and property receivable upon such reclassification,
change, consolidation or merger, conveyance or sale of assets, or share
exchange by a holder of one share of Common Stock issuable upon exercise of
these conversion rights as if they had been exercised immediately prior to
such reclassification, change, consolidation or merger, conveyance or sale
of assets, or share exchange. The constituent documents effecting any
reclassification, change, consolidation or merger, or share exchange shall
provide for adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided in this Section 5.4. The provisions
of this paragraph shall similarly apply to successive reclassifications,
changes, consolidations or mergers, conveyances or sales of assets, or
share exchanges.
(ii) If the Borrower at any time while the Note is outstanding shall
subdivide or combine its Common Stock, the Conversion Price shall be
proportionately reduced, in case of subdivision of shares, as at the
effective date of such subdivision, or if the Borrower shall take a record
of holders of its Common Stock for the purpose of so subdividing, as at
such record date, whichever is earlier, or shall be proportionately
increased, in the case of combination of shares, as at the effective date
of such combination or, if the Borrower shall take a record of holders of
its Common Stock for the purpose of so combining, as at such record date,
whichever is earlier.
7
<PAGE>
(iii) If the Borrower at any time while the Note is outstanding shall
pay to any holders of stock of the Borrower a dividend payable in, or make
any other distribution of, Common Stock, the Conversion Price shall be
adjusted, as of the date the Borrower shall take a record of the holders of
such stock for the purpose of determining the holders entitled to receive
such dividend or other distribution (or if no such record is taken, as at
the date of such payment or other distribution), to that price determined
by multiplying the Conversion Price in effect immediately prior to such
record date (or if no such record is taken, then immediately prior to such
payment or other distribution) by a fraction (1) the numerator of which
shall be the total number of shares of Common Stock outstanding immediately
prior to such dividend or distribution, and (2) the denominator of which
shall be the total number of shares of Common Stock outstanding immediately
after such dividend or distribution.
(iv) If the Borrower shall issue to all holders of its Common Stock
any warrant, option, or other right to subscribe for or purchase Common
Stock at a price per share less than the Average Price at the time of
issuance, the Conversion Price shall be adjusted, as of the date the
Borrower shall take a record of the holders of its Common Stock for the
purpose of receiving such issuance, to that price determined by multiplying
the Conversion Price by a fraction, the numerator of which shall be the
number of shares of Common Stock outstanding on the date of issuance plus
the number of shares which the aggregate offering price of the total number
of shares so offered would purchase at the Average Price at the time of
issuance, and the denominator of which shall be the number of shares of
Common Stock outstanding on the date of issuance plus the number of
additional shares of Common Stock offered for subscription or purchase.
(v) If the Borrower shall distribute to all holders of its Common
Stock evidences of indebtedness of the Borrower, shares of capital stock of
the Borrower (other than Common Stock), or assets, or rights or warrants to
subscribe for or purchase any of its securities (excluding those dividends,
warrants, options, and rights referred to in subparagraph (iv)), then in
each case the Conversion Price shall be adjusted, as of the date the
Borrower shall take a record of the holders of its Common Stock for the
purpose of determining the holders entitled to receive such distribution,
to that price determined by multiplying the Conversion Price by a fraction
the numerator of which shall be the Conversion Price less the fair market
8
<PAGE>
value (as determined by the Board of Directors of the Borrower, whose
determination shall be conclusive) of the evidences of indebtedness of the
Borrower, shares of capital stock of the Borrower (other than Common
Stock), or assets, or rights or warrants to subscribe for or purchase any
of its securities (excluding those dividends, warrants, options, and rights
referred to in subparagraph (iv)), so distributed in respect of one share
of Common Stock and the denominator of which is the Conversion Price.
(vi) No adjustment of the Conversion Price shall be made in an amount
less than $.01 per share, but any such lesser adjustment shall be carried
forward and shall be made at the time together with the next subsequent
adjustment which, together with any adjustments so carried forward, shall
amount to $.01 per share or more.
If any shares of Common Stock required to be reserved for the purposes of
conversion of the Note hereunder require registration with or approval of any
governmental authority under any federal or state law, or listing upon any
national securities exchange, before such shares may be issued upon conversion,
the Borrower will in good faith and as expeditiously as possible endeavor to
cause such shares to be duly registered, approved, or listed, as the case may
be.
5.5 Certain Notices and Calculations. Whenever the Conversion Price is
adjusted as provided in Section 5.4, the Borrower shall promptly deliver to the
holder hereof a certificate signed by two officers of the Borrower setting forth
the Conversion Price after such adjustment and setting forth a brief statement
of the facts requiring such adjustment and the computation thereof.
5.6 Reservation of Shares. The Borrower covenants that it will at all
times reserve and keep available, free from preemptive rights, out of its
authorized but unissued shares of Common Stock, solely for the purpose of issue
upon conversion of this Note as herein provided, such number of shares of Common
Stock as shall then be issuable upon the conversion of this Note. The Borrower
covenants that all shares of Common Stock which shall be so issuable shall, upon
issuance, be duly and validly issued and fully paid and non-assessable. The
Borrower shall from time to time, in accordance with applicable law, increase
the authorized amount of its Common Stock if at any time the authorized amount
of shares of Common Stock remaining unissued shall not be sufficient to permit
the conversion of all Notes at the time outstanding.
9
<PAGE>
5.7 Certain Covenants. Before taking any action which would cause an
adjustment reducing the Conversion Price below the then stated or par value of
the Common Stock issuable upon conversion of this Note, the Borrower will take
any corporate action which may, in the opinion of its counsel, be necessary in
order that the Borrower may validly and legally issue fully paid and non-
assessable shares of such Common Stock at such adjusted conversion price.
5.8 Certain Notices. In case:
(i) the Borrower shall authorize the distribution to all holders of
Common Stock of evidences of its indebtedness or assets (other than cash
dividends or other cash distributions paid out of surplus); or
(ii) the Borrower shall authorize the granting to the holders of
Common Stock of rights or warrants to subscribe for or purchase any shares
of capital stock or any class or of any other rights; or
(iii) of any reclassification of the capital stock of the Borrower
(other than a subdivision or combination of its outstanding shares of
Common Stock), or of any consolidation or merger to which the Borrower is a
party and for which approval of any stockholders of the Borrower is
required, or of the sale, lease, or transfer of all or substantially all of
the property of the Borrower; or
(iv) of the voluntary or involuntary dissolution, liquidation, or
winding up of the Borrower;
then, in each case, the Borrower shall provide to the Lender at least 20 days,
but not more than 45 days, prior to the applicable record or effective date
hereinafter specified, a notice stating (x) the date on which a record is to be
taken for the purpose of such dividend, distribution, rights, or warrants, or,
if a record is not to be taken, the date as of which the holders of Common Stock
of record to be entitled to such dividend, distribution, rights, or warrants are
to be determined, or (y) the date on which such reclassification, consolidation,
merger, sale, lease, transfer, dissolution, liquidation, or winding up is
expected to become effective, and the date as of which it is expected that
holders of Common Stock of record shall be entitled to exchange their shares of
Common Stock for securities or other property deliverable upon such
reclassification, consolidation, merger, sale, lease, transfer, dissolution,
liquidation, or winding up.
10
<PAGE>
6. Miscellaneous.
This Note shall be governed by the laws of the State of Texas and the
applicable laws of the United States without regard to conflicts of law
principles which would select another law.
EXECUTED as of the date first above written.
KAFUS ENVIRONMENTAL INDUSTRIES LTD.
By:
----------------------------
Name:
--------------------------
Title:
-------------------------
11
<PAGE>
[Promissory Note]
12
<PAGE>
[Execution Version]
WARRANT
- -------------------------------------------------------------------------------
THE SECURITIES REPRESENTED BY THIS WARRANT AND THE SHARES OF COMMON STOCK
ISSUABLE UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES OR BLUE SKY LAWS AND
MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR IN RELIANCE ON AN AVAILABLE
EXEMPTION FROM THE ACT AND ANY APPLICABLE STATE SECURITIES OR BLUE SKY LAWS.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS ON
TRANSFER SET FORTH IN SECTION 2.
- -------------------------------------------------------------------------------
KAFUS ENVIRONMENTAL INDUSTRIES LTD.
Common Stock Purchase Warrant
Representing Right To Purchase Shares of
Common Stock
of
Kafus Environmental Industries Ltd.
No. W-E1
<PAGE>
FOR VALUE RECEIVED, THE KAFUS CAPITAL CORPORATION, a British Columbia
corporation (the "Company"), hereby certifies that Enron Capital & Trade
Resources Corp., a Delaware corporation (the "Holder"), is entitled to purchase
from the Company at any time or from time to time during the period (the
"Exercise Period") commencing on the date of this Warrant and ending on 5:00
p.m. (Toronto, Ontario time) on July 31, 2008 (the "Expiration Date"), 750,000
shares of Common Stock of the Company (the Common Stock of the Company being
referred to herein as the "Common Stock" and such number of shares of Common
Stock as adjusted pursuant to the terms hereof, being the "Warrant Shares"), at
a price per share equal to U.S. $4.00 (as such price may be adjusted pursuant to
the terms hereof, the "Exercise Price"). This Warrant is issued to the Holder
(together with such other warrants as may be issued in exchange, transfer, or
replacement of this Warrant, the "Warrants") in connection with the U.S.
$12,500,000 Promissory Note dated as of August 18, 1998 (the "Note"), made by
the Company and payable to the order of the Holder, and entitles the Holder to
purchase the Warrant Shares and to exercise the other rights, powers, and
privileges hereinafter provided.
Section 1. Exercise of Warrant; Cancellations of Warrant. This Warrant
may be exercised in whole or in part, at any time or from time to time, during
the Exercise Period, by presentation to the Company at its principal office at
the address set forth in Section 9 of (a) this Warrant, with the Purchase Form
annexed hereto as Exhibit A duly executed and (b) a certified bank check equal
to the Exercise Price for the Warrant Shares for which this Warrant is being
exercised (the date of such delivery referred to herein as the "Exercise Date").
Within five business days after payment of the Exercise Price, the Company shall
execute and deliver to the Holder a certificate or certificates for the total
number of Warrant Shares for which this Warrant is being exercised, in such
names and denominations as requested in writing by the Holder. The Company
shall pay any and all documentary stamp or similar issue taxes payable in
respect of the issue of the Warrant Shares. If this Warrant is exercised in part
only, the Company shall, upon surrender of this Warrant, execute and deliver a
new Warrant evidencing the rights of the Holder thereof to purchase the balance
of the Warrant Shares issuable hereunder.
Section 2. Exchange, Transfer, Assignment, or Loss of Warrant. Upon
surrender of this Warrant to the Company, with the Assignment Form annexed
hereto as Exhibit B duly executed and funds sufficient to pay any transfer tax,
the Company shall, without charge, execute and deliver a new Warrant or Warrants
in the name of the assignee or assignees named in such Assignment Form and, if
the Holder's entire interest is not being assigned, in the name of the Holder,
and this Warrant shall promptly be canceled. This Warrant may be divided or
combined with other Warrants that carry the same rights upon presentation hereof
at the office of the Company, together with a written notice specifying
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<PAGE>
the names and denominations in which new Warrants are to be issued and signed by
the Holder hereof. Upon receipt by the Company of evidence satisfactory to it of
the loss, theft, destruction, or mutilation of this Warrant, and (in the case of
loss, theft, or destruction) of reasonably satisfactory indemnification
(including, if required in the reasonable judgment of the Company, a statement
of net worth of such Holder that is at a level reasonably satisfactory to the
Company), and upon surrender and cancellation of this Warrant, if mutilated, the
Company shall execute and deliver a new Warrant of like tenor and date.
Section 3. Antidilutive Adjustments. The shares of Common Stock
purchasable on exercise of this Warrant are shares of Common Stock of the
Company as constituted as of the Date of Issue. The number and kind of
securities purchasable on the exercise of this Warrant shall be subject to
adjustment from time to time upon the happening of certain events, as follows:
(a) Mergers, Consolidations, and Reclassifications. In case of any
reclassification or change of outstanding securities issuable upon exercise of
this Warrant at any time (other than a change in par value, or from par value to
no par value, or from no par value to par value or as a result of a subdivision
or combination to which subsection 3(b) applies), or in case of any
consolidation or merger of the Company with or into another corporation (other
than a merger with another corporation in which the Company is the surviving
corporation and which does not result in any reclassification or change (other
than a change in par value, or from par value to no par value, or from no par
value to par value, or as a result of a subdivision or combination to which
subsection 3(b) applies) of outstanding securities issuable upon exercise of
this Warrant), the Holder shall have, and the Company, or such successor
corporation or other entity, shall covenant in the constituent documents
effecting any of the foregoing transactions that such holder does have, the
right to obtain upon the exercise hereof, in lieu of the shares of Common Stock,
other securities, money, or other property theretofore issuable upon exercise of
this Warrant, the kind and amount of shares of stock, other securities, money,
or other property receivable upon such reclassification, change, consolidation,
or merger by a holder of the shares of Common Stock, other securities, money, or
other property issuable upon exercise hereof had this Warrant been exercised
immediately prior to such reclassification, change, consolidation, or merger.
The constituent documents effecting any such reclassification, change,
consolidation, or merger shall provide for any adjustments which shall be as
nearly equivalent as may be practicable to the adjustments provided in this
subsection 3(a). The provisions of this subsection 3(a) shall similarly apply
to successive reclassifications, changes, consolidations, or mergers.
-3-
<PAGE>
(b) Subdivisions and Combinations. If the Company at any time during
the Exercise Period shall subdivide its shares of Common Stock into a greater
number of shares, the number of shares of Common Stock purchasable upon exercise
of this Warrant shall be proportionately increased and the Exercise Price shall
be proportionately decreased, as at the effective date of such subdivision, or
if the Company shall take a record of holders of its Common Stock for the
purpose of so subdividing, as at such record date, whichever is earlier. If the
Company, at any time during the Exercise Period, shall combine its shares of
Common Stock into a smaller number of shares, the number of shares of Common
Stock purchasable upon exercise hereof shall be proportionately reduced and the
Exercise Price shall be proportionately increased, as at the effective date of
such combination, or if the Company shall take a record of holders of its Common
Stock for purposes of such combination, as at such record date, whichever is
earlier.
(c) Dividends and Distributions. If the Company at any time shall
declare a dividend on its Common Stock payable in stock or other securities of
the Company or of any other corporation or other entity, or in property or
otherwise than in cash, to the holders of its Common Stock, the Holder shall,
without additional cost, be entitled to receive upon any exercise hereof, in
addition to the Common Stock to which the Holder would otherwise be entitled
upon such exercise, the number of shares of stock or other securities or
property which the Holder would have been entitled to receive if the Holder had
been a holder immediately prior to the record date for such dividend (or, if no
record date shall have been established, the payment date for such dividend) of
the number of shares of Common Stock purchasable on exercise of this Warrant
immediately prior to such record date or payment date, as the case may be.
(d) Upon any increase or decrease in the number of Warrant Shares
purchasable upon the exercise of this Warrant, the Company shall, within 30 days
thereafter, deliver written notice thereof to the Holder, which notice shall
state the increased or decreased number of Warrant Shares purchasable upon the
exercise of this Warrant and the revised Exercise Price thereof, setting forth
in reasonable detail the method of calculation and the facts upon which such
calculations are based.
Section 4. Notification by the Company. In case at any time while this
Warrant remains outstanding:
(a) the Company shall declare any dividend or make any distribution
upon its Common Stock or any other class of its capital stock; or
-4-
<PAGE>
(b) the Company shall offer for subscription pro rata to the holders
of its Common Stock or any other class of its capital stock any additional
shares of stock of any class or any other securities convertible into or
exchangeable for shares of stock or any rights or options to subscribe thereto;
or
(c) the Board of Directors of the Company shall authorize any capital
reorganization, reclassification, or similar transaction involving the capital
stock of the Company, or a sale or conveyance of all or a substantial part of
the assets of the Company, or a consolidation, merger, or business combination
of the Company; or
(d) actions or proceedings shall be authorized or commenced for a
voluntary or involuntary dissolution, liquidation, or winding-up of the Company;
then, in any one or more of such cases, the Company shall give written notice to
the Holder, at the earliest time legally practicable (and not less than 20 days
before any record date or other date set for definitive action) of the date on
which (i) the books of the Company shall close or a record shall be taken for
such dividend, distribution, or subscription rights or options or (ii) such
reorganization, reclassification, sale, conveyance, consolidation, merger,
dissolution, liquidation, or winding-up shall take place or be voted on by
shareholders of the Company, as the case may be. Such notice shall also specify
the date as of which the holders of the Common Stock of record shall participate
in said dividend, distribution, subscription rights, or options or shall be
entitled to exchange their Common Stock for securities or other property
deliverable upon such reorganization, reclassification, sale, conveyance,
consolidation, merger, dissolution, liquidation, or winding-up, as the case may
be. If the action in question or the record date is subject to the
effectiveness of a registration statement under the Securities Act or to a
favorable vote of shareholders, the notice required by this Section 4 shall so
state.
Section 5. No Voting Rights: Limitations of Liability. Prior to exercise,
this Warrant will not entitle the Holder to any voting rights or other rights as
a stockholder of the Company. No provision hereof, in the absence of
affirmative action by the Holder to exercise this Warrant, and no enumeration
herein of the rights or privileges of the Holder, shall give rise to any
liability of the Holder for the purchase price of the Warrant Shares pursuant to
the exercise hereof.
Section 6. Amendment and Waiver.
(a) No failure or delay of the Holder in exercising any power or right
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise of such
-5-
<PAGE>
right or power, or any abandonment or discontinuance of steps to enforce such a
right or power, preclude any other or further exercise thereof or the exercise
of any other right or power. The rights and remedies of the Holder are
cumulative and not exclusive of any rights or remedies which it would otherwise
have. The provisions of this Warrant may be amended, modified, or waived with
(and only with) the written consent of the Company and the Holder.
(b) No notice or demand on the Company in any case shall entitle the
Company to any other or further notice or demand in similar or other
circumstances.
Section 7. No Fractional Warrant Shares. The Company shall not be
required to issue stock certificates representing fractions of Warrant Shares,
but shall in respect of any fraction of a Warrant Share make a payment in cash
based on the Value of the Common Stock after giving effect to the full exercise
or conversion of the Warrants.
Section 8. Validity of Warrant Shares. The Company shall reserve and keep
available at all times, free from preemptive rights, a sufficient number of
Warrant Shares to satisfy the requirements of this Warrant. The Warrant Shares:
(i) will be upon issuance, free and clear of any liens, claims, or other
encumbrances ("Liens") created by the Company or, to the Company's knowledge,
any other Person; (ii) have been duly and validly authorized and when issued and
paid for in accordance with the terms of the Warrants will be duly and validly
issued, fully paid, and non-assessable; (iii) will not have been issued or sold
in violation of any preemptive or similar rights; and (iv) will not subject the
holder thereof to personal liability by reason of being such holders.
Section 9. Notices. Unless otherwise specified, all notices and other
communications provided for between the Company and the Holder in this Warrant
shall be in writing, including telecopy, and delivered or transmitted to the
addresses set forth below, or to such other address as shall be designated by
the Company or the Holder in written notice to the other party. Notice sent by
telecopy shall be deemed to be given and received when receipt of such
transmission is acknowledged, and delivered notice shall be deemed to be given
and received when receipted for by, or actually received by, an authorized
officer of the Company or the Holder, as the case may be.
-6-
<PAGE>
If to the Company:
Kafus Environmental Industries Ltd.
270 Bridge Street
Dedham MA 02026
Attn: Mr. Michael A. McCabe
telephone: 781-326-5001
telecopier: 781-326-5105
If to the Holder:
Enron Capital & Trade Resources Corp.
Attn: Tony A. Valentine
1400 Smith Street
Houston, Texas 77002
telephone: 713-853-6903
telecopier: 713-646-2654
Section 10. Section and Other Headings. The headings contained in this
Warrant are for reference purposes only and will not affect in any way the
meaning or interpretation of this Warrant.
Section 11. Governing Law. THIS WARRANT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF BRITISH COLUMBIA AND THE APPLICABLE
LAWS OF CANADA WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW WHICH WOULD
SELECT ANOTHER LAW.
Section 12. Binding Effect. The terms and provisions of this Warrant
shall inure to the benefit of the Holder and its successors and assigns and
shall be binding upon the Company and its successors and assigns, including,
without limitation, any successor to the Company by merger, consolidation, or
acquisition of all or substantially all of the Company's assets.
Section 13. Arbitration. Disputes arising under this Warrant shall be
settled by one arbitrator pursuant to the rules of the American Arbitration
Association (the "AAA") for Commercial Arbitration (the "Rules"). Such
arbitration shall be held in New York, New York, or at such other location as
mutually agreed to by the parties to the dispute. Subject to any applicable
limitations contained in this Warrant, arbitration may be commenced at any time
by any party giving notice to the other party that a dispute has been referred
to
-7-
<PAGE>
arbitration under this Section. The arbitrator shall be selected by the joint
agreement of the parties hereto, but if they do not so agree within twenty (20)
days after the date of the notice referred to above, the selection shall be made
pursuant to the Rules from the panel of arbitrators maintained by the AAA. Any
award of the arbitrator shall be accompanied by a written opinion giving the
reasons for the award. The expense of the arbitration shall be borne by the
parties in the manner determined in writing by the arbitrator. This arbitration
provision shall be specifically enforceable by the parties. The determination of
the arbitrator pursuant to this Section shall be final and binding on the
parties and may be entered for enforcement before any court of competent
jurisdiction.
[the remainder of this page intentionally blank]
-8-
<PAGE>
IN WITNESS WHEREOF, the seal of the Company and the signature of its duly
authorized officer have been affixed hereto as of August 18, 1998.
[SEAL] Kafus Environmental Industries Ltd.
Attest: By:
---------------------- ---------------------------------
Name:
-------------------------------
Title:
------------------------------
[Warrant - KEI 750,000 Shares]
-9-
<PAGE>
EXHIBIT A
TO
WARRANT
PURCHASE FORM
To Be Executed by the Holder
Desiring to Exercise a Warrant of
Kafus Environmental Industries Ltd.
The undersigned holder hereby exercises the right to purchase _______
shares of Common Stock covered by the within Warrant, according to the
conditions thereof, and herewith undertakes to make payment in full of the
Exercise Price of such shares or to withdraw this notice of exercise, in
accordance with the terms of the Warrant.
Name of Holder:
---------------------------------------
Signature:
----------------------------
Title:
---------------------------------
Address:
-------------------------------
-------------------------------
-------------------------------
Dated:______, ____.
-10-
<PAGE>
EXHIBIT B
TO
WARRANT
ASSIGNMENT FORM
To Be Executed by the Holder
Desiring to Transfer a Warrant of
Kafus Environmental Industries Ltd.
FOR VALUE RECEIVED, the undersigned holder hereby sells, assigns, and
transfers unto ______________ the right to purchase ______shares of Common Stock
covered by the within Warrant, and does hereby irrevocably constitute and
appoint _________________ Attorney to transfer the said Warrant on the books of
the Company (as defined in such Warrant), with full power of substitution.
Name of Holder:
---------------------------------------
Signature:
----------------------------
Title:
---------------------------------
Address:
-------------------------------
-------------------------------
-------------------------------
Dated:______, ____.
In the presence of
- --------------------------------
NOTICE:
The signature to the foregoing Assignment Form must correspond to the name as
written upon the face of the within Warrant in every detail, without alteration
or enlargement or any change whatsoever.
-11-
<PAGE>
[Execution Version]
WARRANT
- --------------------------------------------------------------------------------
THE SECURITIES REPRESENTED BY THIS WARRANT AND THE SHARES OF COMMON STOCK
ISSUABLE UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES OR BLUE SKY LAWS AND
MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR IN RELIANCE ON AN AVAILABLE
EXEMPTION FROM THE ACT AND ANY APPLICABLE STATE SECURITIES OR BLUE SKY LAWS.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS ON
TRANSFER SET FORTH IN SECTION 2.
- --------------------------------------------------------------------------------
KAFUS ENVIRONMENTAL INDUSTRIES LTD.
Common Stock Purchase Warrant
Representing Right To Purchase Shares of
Common Stock
of
Kafus Environmental Industries Ltd.
No. W-E4
<PAGE>
FOR VALUE RECEIVED, THE KAFUS CAPITAL CORPORATION, a British Columbia
corporation (the "Company"), hereby certifies that Enron Capital & Trade
Resources Corp., a Delaware corporation (the "Holder"), is entitled to purchase
from the Company at any time or from time to time during the period (the
"Exercise Period") commencing on October 1, 1998, and ending on 5:00 p.m.
(Toronto, Ontario time) on July 31, 2008 (the "Expiration Date"), 45,000 shares
of Common Stock of the Company (the Common Stock of the Company being referred
to herein as the "Common Stock" and such number of shares of Common Stock as
adjusted pursuant to the terms hereof, being the "Warrant Shares"), at a price
per share equal to U.S. $4.00 (as such price may be adjusted pursuant to the
terms hereof, the "Exercise Price"). This Warrant is issued to the Holder
(together with such other warrants as may be issued in exchange, transfer, or
replacement of this Warrant, the "Warrants") in connection with the U.S.
$12,500,000 Promissory Note dated as of August 18, 1998 (the "Note"), made by
the Company and payable to the order of the Holder, and entitles the Holder to
purchase the Warrant Shares and to exercise the other rights, powers, and
privileges hereinafter provided.
NOTWITHSTANDING THE FOREGOING, this Warrrant shall terminate if prior to the
commencement of the Exercise Period the weighted average trading price of Common
Stock for the 15 trading days immediately preceding such commencement date is
greater than U.S. $4.00.
Section 1. Exercise of Warrant; Cancellations of Warrant. This Warrant
may be exercised in whole or in part, at any time or from time to time, during
the Exercise Period, by presentation to the Company at its principal office at
the address set forth in Section 9 of (a) this Warrant, with the Purchase Form
annexed hereto as Exhibit A duly executed and (b) a certified bank check equal
to the Exercise Price for the Warrant Shares for which this Warrant is being
exercised (the date of such delivery referred to herein as the "Exercise Date").
Within five business days after payment of the Exercise Price, the Company shall
execute and deliver to the Holder a certificate or certificates for the total
number of Warrant Shares for which this Warrant is being exercised, in such
names and denominations as requested in writing by the Holder. The Company
shall pay any and all documentary stamp or similar issue taxes payable in
respect of the issue of the Warrant Shares. If this Warrant is exercised in part
only, the Company shall, upon surrender of this Warrant, execute and deliver a
new Warrant evidencing the rights of the Holder thereof to purchase the balance
of the Warrant Shares issuable hereunder.
Section 2. Exchange, Transfer, Assignment, or Loss of Warrant. Upon
surrender of this Warrant to the Company, with the Assignment Form annexed
hereto as Exhibit B duly executed and funds sufficient to pay any transfer tax,
the Company shall, without
-2-
<PAGE>
charge, execute and deliver a new Warrant or Warrants in the name of the
assignee or assignees named in such Assignment Form and, if the Holder's entire
interest is not being assigned, in the name of the Holder, and this Warrant
shall promptly be canceled. This Warrant may be divided or combined with other
Warrants that carry the same rights upon presentation hereof at the office of
the Company, together with a written notice specifying the names and
denominations in which new Warrants are to be issued and signed by the Holder
hereof. Upon receipt by the Company of evidence satisfactory to it of the loss,
theft, destruction, or mutilation of this Warrant, and (in the case of loss,
theft, or destruction) of reasonably satisfactory indemnification (including, if
required in the reasonable judgment of the Company, a statement of net worth of
such Holder that is at a level reasonably satisfactory to the Company), and upon
surrender and cancellation of this Warrant, if mutilated, the Company shall
execute and deliver a new Warrant of like tenor and date.
Section 3. Antidilutive Adjustments. The shares of Common Stock
purchasable on exercise of this Warrant are shares of Common Stock of the
Company as constituted as of the Date of Issue. The number and kind of
securities purchasable on the exercise of this Warrant shall be subject to
adjustment from time to time upon the happening of certain events, as follows:
(a) Mergers, Consolidations, and Reclassifications. In case of any
reclassification or change of outstanding securities issuable upon exercise of
this Warrant at any time (other than a change in par value, or from par value to
no par value, or from no par value to par value or as a result of a subdivision
or combination to which subsection 3(b) applies), or in case of any
consolidation or merger of the Company with or into another corporation (other
than a merger with another corporation in which the Company is the surviving
corporation and which does not result in any reclassification or change (other
than a change in par value, or from par value to no par value, or from no par
value to par value, or as a result of a subdivision or combination to which
subsection 3(b) applies) of outstanding securities issuable upon exercise of
this Warrant), the Holder shall have, and the Company, or such successor
corporation or other entity, shall covenant in the constituent documents
effecting any of the foregoing transactions that such holder does have, the
right to obtain upon the exercise hereof, in lieu of the shares of Common Stock,
other securities, money, or other property theretofore issuable upon exercise of
this Warrant, the kind and amount of shares of stock, other securities, money,
or other property receivable upon such reclassification, change, consolidation,
or merger by a holder of the shares of Common Stock, other securities, money, or
other property issuable upon exercise hereof had this Warrant been exercised
immediately prior to such reclassification, change, consolidation, or merger.
The constituent documents effecting any such reclassification, change,
consolidation, or merger shall provide for any adjustments which shall be as
nearly
-3-
<PAGE>
equivalent as may be practicable to the adjustments provided in this subsection
3(a). The provisions of this subsection 3(a) shall similarly apply to successive
reclassifications, changes, consolidations, or mergers.
(b) Subdivisions and Combinations. If the Company at any time during
the Exercise Period shall subdivide its shares of Common Stock into a greater
number of shares, the number of shares of Common Stock purchasable upon exercise
of this Warrant shall be proportionately increased and the Exercise Price shall
be proportionately decreased, as at the effective date of such subdivision, or
if the Company shall take a record of holders of its Common Stock for the
purpose of so subdividing, as at such record date, whichever is earlier. If the
Company, at any time during the Exercise Period, shall combine its shares of
Common Stock into a smaller number of shares, the number of shares of Common
Stock purchasable upon exercise hereof shall be proportionately reduced and the
Exercise Price shall be proportionately increased, as at the effective date of
such combination, or if the Company shall take a record of holders of its Common
Stock for purposes of such combination, as at such record date, whichever is
earlier.
(c) Dividends and Distributions. If the Company at any time shall
declare a dividend on its Common Stock payable in stock or other securities of
the Company or of any other corporation or other entity, or in property or
otherwise than in cash, to the holders of its Common Stock, the Holder shall,
without additional cost, be entitled to receive upon any exercise hereof, in
addition to the Common Stock to which the Holder would otherwise be entitled
upon such exercise, the number of shares of stock or other securities or
property which the Holder would have been entitled to receive if the Holder had
been a holder immediately prior to the record date for such dividend (or, if no
record date shall have been established, the payment date for such dividend) of
the number of shares of Common Stock purchasable on exercise of this Warrant
immediately prior to such record date or payment date, as the case may be.
(d) Upon any increase or decrease in the number of Warrant Shares
purchasable upon the exercise of this Warrant, the Company shall, within 30 days
thereafter, deliver written notice thereof to the Holder, which notice shall
state the increased or decreased number of Warrant Shares purchasable upon the
exercise of this Warrant and the revised Exercise Price thereof, setting forth
in reasonable detail the method of calculation and the facts upon which such
calculations are based.
Section 4. Notification by the Company. In case at any time while this
Warrant remains outstanding:
-4-
<PAGE>
(a) the Company shall declare any dividend or make any distribution
upon its Common Stock or any other class of its capital stock; or
(b) the Company shall offer for subscription pro rata to the holders
of its Common Stock or any other class of its capital stock any additional
shares of stock of any class or any other securities convertible into or
exchangeable for shares of stock or any rights or options to subscribe thereto;
or
(c) the Board of Directors of the Company shall authorize any capital
reorganization, reclassification, or similar transaction involving the capital
stock of the Company, or a sale or conveyance of all or a substantial part of
the assets of the Company, or a consolidation, merger, or business combination
of the Company; or
(d) actions or proceedings shall be authorized or commenced for a
voluntary or involuntary dissolution, liquidation, or winding-up of the Company;
then, in any one or more of such cases, the Company shall give written notice to
the Holder, at the earliest time legally practicable (and not less than 20 days
before any record date or other date set for definitive action) of the date on
which (i) the books of the Company shall close or a record shall be taken for
such dividend, distribution, or subscription rights or options or (ii) such
reorganization, reclassification, sale, conveyance, consolidation, merger,
dissolution, liquidation, or winding-up shall take place or be voted on by
shareholders of the Company, as the case may be. Such notice shall also specify
the date as of which the holders of the Common Stock of record shall participate
in said dividend, distribution, subscription rights, or options or shall be
entitled to exchange their Common Stock for securities or other property
deliverable upon such reorganization, reclassification, sale, conveyance,
consolidation, merger, dissolution, liquidation, or winding-up, as the case may
be. If the action in question or the record date is subject to the
effectiveness of a registration statement under the Securities Act or to a
favorable vote of shareholders, the notice required by this Section 4 shall so
state.
Section 5. No Voting Rights: Limitations of Liability. Prior to exercise,
this Warrant will not entitle the Holder to any voting rights or other rights as
a stockholder of the Company. No provision hereof, in the absence of
affirmative action by the Holder to exercise this Warrant, and no enumeration
herein of the rights or privileges of the Holder, shall give rise to any
liability of the Holder for the purchase price of the Warrant Shares pursuant to
the exercise hereof.
-5-
<PAGE>
Section 6. Amendment and Waiver.
(a) No failure or delay of the Holder in exercising any power or right
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise of such right or power, or any abandonment or discontinuance of steps
to enforce such a right or power, preclude any other or further exercise thereof
or the exercise of any other right or power. The rights and remedies of the
Holder are cumulative and not exclusive of any rights or remedies which it would
otherwise have. The provisions of this Warrant may be amended, modified, or
waived with (and only with) the written consent of the Company and the Holder.
(b) No notice or demand on the Company in any case shall entitle the
Company to any other or further notice or demand in similar or other
circumstances.
Section 7. No Fractional Warrant Shares. The Company shall not be
required to issue stock certificates representing fractions of Warrant Shares,
but shall in respect of any fraction of a Warrant Share make a payment in cash
based on the Value of the Common Stock after giving effect to the full exercise
or conversion of the Warrants.
Section 8. Validity of Warrant Shares. The Company shall reserve and keep
available at all times, free from preemptive rights, a sufficient number of
Warrant Shares to satisfy the requirements of this Warrant. The Warrant Shares:
(i) will be upon issuance, free and clear of any liens, claims, or other
encumbrances ("Liens") created by the Company or, to the Company's knowledge,
any other Person; (ii) have been duly and validly authorized and when issued and
paid for in accordance with the terms of the Warrants will be duly and validly
issued, fully paid, and non-assessable; (iii) will not have been issued or sold
in violation of any preemptive or similar rights; and (iv) will not subject the
holder thereof to personal liability by reason of being such holders.
Section 9. Notices. Unless otherwise specified, all notices and other
communications provided for between the Company and the Holder in this Warrant
shall be in writing, including telecopy, and delivered or transmitted to the
addresses set forth below, or to such other address as shall be designated by
the Company or the Holder in written notice to the other party. Notice sent by
telecopy shall be deemed to be given and received when receipt of such
transmission is acknowledged, and delivered notice shall be deemed to be given
and received when receipted for by, or actually received by, an authorized
officer of the Company or the Holder, as the case may be.
-6-
<PAGE>
If to the Company:
Kafus Environmental Industries Ltd.
270 Bridge Street
Dedham MA 02026
Attn: Mr. Michael A. McCabe
telephone: 781-326-5001
telecopier: 781-326-5105
If to the Holder:
Enron Capital & Trade Resources Corp.
Attn: Tony A. Valentine
1400 Smith Street
Houston, Texas 77002
telephone: 713-853-6903
telecopier: 713-646-2654
Section 10. Section and Other Headings. The headings contained in this
Warrant are for reference purposes only and will not affect in any way the
meaning or interpretation of this Warrant.
Section 11. Governing Law. THIS WARRANT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF BRITISH COLUMBIA AND THE APPLICABLE
LAWS OF CANADA WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW WHICH WOULD
SELECT ANOTHER LAW.
Section 12. Binding Effect. The terms and provisions of this Warrant
shall inure to the benefit of the Holder and its successors and assigns and
shall be binding upon the Company and its successors and assigns, including,
without limitation, any successor to the Company by merger, consolidation, or
acquisition of all or substantially all of the Company's assets.
Section 13. Arbitration. Disputes arising under this Warrant shall be
settled by one arbitrator pursuant to the rules of the American Arbitration
Association (the "AAA") for Commercial Arbitration (the "Rules"). Such
arbitration shall be held in New York, New York, or at such other location as
mutually agreed to by the parties to the dispute. Subject to any applicable
limitations contained in this Warrant, arbitration may be commenced at any time
by any party giving notice to the other party that a dispute has been referred
to
-7-
<PAGE>
arbitration under this Section. The arbitrator shall be selected by the joint
agreement of the parties hereto, but if they do not so agree within twenty (20)
days after the date of the notice referred to above, the selection shall be made
pursuant to the Rules from the panel of arbitrators maintained by the AAA. Any
award of the arbitrator shall be accompanied by a written opinion giving the
reasons for the award. The expense of the arbitration shall be borne by the
parties in the manner determined in writing by the arbitrator. This arbitration
provision shall be specifically enforceable by the parties. The determination of
the arbitrator pursuant to this Section shall be final and binding on the
parties and may be entered for enforcement before any court of competent
jurisdiction.
[the remainder of this page intentionally blank]
-8-
<PAGE>
IN WITNESS WHEREOF, the seal of the Company and the signature of its duly
authorized officer have been affixed hereto as of August 18, 1998.
[SEAL] KAFUS ENVIRONMENTAL INDUSTRIES LTD.
Attest: By:
------------------------- -------------------------------
Name:
-----------------------------
Title:
----------------------------
[Warrant - KEI 45,000 Shares]
-9-
<PAGE>
EXHIBIT A
TO
WARRANT
PURCHASE FORM
To Be Executed by the Holder
Desiring to Exercise a Warrant of
Kafus Environmental Industries Ltd.
The undersigned holder hereby exercises the right to purchase _______
shares of Common Stock covered by the within Warrant, according to the
conditions thereof, and herewith undertakes to make payment in full of the
Exercise Price of such shares or to withdraw this notice of exercise, in
accordance with the terms of the Warrant.
Name of Holder:
------------------------------------
Signature:
--------------------------
Title:
------------------------------
Address:
----------------------------
----------------------------
----------------------------
Dated: ________, ____.
-10-
<PAGE>
EXHIBIT B
TO
WARRANT
ASSIGNMENT FORM
To Be Executed by the Holder
Desiring to Transfer a Warrant of
Kafus Environmental Industries Ltd.
FOR VALUE RECEIVED, the undersigned holder hereby sells, assigns, and
transfers unto ________ the right to purchase ____ shares of Common Stock
covered by the within Warrant, and does hereby irrevocably constitute and
appoint _________________ Attorney to transfer the said Warrant on the books of
the Company (as defined in such Warrant), with full power of substitution.
Name of Holder:
------------------------------------
Signature:
--------------------------
Title:
------------------------------
Address:
----------------------------
----------------------------
----------------------------
Dated: ________, ____.
In the presence of
- ---------------------------------
NOTICE:
The signature to the foregoing Assignment Form must correspond to the name as
written upon the face of the within Warrant in every detail, without alteration
or enlargement or any change whatsoever.
-11-
<PAGE>
[Execution Version]
WARRANT
- --------------------------------------------------------------------------------
THE SECURITIES REPRESENTED BY THIS WARRANT AND THE SHARES OF COMMON STOCK
ISSUABLE UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES OR BLUE SKY LAWS AND
MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR IN RELIANCE ON AN AVAILABLE
EXEMPTION FROM THE ACT AND ANY APPLICABLE STATE SECURITIES OR BLUE SKY LAWS.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS ON
TRANSFER SET FORTH IN SECTION 2.
- --------------------------------------------------------------------------------
KAFUS ENVIRONMENTAL INDUSTRIES LTD.
Common Stock Purchase Warrant
Representing Right To Purchase Shares of
Common Stock
of
Kafus Environmental Industries Ltd.
----------
No. W-E2
----------
<PAGE>
FOR VALUE RECEIVED, THE KAFUS CAPITAL CORPORATION, a British Columbia
corporation (the "Company"), hereby certifies that Enron Capital & Trade
Resources Corp., a Delaware corporation (the "Holder"), is entitled to purchase
from the Company at any time or from time to time during the period (the
"Exercise Period") commencing April 30, 1999, and ending on 5:00 p.m. (Toronto,
Ontario time) on July 31, 2008 (the "Expiration Date"), 250,000 shares of Common
Stock of the Company (the Common Stock of the Company being referred to herein
as the "Common Stock" and such number of shares of Common Stock as adjusted
pursuant to the terms hereof, being the "Warrant Shares"), at a price per share
equal to the weighted average closing price of Common Stock for the 15 trading
days immediately prior to commencement of the Exercise Period, but with a
minimum price of U.S. $3.50 and a maximum price of U.S. $4.00 (as such price may
be adjusted pursuant to the terms hereof, the "Exercise Price"). This Warrant
is issued to the Holder (together with such other warrants as may be issued in
exchange, transfer, or replacement of this Warrant, the "Warrants") in
connection with the U.S. $12,500,000 Promissory Note dated as of August 18, 1998
(the "Note"), made by the Company and payable to the order of the Holder, and
entitles the Holder to purchase the Warrant Shares and to exercise the other
rights, powers, and privileges hereinafter provided.
NOTWITHSTANDING THE FOREGOING, this Warrant shall terminate if prior to the
commencement of the Exercise Period either (a) a third party not affiliated with
the Holder purchases the depreciation of CanFibre of Riverside, Inc., and
invests in CanFibre of Riverside, Inc., in a manner which has provided at least
U.S. $8,000,000 in unrestricted distributable cash proceeds to CanFibre U.S.
Inc., is subordinate to all of the loans made by the Holder to CanFibre of
Riverside, Inc., and is otherwise reasonably acceptable to the Holder or (b) the
Company has sold interests in the Company in a manner which has provided at
least U.S. $8,000,000 in unrestricted cash proceeds to the Company and is
otherwise reasonably acceptable to the Holder.
Section 1. Exercise of Warrant; Cancellations of Warrant. This Warrant
may be exercised in whole or in part, at any time or from time to time, during
the Exercise Period, by presentation to the Company at its principal office at
the address set forth in Section 9 of (a) this Warrant, with the Purchase Form
annexed hereto as Exhibit A duly executed and (b) a certified bank check equal
to the Exercise Price for the Warrant Shares for which this Warrant is being
exercised (the date of such delivery referred to herein as the "Exercise Date").
Within five business days after payment of the Exercise Price, the Company shall
execute and deliver to the Holder a certificate or certificates for the total
number of Warrant Shares for which this Warrant is being exercised, in such
names and denominations as requested in writing by the Holder. The Company
shall pay any and all documentary stamp or similar issue taxes payable in
respect of the issue of the Warrant Shares. If this Warrant
-2-
<PAGE>
is exercised in part only, the Company shall, upon surrender of this Warrant,
execute and deliver a new Warrant evidencing the rights of the Holder thereof to
purchase the balance of the Warrant Shares issuable hereunder.
Section 2. Exchange, Transfer, Assignment, or Loss of Warrant. Upon
surrender of this Warrant to the Company, with the Assignment Form annexed
hereto as Exhibit B duly executed and funds sufficient to pay any transfer tax,
the Company shall, without charge, execute and deliver a new Warrant or Warrants
in the name of the assignee or assignees named in such Assignment Form and, if
the Holder's entire interest is not being assigned, in the name of the Holder,
and this Warrant shall promptly be canceled. This Warrant may be divided or
combined with other Warrants that carry the same rights upon presentation hereof
at the office of the Company, together with a written notice specifying the
names and denominations in which new Warrants are to be issued and signed by the
Holder hereof. Upon receipt by the Company of evidence satisfactory to it of
the loss, theft, destruction, or mutilation of this Warrant, and (in the case of
loss, theft, or destruction) of reasonably satisfactory indemnification
(including, if required in the reasonable judgment of the Company, a statement
of net worth of such Holder that is at a level reasonably satisfactory to the
Company), and upon surrender and cancellation of this Warrant, if mutilated, the
Company shall execute and deliver a new Warrant of like tenor and date.
Section 3. Antidilutive Adjustments. The shares of Common Stock
purchasable on exercise of this Warrant are shares of Common Stock of the
Company as constituted as of the Date of Issue. The number and kind of
securities purchasable on the exercise of this Warrant shall be subject to
adjustment from time to time upon the happening of certain events, as follows:
(a) Mergers, Consolidations, and Reclassifications. In case of any
reclassification or change of outstanding securities issuable upon exercise of
this Warrant at any time (other than a change in par value, or from par value to
no par value, or from no par value to par value or as a result of a subdivision
or combination to which subsection 3(b) applies), or in case of any
consolidation or merger of the Company with or into another corporation (other
than a merger with another corporation in which the Company is the surviving
corporation and which does not result in any reclassification or change (other
than a change in par value, or from par value to no par value, or from no par
value to par value, or as a result of a subdivision or combination to which
subsection 3(b) applies) of outstanding securities issuable upon exercise of
this Warrant), the Holder shall have, and the Company, or such successor
corporation or other entity, shall covenant in the constituent documents
effecting any of the foregoing transactions that such holder does have, the
right to obtain upon the exercise hereof, in lieu of the shares of Common Stock,
other securities,
-3-
<PAGE>
money, or other property theretofore issuable upon exercise of this Warrant, the
kind and amount of shares of stock, other securities, money, or other property
receivable upon such reclassification, change, consolidation, or merger by a
holder of the shares of Common Stock, other securities, money, or other property
issuable upon exercise hereof had this Warrant been exercised immediately prior
to such reclassification, change, consolidation, or merger. The constituent
documents effecting any such reclassification, change, consolidation, or merger
shall provide for any adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided in this subsection 3(a). The provisions
of this subsection 3(a) shall similarly apply to successive reclassifications,
changes, consolidations, or mergers.
(b) Subdivisions and Combinations. If the Company at any time
during the Exercise Period shall subdivide its shares of Common Stock into a
greater number of shares, the number of shares of Common Stock purchasable upon
exercise of this Warrant shall be proportionately increased and the Exercise
Price shall be proportionately decreased, as at the effective date of such
subdivision, or if the Company shall take a record of holders of its Common
Stock for the purpose of so subdividing, as at such record date, whichever is
earlier. If the Company, at any time during the Exercise Period, shall combine
its shares of Common Stock into a smaller number of shares, the number of shares
of Common Stock purchasable upon exercise hereof shall be proportionately
reduced and the Exercise Price shall be proportionately increased, as at the
effective date of such combination, or if the Company shall take a record of
holders of its Common Stock for purposes of such combination, as at such record
date, whichever is earlier.
(c) Dividends and Distributions. If the Company at any time shall
declare a dividend on its Common Stock payable in stock or other securities of
the Company or of any other corporation or other entity, or in property or
otherwise than in cash, to the holders of its Common Stock, the Holder shall,
without additional cost, be entitled to receive upon any exercise hereof, in
addition to the Common Stock to which the Holder would otherwise be entitled
upon such exercise, the number of shares of stock or other securities or
property which the Holder would have been entitled to receive if the Holder had
been a holder immediately prior to the record date for such dividend (or, if no
record date shall have been established, the payment date for such dividend) of
the number of shares of Common Stock purchasable on exercise of this Warrant
immediately prior to such record date or payment date, as the case may be.
(d) Upon any increase or decrease in the number of Warrant Shares
purchasable upon the exercise of this Warrant, the Company shall, within 30 days
thereafter, deliver written notice thereof to the Holder, which notice shall
state the increased or
-4-
<PAGE>
decreased number of Warrant Shares purchasable upon the exercise of this Warrant
and the revised Exercise Price thereof, setting forth in reasonable detail the
method of calculation and the facts upon which such calculations are based.
Section 4. Notification by the Company. In case at any time while this
Warrant remains outstanding:
(a) the Company shall declare any dividend or make any distribution
upon its Common Stock or any other class of its capital stock; or
(b) the Company shall offer for subscription pro rata to the
holders of its Common Stock or any other class of its capital stock any
additional shares of stock of any class or any other securities convertible into
or exchangeable for shares of stock or any rights or options to subscribe
thereto; or
(c) the Board of Directors of the Company shall authorize any
capital reorganization, reclassification, or similar transaction involving the
capital stock of the Company, or a sale or conveyance of all or a substantial
part of the assets of the Company, or a consolidation, merger, or business
combination of the Company; or
(d) actions or proceedings shall be authorized or commenced for a
voluntary or involuntary dissolution, liquidation, or winding-up of the Company;
then, in any one or more of such cases, the Company shall give written notice to
the Holder, at the earliest time legally practicable (and not less than 20 days
before any record date or other date set for definitive action) of the date on
which (i) the books of the Company shall close or a record shall be taken for
such dividend, distribution, or subscription rights or options or (ii) such
reorganization, reclassification, sale, conveyance, consolidation, merger,
dissolution, liquidation, or winding-up shall take place or be voted on by
shareholders of the Company, as the case may be. Such notice shall also specify
the date as of which the holders of the Common Stock of record shall participate
in said dividend, distribution, subscription rights, or options or shall be
entitled to exchange their Common Stock for securities or other property
deliverable upon such reorganization, reclassification, sale, conveyance,
consolidation, merger, dissolution, liquidation, or winding-up, as the case may
be. If the action in question or the record date is subject to the
effectiveness of a registration statement under the Securities Act or to a
favorable vote of shareholders, the notice required by this Section 4 shall so
state.
-5-
<PAGE>
Section 5. No Voting Rights: Limitations of Liability. Prior to exercise,
this Warrant will not entitle the Holder to any voting rights or other rights as
a stockholder of the Company. No provision hereof, in the absence of
affirmative action by the Holder to exercise this Warrant, and no enumeration
herein of the rights or privileges of the Holder, shall give rise to any
liability of the Holder for the purchase price of the Warrant Shares pursuant to
the exercise hereof.
Section 6. Amendment and Waiver.
(a) No failure or delay of the Holder in exercising any power or
right hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise of such right or power, or any abandonment or discontinuance of
steps to enforce such a right or power, preclude any other or further exercise
thereof or the exercise of any other right or power. The rights and remedies of
the Holder are cumulative and not exclusive of any rights or remedies which it
would otherwise have. The provisions of this Warrant may be amended, modified,
or waived with (and only with) the written consent of the Company and the
Holder.
(b) No notice or demand on the Company in any case shall entitle
the Company to any other or further notice or demand in similar or other
circumstances.
Section 7. No Fractional Warrant Shares. The Company shall not be
required to issue stock certificates representing fractions of Warrant Shares,
but shall in respect of any fraction of a Warrant Share make a payment in cash
based on the Value of the Common Stock after giving effect to the full exercise
or conversion of the Warrants.
Section 8. Validity of Warrant Shares. The Company shall reserve and keep
available at all times, free from preemptive rights, a sufficient number of
Warrant Shares to satisfy the requirements of this Warrant. The Warrant Shares:
(i) will be upon issuance, free and clear of any liens, claims, or other
encumbrances ("Liens") created by the Company or, to the Company's knowledge,
any other Person; (ii) have been duly and validly authorized and when issued and
paid for in accordance with the terms of the Warrants will be duly and validly
issued, fully paid, and non-assessable; (iii) will not have been issued or sold
in violation of any preemptive or similar rights; and (iv) will not subject the
holder thereof to personal liability by reason of being such holders.
-6-
<PAGE>
Section 9. Notices. Unless otherwise specified, all notices and other
communications provided for between the Company and the Holder in this Warrant
shall be in writing, including telecopy, and delivered or transmitted to the
addresses set forth below, or to such other address as shall be designated by
the Company or the Holder in written notice to the other party. Notice sent by
telecopy shall be deemed to be given and received when receipt of such
transmission is acknowledged, and delivered notice shall be deemed to be given
and received when receipted for by, or actually received by, an authorized
officer of the Company or the Holder, as the case may be.
If to the Company:
Kafus Environmental Industries Ltd.
270 Bridge Street
Dedham MA 02026
Attn: Mr. Michael A. McCabe
telephone: 781-326-5001
telecopier: 781-326-5105
If to the Holder:
Enron Capital & Trade Resources Corp.
Attn: Tony A. Valentine
1400 Smith Street
Houston, Texas 77002
telephone: 713-853-6903
telecopier: 713-646-2654
Section 10. Section and Other Headings. The headings contained in this
Warrant are for reference purposes only and will not affect in any way the
meaning or interpretation of this Warrant.
Section 11. Governing Law. THIS WARRANT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF BRITISH COLUMBIA AND THE APPLICABLE
LAWS OF CANADA WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW WHICH WOULD
SELECT ANOTHER LAW.
-7-
<PAGE>
Section 12. Binding Effect. The terms and provisions of this Warrant
shall inure to the benefit of the Holder and its successors and assigns and
shall be binding upon the Company and its successors and assigns, including,
without limitation, any successor to the Company by merger, consolidation, or
acquisition of all or substantially all of the Company's assets.
Section 13. Arbitration. Disputes arising under this Warrant shall be
settled by one arbitrator pursuant to the rules of the American Arbitration
Association (the "AAA") for Commercial Arbitration (the "Rules"). Such
arbitration shall be held in New York, New York, or at such other location as
mutually agreed to by the parties to the dispute. Subject to any applicable
limitations contained in this Warrant, arbitration may be commenced at any time
by any party giving notice to the other party that a dispute has been referred
to arbitration under this Section. The arbitrator shall be selected by the joint
agreement of the parties hereto, but if they do not so agree within twenty (20)
days after the date of the notice referred to above, the selection shall be made
pursuant to the Rules from the panel of arbitrators maintained by the AAA. Any
award of the arbitrator shall be accompanied by a written opinion giving the
reasons for the award. The expense of the arbitration shall be borne by the
parties in the manner determined in writing by the arbitrator. This arbitration
provision shall be specifically enforceable by the parties. The determination of
the arbitrator pursuant to this Section shall be final and binding on the
parties and may be entered for enforcement before any court of competent
jurisdiction.
[the remainder of this page intentionally blank]
-8-
<PAGE>
IN WITNESS WHEREOF, the seal of the Company and the signature of its duly
authorized officer have been affixed hereto as of August 18, 1998.
[SEAL] Kafus Environmental Industries Ltd.
Attest:______________________ By:___________________________________
Name:_________________________________
Title:________________________________
[Warrant - KEI 250,000 Shares]
-9-
<PAGE>
EXHIBIT A
TO
WARRANT
PURCHASE FORM
To Be Executed by the Holder
Desiring to Exercise a Warrant of
Kafus Environmental Industries Ltd.
The undersigned holder hereby exercises the right to purchase _______
shares of Common Stock covered by the within Warrant, according to the
conditions thereof, and herewith undertakes to make payment in full of the
Exercise Price of such shares or to withdraw this notice of exercise, in
accordance with the terms of the Warrant.
Name of Holder:
______________________________________
Signature:____________________________
Title:________________________________
Address:______________________________
______________________________________
______________________________________
Dated:______________, ____.
-10-
<PAGE>
EXHIBIT B
TO
WARRANT
ASSIGNMENT FORM
To Be Executed by the Holder
Desiring to Transfer a Warrant of
Kafus Environmental Industries Ltd.
FOR VALUE RECEIVED, the undersigned holder hereby sells, assigns, and
transfers unto_________________the right to purchase______shares of Common Stock
covered by the within Warrant, and does hereby irrevocably constitute and
appoint _________________ Attorney to transfer the said Warrant on the books of
the Company (as defined in such Warrant), with full power of substitution.
Name of Holder:
___________________________________
Signature:_________________________
Title:_____________________________
Address:___________________________
Dated:______________, ____.
In the presence of
_______________________________
NOTICE:
The signature to the foregoing Assignment Form must correspond to the name as
written upon the face of the within Warrant in every detail, without alteration
or enlargement or any change whatsoever.
-11-
<PAGE>
[Execution Version]
WARRANT
- --------------------------------------------------------------------------------
THE SECURITIES REPRESENTED BY THIS WARRANT AND THE SHARES OF COMMON STOCK
ISSUABLE UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES OR BLUE SKY LAWS AND
MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR IN RELIANCE ON AN AVAILABLE
EXEMPTION FROM THE ACT AND ANY APPLICABLE STATE SECURITIES OR BLUE SKY LAWS.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS ON
TRANSFER SET FORTH IN SECTION 2.
- --------------------------------------------------------------------------------
KAFUS ENVIRONMENTAL INDUSTRIES LTD.
Common Stock Purchase Warrant
Representing Right To Purchase Shares of
Common Stock
of
Kafus Environmental Industries Ltd.
--------------
No. W-E3
--------------
<PAGE>
FOR VALUE RECEIVED, THE KAFUS CAPITAL CORPORATION, a British Columbia
corporation (the "Company"), hereby certifies that Enron Capital & Trade
Resources Corp., a Delaware corporation (the "Holder"), is entitled to purchase
from the Company at any time or from time to time during the period (the
"Exercise Period") commencing on January 19, 2000, and ending on 5:00 p.m.
(Toronto, Ontario time) on July 31, 2008 (the "Expiration Date"), 500,000 shares
of Common Stock of the Company (the Common Stock of the Company being referred
to herein as the "Common Stock" and such number of shares of Common Stock as
adjusted pursuant to the terms hereof, being the "Warrant Shares"), at a price
per share equal to U.S. $4.00 (as such price may be adjusted pursuant to the
terms hereof, the "Exercise Price"). This Warrant is issued to the Holder
(together with such other warrants as may be issued in exchange, transfer, or
replacement of this Warrant, the "Warrants") in connection with the U.S.
$12,500,000 Promissory Note dated as of August 18, 1998 (the "Note"), made by
the Company and payable to the order of the Holder, and entitles the Holder to
purchase the Warrant Shares and to exercise the other rights, powers, and
privileges hereinafter provided.
NOTWITHSTANDING THE FOREGOING, this Warrrant shall terminate if prior to the
commencement of the Exercise Period (a) the outstanding principal balance of the
Note and all accrued but unpaid interest thereon is paid in full in cash, and
not by conversion, (b) such payment occurs at a time when no Event of Default
(as such term is defined under the Securities Purchase Agreement dated as of
August 18, 1998, between the Company and the Holder ) has occurred, and (c) all
commitments of the Holder to lend which are related to the Note have been
terminated.
Section 1. Exercise of Warrant; Cancellations of Warrant. This Warrant may
be exercised in whole or in part, at any time or from time to time, during the
Exercise Period, by presentation to the Company at its principal office at the
address set forth in Section 9 of (a) this Warrant, with the Purchase Form
annexed hereto as Exhibit A duly executed and (b) a certified bank check equal
to the Exercise Price for the Warrant Shares for which this Warrant is being
exercised (the date of such delivery referred to herein as the "Exercise Date").
Within five business days after payment of the Exercise Price, the Company shall
execute and deliver to the Holder a certificate or certificates for the total
number of Warrant Shares for which this Warrant is being exercised, in such
names and denominations as requested in writing by the Holder. The Company shall
pay any and all documentary stamp or similar issue taxes payable in respect of
the issue of the Warrant Shares. If this Warrant is exercised in part only, the
Company shall, upon surrender of this Warrant, execute and deliver a new Warrant
evidencing the rights of the Holder thereof to purchase the balance of the
Warrant Shares issuable hereunder.
-2-
<PAGE>
Section 2. Exchange, Transfer, Assignment, or Loss of Warrant. Upon
surrender of this Warrant to the Company, with the Assignment Form annexed
hereto as Exhibit B duly executed and funds sufficient to pay any transfer tax,
the Company shall, without charge, execute and deliver a new Warrant or Warrants
in the name of the assignee or assignees named in such Assignment Form and, if
the Holder's entire interest is not being assigned, in the name of the Holder,
and this Warrant shall promptly be canceled. This Warrant may be divided or
combined with other Warrants that carry the same rights upon presentation hereof
at the office of the Company, together with a written notice specifying the
names and denominations in which new Warrants are to be issued and signed by the
Holder hereof. Upon receipt by the Company of evidence satisfactory to it of the
loss, theft, destruction, or mutilation of this Warrant, and (in the case of
loss, theft, or destruction) of reasonably satisfactory indemnification
(including, if required in the reasonable judgment of the Company, a statement
of net worth of such Holder that is at a level reasonably satisfactory to the
Company), and upon surrender and cancellation of this Warrant, if mutilated, the
Company shall execute and deliver a new Warrant of like tenor and date.
Section 3. Antidilutive Adjustments. The shares of Common Stock purchasable
on exercise of this Warrant are shares of Common Stock of the Company as
constituted as of the Date of Issue. The number and kind of securities
purchasable on the exercise of this Warrant shall be subject to adjustment from
time to time upon the happening of certain events, as follows:
(a) Mergers, Consolidations, and Reclassifications. In case of any
reclassification or change of outstanding securities issuable upon exercise of
this Warrant at any time (other than a change in par value, or from par value to
no par value, or from no par value to par value or as a result of a subdivision
or combination to which subsection 3(b) applies), or in case of any
consolidation or merger of the Company with or into another corporation (other
than a merger with another corporation in which the Company is the surviving
corporation and which does not result in any reclassification or change (other
than a change in par value, or from par value to no par value, or from no par
value to par value, or as a result of a subdivision or combination to which
subsection 3(b) applies) of outstanding securities issuable upon exercise of
this Warrant), the Holder shall have, and the Company, or such successor
corporation or other entity, shall covenant in the constituent documents
effecting any of the foregoing transactions that such holder does have, the
right to obtain upon the exercise hereof, in lieu of the shares of Common Stock,
other securities, money, or other property theretofore issuable upon exercise of
this Warrant, the kind and amount of shares of stock, other securities, money,
or other property receivable upon such reclassification, change, consolidation,
or merger by a holder of the shares of Common Stock, other securities, money, or
other property issuable upon exercise hereof had this
-3-
<PAGE>
Warrant been exercised immediately prior to such reclassification, change,
consolidation, or merger. The constituent documents effecting any such
reclassification, change, consolidation, or merger shall provide for any
adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided in this subsection 3(a). The provisions of this subsection
3(a) shall similarly apply to successive reclassifications, changes,
consolidations, or mergers.
(b) Subdivisions and Combinations. If the Company at any time during
the Exercise Period shall subdivide its shares of Common Stock into a greater
number of shares, the number of shares of Common Stock purchasable upon exercise
of this Warrant shall be proportionately increased and the Exercise Price shall
be proportionately decreased, as at the effective date of such subdivision, or
if the Company shall take a record of holders of its Common Stock for the
purpose of so subdividing, as at such record date, whichever is earlier. If the
Company, at any time during the Exercise Period, shall combine its shares of
Common Stock into a smaller number of shares, the number of shares of Common
Stock purchasable upon exercise hereof shall be proportionately reduced and the
Exercise Price shall be proportionately increased, as at the effective date of
such combination, or if the Company shall take a record of holders of its Common
Stock for purposes of such combination, as at such record date, whichever is
earlier.
(c) Dividends and Distributions. If the Company at any time shall
declare a dividend on its Common Stock payable in stock or other securities of
the Company or of any other corporation or other entity, or in property or
otherwise than in cash, to the holders of its Common Stock, the Holder shall,
without additional cost, be entitled to receive upon any exercise hereof, in
addition to the Common Stock to which the Holder would otherwise be entitled
upon such exercise, the number of shares of stock or other securities or
property which the Holder would have been entitled to receive if the Holder had
been a holder immediately prior to the record date for such dividend (or, if no
record date shall have been established, the payment date for such dividend) of
the number of shares of Common Stock purchasable on exercise of this Warrant
immediately prior to such record date or payment date, as the case may be.
(d) Upon any increase or decrease in the number of Warrant Shares
purchasable upon the exercise of this Warrant, the Company shall, within 30 days
thereafter, deliver written notice thereof to the Holder, which notice shall
state the increased or decreased number of Warrant Shares purchasable upon the
exercise of this Warrant and the revised Exercise Price thereof, setting forth
in reasonable detail the method of calculation and the facts upon which such
calculations are based.
-4-
<PAGE>
Section 4. Notification by the Company. In case at any time while this
Warrant remains outstanding:
(a) the Company shall declare any dividend or make any distribution
upon its Common Stock or any other class of its capital stock; or
(b) the Company shall offer for subscription pro rata to the holders
of its Common Stock or any other class of its capital stock any additional
shares of stock of any class or any other securities convertible into or
exchangeable for shares of stock or any rights or options to subscribe thereto;
or
(c) the Board of Directors of the Company shall authorize any capital
reorganization, reclassification, or similar transaction involving the capital
stock of the Company, or a sale or conveyance of all or a substantial part of
the assets of the Company, or a consolidation, merger, or business combination
of the Company; or
(d) actions or proceedings shall be authorized or commenced for a
voluntary or involuntary dissolution, liquidation, or winding-up of the Company;
then, in any one or more of such cases, the Company shall give written notice to
the Holder, at the earliest time legally practicable (and not less than 20 days
before any record date or other date set for definitive action) of the date on
which (i) the books of the Company shall close or a record shall be taken for
such dividend, distribution, or subscription rights or options or (ii) such
reorganization, reclassification, sale, conveyance, consolidation, merger,
dissolution, liquidation, or winding-up shall take place or be voted on by
shareholders of the Company, as the case may be. Such notice shall also specify
the date as of which the holders of the Common Stock of record shall participate
in said dividend, distribution, subscription rights, or options or shall be
entitled to exchange their Common Stock for securities or other property
deliverable upon such reorganization, reclassification, sale, conveyance,
consolidation, merger, dissolution, liquidation, or winding-up, as the case may
be. If the action in question or the record date is subject to the effectiveness
of a registration statement under the Securities Act or to a favorable vote of
shareholders, the notice required by this Section 4 shall so state.
Section 5. No Voting Rights: Limitations of Liability. Prior to exercise,
this Warrant will not entitle the Holder to any voting rights or other rights as
a stockholder of the Company. No provision hereof, in the absence of affirmative
action by the Holder to exercise this Warrant, and no enumeration herein of the
rights or privileges of the Holder,
-5-
<PAGE>
shall give rise to any liability of the Holder for the purchase price of the
Warrant Shares pursuant to the exercise hereof.
Section 6. Amendment and Waiver.
(a) No failure or delay of the Holder in exercising any power or right
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise of such right or power, or any abandonment or discontinuance of steps
to enforce such a right or power, preclude any other or further exercise thereof
or the exercise of any other right or power. The rights and remedies of the
Holder are cumulative and not exclusive of any rights or remedies which it would
otherwise have. The provisions of this Warrant may be amended, modified, or
waived with (and only with) the written consent of the Company and the Holder.
(b) No notice or demand on the Company in any case shall entitle the
Company to any other or further notice or demand in similar or other
circumstances.
Section 7. No Fractional Warrant Shares. The Company shall not be required
to issue stock certificates representing fractions of Warrant Shares, but shall
in respect of any fraction of a Warrant Share make a payment in cash based on
the Value of the Common Stock after giving effect to the full exercise or
conversion of the Warrants.
Section 8. Validity of Warrant Shares. The Company shall reserve and keep
available at all times, free from preemptive rights, a sufficient number of
Warrant Shares to satisfy the requirements of this Warrant. The Warrant Shares:
(i) will be upon issuance, free and clear of any liens, claims, or other
encumbrances ("Liens") created by the Company or, to the Company's knowledge,
any other Person; (ii) have been duly and validly authorized and when issued and
paid for in accordance with the terms of the Warrants will be duly and validly
issued, fully paid, and non-assessable; (iii) will not have been issued or sold
in violation of any preemptive or similar rights; and (iv) will not subject the
holder thereof to personal liability by reason of being such holders.
Section 9. Notices. Unless otherwise specified, all notices and other
communications provided for between the Company and the Holder in this Warrant
shall be in writing, including telecopy, and delivered or transmitted to the
addresses set forth below, or to such other address as shall be designated by
the Company or the Holder in written notice to the other party. Notice sent by
telecopy shall be deemed to be given and received when receipt of such
transmission is acknowledged, and delivered notice shall be deemed
-6-
<PAGE>
to be given and received when receipted for by, or actually received by, an
authorized officer of the Company or the Holder, as the case may be.
If to the Company:
Kafus Environmental Industries Ltd.
270 Bridge Street
Dedham MA 02026
Attn: Mr. Michael A. McCabe
telephone: 781-326-5001
telecopier: 781-326-5105
If to the Holder:
Enron Capital & Trade Resources Corp.
Attn: Tony A. Valentine
1400 Smith Street
Houston, Texas 77002
telephone: 713-853-6903
telecopier: 713-646-2654
Section 10. Section and Other Headings. The headings contained in this
Warrant are for reference purposes only and will not affect in any way the
meaning or interpretation of this Warrant.
Section 11. Governing Law. THIS WARRANT SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAWS OF BRITISH COLUMBIA AND THE APPLICABLE LAWS OF
CANADA WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW WHICH WOULD SELECT
ANOTHER LAW.
Section 12. Binding Effect. The terms and provisions of this Warrant shall
inure to the benefit of the Holder and its successors and assigns and shall be
binding upon the Company and its successors and assigns, including, without
limitation, any successor to the Company by merger, consolidation, or
acquisition of all or substantially all of the Company's assets.
Section 13. Arbitration. Disputes arising under this Warrant shall be
settled by one arbitrator pursuant to the rules of the American Arbitration
Association (the "AAA") for
-7-
<PAGE>
Commercial Arbitration (the "Rules"). Such arbitration shall be held in New
York, New York, or at such other location as mutually agreed to by the parties
to the dispute. Subject to any applicable limitations contained in this Warrant,
arbitration may be commenced at any time by any party giving notice to the other
party that a dispute has been referred to arbitration under this Section. The
arbitrator shall be selected by the joint agreement of the parties hereto, but
if they do not so agree within twenty (20) days after the date of the notice
referred to above, the selection shall be made pursuant to the Rules from the
panel of arbitrators maintained by the AAA. Any award of the arbitrator shall be
accompanied by a written opinion giving the reasons for the award. The expense
of the arbitration shall be borne by the parties in the manner determined in
writing by the arbitrator. This arbitration provision shall be specifically
enforceable by the parties. The determination of the arbitrator pursuant to this
Section shall be final and binding on the parties and may be entered for
enforcement before any court of competent jurisdiction.
[the remainder of this page intentionally blank]
-8-
<PAGE>
IN WITNESS WHEREOF, the seal of the Company and the signature of its duly
authorized officer have been affixed hereto as of August 18, 1998.
[SEAL] KAFUS ENVIRONMENTAL INDUSTRIES LTD.
Attest: ________________ By: ________________________________
Name: ______________________________
Title: _____________________________
<PAGE>
EXHIBIT A
TO
WARRANT
PURCHASE FORM
To Be Executed by the Holder
Desiring to Exercise a Warrant of
Kafus Environmental Industries Ltd.
The undersigned holder hereby exercises the right to purchase _______
shares of Common Stock covered by the within Warrant, according to the
conditions thereof, and herewith undertakes to make payment in full of the
Exercise Price of such shares or to withdraw this notice of exercise, in
accordance with the terms of the Warrant.
Name of Holder:
------------------------------------
Signature:
-------------------------
Title:
-----------------------------
Address:
---------------------------
------------------------------------
------------------------------------
Dated:
--------------,-------.
-10-
<PAGE>
EXHIBIT B
TO
WARRANT
ASSIGNMENT FORM
To Be Executed by the Holder
Desiring to Transfer a Warrant of
Kafus Environmental Industries Ltd.
FOR VALUE RECEIVED, the undersigned holder hereby sells, assigns, and
transfers unto ________ the right to purchase _______ shares of Common Stock
covered by the within Warrant, and does hereby irrevocably constitute and
appoint _________________ Attorney to transfer the said Warrant on the books of
the Company (as defined in such Warrant), with full power of substitution.
Name of Holder:
-----------------------------------
Signature:
------------------------
Title:
----------------------------
Address:
--------------------------
-----------------------------------
-----------------------------------
Dated: ____________, ____.
In the presence of
- -------------------------------
NOTICE:
The signature to the foregoing Assignment Form must correspond to the name as
written upon the face of the within Warrant in every detail, without alteration
or enlargement or any change whatsoever.
-11-
<PAGE>
[Execution Version]
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and entered
into as of August 18, 1998, by and between Kafus Environmental Industries Ltd.,
a British Columbia Corporation (the "Company"), and Enron Capital & Trade
Resources Corp., a Delaware corporation (the "Purchaser").
RECITALS
WHEREAS, the Company and the Purchaser are parties to a Letter Securities
Purchase Agreement dated as of August 18, 1998 (as modified from time to time,
the "Securities Purchase Agreement"), pursuant to which the Company shall issue
and sell to the Purchaser, and the Purchaser shall purchase from the Company a
convertible Note and certain Warrants as more particularly described therein.
WHEREAS, the Purchaser desires that the Company register the Common Stock
issuable upon conversion of the Note (the "Conversion Shares") and the Common
Stock issuable upon the exercise of the Warrants (the "Warrant Shares") upon the
terms and subject to the conditions set forth in this Agreement.
WHEREAS, the execution and delivery of this Agreement is a condition
precedent to the Purchaser's obligations under the Securities Purchase
Agreement.
NOW, THEREFORE, the parties hereto, intending legally to be bound, hereby
agree as follows:
1. DEFINITIONS.
As used in this Agreement, the following terms shall have the meanings
ascribed to them below:
(a) "Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control," when used with respect to any Person, means the power to direct the
management and policies of such Person, directly
<PAGE>
or indirectly, whether through the ownership of voting securities, by contract
or otherwise, and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
(b) "Applicable Rate" shall mean 1.5% monthly with respect to the first
month and 2% monthly for each subsequent month, until the Registration Statement
shall become effective.
(c) "Business Day" means any Monday, Tuesday, Wednesday, Thursday, or
Friday that is not a day on which banking institutions in the City of New York,
New York, or Toronto, Ontario, are required by law, regulation or executive
order to close.
(d) "Holder" shall mean the Purchaser and any other Person who has become a
Permitted Transferee pursuant to Section 9(c).
(e) "Registrable Securities" means (a) any Common Stock issuable upon
conversion of the Note, (b) any Common Stock issuable upon exercise of any
Warrant, (c) all other shares of Common Stock purchased, acquired, or received
from any Person by the Purchaser and its Affiliates (or which they shall have
the right to purchase or acquire) pursuant to or in connection with the
transactions contemplated by the Securities Purchase Agreement and (d) any
securities issued or issuable in respect of or in exchange for any of the shares
of Common Stock referred to in clauses (a) through (c) above by way of a stock
dividend or stock split or in connection with a combination of shares,
recapitalization, reclassification, merger, consolidation, or exchange offer
("Distribution Securities"). For purposes of this Agreement, a Registrable
Security ceases to constitute a Registrable Security hereunder (i) when such
Registrable Security shall have been effectively registered under the Securities
Act and disposed of in a public market transaction pursuant to a Registration
Statement, (ii) when such Registrable Security shall have been sold pursuant to
Rule 144 (or any successor provision) under the Securities Act, (iii) when such
Registrable Security shall have been otherwise transferred and a new certificate
for such Registrable Security not bearing a legend restricting further transfer
shall have been delivered by the Company, (iv) with respect to a particular
Holder, at any time when all of such Holder's remaining Registrable Securities
can be sold in a single transaction in compliance with Rule 144 under the
Securities Act, (v) on the third anniversary of the original issuance date of
such Registrable Security, provided that the Holder of such Registerable
Security is not an Affiliate of the Company as of such date, and has not been an
Affiliate of the Company for a period of three months preceding such date, or
(vi) when such Registrable Security shall have ceased to be outstanding.
(f) "Registration Statement" shall have the meaning set forth in Section 2.
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(g) "Registration Termination Date" means, the first date on which all
Conversion Shares and all Warrant Shares (and any Distribution Securities with
respect thereto) cease to be Registrable Securities.
(h) "Securities Act" means the Securities Act of 1933, as amended.
(i) "Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(j) "SEC" means the United States Securities Exchange Commission, or any
successor agency thereto.
Other capitalized terms shall have the meanings ascribed to them in the
other sections of this Agreement or in the Securities Purchase Agreement if not
defined herein.
2. SHELF REGISTRATION.
(a) Effective Registration. On or before June 30, 1999 (the "Filing
Deadline"), the Company shall file with the SEC under the Securities Act a
Registration Statement on Form F-1 ("Registration Statement"), or on such other
registration form under the Securities Act as the Company shall deem
appropriate, covering the sale by the Holders on a continuous or delayed basis
pursuant to Rule 415 thereunder (or any similar rule that may be adopted by the
SEC) of (i) the Conversion Shares and (ii) the Warrant Shares. The Company shall
use its best efforts to cause each Registration Statement to be declared
effective on or prior to the one hundred and fiftieth (150th) day following the
Filing Deadline and shall thereafter keep such Registration Statement
continuously effective until the Registration Termination Date.
(b) Delay in Effectiveness. In the event any Registration Statement is not
declared effective by the SEC within 150 days after the Filing Deadline (the
"Effectiveness Deadline"), or in the event the effectiveness of any Registration
Statement is suspended or terminated at any time after its Effectiveness
Deadline and prior to the Registration Termination Date, then for each month (or
portion thereof) such Registration Statement is not so effective, the Company
shall pay to the Holders, as liquidated damages and not as a penalty, an amount
equal to the product of the face amount of the Note (being the maximum total
purchase price of the Securities, whether or not the full amount is advanced
under the Note) and the Applicable Rate. The Company shall pay such liquidated
damages to each Holder based upon the proportion of the Registerable Securities
owned by such Holder. Such payments shall be made on the first Business Day of
each month following any month
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in which such Registration Statement is not effective, with a final payment
within five (5) Business Days after such Registration Statement becomes
effective.
3. REGISTRATION PROCEDURES.
(a) Company Procedures. In connection with the Company's registration
obligations pursuant to Section 2, the Company shall keep each Registration
Statement continuously effective for the period of time provided in Section 2,
to permit the sale of Registrable Securities covered by such Registration
Statement in accordance with the intended method or methods of distribution
thereof specified in such Registration Statement or in the related
prospectus(es), and shall:
(i) comply with such provisions of the Securities Act as may be
necessary to facilitate the disposition of all Registrable Securities
covered by such Registration Statement during the applicable period in
accordance with the intended method or methods of disposition thereof set
forth in such Registration Statement or such prospectus or supplement
thereto;
(ii) notify the Holders, promptly (A) when each Registration
Statement, prospectus, or supplement thereto or further post-effective
amendment has been filed, and, with respect to each Registration Statement
or further post-effective amendment, when it has become effective, (B) of
any request by the SEC for amendments or supplements to any Registration
Statement or prospectus or for additional information, (C) of the issuance
by the SEC of any comments with respect to any filing and of any stop order
suspending the effectiveness of any Registration Statement or the
initiation of any proceedings for that purpose, (D) of the receipt by the
Company of any notification with respect to the suspension of the
qualification of any Registrable Securities for sale in any jurisdiction or
the initiation or threatening of any proceeding for such purpose, (E) of
the happening of any event that makes any statement made in any
Registration Statement, prospectus, or any other document incorporated
therein by reference untrue or that requires the making of any changes in
such Registration Statement, prospectus, or any document incorporated
therein by reference in order that such documents not contain any 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, and (F) of the Company's determination that a further post-
effective amendment to such Registration Statement would be appropriate;
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(iii) furnish to each Holder, without charge, as many conformed
copies as may reasonably be requested by such Holder, of each Registration
Statement and any further post-effective amendments thereto, including
financial statements and schedules, all documents incorporated therein by
reference and all exhibits (including those incorporated by reference);
(iv) deliver to each Holder, without charge, as many copies of the
then effective prospectus covering such Registrable Securities and any
amendments or supplements thereto as such Holder may reasonably request;
(v) register, qualify, obtain an exemption therefrom, or cooperate
with the Holders and their counsel in connection with the registration or
qualification or exemption therefrom of such Registrable Securities for
offer and sale under the securities or blue sky laws of such jurisdictions
as may be reasonably requested in writing by the Holders and do any and all
other acts or things necessary or advisable to enable the disposition in
such jurisdictions of the Registrable Securities covered by the then
effective Registration Statements; provided, however, that the Company
shall not be required to (A) qualify as a foreign corporation or generally
to transact business in any jurisdiction where it is not then so qualified,
(B) qualify as a dealer (or other similar entity) in securities, (C)
otherwise subject itself to taxation in connection with such activities, or
(D) take any action which would subject it to general service of process in
any jurisdiction where it is not then so subject;
(vi) upon the occurrence of any event contemplated by clauses (E)
or (F) of paragraph (ii) above, promptly prepare and file, if necessary, a
further post-effective amendment to each Registration Statement or a
supplement to the related prospectuses or any document incorporated therein
by reference or file any other required document so that each Registration
Statement and the related prospectuses will not thereafter contain an
untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein not misleading;
(vii) in no event later than five (5) Business Days before filing
any Registration Statement, any further post-effective amendment thereto,
any prospectus or any amendment or supplement thereto (other than any
amendment or supplement made solely as a result of incorporation by
reference of documents), furnish to the Holders copies of all such
documents proposed to be filed;
(viii) not file any Registration Statement or amendment thereto or
any prospectus or any supplement thereto (other than any amendment or
supplement
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made solely as a result of incorporation by reference of documents) to
which the Holders holding a majority of the Registrable Securities shall
have reasonably objected in writing, within three (3) Business Days after
receipt of such documents, to the effect that such Registration Statement
or amendment thereto or prospectus or supplement thereto does not comply in
all material respects with the requirements of the Securities Act
(including, without limitation respect of any information describing the
manner in which the Holders acquired such Registrable Securities and the
intended method or methods of distribution of such Registrable Securities),
(provided that the foregoing shall not limit the right of any Holder
reasonably to object, within three (3) Business Days after receipt of such
documents, to any particular information relating specifically to such
Holder that is to be contained in any Registration Statement, prospectus or
supplement including without limitation, any information describing the
manner in which such Holder acquired such Registrable Securities and the
intended method or methods of distribution of such Registrable Securities),
and if the Company is unable to file any such document due to the
objections of the Holders, the Company shall exert commercially reasonable
efforts to cooperate with the Holders to prepare, as soon as practicable, a
document that is responsive in all material respects to the reasonable
objections of the Holders, provided however, that the Effectiveness
Deadline (as defined in Section 2(b)) shall be extended by the period,
during which the Company is prevented from filing a Registration Statement
or amendment thereto by reason of this paragraph 3(a)(viii);
(ix) promptly after the filing of any document that is to be
incorporated by reference into any Registration Statement or prospectus,
provide copies of such document to the Holder;
(x) cause all Registrable Securities covered by each Registration
Statement to be listed on the Nasdaq National Market, American Stock
Exchange, any national securities exchange, an over-the-counter market, or,
if the Common Stock securities of the Company are not listed thereon, on
the primary exchanges, markets, or inter-dealer quotations systems
(including NASDAQ) if any, on which similar securities issued by the
Company are then listed, prior to the date on which such Registrable
Securities were issued;
(xi) take all actions reasonably required to prevent the entry of
any stop order by the Securities and Exchange Commission or by any state
securities regulators or to remove any such order if entered; and
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(xii) file post-effective amendments to any Registration Statement
or supplement the related prospectus, as required, to permit sales of
Registrable Securities covered thereby to be made by Permitted Transferees
of the Holders.
(b) Holder Procedures.
(i) The Company may require each Holder to furnish to the Company
such information regarding such Holder and the proposed distribution of
such Registrable Securities as the Company may from time to time reasonably
request in writing and which is necessary for compliance with applicable
law.
(ii) Each Holder agrees to cooperate with the Company in all
reasonable respects in connection with the preparation and filing of the
Registration Statement, any Amendment, any prospectus, and any prospectus
supplement.
(c) Additional Information Available. So long as any Registration
Statement is effective covering the resale of Registrable Securities owned by a
Holder, the Company will furnish to such Holder(s):
(i) as soon as practicable after it becomes available (but in the
case of the Company's Annual Report to Stockholders, within 140 days after
the end of each fiscal year of the Company), one copy of: (A) its Annual
Report to Stockholders (which Annual Report shall contain financial
statements audited in accordance with Canadian generally accepted
accounting principles by a national firm of certified public accountants);
(B) its Annual Report on Form 20-F; and (C) its Quarterly Reports on Form
6-K; and
(ii) upon the reasonable request of a Holder, all exhibits to the
Annual Report on Form 20-F; and the Company, upon the reasonable request of
a Holder, will meet with such Holder or a representative thereof at the
Company's headquarters to discuss all information relevant for disclosure
in any Registration Statement and will otherwise cooperate with any Holder
conducting an investigation for the purpose of reducing or eliminating such
Holder's exposure to liability under the Securities Act including the
reasonable production of information at the Company's headquarters.
4. REGISTRATION EXPENSES.
All expenses incident to the Company's performance of or compliance with
this Agreement, including without limitation all registration and filing fees,
fees, and expenses
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of compliance with state securities or blue sky laws (including fees and
disbursements of counsel in connection with blue sky qualifications or
registrations (or the obtaining of exemptions therefrom) of the Registrable
Securities), messenger and delivery expenses, internal expenses (including,
without limitation, all salaries and expenses of its officers and employees
performing legal or accounting duties), fees and disbursements of its counsel
and its independent certified public accountants, securities acts liability
insurance (if the Company elects to obtain such insurance), and reasonable fees
and expenses of any special experts retained by the Company in connection with
any registration hereunder (all of such expenses herein referred to as
"Registration Expenses"), shall be borne by the Company; provided, however, the
Registration Expenses shall not include any sales or underwriting discounts,
commissions, or fees attributable to the sale of the Registrable Securities or
the fees and expenses of counsel to the Holders (other than to the extent
provided in the Securities Purchase Agreement).
5. INDEMNIFICATION; CONTRIBUTION.
(a) Indemnification by the Company. The Company shall indemnify and hold
harmless, to the full extent permitted by law, each Holder, and such Holder's
respective officers, directors, employees, representatives, agents, and
controlling persons (within the meaning of the Securities Act), against all
losses, claims, damages, liabilities, and expenses, but in no event greater than
the gross purchase price Holder paid to the Company for Registrable Securities,
resulting from any untrue or alleged untrue statement of a material fact
contained in any Registration Statement, any prospectus, or any amendment or
supplement thereto, or any omission or alleged omission of a material fact
required to be stated therein or necessary to make the statements therein not
misleading, except in each case insofar as the same directly arises out of or is
directly based upon an untrue statement or alleged untrue statement of a
material fact or an omission or alleged omission to state a material fact in
such Registration Statement, prospectus, amendment, or supplement, as the case
may be, made or omitted, as the case may be, in reliance upon and in conformity
with information furnished to the Company in writing by such Holder expressly
for use therein.
(b) Indemnification by the Holders. Each Holder shall indemnify and hold
harmless, to the full extent permitted by law, the Company, its officers,
directors, employees, representatives, agents, and controlling persons (within
the meaning of the Securities Act), against all losses, claims, damages,
liabilities, and expenses (including, without limitation, reasonable costs of
investigation and legal expenses) resulting from any untrue or alleged untrue
statement of a material fact contained in any Registration Statement, any
prospectus, or any amendment or supplement thereto, and any omission or alleged
omission of a material fact required to be stated therein or necessary to make
the statements therein not misleading,
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<PAGE>
to the extent the same directly result from any untrue statement or alleged
untrue statement of a material fact or any omission or alleged omission to state
a material fact in such Registration Statement, prospectus, amendment, or
supplement, as the case may be, made or omitted, as the case may be, in reliance
upon and in conformity with information furnished to the Company in writing by
such Holder expressly for use therein. The liability of each Holder under the
indemnity and contributions provisions of this Section 5 shall be several and
not joint and shall be limited to an amount equal to the gross price of the
Registrable Securities sold by such Holder pursuant to the Registration
Statement.
(c) Conduct of Indemnification Proceedings. Each party entitled to
indemnification under this Section 5 (the "Indemnified Party") shall give
written notice to the party required to provide indemnification (the
"Indemnifying Party") promptly after such Indemnified Party has actual knowledge
of any claim as to which indemnity may be sought, and shall permit the
Indemnifying Party to assume the defense of any such claim or any litigation
resulting therefrom; provided, that counsel for the Indemnifying Party who will
conduct the defense of such claim or litigation, is approved by the Indemnified
Party (whose approval will not be unreasonably withheld or delayed); and
provided, further, that the failure of any Indemnified Party to give notice as
provided herein shall not relieve the Indemnifying Party of its obligations
except to the extent that its defense of the claim or litigation involved is
prejudiced by such failure. The Indemnified Party may participate in such
defense at such party's expense; provided, however, that the Indemnifying Party
shall pay such expense if representation of such Indemnified Party by the
counsel retained by the Indemnifying Party would be inappropriate due to actual
or potential conflicts of interest between the Indemnified Party and any other
party represented by such counsel in such proceeding. No Indemnifying Party, in
the defense of any such claim or litigation, except with the consent of each
Indemnified Party, shall consent to entry of any judgment or enter into any
settlement that does not include as an unconditional term thereof the giving by
the claimant or plaintiff to such Indemnified Party of a release from all
liability in respect of any claim or litigation, and no Indemnified Party will
consent to entry of any judgment or settle any claim or litigation without the
prior written consent of the Indemnifying Party (not to be unreasonably withheld
or delayed). Each Indemnified Party shall furnish such information regarding
himself, herself or itself and the claim in question as the Indemnifying Party
may reasonably request and as shall be reasonably required in connection with
the defense of such claim and litigation resulting therefrom.
(d) Contribution.
(i) If for any reason the indemnification provided for in this
Section 5 from an Indemnifying Party, although otherwise applicable by its
terms, is
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unavailable to an Indemnified Party hereunder, then the Indemnifying Party,
in lieu of indemnifying such Indemnified Party, shall contribute to the
amount paid or payable by the Indemnified Parties as a result of such
losses, claims, damages, liabilities, or expenses in such proportion as is
appropriate to reflect the relative fault of such Indemnifying Party and
the Indemnified Parties in connection with the actions that resulted in
such losses, claims, damages, liabilities, or expenses, as well as any
other relevant equitable considerations. The relative fault of such
Indemnifying Party and the Indemnified Parties shall be determined by
reference to, among other things, whether any action in question, including
any untrue or alleged untrue statement of a material fact, has been made
by, or relates to information supplied by, such Indemnifying Party or the
Indemnified Parties, and the parties' relative intent, knowledge, access to
information, and opportunity to correct or prevent such action. The amount
paid or payable by a party as a result of the losses, claims, damages,
liabilities, and expenses referred to above shall be deemed to include,
subject to the limitations set forth in Section 5(c), any legal or other
fees or expenses reasonably incurred by such party in connection with any
investigation or proceeding.
(ii) The parties hereto agree that it would not be just and
equitable if contribution pursuant to this Section 5(d) were determined by
pro rata allocation or by any other method of allocation that does not take
account of the equitable considerations referred to in the immediately
preceding paragraph. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be
entitled to contribution from any Person who was not guilty of such
fraudulent misrepresentation.
6. RULE 144 REQUIREMENTS.
The Company agrees to:
(a) use its best efforts to make and keep public information available, as
those terms are understood and defined in Rule 144 under the Securities Act;
(b) use its best efforts to file with the SEC in a timely manner all
reports and other documents required of the Company under the Securities Act and
the Securities Exchange Act; and
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(c) furnish to each Holder upon request a written statement by the Company
as to its compliance with the reporting requirements of said Rule 144 and of the
Securities Act and the Securities Exchange Act.
7. INJUNCTIONS.
Each of the parties hereto acknowledges and agrees that one or more of the
parties would be damaged irreparably in the event the provisions of this
Agreement are not performed in accordance with their specific terms or otherwise
are breached. Accordingly, each of the parties agrees that the other party
shall be entitled to an injunction or injunctions to prevent breaches of the
provisions hereof in any action instituted in any court of the United States or
any state thereof having jurisdiction over the parties in the matter, in
addition to any other remedy to which it may be entitled, at law or in equity.
8. TERMINATION.
This Agreement shall terminate on the Registration Termination Date;
provided, however, that the provisions of Section 5, 6, and 7 shall survive the
termination of this Agreement.
9. MISCELLANEOUS.
(a) Amendments and Waivers. Except as otherwise provided herein, the
provisions of this Agreement may not be amended, supplemented, or otherwise
modified, and waivers or consents to departures from the provisions hereof may
not be given, unless the Company shall have obtained the prior written consent
of the Holders holding more than 80% of the Registrable Securities at the time
of such amendment.
(b) Notices. Unless otherwise specified, all notices and other
communications provided for between the Company and the Purchaser in this
Agreement shall be in writing, including telecopy, and delivered or transmitted
to the addresses set forth below, or to such other address as shall be
designated by the Company or the Purchaser in written notice to the other party.
Notice sent by telecopy shall be deemed to be given and received when receipt of
such transmission is acknowledged, and delivered notice shall be deemed to be
given and received when receipted for by, or actually received by, an authorized
officer of the Company or the Purchaser, as the case may be.
(i) if to the Purchaser, to such address as is specified for the
Purchaser under the terms of the Securities Purchase Agreement or if to
another Holder, to the
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address indicated on the Company's register relating to the Warrants or
Registrable Securities held by such Holder or at such other address as such
Holder may have furnished to the Company in writing.
(ii) if to the Company, at:
Kafus Environmental Industries Ltd.
270 Bridge Street
Dedham MA 02026
Attn: Mr. Michael A. McCabe
telephone: 781-326-5001
telecopier: 781-326-5105
(c) Successors and Assigns. This Agreement shall be binding upon and shall
inure to the benefit of the Company and each Holder and their respective
successors and assigns. The rights provided by this Agreement shall be
transferred automatically from the Purchaser to any Person to whom the Note, any
Warrants, or any Registrable Securities are transferred, provided that (x) the
Company is given written notice of the transfer and the name, address, telephone
number, and facsimile number of the transferees and (y) the subsequent
transferee agrees in writing to be bound by all of the terms of this Agreement
(any transferee referred to in the foregoing clauses being referred to herein as
a "Permitted Transferee").
(d) Counterparts. This Agreement may be executed in any number of
counterparts and by the parties in separate counterparts, each of which when so
executed shall be deemed to be an original and all of which taken together shall
constitute one and the same agreement.
(e) Headings; Construction. The Section numbers and headings in this
Agreement are for convenience of reference only and shall not limit or otherwise
affect the meaning hereof. Unless the context otherwise requires, all references
to Sections are to sections of this Agreement, and words in the singular include
the plural and vice versa. In computing any period of time specified in this
Agreement or in any notices, the date of the act or event from which such period
of time is to be measured shall be included, any such period shall expire at
5:00 p.m., New York time, on the last day of such period, and any such period
denominated in months shall expire on the date in the last month of such period
that has the same numerical designation as the date of the act or event from
which such period is to be measured; provided, however, that if there is no date
in the last month of such period
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that has the same numerical designation as of the date of such act or event,
such period shall expire on the last day of the last month of such period.
(f) Governing Law. This Agreement shall be governed by and construed in
accordance with the internal laws of Texas, without regard to the principles of
conflicts of laws thereof which would select any other law.
(g) Arbitration. Disputes arising under this Agreement shall be settled by
one arbitrator pursuant to the rules of the American Arbitration Association
(the "AAA") for Commercial Arbitration (the "Rules"). Such arbitration shall be
held in New York, New York, or at such other location as mutually agreed to by
the parties to the dispute. Subject to any applicable limitations contained in
this Agreement, arbitration may be commenced at any time by any party giving
notice to the other party that a dispute has been referred to arbitration under
this Section. The arbitrator shall be selected by the joint agreement of the
parties hereto, but if they do not so agree within twenty (20) days after the
date of the notice referred to above, the selection shall be made pursuant to
the Rules from the panel of arbitrators maintained by the AAA. Any award of the
arbitrator shall be accompanied by a written opinion giving the reasons for the
award. The expense of the arbitration shall be borne by the parties in the
manner determined in writing by the arbitrator. This arbitration provision shall
be specifically enforceable by the parties. The determination of the arbitrator
pursuant to this Section shall be final and binding on the parties and may be
entered for enforcement before any court of competent jurisdiction.
(h) Severability. If one or more of the provisions hereof, or the
application thereof in any circumstance, is held invalid, illegal, or
unenforceable in any respect, for any reason, the validity, legality. and
enforceability of the remaining provisions hereof shall not be in any way
affected or impaired thereby, and the provisions held to be invalid, illegal, or
unenforceable shall be reformed to the minimum extent necessary, and in a manner
as consistent with the purposes thereof as is practicable, so as to render it
valid, legal, and enforceable.
(i) Entire Agreement. This Agreement is intended by the parties hereto to
be a final expression thereof and is intended to be a complete and exclusive
statement of the agreement and understanding of such parties in respect of the
subject matter contained herein related to the Registrable Securities. This
Agreement supersedes all prior agreements and understandings among the Company
and any of the Holders with respect to such subject matter.
[the remainder of this page is intentionally blank]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the day and year first above written.
KAFUS ENVIRONMENTAL INDUSTRIES LTD.
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
ENRON CAPITAL & TRADE RESOURCES CORP.
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
[Registration Rights Agreement]
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Waiver And Amendment Agreement
August 18, 1998
Enron Capital & Trade Resources Corp.
Attn: Tony A. Valentine
1400 Smith Street
Houston, Texas 77002
The Samarac Corporation, Ltd.
Attn: Kenneth Swaisland
Suite 440, 755 Burrard Street
Vancouver, B.C. V6Z 1X6
RE: KAFUS ENVIRONMENTAL INDUSTRIES, LTD.
SERIES I PREFERENCE SHARES
Gentlemen:
Reference is made to the "Securities Purchase Agreement" dated as of August
18, 1998 (the "Securities Purchase Agreement"), made by Kafus Environmental
Industries, Ltd., a British Columbia corporation (the "Company") and Enron
Capital & Trade Resources Corp., a Delaware corporation ("Enron"). This Waiver
and Amendment Agreement is entered into in connection with the execution of the
Securities Purchase Agreement, and is intended to amend certain terms under that
certain "Subscription Agreement" dated as of July 16, 1997 (the "Subscription
Agreement") pursuant to which the Company issued to Enron, among other
securities, 15,000 Series I 10% Convertible Redeemable Preference Shares (the
"Preference Shares") having the rights and preferences set forth in the Articles
of Amendment attached to the Subscription Agreement as Exhibit B (the "Articles
of Amendment"), and also to amend and reinstate certain terms under the now-
expired letter agreement dated July 16, 1997 (the "Letter Agreement") wherein
Enron agreed, with respect to 5,000 of its 15,000 Preference Shares, that it
would not exercise its right to convert such Preference Shares into shares of
the Company's common stock, without par value (the "Common Stock") prior to
January 16, 1998, without the prior written consent of the Company, and wherein
Enron further agreed that in the event the trade weighted average of the prices
for the Common Stock during any period of 30 consecutive days ending on or prior
to January 16, 1998 exceeded US$7.00 per share and the Common Stock was listed
on a national securities exchange, then the Company would have the right to
purchase from Enron any or all of the 5,000 Preference Shares for a cash
purchase price equal to US$1,200 per share, plus all accrued and unpaid
dividends. In consideration for arranging certain financing for the Company, the
Company subsequently assigned its rights of repurchase under the Letter
Agreement to The Samarac Corporation, Ltd., an
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Ontario corporation ("Samarac"). On January 16, 1998, the Letter Agreement
terminated in accordance with its terms.
In consideration for the mutual covenants and agreements entered into
between the parties under the Securities Purchase Agreement and the Transaction
Documents relating thereto (as defined therein), the Company, Samarac, and Enron
now agree as follows:
1. Waiver of Rights and Agreement. Enron voluntarily waives, until February
18, 2000, its rights pursuant to Section 3.0 of the Series I 10% Convertible
Redeemable Preference Shares in the event that the conditions set forth in
Section 3.0 thereof are met by January 16, 1999. Enron and the Company agree
that in the event that the Average Price (as defined therein) of the Common
Stock during the 30 days immediately preceding February 18, 2000, is less than
US$7.00 (adjusted appropriately for any stock split, reverse stock split, or
other recapitalization occurring after the issuance of the Preference Shares),
Enron shall have the right to require the Company to repurchase any or all of
the Preference Shares, for an amount in cash equal to US$1,000 per share, plus
all accrued and unpaid dividends through the date of repurchase, which shall be
within 60 days of the date of exercise by Enron of its right to require such
repurchase.
2. Amendment of Section 3.0. If necessary, the Company hereby undertakes to
use its best efforts to obtain the requisite vote of shareholders at the
Company's annual meeting to be held in or around March 1999 authorizing the
amendment of Section 3.0 of the Articles of Amendment (for which amendment Enron
agrees to vote all of its shares) so that Section 3.0 shall thereafter provide
as follows:
3.0 Redemption. If either (i) the Common Stock is not listed on a U.S.
national securities exchange or the NASDAQ National Market as of February
18, 2000, or (ii) the Average Price of the Common Stock during the 30 days
immediately preceding February 18, 2000, is less than US$7.00 (adjusted
appropriately for any stock split, reverse stock split, or other
recapitalization occurring after the issuance of the Preference Shares),
each Preference Shareholder thereafter shall have the right, by written
notice to the Company (a "Repurchase Notice"), to require that the Company
repurchase any or all of such Preference Shareholder's Preference Shares,
for an amount in cash equal to $1,000 per share, plus all accrued and
unpaid dividends through the date of repurchase. Any Repurchase Notice
shall be accompanied by duly endorsed certificates representing the
Preference Shares to be repurchased. The Company shall make payment in
cash of the appropriate amounts to the holder requiring repurchase, within
60 days of the date of the Repurchase Notice.
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3. Samarac Option./1/
(a) Enron agrees, with respect to 5,000 of its Preference Shares (the
"Shares"), that it shall not exercise its right to convert such Shares into
shares of Common Stock prior to February 18, 2000 (the "Determination Date"),
without the prior written consent of the Company and Samarac.
(b) In the event (i) the trade weighted average of the prices for the
Common Stock during any period of 30 consecutive days ending on or prior to the
Determination Date (a "Measurement Period") exceeds US$7.00 per share (such
price to be adjusted appropriately for any stock split, reverse stock split, or
similar recapitalization after the date hereof) and (ii) the Common Stock is
listed on a U.S. national securities exchange or the NASDAQ National Market
throughout such 30-day period, then Samarac or its assignee shall have the right
(but not the obligation) to purchase from Enron any or all of the Shares for a
cash purchase price equal to US$1,200 per Share, plus all dividends accrued
(whether or not declared) on the Shares (collectively, the "Purchase Price").
To exercise its right to purchase the Shares pursuant to this Section 3(b),
Samarac or its assignee shall, within 10 days following the last day of a
Measurement Period, in which the conditions specified in 3(b)(i) and 3(b)(ii)
above are satisfied, notify Enron of such election. Samarac or its assignee may
make only one election to purchase Shares hereunder. The consummation of any
purchase of the Shares upon an exercise of the rights hereunder (the "Closing")
shall take place at the offices of Enron, on the 5th Business Day following the
receipt by Enron of such notice from Samarac or its assignee. At the Closing,
(a) Enron shall deliver to Samarac or its assignee certificates representing the
Shares, duly endorsed in blank or accompanied by stock powers executed in blank
and (b) Samarac or its assignee shall deliver to Enron by wire transfer an
amount equal to the Purchase Price for the Shares purchased.
(c) Nothing herein shall be deemed to limit in any way the ability of Enron
to convert any Preference Shares other than the Shares or its ability to sell or
transfer the Shares to any Affiliate of Enron or, upon receipt of the prior
written consent of Samarac, which shall not be unreasonably withheld, to any
other Person who agrees in writing to be bound by the terms hereof. Samarac may
assign its rights hereunder to any Person, provided Samarac has obtained the
prior written consent of Enron to such transfer (which shall not be unreasonably
withheld). This agreement shall terminate and the Company shall have no further
rights hereunder as of the Determination Date, unless extended by the parties in
writing.
(d) Upon receipt of notice from Samarac or its assignee that it intends to
effect a purchase of Shares pursuant to Section 3(b) hereof, Enron may elect, at
its sole discretion, to accept the Purchase Price in the form of either (i)
cash, or (ii) delivery of shares of the Company's Common Stock, the number of
which shall be the quotient of the Purchase Price divided by US$7.00. No
- ------------------
/1/ The capitalized terms used herein that are not otherwise defined shall
have the meanings ascribed to them in the Subscription Agreement.
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fractional shares of Common Stock will be issued, and any fractional shares will
be rounded to the nearest whole number.
(e) Enron acknowledges that in the event that Enron elects to accept the
Purchase Price in the form of shares of the Company's Common Stock, the transfer
of such shares by Samarac to Enron will constitute a distribution of shares by a
control person of the Company and will be subject to the prospectus and
registration requirements of the Securities Act (British Columbia), unless
exempted; including an exemption that will be available if the aggregate
Purchase Price is at least Cdn$97,000, Samarac files a notice of its intention
to effect such transfer with the British Columbia Securities Commission and all
applicable stock exchanges on which the Company is trading at least seven (7)
days prior to the transfer, and certain other conditions prescribed under
British Columbia securities legislation are met. Enron also acknowleges that
such shares of the Company's Common Stock will be subject to a hold period under
British Columbia securities legislation whereby such shares may not be resold in
British Columbia or to a resident of British Columbia for a period of one year
unless the transfer is effected pursuant to a prospectus or pursuant to an
exemption from the prospectus requirements.
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5. Counterparts. This Agreement may be executed in counterparts which
together shall constitute one and the same instrument.
EXECUTED as of the date first written above.
Very truly yours,
KAFUS ENVIRONMENTAL INDUSTRIES, LTD.
By:_____________________________________
Mike McCabe, President
AGREED TO AND ACCEPTED
as of the date first above written.
ENRON CAPITAL & TRADE RESOURCES CORP.
By:______________________________________
Name:____________________________________
Title:___________________________________
THE SAMARAC CORPORATION, LTD.
By:______________________________________
Name:____________________________________
Title:___________________________________
The undersigned hereby acknowledges and reaffirms his obligation (without
expansion or enlargement thereof whatsoever) under that certain "Guaranty" dated
as of July 16, 1997, in favor of Enron, and agrees to be bound by the terms set
forth herein.
_________________________________________
Kenneth F. Swaisland
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