<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 13D/A
UNDER THE SECURITIES EXCHANGE ACT OF 1934
(Amendment No. 2)
KAFUS ENVIRONMENTAL INDUSTRIES LTD.
(Name of Issuer)
COMMON STOCK, WITHOUT PAR VALUE
(Title of Class of Securities)
482910 10 6
(CUSIP Number)
Julia Murray
General Counsel - Finance
Enron Capital & Trade Resources Corp.
1400 Smith Street
Houston, Texas 77002
(713) 853-6161
(Name, Address and Telephone Number of Person Authorized to Receive Notices and
Communications)
December 23, 1998
(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 (S)(S)240.13d-1(e), 240.13d-1(f) or 240.13d-1(g), check the
following box: [_].
NOTE: Schedules filed in paper format shall include a signed original and five
copies of the schedule, including all exhibits. See (S)240.13d-7(b) 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).
Page 1 of 16
<PAGE>
===============================================================================
SCHEDULE 13D
- -----------------------
CUSIP NO.: 482910 10 6
- -----------------------
- ------------------------------------------------------------------------------
NAME OF REPORTING PERSON
1 S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
Sundance Assets, L.P.
- ------------------------------------------------------------------------------
CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP
2 (a) [_]
(b) [X]
- ------------------------------------------------------------------------------
SEC USE ONLY
3
- ------------------------------------------------------------------------------
SOURCE OF FUNDS
4
00
- ------------------------------------------------------------------------------
CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT
TO ITEM 2(d) or 2(e) [_]
5
- ------------------------------------------------------------------------------
CITIZENSHIP OR PLACE OF ORGANIZATION
6
Delaware
- ------------------------------------------------------------------------------
SOLE VOTING POWER
7
NUMBER OF 0
SHARES -----------------------------------------------------------
BENEFICIALLY SHARED VOTING POWER
OWNED BY 8 11,025,000*
EACH -----------------------------------------------------------
REPORTING SOLE DISPOSITIVE POWER
PERSON 9
WITH 0
-----------------------------------------------------------
SHARED DISPOSITIVE POWER
10 11,025,000*
- ------------------------------------------------------------------------------
AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
11
11,025,000*
- ------------------------------------------------------------------------------
CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES
12
[_] N/A
- ------------------------------------------------------------------------------
PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
13 34.6%
- ------------------------------------------------------------------------------
TYPE OF REPORTING PERSON
14 PN
- ------------------------------------------------------------------------------
*Represents shares of Common Stock held by the Reporting Entities and initially
issuable upon conversion or exercise of the Securities described herein.
Page 2 of 16
<PAGE>
===============================================================================
SCHEDULE 13D
- -----------------------
CUSIP NO.: 482910 10 6
- -----------------------
- ------------------------------------------------------------------------------
NAME OF REPORTING PERSON
1 S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
Enron Capital & Trade Resources Corp.
- ------------------------------------------------------------------------------
CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP
2 (a) [_]
(b) [X]
- ------------------------------------------------------------------------------
SEC USE ONLY
3
- ------------------------------------------------------------------------------
SOURCE OF FUNDS
4
WC
- ------------------------------------------------------------------------------
CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT
TO ITEM 2(d) or 2(e) [_]
5
- ------------------------------------------------------------------------------
CITIZENSHIP OR PLACE OF ORGANIZATION
6
Delaware
- ------------------------------------------------------------------------------
SOLE VOTING POWER
7
NUMBER OF 0
SHARES -----------------------------------------------------------
BENEFICIALLY SHARED VOTING POWER
OWNED BY 8 13,125,000*
EACH -----------------------------------------------------------
REPORTING SOLE DISPOSITIVE POWER
PERSON 9
WITH 0
-----------------------------------------------------------
SHARED DISPOSITIVE POWER
10 13,125,000*
- ------------------------------------------------------------------------------
AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
11
13,125,000*
- ------------------------------------------------------------------------------
CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES
12
[_] N/A
- ------------------------------------------------------------------------------
PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
13 39.6%
- ------------------------------------------------------------------------------
TYPE OF REPORTING PERSON
14 CO
- ------------------------------------------------------------------------------
*Represents shares of Common Stock held by the Reporting Entities and initially
issuable upon conversion or exercise of the Securities described herein.
Page 3 of 16
<PAGE>
===============================================================================
SCHEDULE 13D
- -----------------------
CUSIP NO.: 482910 10 6
- -----------------------
- ------------------------------------------------------------------------------
NAME OF REPORTING PERSON
1 S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
Enron Corp.
- ------------------------------------------------------------------------------
CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP
2 (a) [_]
(b) [X]
- ------------------------------------------------------------------------------
SEC USE ONLY
3
- ------------------------------------------------------------------------------
SOURCE OF FUNDS
4
00
- ------------------------------------------------------------------------------
CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT
TO ITEM 2(d) or 2(e) [_]
5
- ------------------------------------------------------------------------------
CITIZENSHIP OR PLACE OF ORGANIZATION
6
Oregon
- ------------------------------------------------------------------------------
SOLE VOTING POWER
7
NUMBER OF 0
SHARES -----------------------------------------------------------
BENEFICIALLY SHARED VOTING POWER
OWNED BY 8 13,125,000*
EACH -----------------------------------------------------------
REPORTING SOLE DISPOSITIVE POWER
PERSON 9
WITH 0
-----------------------------------------------------------
SHARED DISPOSITIVE POWER
10 13,125,000*
- ------------------------------------------------------------------------------
AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
11
13,125,000*
- ------------------------------------------------------------------------------
CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES
12
[_] N/A
- ------------------------------------------------------------------------------
PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
13 39.6%
- ------------------------------------------------------------------------------
TYPE OF REPORTING PERSON
14 CO
- ------------------------------------------------------------------------------
*Represents shares of Common Stock held by the Reporting Entities and initially
issuable upon conversion or exercise of the Securities described herein.
Page 4 of 16
<PAGE>
STATEMENT ON SCHEDULE 13D
NOTE: All information herein with respect to Kafus Environmental Industries,
Ltd., a British Columbia corporation (the "Issuer"), is to the best knowledge
and belief of the Reporting Entities (as defined herein). The joint Schedule 13D
of Enron Corp. ("Enron") and Enron Capital & Trade Resources Corp. ("ECT") dated
July 27, 1997, as amended by an amendment dated September 4, 1998, is further
amended by the addition of the following:
ITEM 2. IDENTITY AND BACKGROUND, ITEM 4. PURPOSE OF TRANSACTION AND ITEM 5.
INTEREST IN SECURITIES OF THE ISSUER.
On December 31, 1998, ECT and the Issuer entered into a Note Agreement
pursuant to which ECT acquired (i) a $10.0 million Convertible Promissory Note
(Term Loan A) of the Issuer (" Term A Note") and (ii) a $10.0 million
Convertible Promissory Note (Term Loan B) of the Issuer ("Term B Note"). The
Term A Note and the Term B Note are each convertible, at the option of the
holder, into shares of Common Stock of the Issuer at any time prior to December
31, 2003, at an initial conversion price of $8.00 per share. The Term B Note
will be extinguished on December 31, 2000, if the average price (as defined) of
the Common Stock of the Issuer during the 15 days preceeding December 31, 2000
exceeds $6.50 per share and certain other conditions are met. Similarly, any
shares of Common Stock issued upon conversion of the Term Loan B will be
forfeited to the Company in the event the foregoing conditions are met. The
Issuer and ECT also amended and restated the terms of a $12.5 million
Convertible Promissory Note acquired by ECT from the Issuer in August 1998. The
$12.5 million Note is convertible, at the option of the holder, into shares of
Common Stock of the Issuer at an initial conversion price of $4.00 per share, at
any time prior to the maturity date of the Note, December 31, 2000. ECT also
agreed to the modification of the terms of
Page 5 of 16
<PAGE>
outstanding Warrants to purchase 750,000 shares of Common Stock of the Issuer,
including a deferral of the commencement of the period during which such
Warrants may be exercised. ECT also acquired 100,000 shares of Common Stock from
the Issuer on December 31, 1998, as payment of a commitment fee.
The Issuer and ECT entered into a Registration Rights Agreement dated as of
December 31, 1998, pursuant to the terms of which the Issuer agreed to file a
Registration Statement with the Securities and Exchange Commission with respect
to all shares of Common Stock held by ECT and certain of its affiliates. The
Issuer is obligated to file such a Registration Statement no later than June 30,
1999, and to use its best efforts to cause the Registration Statement to be
declared effective as soon thereafter as is practicable.
As a result of transactions effected on or as of December 23, 1998,
3,481,652 shares of Common Stock and other securities of the Issuer convertible
into or exercisable for 7,295,000 shares of Common Stock of the Issuer, in each
case that were held by ECT, were contributed to the capital of Sundance Assets,
L.P., a Delaware limited partnership ("Sundance"), as part of an internal
reorganization of the merchant asset portfolio of Enron and its subsidiaries and
affiliates. In addition, on December 31, 1998, Sundance became entitled to
receive 248,348 shares of Common Stock issuable as a dividend of the Issuer's
Series I Preference Shares, which were acquired from the Issuer by ECT in August
1997 and transferred to Sundance as of December 23, 1998. The general partner of
Sundance is Ponderosa Assets, L. P., a Delaware limited partnership
("Ponderosa"), which is wholly-owned by Enron and its subsidiaries. The general
partner of Ponderosa is Enron Ponderosa Management Holdings, Inc., a Delaware
corporation and wholly-owned
Page 6 of 16
<PAGE>
subsidiary of Enron ("EPMH"). Ponderosa as the general partner of Sundance, and
EPMH, as the general partner of Ponderosa, may each be deemed to be controlling
persons of Sundance.
This Schedule 13D/A amendment is being filed by (i) Sundance (as its
initial filing of Schedule 13D) whose principal business is the ownership and
management of a diversified portfolio of energy related investments, (ii) ECT
and (iii) Enron. Sundance, ECT and Enron are referred to herein as the
"Reporting Entities."
The address of the principal business office of Sundance, Ponderosa and
EPMH is 1400 Smith Street, Houston, Texas 77002. Schedule I attached hereto
sets forth certain additional information with respect to each director and each
executive officer of EPMH. Schedules II and III, respectively, set forth
current lists of the executive officers and directors of ECT and Enron,
respectively. The filing of this statement on Schedule 13D shall not be
construed as an admission that EPMH or any person listed on Schedules I, II or
III hereto is, for the purposes of Section 13(d) or 13(g) of the Act, the
beneficial owner of any securities covered by this statement.
None of the Reporting Entities, nor to their knowledge Ponderosa or EPMH or
any person listed on Schedules I, II or III hereto, has been, during the last
five years (a) convicted of any criminal proceeding (excluding traffic
violations or similar misdemeanors ) or (b) a party to a civil proceeding of a
judicial or administrative body of competent jurisdiction and as a result of
such proceeding was or is subject to a judgment, decree or final order enjoining
future violations of, or prohibiting or mandating activities subject to, U. S.
federal or state securities laws or finding any violations with respect to such
laws.
The securities reported by Sundance herein were acquired as a contribution
to capital upon formation of Sundance. The securities are being held by Sundance
for investment purposes. Sundance intends to review its investment
Page 7 of 16
<PAGE>
in the Issuer on a continuing 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 Sundance, 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.
Sundance owns directly (i) 3,730,000 shares of Common Stock and (ii) other
securities previously held in the name of ECT, which are convertible into or
exercisable for an aggregate of 7,295,000 shares of Common Stock, subject to
adjustment. If all such securities were converted into Common Stock, the
11,025,000 shares of Common Stock that would then be owned by Sundance would
represent approximately 34.6% of the outstanding Common Stock (based on the
number of shares of Common Stock outstanding as of December 31, 1998 as reported
by the Issuer). Enron and ECT may also be deemed to beneficially own the Common
Stock and the other securities held by Sundance. Enron disclaims beneficial
ownership of any Common Stock or such securities. This Schedule does not include
shares of Common Stock issuable upon the exercise or conversion of certain
promissory notes or other instruments, which may entitle the holder to acquire
shares of Common Stock only upon the occurrence of certain events, which will
not occur within 60 days of the filing of this Schedule.
ECT, Ponderosa, EPMH and Enron may be deemed to share voting and
dispositive power over the Common Stock and the other securities (and the shares
of Common Stock issuable upon conversion or exercise thereof) held by Sundance.
Page 8 of 16
<PAGE>
Other than the transactions described herein, none of the Reporting
Entities, nor to their knowledge Ponderosa, EPMH or any the of the persons named
in Schedule I hereto, has effected any transactions in the Common Stock during
the preceding sixty days.
Page 9 of 16
<PAGE>
ITEM 7. MATERIAL TO BE FILED AS EXHIBITS.
Exhibit 1: Note Agreement
Exhibit 2: Warrant Agreement
Exhibit 3: Forms of Term A Note and Term B Note
Exhibit 4: Registration Rights Agreement
Exhibit 5: Joint Filing Agreement
Page 10 of 16
<PAGE>
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.
Date: January 12, 1999 SUNDANCE ASSETS, L.P.
By: Ponderosa Assets, L.P.
its general partner
By: Enron Ponderosa Management
Holdings, Inc. its general partner
By /s/ Peggy B. Menchaca
----------------------------
Name: Peggy B. Menchaca
Title: Vice President and Secretary
Date: January 12, 1999 ENRON CAPITAL & TRADE RESOURCES, CORP.
By: /s/ Peggy B. Menchaca
----------------------------
Name: Peggy B. Menchaca
Title: Vice President and Secretary
Date: January 12, 1999 ENRON CORP.
By: /s/ Peggy B. Menchaca
----------------------------
Name: Peggy B. Menchaca
Title: Vice President and Secretary
Page 11 of 16
<PAGE>
SCHEDULE I
DIRECTORS AND EXECUTIVE OFFICERS
ENRON PONDEROSA MANAGEMENT HOLDINGS, INC.
Name and Business Address Citizenship Position and Occupation
- ------------------------- ----------- -----------------------
1400 Smith Street
Houston, TX 77002
James V. Derrick, Jr. U.S.A. Director
Mark A. Frevert U.S.A. Director
Kenneth D. Rice U.S.A. Director and Chairman, Chief
Executive Officer and Managing
Director
Gene E. Humphrey U.S.A. President and Managing Director
Richard B. Buy U.S.A. Managing Director
Andrew S. Fastow U.S.A. Managing Director
Mark E. Haedicke U.S.A. Managing Director and General
Counsel
Jeffrey McMahon U.S.A. Managing Director, Finance and
Treasurer
Jeremy M. Blachman U.S.A. Vice President
William W. Brown U.S.A. Vice President
Robert J. Hermann U.S.A. Vice President and General Tax
Counsel
Michael J. Kopper U.S.A. Vice President
Peggy B. Menchaca U.S.A. Vice President and Secretary
Jordan H. Mintz U.S.A. Vice President, Tax and Tax
Counsel
Kristina M. Mordaunt U.S.A. Vice President and Assistant
General Counsel
Page 12 of 16
<PAGE>
SCHEDULE II
DIRECTORS AND EXECUTIVE OFFICERS
ENRON CAPITAL & TRADE RESOURCES CORP.
Name and Business Address Citizenship Position and Occupation
- ------------------------- ----------- -----------------------
1400 Smith Street
Houston, TX 77002
Mark A. Frevert U.S.A. Director; President--ECT Europe
and Managing Director
Mark E. Haedicke U.S.A. Director; Managing Director and
General Counsel
Kevin P. Hannon U.S.A. Director; President and Chief
Operating Officer
Kenneth D. Rice U.S.A. Director; Chairman of the Board,
Chief Executive Officer and
Managing Director; Chairman and
Chief Executive Officer--ECT North
America
Gene E. Humphrey U.S.A. Vice Chairman
Robert J. Hermann U.S.A. Vice President and General Tax
Counsel
Page 13 of 16
<PAGE>
SCHEDULE III
DIRECTORS AND EXECUTIVE OFFICERS
ENRON CORP.
<TABLE>
<CAPTION>
Name and Business Address Citizenship Position and Occupation
- ------------------------- ----------- -----------------------
<S> <C> <C>
Robert A. Belfer U.S.A. Director; Chairman, President and
767 Fifth Avenue, 46th Fl. Chief Executive Officer, Belco Oil &
New York, NY 10153 Gas Corp.
Houston, TX 77002
Norman P. Blake, Jr. U.S.A. Director; Chairman, United States
USF&G Corporation Fidelity and Guaranty Company
6225 Smith Ave. LA 0300
Baltimore, MD 21209
Ronnie C. Chan U.S.A. Director; Chairman of Hang Lung
Hang Lung Development Development Group
Company Limited
28/F, Standard Chartered
Bank Building
4 Des Vouex Road Central
Hong Kong
John H. Duncan U.S.A. Director; Investments
5851 San Felipe, Suite 850
Houston, TX 77057
Joe H. Foy U.S.A. Director; Retired Senior Partner,
404 Highridge Dr. Bracewell & Patterson, L.L.P.
Kerrville, TX 78028
Wendy L. Gramm U.S.A. Director; Former Chairman, U.S.
P. O. Box 39134 Commodity Futures Trading
Washington, D.C. 20016 Commission
Ken L. Harrison U.S.A. Director; Vice Chairman of Enron
121 S. W. Salmon Street Corp.
Portland, OR 97204
</TABLE>
Page 14 of 16
<PAGE>
<TABLE>
<CAPTION>
Name and Business Address Citizenship Position and Occupation
- ------------------------- ----------- -----------------------
<S> <C> <C>
Robert K. Jaedicke U.S.A. Director; Professor (Emeritus),
Graduate School of Business Graduate School of Business
Stanford University Stanford University
Stanford, CA 94305
Charles A. LeMaistre U.S.A. Director; President (Emeritus),
13104 Travis View Loop University of Texas M.D. Anderson
Austin, TX 78732 Cancer Center
Jerome J. Meyer U.S.A. Director; Chairman and Chief
26600 S.W. Parkway Executive Officer, Tektronix, Inc.
Building 63; P. O. Box 1000
Wilsonville, OR 97070-1000
John A. Urquhart U.S.A. Director; Senior Advisor to the
John A. Urquhart Assoc. Chairman of Enron Corp.; President,
111 Beach Road John A. Urquhart Associates
Fairfield, CT 06430
John Wakeham U.K. Director; Former U.K. Secretary of
Pingleston House State for Energy and Leader of the
Old Alresford Houses of Commons and Lords
Hampshire S024 9TB
United Kingdom
Charls E. Walker U.S.A. Director; Chairman, Walker &
Walker & Walker, LLC Walker, LLC
10220 River Road, Ste. 105
Potomac, Maryland 20854
Herbert S. Winokur, Jr. U.S.A. Director; President, Winokur &
Winokur & Associates, Inc. Associates, Inc.
30 East Elm Ct.
Greenwich, CT 06830
Each of the following person's
business address is:
1400 Smith Street
Houston, TX 77002
Kenneth L. Lay U.S.A. Director; Chairman and Chief
Executive Officer
J. Clifford Baxter U.S.A. Senior Vice President, Corporate
Development
</TABLE>
Page 15 of 16
<PAGE>
<TABLE>
<CAPTION>
Name and Business Address Citizenship Position and Occupation
- ------------------------- ----------- -----------------------
<S> <C> <C>
Richard B. Buy U.S.A. Senior Vice President and Chief Risk
Officer
Richard A. Causey U.S.A. Senior Vice President, Chief
Accounting, Information and
Administrative Officer
James V. Derrick, Jr. U.S.A. Senior Vice President and General
Counsel
Andrew S. Fastow U.S.A. Senior Vice President and Chief
Financial Officer
Mark A. Frevert U.S.A. President and Chief Executive
Officer, Enron Europe, Ltd.
Stanley C. Horton U.S.A. Chairman and Chief Executive
Officer, Enron Gas Pipeline Group
Rebecca P. Mark U.S.A. Vice Chairman; Chairman, Enron
International, Inc.
Lou L. Pai U.S.A. Chairman, President ahnd Chief
Executive Officer, Enron Energy
Services, Inc.
Kenneth D. Rice U.S.A. Chairman and Chief Executive
Officer, Enron Capital & Trade
Resources Corp. - North America
Jeffrey K. Skilling U.S.A. Director; President and Chief
Operating Officer, Enron Corp.
Joseph W. Sutton U.S.A. President and Chief Executive
Officer, Enron International, Inc.
</TABLE>
Page 16 of 16
<PAGE>
Exhibit 1
[Execution Version]
Note Agreement
December 31, 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 Notes (as defined below) issued by Kafus Environmental
Industries Ltd., a British Columbia corporation (the "Company"), to Enron
Capital & Trade Resources Corp., a Delaware corporation (the "Purchaser"). This
Note Agreement (this "Agreement") is entered into to provide for the issuance of
the Notes from time to time, and is intended to supplement the terms of the
Notes. In consideration of the benefits to be provided to the Company in
connection with the issuance of the Notes, 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:
"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.
<PAGE>
"Asset Purchase Agreement" means the Asset Purchase Agreement dated as of
December 31, 1998, between Samarac and the Company agreeing to the sale and
delegation to the Purchaser of all rights and obligations of Samarac under
CanFibre Group Agreements, subject to certain conditions as specified therein.
"Average Price" with respect to Common Stock means, on any day or for any
period, as applicable, 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.
"Business Day" has the meaning specified in Section 6.3(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, whose interests have been sold and delegated to the Company, providing
for the payment of 10% of certain amounts to Samarac for management services.
"CanFibre Group Development Payment Agreement" means the Amended and
Restated Development Payment Agreement dated as of December 1, 1994, between
CanFibre Group and Samarac, whose interests have been sold and delegated to the
Company, providing for the payment of 10% of certain amounts to Samarac for
development services.
"Common Stock" means the common stock of the Company.
"Consent and Agreements" means (a) the Consent and Agreement dated as of
December 31, 1998, made by CanFibre Group in favor of the Purchaser consenting
to the security interests under the Security Agreement and terminating the
consent and Agreement dated as of August 18, 1998, between these two parties and
(b) the Consent and Agreement dated as of December 31, 1998, made
-2-
<PAGE>
by Samarac in favor of the Purchaser consenting to the security interests under
the Security Agreement.
"Credit Parties" means the Company, CanFibre Group, and, for the purposes
of Section 5.1, Samarac.
"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.
"Equity Documents" means any subscription agreements, stock designations,
warrant agreements, warrants, options, shareholder agreements, and similar
agreements regarding equity investments in the Company entered into by the
Company with or for the benefit of the Purchaser.
"Event of Default" means the occurrence of any of the events specified in
Section 5.1.
"Financial Statements" means the June 30, 1998, financial statements of the
Company.
"Loan Documents" means this Agreement, the Notes, the Pledge Agreement, the
Security Agreement, the Consent and Agreements, and each other agreement,
document, or instrument now or hereafter executed which secures, supports, or
otherwise relates to the Notes.
"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, Camden Agro-Systems Ltd., an Ontario corporation, and Hyaton
Company Inc., a Nevada corporation, and any Subsidiary of the foregoing
corporations.
"Notes" means:
(a) the $12,500,000 Convertible Promissory Note (Advancing Credit
Facility) dated as of December 31, 1998 (the "Advancing Credit Facility
Note"), made by the Company and payable to the Purchaser;
-3-
<PAGE>
(b) the $10,000,000 Convertible Promissory Note (Term Loan A) dated as
of December 31, 1998 (the "$10,000,000 Term Loan A Note"), made by the
Company and payable to the Purchaser;
(c) the $10,000,000 Convertible Promissory Note (Term Loan B) dated as
of December 31, 1998 (the "$10,000,000 Term Loan B Note"), made by the
Company and payable to the Purchaser; and
(d) the $4,250,000 Convertible Promissory Note (Term Loan C) dated as
of December 31, 1998 (the "$4,250,000 Term Loan C Note"), made by the
Company and payable to the Purchaser.
"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 December 31,
1998, made by the Company in favor of 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 December 31, 1998, between the Company and the Purchaser providing
for the registration of the Common Stock issuable upon conversion of any Notes.
"Samarac" means The Samarac Corporation Ltd., an Ontario corporation.
"Security Agreement" means the Security Agreement dated as of December 31,
1998, made by the Company in favor the Purchaser granting the Purchaser a
security interest in the CanFibre Group Agreements and the Asset Purchase
Agreement to secure the Loan Obligations.
"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
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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.
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 Unless otherwise stated, all monetary amounts expressed under the
Loan Documents and all payments due under the Loan Documents are expressed in
and shall be due in U.S. Dollars.
Section 2. The Notes.
2.1. Advancing Credit Facility Note.
(a) Effective on the date of this Agreement, the Company has amended
and restated the prior outstanding $12,500,000 Convertible Promissory Note dated
as of August 18, 1998 (the "Prior Note"), made by the Company and payable to the
Purchaser into the Advancing Credit Facility Note described herein. The
outstanding principal amount of the Prior Note is continued under the Advancing
Credit Facility Note.
(b) Subject to the terms and conditions set forth herein, the
Purchaser agrees to advance additional principal to the Company under the
Advancing Credit Facility Note from the date of this Agreement through the
Maturity Date of such Note as defined therein provided that the outstanding
principal amount of the Advancing Credit Facility Note may not exceed the face
amount of the Advancing Credit Facility Note.
(c) Each advance of principal under the Advancing Credit Facility 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 paragraph (d) below have
been
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satisfied, and be in a form reasonably satisfactory to the Purchaser. No more
than two advances may be made during any month.
(d) The Purchaser's obligation to make each advance of principal under
the Advancing Credit Facility Note (including the first and final advance) is
subject to the following conditions precedent:
(i) The Purchaser shall have received a written borrowing
request from the Company in accordance with paragraph (c) above;
(ii) 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; and
(iii) No Material Adverse Change shall have occurred.
2.2. $10,000,000 Term Loan A Note. Effective on the date of this
Agreement, the Company has issued the $10,000,000 Term Loan A Note in exchange
for the delivery to the Company of the $10,000,000 Subordinated Convertible
Promissory Note dated as of December 31, 1997, made by CanFibre Group and
payable to the Purchaser. The outstanding principal amount of the $10,000,000
Term Loan A Note upon issuance is $10,000,000.
2.3. $10,000,000 Term Loan B Note. Effective on the date of this
Agreement, the Company has issued the $10,000,000 Term Loan B Note in exchange
for the termination of the Limited Recourse Guaranty, Assignment Agreement, and
Security Agreement each dated as of August 18, 1998, and between Samarac and the
Purchaser, releasing certain interests under the CanFibre Group Agreements so
that they might be purchased by the Company under the Asset Purchase Agreement.
The outstanding principal amount of the $10,000,000 Term Loan B Note upon
issuance is $10,000,000, but such Note remains subject to termination as set
forth therein.
2.4. $4,250,000 Term Loan C Note. Effective on the date of this
Agreement, the Company has amended and restated and increased the prior
outstanding $3,000,000 Convertible Promissory Note dated as of December 31,
1997, made by the Company and payable to the Purchaser into the $4,250,000 Term
Loan C Note described herein. The outstanding principal amount of the prior note
is continued under the $4,250,000 Term Loan C Note and increased to the face
amount of the $4,250,000 Term Loan C Note in satisfaction of certain fees due to
the Purchaser in connection with the Purchaser's investments in CanFibre of
Lackawanna LLC, a subsidiary of the
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Company. Therefore, the outstanding principal amount of the $4,250,000 Term Loan
C Note upon issuance is $4,250,000.
Section 3. Representations and Warranties. Upon the execution of this
Agreement, and with each advance or deemed advance of principal under any Note,
the Company represents and warrants to the Purchaser as follows:
3.1 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.
3.2 Authorization. The Company has all requisite corporate power to
execute and deliver the Loan 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 Loan Documents to
which it is a party and the performance by the Company of its obligations
thereunder have been taken. Each Loan 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.
3.3 Capitalization.
(a) As of the date of this Agreement the authorized capital stock of
the Company consists of:
(i) 50,000,000 Preference Shares, without par value, of which:
15,000 have been designated as Series I Preference Shares and all
of which are issued and are outstanding,
5,000 have been designated as Series II Preference Shares of
which none are issued and outstanding,
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3,000 have been designated as Series III Preference Shares of
which none are issued and outstanding,
1,000 have been designated as Series IV Preference Shares of
which 1,000 are issued and outstanding,
75 have been designated as Series V Preference Shares of which
none are issued and outstanding,
75 have been designated as Series VI Preference Shares of which
none are issued and outstanding,
75 have been designated as Series VII Preference Shares of which
none are issued and outstanding, and
2,500 have been designated as Series VIII Preference Shares of
which 2,500 are issued and outstanding; and
(ii) 100,000,000 shares of Common Stock, without par value, of
which 24,609,368 shares are issued and outstanding as of December 29, 1998.
(b) 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.
(c) 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) 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 granted to the Purchaser;
(ii) the Series I, IV, and VIII Preference Shares;
(iii) outstanding warrants to purchase shares of Common Stock as
set forth in the attached Schedule 3.3(c)(iii);
(iv) outstanding options to purchase shares of Common Stock as
set forth in the attached Schedule 3.3(c)(iv);
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(v) 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.
(vi) 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;
(vii) 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;
(viii) 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;
(ix) 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;
(x) 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;
(xi) 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.;
(xii) The Company has issued a $3,000,000 Promissory Note (the
"$3,000,000 HSB Note") payable to HSB Engineering Finance Corporation
("HSB"), which becomes payable upon deemed funding in connection with
draws under a $3,000,000 letter of credit issued at the request of CanFibre
of Lackawanna LLC. The $3,000,000 HSB Note is secured by a pledge of
1,250,000 shares of Common Stock of the Company pledged by Samarac. In
addition, the Company is issuing 75,000 shares of Common Stock to HSB in
connection with the $3,000,000 HSB Note;
(xiii) Dieffenbacher Panel Production Systems GmbH has an option
to acquire preference equity in CanFibre Group at an issue value of
$750,000 which becomes
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exercisable upon deemed funding in connection with draws under a $750,000
letter of credit issued at the request of CanFibre of Lackawanna LLC and
may be converted to common stock of CanFibre Group three years after the
option becomes exercisable;
(xiv) Stone & Webster Development Corp. has an option to acquire
preference equity of CanFibre of Lackawanna LLC which becomes exercisable
upon deemed funding in connection with draws under a $3,500,000 letter of
credit issued at the request of CanFibre of Lackawanna LLC and may be
converted to common stock of CanFibre Group three years after the option
becomes exercisable and may be converted to common stock of CanFibre of
Lackwanna LLC three years after the option becomes exercisable; and
(xv) Gerhard Spengler and R&S Stanztechnik GmbH are being issued
25,000 shares of Common Stock for services rendered
3.4 Subsidiaries. As of the date of this Agreement, Schedule 3.4 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.
3.5 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 Loan Documents.
3.6 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
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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 Notes, have not made, at any time, any oral communication in
connection with the issuing of the Notes 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 June 30, 1998, 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 by the SEC under the Exchange Act and, therefore, affirms
that it is a foreign issuer not meeting the following conditions: (1) more than
50 percent of the outstanding voting securities of the Company are held of
record either directly or indirectly through voting trust certificates or
depositary receipts by residents of the United States; and (2) any of the
following: (i) the majority of the executive officers or directors are United
States citizens or residents, (ii) more than 50 percent of the Company is
administered principally in the United States, or (iii) the business of the
Company is administered principally in the United States. 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.
3.7 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.
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3.8 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 Notes 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.
3.9 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.
3.10 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 Loan 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.
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3.11 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.
3.12 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.
3.13 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 Loan Documents, except for filings pursuant
to Regulation D promulgated under the Act, Blue Sky filings, securities filing
required by 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 Notes will require listing
approval of the American Stock Exchange prior to being publicly traded.
3.14 Private Offering. The offer, issuance, and sale of the Notes and the
shares of Common Stock issuable upon conversion of the Notes 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.
3.15 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 Notes, and the shares of Common
Stock issuable upon conversion of the Notes.
3.16 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)
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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.
3.17 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 Loan 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 3.17 regarding issuance shares of Common Stock upon
conversion of any Note. In 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 4. Covenants. So long as the Purchaser retains any commitments
hereunder or any Loan Obligations remain outstanding, the Company covenants as
follows:
4.1 Use of Proceeds. The Company shall use the proceeds of the Notes
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.
4.2 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.
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4.3 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 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 4.3(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; (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; and (viii)
Debt in the form of the $3,000,000 HSB Note.
(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
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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).
4.4 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 4.3(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 4.3(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 4.3(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
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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.
(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.
4.5 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.
4.6 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.
4.7 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.
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$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 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 or 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.
4.8 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;
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(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 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.
4.9 Dividends. Without the prior written approval of the Purchaser, 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.
4.10 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.
4.11 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.
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4.12 Transactions with Affiliates. Without the prior written consent of
the Purchaser, 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 the Company or such Subsidiary as the monetary
or business consideration which such Person would obtain in a comparable arm's
length transaction.
4.13 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.
4.14 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 Notes. 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 Notes 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.
4.15 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);
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(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.
4.16 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 Notes 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.
4.17 HSR Act. The Company agrees that, in the event that conversion of the
Notes 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.
4.18 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 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
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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 4.18 shall terminate on the date the
Purchaser and its Affiliates beneficially own less than 10% of the outstanding
Common Stock.
Section 5. Default and Remedies.
5.1 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 Equity 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 Equity Document or any covenant in
any Loan Document or Equity 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 Equity 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 Equity 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
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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;
(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) other than as a result
of the voting of the Purchaser, 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.
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5.2 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 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
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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 6. Miscellaneous.
6.1 Expenses. The Company shall pay directly or reimburse the Purchaser
for all reasonable expenses of the Purchaser, including reasonable charges and
disbursements of legal counsel for the Purchaser, in connection with the
amendment, modification, waiver, or interpretation of the Loan Documents, and
the preservation or enforcement of any rights of the Purchaser under the Loan
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.
6.2 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 6.2, 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 Loan Documents and (b) any
litigation or proceeding relating to the Loan 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.
6.3 Certain Provisions Regarding Payments.
(a) Unless otherwise specified, the Company shall make all payments
required under the Loan 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
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Purchaser in writing in immediately available funds. Whenever any payment to be
made under the Loan 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 Loan Documents, such obligation shall be payable upon
demand.
(b) Any and all payments by the Company under the Loan Documents 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 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 Loan Documents.
(d) If any sum due from the Company under the Loan 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.
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6.4 Waiver, Amendment, and Survival. 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
Company in the Loan Documents shall survive the execution of this Agreement and
any other document or agreement.
6.5 Successors and Assigns. 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.
6.6 Notice. 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.
Kafus Environmental Industries Ltd.
Suite 440, 755 Burrard Street
Vancover, BC Canada V62 1X6
Attn: Mr. Ken Swaisland
Telephone: 604-684-0663
Telecopier: 604-685-2426
and
Kafus Environmental Industries Ltd.
270 Bridge Street
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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
6.7 Choice of Law. 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 British Columbia and the applicable laws of Canada,
without regard to conflicts of law principles which would select another law.
6.8 Arbitration. 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 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.
6.9 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 Loan Documents to the
contrary, it
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<PAGE>
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 Loan 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 Loan Documents.
6.10 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>
6.11 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:
------------------------
[Note Agreement]
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<PAGE>
Exhibit 2
[Execution Version]
Warrant Agreement
December 31, 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 Securities Purchase Agreement dated as of August 18,
1998 (the "Securities Purchase Agreement"), between Kafus Environmental
Industries Ltd., a British Columbia corporation (the "Company"), and 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 (the "750,000 Share Warrant"), 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 (the "250,000 Share Warrant"), made by the Company and issued to
the Purchaser (as amended herein), (c) the Warrant for 500,000 Shares of Common
Stock dated as of August 18, 1998 (the "500,000 Share Warrant"), made by the
Company and issued to the Purchaser (as amended herein), and (d) the Warrant for
45,000 Shares of Common Stock dated as of August 18, 1998 (the "45,000 Share
Warrant"), made by the Company and issued to the Purchaser (such Warrants in (a)
through (d) being the "Warrants"). This Warrant Agreement (this "Agreement") is
entered into in connection with the execution of the Note Agreement dated as of
December 31, 1998 (the "Note Agreement"), between the Company and the Purchaser
the terms of which have superceded the terms of the Securities Purchase
Agreement with respect to certain Notes thereunder. This Agreement supercedes
the Securities Purchase Agreement with respect to the Warrants. In
consideration of the termination of the Securities Purchase Agreement, 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:
<PAGE>
"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.
"Average Price" with respect to Common Stock means, on any day or for any
period, as applicable, 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.
"Business Day" has the meaning specified in Section 7.2(a).
"CanFibre Group" means The CanFibre Group Ltd., an Ontario corporation.
"Financial Statements" means the June 30, 1998, financial statements of the
Company.
"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.
"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.
"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 exercise of any of the
Warrants.
"Samarac" means The Samarac Corporation Ltd., an Ontario corporation.
"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
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<PAGE>
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 this Agreement, the Warrants, and the
Registration Rights Agreement.
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 Unless otherwise stated, all monetary amounts expressed under the
Loan Documents and all payments due under the Warrant Documents are expressed in
and shall be due in U.S. Dollars.
Section 2. The Warrants; Certain Amendments.
2.1 In connection with the Securities Purchase Agreement, the Company
issued and sold to the Purchaser and the Purchaser purchased the Warrants, and
the Warrants remain issued and outstanding.
2.2 The 250,000 Share Warrant is amended by replacing the first two
paragraphs thereof immediately preceding Section 1 thereof in their entirety
with the following:
FOR VALUE RECEIVED, KAFUS ENVIRONMENTAL INDUSTRIES LTD., 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 December 31, 2000, 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 was 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
-3-
<PAGE>
"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 both (1) 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 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 cash
proceeds to the Company and is otherwise reasonably acceptable to the
Holder and (2) the $4,250,000 Convertible Promissory Note (Term Loan C)
dated as of December 31, 1998, made by the Company and payable to the
Holder has been prepaid or repaid in full in cash and not by conversion or
other agreement.
2.3 The 500,000 Share Warrant is amended by replacing the first two
paragraphs thereof immediately preceding Section 1 thereof in their entirety
with the following:
FOR VALUE RECEIVED, KAFUS ENVIRONMENTAL INDUSTRIES LTD., 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 December 31, 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 was 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 $12,500,000 Convertible Promissory Note (Advancing Credit
Facility) dated as of December 31, 1998 (as modified from time to time, the
"$12,500,000 Advancing Credit Facility Note"), made by the Company and
payable to Enron Capital & Trade Resources Corp. and all accrued but unpaid
interest thereon is prepaid or repaid in full in cash, and not by
conversion or other agreement, (b) such payment occurs at a time when no
Event of Default (as such term is defined under the Note Agreement
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<PAGE>
dated as of December 31, 1998, between the Company and the Holder ) has
occurred, and (c) all commitments of the Holder to lend which are related
to the $12,500,000 Advancing Credit Facility Note have been terminated.
Section 3. Conditions Precedent. The conditions precedent to the issuance,
sale, and purchase of the Warrants were satisfied or waived.
Section 4. Representations and Warranties. The Company represents and
warrants to the Purchaser that each of the representations and warranties set
forth in the Securities Purchase Agreement were accurate and complete when made
thereunder.
Section 5. Covenants. So long as the Purchaser retains any Warrants, the
Company covenants as follows:
5.1 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.
5.2 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 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 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.
5.3 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
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<PAGE>
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.
5.4 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 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.
5.5 HSR Act. The Company agrees that, in the event that 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.
5.6 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 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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<PAGE>
Section 6. Default and Remedies. In the event the Company shall breach any
of its representations, warranties, or covenants hereunder, (a) 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 Warrant Documents, irrespective of
whether or not the Purchaser shall have made any demand under the Warrant
Documents and although such obligations may be contingent and unmatured and (b)
the Purchaser may exercise all of its rights under the Warrant Documents and all
other rights at law or in equity. No right, power, or remedy conferred to the
Purchaser in the Warrant Documents or in any documents securing or supporting
the Warrant 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 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 Warrant Documents and (b) any
litigation or proceeding relating to the Warrant 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-
<PAGE>
7.2 Certain Provisions Regarding Payments.
(a) Unless otherwise specified, the Company shall make all payments
required under the Warrant 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 Warrant
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
Warrant Documents, such obligation shall be payable upon demand.
(b) Any and all payments by the Company under the Warrant Documents
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 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 Warrant Documents.
(d) If any sum due from the Company under the Warrant 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.
7.3 Waiver, Amendment, and Survival. Performance under this Agreement
may be waived only in a writing signed by the party against whom enforcement is
sought, and such a waiver
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<PAGE>
shall be effective only for the purposes and only to the extent stated in that
writing. The terms of this Agreement 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 Company in the Warrant
Documents shall survive the execution of this Agreement and any other document
or agreement.
7.4 Successors and Assigns.
(a) This Agreement shall bind and inure to the benefit of the
Company and its successors and assigns and the Purchaser and its respective
successors and assigns including successors to any Warrants. The Company may not
assign its rights or delegate its duties under the Warrant Documents. The
Purchaser may assign its rights and delegate its duties to successors and
assigns of the Warrants.
7.5 Notice. Unless otherwise specified, all notices and other
communications provided for between the Company and the Purchaser under 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.
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
7.6 Choice of Law. This Agreement shall be governed by and construed and
enforced in accordance with the laws of British Columbia and the applicable laws
of the Canada, without regard to conflicts of law principles which would select
another law.
7.7 Arbitration.
(a) Disputes arising under the Warrant 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
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<PAGE>
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 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.
7.8 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>
7.9 No Further Agreements. THIS WRITTEN AGREEMENT AND THE OTHER WARRANT
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:
------------------------
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<PAGE>
Exhibit 3
[Execution Version]
CONVERTIBLE PROMISSORY NOTE
(Term Loan A)
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. $10,000,000 Vancouver, British Columbia December 31, 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 TEN MILLION AND NO/100 UNITED STATES DOLLARS (U.S. $10,000,000)
in accordance with the terms of this Convertible Promissory Note (this "Note").
1.. Principal.
The Borrower may prepay the outstanding principal amount of this Note upon
ten (10) days advanced written notice to the Lender, provided that prepayments
shall be applied first to accrued but unpaid interest and then to the
outstanding principal amount of this Note. The Lender may convert any part of
this Note in accordance with Section 5 after receipt of the notice of
prepayment.
The Borrower shall pay to the Lender the outstanding principal amount of
this Note on December 31, 2003 (the "Maturity Date").
<PAGE>
2.. Interest.
The outstanding principal amount of this Note shall bear interest at 10.20%
per annum compounded annually, 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. For purposes of this
Note, including Section 5, compounding interest shall not be deemed to increase
the principal amount of this Note, but merely as a method of calculating the
rate of interest charged.
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.
Unless otherwise stated, all monetary amounts expressed under this Note
and all payments due under this Note are expressed in and shall be due in U.S.
Dollars. 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 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 Houston, Texas, and
Vancouver, British Columbia, 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
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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.
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 Note Agreement dated as of
December 31, 1998 (as modified from time to time, the "Note Agreement"), between
the Borrower and the Lender 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
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<PAGE>
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 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 non usurious 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 con tracts 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.
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<PAGE>
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.
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:
"Average Price" with respect to Common Stock means, on any day or for any
period, as applicable, 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.
"Common Stock" means the Borrower's Common Stock, no par value ("Common
Stock").
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<PAGE>
"Conversion Price" means the Interest Conversion Price or the Principal
Conversion Price, as applicable to the obligation being converted.
"Interest Conversion Price" means, as of any date of determination, the
lesser of (a) the Principal Conversion Price and (b) the Average Price of the
Common Stock for the 30 days preceding the date of determination.
"Principal Conversion Price" means U.S. $8.00, subject to adjustment as
provided for in this Section 5.
5.2 Principal Conversion. The Lender may convert any portion of the
outstanding principal amount of this Note into that number of fully paid and
non-assessable shares of Common Stock obtained by dividing the portion of the
outstanding principal amount of this Note being converted by the Principal
Conversion Price. The outstanding principal amount of this Note may be
converted by an executed notice of conversion provided by the Lender to the
Borrower. Upon request of the Borrower in connection with any conversion of the
principal of this Note, the Lender shall surrender this Note to the Borrower at
its office in Dedham, Massachusetts. If less than all of the outstanding
principal amount of this Note is converted, the Borrower shall issue to the
Lender a restatement of this Note for the remaining principal amount of this
Note. The Lender shall have no obligation to convert this Note.
5.3 Interest Conversion. The Lender may convert any portion of the
accrued but unpaid interest on this Note, and upon any conversion of all or a
portion of the outstanding principal amount of this Note pursuant to Section
5.2, the Lender shall convert the accrued but unpaid interest attributable to
such principal being converted, into that number of fully paid and non-
assessable shares of Common Stock obtained by dividing the portion of the
accrued but unpaid interest on this Note being converted by the Interest
Conversion Price. Accrued but unpaid interest on this Note may be converted by
an executed notice of conversion provided by the Lender to the Borrower. Except
as expressed above in connection with any conversion of principal, the Lender
shall have no obligation to convert any accrued but unpaid interest on this
Note.
5.4 Issuance of Common Stock on Conversion. As promptly as practicable
after 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 due upon such conversion 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 the applicable notice
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<PAGE>
of conversion was received by the Borrower so that the rights of the Lender with
respect to the principal or interest being converted shall cease at such time
and, subject to the following provisions of this Section 5.4, 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 applicable Conversion
Price in effect at such time; provided, however, that no conversion 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 conversion 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 applicable Conversion Price in effect on the date of 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.
Instead of any fractional shares of Common Stock which would otherwise be
issuable upon conversion, 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.
5.5 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:
(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
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<PAGE>
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 5.5. 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 Principal 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.
(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 general distribution of, Common Stock, the Principal 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 Principal 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
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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 Principal 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 Principal 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 Principal 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 Principal Conversion Price by a
fraction the numerator of which shall be the Principal Conversion Price
less the fair market 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
Principal Conversion Price.
(vi) No adjustment of the Principal 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
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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.
5.6 Certain Notices and Calculations. Whenever the Principal Conversion
Price is adjusted as provided in Section 5.5, the Borrower shall promptly
deliver to the holder hereof a certificate signed by two officers of the
Borrower setting forth the Principal Conversion Price after such adjustment and
setting forth a brief statement of the facts requiring such adjustment and the
computation thereof.
5.7 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.
5.8 Certain Covenants. Before taking any action which would cause an
adjustment reducing the Principal 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.
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5.9 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.
6.. Miscellaneous.
This Note shall be governed by the laws of British Columbia and the
applicable laws of Canada without regard to conflicts of law principles which
would select another law.
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EXECUTED as of the date first above written.
KAFUS ENVIRONMENTAL INDUSTRIES LTD.
By:
---------------------------------
Name:
---------------------------------
Title:
---------------------------------
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Exhibit 3
[Execution Version]
CONVERTIBLE PROMISSORY NOTE
(Term Loan B)
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. $10,000,000 Vancouver, British Columbia December 31, 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 TEN MILLION AND NO/100 UNITED STATES DOLLARS (U.S. $10,000,000)
in accordance with the terms of this Convertible Promissory Note (this "Note").
1.. Principal.
The Borrower may prepay the outstanding principal amount of this Note upon
ten (10) days advanced written notice to the Lender, provided that prepayments
shall be applied first to accrued but unpaid interest and then to the
outstanding principal amount of this Note. The Lender may convert any part of
this Note in accordance with Section 5 after receipt of the notice of
prepayment.
The Borrower shall pay to the Lender the outstanding principal amount of
this Note on December 31, 2003 (the "Maturity Date").
<PAGE>
2.. Interest.
The outstanding principal amount of this Note shall bear interest at 10.20%
per annum compounded annually, 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. For purposes of this
Note, including Section 5, compounding interest shall not be deemed to increase
the principal amount of this Note, but merely as a method of calculating the
rate of interest charged.
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.
Unless otherwise stated, all monetary amounts expressed under this Note
and all payments due under this Note are expressed in and shall be due in U.S.
Dollars. 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 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 Houston, Texas, and
Vancouver, British Columbia, 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
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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.
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 Note Agreement dated as of
December 31, 1998 (as modified from time to time, the "Note Agreement"), between
the Borrower and the Lender 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
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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 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 non usurious 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 con tracts 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.
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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.
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:
"Average Price" with respect to Common Stock means, on any day or for any
period, as applicable, 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.
"Common Stock" means the Borrower's Common Stock, no par value ("Common
Stock").
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<PAGE>
"Conversion Price" means the Interest Conversion Price or the Principal
Conversion Price, as applicable to the obligation being converted.
"Interest Conversion Price" means, as of any date of determination, the
lesser of (a) the Principal Conversion Price and (b) the Average Price of the
Common Stock for the 30 days preceding the date of determination.
"Principal Conversion Price" means U.S. $8.00, subject to adjustment as
provided for in this Section 5.
5.2 Principal Conversion. Beginning on December 31, 2000, the Lender may
convert any portion of the outstanding principal amount of this Note into that
number of fully paid and non-assessable shares of Common Stock obtained by
dividing the portion of the outstanding principal amount of this Note being
converted by the Principal Conversion Price. The outstanding principal amount of
this Note may be converted by an executed notice of conversion provided by the
Lender to the Borrower. Upon request of the Borrower in connection with any
conversion of the principal of this Note, the Lender shall surrender this Note
to the Borrower at its office in Dedham, Massachusetts. If less than all of the
outstanding principal amount of this Note is converted, the Borrower shall issue
to the Lender a restatement of this Note for the remaining principal amount of
this Note. The Lender shall have no obligation to convert this Note.
5.3 Interest Conversion. Beginning on December 31, 2000, the Lender may
convert any portion of the accrued but unpaid interest on this Note, and upon
any conversion of all or a portion of the outstanding principal amount of this
Note pursuant to Section 5.2, the Lender shall convert the accrued but unpaid
interest attributable to such principal being converted, into that number of
fully paid and non-assessable shares of Common Stock obtained by dividing the
portion of the accrued but unpaid interest on this Note being converted by the
Interest Conversion Price. Accrued but unpaid interest on this Note may be
converted by an executed notice of conversion provided by the Lender to the
Borrower. Except as expressed above in connection with any conversion of
principal, the Lender shall have no obligation to convert any accrued but unpaid
interest on this Note.
5.4 Issuance of Common Stock on Conversion. As promptly as practicable
after 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 due upon such conversion in accordance with the
provisions of this Section 5. Such conversion shall
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be deemed to have been made at the close of business on the date that the
applicable notice of conversion was received by the Borrower so that the rights
of the Lender with respect to the principal or interest being converted shall
cease at such time and, subject to the following provisions of this Section 5.4,
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 applicable
Conversion Price in effect at such time; provided, however, that no conversion
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 conversion 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 applicable Conversion Price in effect on the
date of 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.
Instead of any fractional shares of Common Stock which would otherwise be
issuable upon conversion, 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.
5.5 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:
(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
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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 5.5. 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 Principal 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.
(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 general distribution of, Common Stock, the Principal 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 Principal 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
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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 Principal 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 Principal 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 Principal 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 Principal Conversion Price by a
fraction the numerator of which shall be the Principal Conversion Price
less the fair market 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
Principal Conversion Price.
(vi) No adjustment of the Principal 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
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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.
5.6 Certain Notices and Calculations. Whenever the Principal Conversion
Price is adjusted as provided in Section 5.5, the Borrower shall promptly
deliver to the holder hereof a certificate signed by two officers of the
Borrower setting forth the Principal Conversion Price after such adjustment and
setting forth a brief statement of the facts requiring such adjustment and the
computation thereof.
5.7 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.
5.8 Certain Covenants. Before taking any action which would cause an
adjustment reducing the Principal 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.
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5.9 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.
6.. Termination of Note. The obligations of the Borrower to make the payments
of principal and interest under this Note will terminate, and the Lender shall
surrender this Note and any Common Stock that the Lender may have received as a
result of any conversion of the outstanding principal amount of or accrued but
unpaid interest on this Note pursuant to Section 5, if on December 31, 2000 (the
"Termination Test Date"): (a) the Borrower has closed and funded three or more
Projects (as defined below) on or before the Termination Test Date and (b) the
weighted average trading price of the Borrower's Common Stock for the 15 trading
days immediately preceding the Termination Test Date, is greater than U.S.
$6.50. As used in this paragraph, any of the following shall constitute a
"Project": (i)
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any of the following projects once a project financing having total project
construction and start-up costs of U.S. $50,000,000 or greater for such project
has closed: (A) the CanFibre Lackawanna MDF Project, (B) the Kenaf Newsprint
Project (South Texas), (C) the CanFibre Europe MDF Project, or (D) any two Bio-
Composite projects (which together count as one Project) or (ii) any other
project which has obtained project financing and in which the Borrower or any of
its affiliates owns a 50% or greater equity interest and which has total project
construction and start-up costs of U.S. $50,000,000 or greater. Projects exclude
the CanFibre Riverside MDF Project and the Fortra Cement Fiberboard Project.
These conditions are absolute, and the Lender shall have no obligation to
finance, vote for, or otherwise support the completion of any Project, to take
any action or withhold from taking any action with respect to its common stock
in the Company or any indebtedness owed by the Company to the Lender.
7.. Miscellaneous.
The Lender will not assign or otherwise dispose of this Note or any Common
Stock that the Lender may have received as a result of any conversion of the
outstanding principal amount of or accrued but unpaid interest on this Note
pursuant to Section 5 prior to the Termination Test Date without the prior
written consent of the Borrower.
This Note shall be governed by the laws of British Columbia and the
applicable laws of Canada 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:
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Title:
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Exhibit 4
[Execution Version]
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and entered
into as of December 31, 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 Note Agreement
dated as of December 31, 1998 (as modified from time to time, the "Note
Agreement"), governing certain Notes as defined therein (the "Notes").
WHEREAS, the Company and the Purchaser are parties to a Warrant Agreement
dated as of December 31, 1998 (as modified from time to time, the "Warrant
Agreement"), governing certain Warrants as defined therein (the "Warrants").
WHEREAS, the Company has issued to ECT Securities Limited Partnership, an
Affiliate of the Purchaser, 100,000 shares of Common Stock of the Company in
connection with the closing of the CanFibre Lackawanna project finance (the
"CanFibre Lackawanna Shares").
WHEREAS, the Purchaser desires that the Company register the Common Stock
issuable upon conversion of the Notes (the "Conversion Shares"), the Common
Stock issuable upon the exercise of the Warrants (the "Warrant Shares"), and the
CanFibre Lackawanna 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 Note Agreement and certain
agreements related to the CanFibre Lackawanna project finance.
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:
<PAGE>
(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 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, ECT Securities Limited Partnership,
and any other Person who has become a Permitted Transferee pursuant to Section
9(c).
(e) "Registrable Securities" means (a) the Conversion Shares, (b) the
Warrant Shares, (c) the CanFibre Lackawanna Shares, (d) all other shares of
Common Stock owned by the Purchaser and its Affiliates as of the date of filing
of the Registration Statement (or which they shall have the right to purchase or
acquire as of such date), and (e) 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 (d) 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.
(g) "Registration Termination Date" means, the first date on which all
Conversion Shares, Warrant Shares, and CanFibre Lackawanna Shares (and any
Distribution Securities with respect thereto) cease to be Registrable
Securities.
(h) "Securities Act" means the Securities Act of 1933, as amended.
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(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 Note Agreement or in the Warrant
Agreement in each case if not defined by the prior agreement listed.
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, (ii) the Warrant Shares, and (iii) the
CanFibre Lackawanna 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, at the election
of the Holder: (1) for each month (or portion thereof) such Registration
Statement is not so effective, the Company shall pay to the Holder, as
liquidated damages and not as a penalty, an amount equal to the product of (x)
the number of shares of Common Stock that are or could become, if all Notes were
converted and Warrants were exercised, Registerable Securities multiplied by the
closing price of the Common Stock on the first day of the month as to which
liquidated damages are payable and (y) outstanding principal amount of the Notes
eligible for conversion to Common Stock and the Applicable Rate or (2) the
Holder may seek remedies at law or in equity. In either case, the Company shall
pay any 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 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:
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(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;
(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
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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 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
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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
(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.
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<PAGE>
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 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 Note Agreement and the Warrant 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, 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.
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<PAGE>
(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 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.
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<PAGE>
(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
(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.
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<PAGE>
(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 Note Agreement or if to another Holder,
to the 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 any 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
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<PAGE>
last month of such period 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.
(j) Enforcement by Purchaser. ECT Securities Limited Partnership is an
intended beneficiary of this Agreement with respect to the CanFibre Lackawanna
Shares and any Registrable Securities related thereto, and the rights of ECT
Securities Limited Partnership under this Agreement may be enforced by ECT
Securities Limited Partnership or by the Purchaser acting on behalf of ECT
Securities Limited Partnership.
[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:________________________
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<PAGE>
Exhibit 5
JOINT FILING AGREEMENT
The undersigned each agree that (i) the Statement on Schedule 13D relating
to the Common Stock, without par value, of Kafus Environmental Industries, Ltd.
is adopted and filed on behalf on each of them, (ii) all future amendments to
such Statement on Schedule 13D will, unless written notice to the contrary is
delivered as described below, be jointly filed on behalf of each of them, and
(iii) the provisions of Rule 13d-1(k)(1) under the Securities Exchange Act of
1934, as amended, apply to each of them. This agreement may be terminated with
respect to the obligation to jointly file future amendments to such Statement on
Schedule 13D as to any of the undersigned upon such person giving written notice
thereof to each of the other persons signatory hereto, at the principal office
thereof.
EXECUTED as of January 12, 1999.
SUNDANCE ASSETS, L.P.
By: Ponderosa Assets, L.P.
its general partner
By: Enron Ponderosa Management Holdings, Inc.
its general partner
By: /s/ Peggy B. Menchaca
______________________________
Name: Peggy B. Menchaca
Title: Vice President and Secretary
ENRON CAPITAL & TRADE RESOURCES CORP.
By: /s/ Peggy B. Menchaca
_____________________________________
Name: Peggy B. Menchaca
Title: Vice President and Secretary
ENRON CORP.
By: /s/ Peggy B. Menchaca
_____________________________________
Name: Peggy B. Menchaca
Title: Vice President and Secretary
