<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 13D/A
UNDER THE SECURITIES EXCHANGE ACT OF 1934
(Amendment No. 3)
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)
March 11, 1999
(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 (SS) 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 (the "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 18
<PAGE>
SCHEDULE 13D
- ------------------------
CUSIP NO.: 482910 10 6
- ------------------------
- --------------------------------------------------------------------------------
1 NAME OF REPORTING PERSON
S.S. OR IRS IDENTIFICATION NO. OF ABOVE PERSON
Sundance Assets, L.P.
- --------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) [_]
(b) [X]
- --------------------------------------------------------------------------------
3 SEC USE ONLY
- --------------------------------------------------------------------------------
4 SOURCE OF FUNDS
00
- --------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO
ITEM 2(d) or 2(e) [_]
- --------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
Delaware
- --------------------------------------------------------------------------------
7 SOLE VOTING POWER
NUMBER OF
SHARES 0
BENEFICIALLY ----------------------------------------------------------------
OWNED BY 8 SHARED VOTING POWER
EACH
REPORTING 9,775,000
PERSON ----------------------------------------------------------------
WITH 9 SOLE DISPOSITIVE POWER
0
----------------------------------------------------------------
10 SHARED DISPOSITIVE POWER
9,775,000
- --------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
9,775,000
- --------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES
[_]
N/A
- --------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
27.8%
- --------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON
PN
- --------------------------------------------------------------------------------
Page 2 of 18
<PAGE>
SCHEDULE 13D
- ------------------------
CUSIP NO.: 482910 10 6
- ------------------------
- --------------------------------------------------------------------------------
1 NAME OF REPORTING PERSON
S.S. OR IRS IDENTIFICATION NO. OF ABOVE PERSON
Enron Capital & Trade Resources Corp.
- --------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) [_]
(b) [X]
- --------------------------------------------------------------------------------
3 SEC USE ONLY
- --------------------------------------------------------------------------------
4 SOURCE OF FUNDS
WC
- --------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO
ITEM 2(d) or 2(e) [_]
- --------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
Delaware
- --------------------------------------------------------------------------------
7 SOLE VOTING POWER
NUMBER OF
SHARES 0
BENEFICIALLY ----------------------------------------------------------------
OWNED BY 8 SHARED VOTING POWER
EACH
REPORTING 11,262,000
PERSON ----------------------------------------------------------------
WITH 9 SOLE DISPOSITIVE POWER
0
----------------------------------------------------------------
10 SHARED DISPOSITIVE POWER
11,262,000
- --------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
11,262,000
- --------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES
[_]
N/A
- --------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
30.7%
- --------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON
CO
- --------------------------------------------------------------------------------
Page 3 of 18
<PAGE>
SCHEDULE 13D
- ------------------------
CUSIP NO.: 482910 10 6
- ------------------------
- --------------------------------------------------------------------------------
1 NAME OF REPORTING PERSON
S.S. OR IRS IDENTIFICATION NO. OF ABOVE PERSON
Enron Corp.
- --------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) [_]
(b) [X]
- --------------------------------------------------------------------------------
3 SEC USE ONLY
- --------------------------------------------------------------------------------
4 SOURCE OF FUNDS
00
- --------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO
ITEM 2(d) or 2(e) [_]
- --------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
Oregon
- --------------------------------------------------------------------------------
7 SOLE VOTING POWER
NUMBER OF
SHARES 0
BENEFICIALLY ----------------------------------------------------------------
OWNED BY 8 SHARED VOTING POWER
EACH
REPORTING 11,262,000
PERSON ----------------------------------------------------------------
WITH 9 SOLE DISPOSITIVE POWER
0
----------------------------------------------------------------
10 SHARED DISPOSITIVE POWER
11,262,000
- --------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
11,512,000
- --------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES
[_]
N/A
- --------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
30.7%
- --------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON
CO
- --------------------------------------------------------------------------------
Page 4 of 18
<PAGE>
STATEMENT ON SCHEDULE 13D
NOTE: This Schedule 13D/A amendment is being filed by (i) Sundance Assets,
L.P. ("Sundance"), (ii) Enron Capital & Trade Resources Corp. ("ECT") and (iii)
Enron Corp. ("Enron"), which are collectively referred to as the "Reporting
Entities." All information with respect to Kafus Environmental Industries,
Ltd., a British Columbia corporation (the "Issuer"), is presented to the best
knowledge and belief of the Reporting Entities. The joint Schedule 13D of Enron
and ECT dated July 27, 1997 (the "July filing"), as amended by a Schedule 13D/A
dated September 4, 1998 (the "September filing"), and as further amended by a
Schedule 13D/A dated January 12, 1999 (the "January filing"), is further amended
by the following:
ITEM 3. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION; ITEM 4. PURPOSE OF
TRANSACTION AND ITEM 5. INTEREST IN SECURITIES OF THE ISSUER.
ECT Merchant Investments Corp. ("ECT Merchant"), a Delaware corporation, is
a wholly owned subsidiary of ECT and is engaged primarily in the business of
owning and managing a diversified portfolio of energy related investments. On
March 1, 1999, ECT transferred to ECT Merchant 100,000 shares of Common Stock of
the Issuer as a capital contribution. On March, 11, 1999, ECT Merchant purchased
warrants from the Issuer in consideration of advances it made to the Issuer
under the terms of a new credit facility which were funded from ECT Merchant's
working capital. As a result of this transaction, ECT Merchant acquired
beneficial ownership of 637,000 shares of Common Stock that are issuable
pursuant to two of the three warrants purchased.
On March 11, 1999, the Issuer also issued a convertible note and amended
certain existing instruments and agreements. These changes and new arrangements
are reflected in the following documents, each of which is dated as of March 11,
1999:
(i) Amended and Restated Note Agreement between the Issuer and ECT Merchant
(the "New Advancing Credit Facility Agreement"), which (a) provides for the
issuance to ECT Merchant of a Convertible Promissory Note (Advancing Credit
Page 5 of 18
<PAGE>
Facility) in the maximum amount of $7.5 million (the "$7.5 Million Note"), (b)
defines the terms and conditions governing advances under the $7.5 Million Note,
and (c) supersedes the Note Agreement dated as of December 31, 1998 between the
Issuer and ECT (the "December Note Agreement");
(ii) $7.5 Million Note payable to ECT Merchant, the outstanding principal
balance and accrued interest of which may be converted into Common Stock at the
option of the holder at a conversion price of $4.00, subject to antidilution
adjustments, if the note is not paid on its December 31, 2000 maturity date;
(iii) Amended and Restated Convertible Promissory Note (the "Amended Term
Loan B Note"), which is further described below and which amends the Convertible
Promissory Note ("Term Loan B Note") dated as of December 31, 1998;
(iv) Warrant Agreement between the Issuer and ECT Merchant (the "New
Warrant Agreement"), which sets forth certain covenants relating to warrants ECT
Merchant purchased which entitle it to acquire an aggregate of 937,500 shares
of Common Stock;
(v) three Warrants issued to ECT Merchant pursuant to the New Warrant
Agreement, which entitle the holder to purchase 150,000, 487,500 and 300,000
shares, respectively, of Common Stock;
(vi) Amended and Restated Note Agreement (Sundance Assets, L.P.) between
Sundance and the Issuer, which amends the December Note Agreement by separately
setting out the rights and obligations under the December Note Agreement that
relate to Convertible Promissory Note (Term Loan A) issued to ECT pursuant
thereto (the "Term Loan A Note");
(vii) Amendment to Warrant Agreement between the Issuer and Sundance,
which acknowledges that the Amended and Restated Registration Rights Agreement
described below applies to the 1,545,000 warrants held by Sundance;
Page 6 of 18
<PAGE>
(viii) Registration Rights Agreement between the Issuer and ECT Merchant,
which requires the Issuer to file a shelf registration statement by June 30,
1999 covering (a) the Common Stock held by ECT Merchant, (b) all Common Stock
issuable upon exercise of the warrants issued pursuant to the New Warrant
Agreement and (c) all Common Stock issuable upon the conversion of the Amended
Term Loan B Note, the $7.5 Million Note and certain other notes and
(ix) Amended and Restated Registration Rights Agreement between the Issuer
and Sundance, which amends and restates the Registration Rights Agreement dated
as of December 31, 1998 with ECT described in the January filing so as to
provide for the registration of all Common Stock that may be held by Sundance
and all Common Stock issuable pursuant to the exercise or conversion of the
warrants and notes which were transferred from ECT to Sundance.
ECT Merchant may convert the outstanding principal balance of the Amended
Term Loan B Note into Common Stock during the period that begins December 31,
2000 and ends December 31, 2003; the conversion price is $8.00 per share,
subject to antidilution adjustments. During that period, ECT Merchant may
convert the accrued interest on the Amended Term Loan B Note into Common Stock
(and upon any conversion of principal, ECT Merchant shall convert the interest
accrued on such principal) at a conversion price that equals the lesser of the
principal conversion price and the average price of the Common Stock for the 30
days preceding the determination date. ECT Merchant must surrender the Amended
Term Loan B Note and any Common Stock received upon its conversion if (a) on or
before December 31, 2000, the Issuer has closed and funded three or more
projects described in the note, (b) on or before December 31, 2000, (i) the
Issuer has prepaid or repaid in full in cash, and not by conversion or other
agreement, the outstanding principal balance and all accrued but unpaid interest
on (x) the $12.5 million Convertible Promissory Note (Advancing Credit Facility
Note) dated as of December 31, 1998 made by the Issuer (the "$12.5 Million
Note") and the $7.5 Million Note, (ii) such payments occur at a time when no
event of default has
Page 7 of 18
<PAGE>
occurred, and (iii) all commitments of ECT Merchant to lend which are related to
the $12.5 Million Note and the $7.5 Million Note have been terminated, and (c)
the weighted average trading price of the Common Stock for the 15 trading days
immediately preceding December 31, 2000 is greater than $7.00.
One warrant issued pursuant to the New Warrant Agreement entitles ECT
Merchant to purchase 150,000 shares of Common Stock at $4.00 per share, subject
to antidilution adjustments, during the period that begins April 30, 1999 and
ends January 31, 2009. This warrant terminates if, prior to April 30, 1999, both
(1) either (a) a third party not affiliated with the warrantholder purchases the
depreciation of CanFibre of Riverside, Inc. ("CanFibre"), an affiliate of the
Issuer, and invests in CanFibre in a manner which (x) has provided at least $8.0
million in distributable cash proceeds to CanFibre U.S. Inc., (y) is subordinate
to all of the loans made by the warrantholder and ECT to CanFibre, and (z) is
otherwise reasonably acceptable to the warrantholder or (b) the Issuer has sold
interests in itself in a manner which has provided at least $8.0 million in cash
proceeds and is otherwise reasonably acceptable to the warrantholder and (2) the
$4.25 million Convertible Promissory Note (Term Loan C) dated as of December 31,
1998 which was issued by the Issuer to ECT and assigned to ECT Merchant has been
prepaid or repaid in full in cash, and not by conversion or other agreement.
ECT Merchant also acquired a warrant to purchase 487,500 shares of Common
Stock at a price of $5.00 per share, subject to antidilution adjustments, at any
time during the period commencing March 11, 1999 and ending January 31, 2009. A
third warrant entitles ECT Merchant to purchase 300,000 shares of Common Stock
at $4.00 per share, subject to antidilution adjustments, at any time during the
period commencing December 31, 2000 and ending January 31, 2009. The 300,000
share warrant terminates if, before December 31, 2000, (i) the outstanding
balance on the Amended Term Loan B Note is paid in cash, (ii) no event of
default with respect to the New Advancing Credit Facility Agreement has
occurred, and (iii) all ECT Merchant's commitments to lend which are related to
the Amended Term Loan B Note have been terminated. Because it first becomes
exercisable December 31, 2000, the shares
Page 8 of 18
<PAGE>
represented by the 300,000 share warrant will not be beneficially owned by ECT
Merchant within the meaning of Rule 13d-3 until November 1, 2000.
In addition to the foregoing, ECT and Samarac Corporation Ltd. ("Samarac")
agreed as of December 31, 1998 to amend the Shareholders Agreement dated July
16, 1997 referenced in the July filing in order to (i) extend its term to two
years as of December 31, 1998, (ii) expand the limitation on the sale of 5% of a
shareholder's Common Stock ownership to include shares acquired on conversion of
Samarac's Series VIII preference shares, and (iii) modify certain of Samarac's
assignment rights with respect to Series VIII preference shares. In February,
1999, ECT exercised its right pursuant to the Shareholders Agreement and the
Subscription Agreement dated July 16, 1997 to nominate a director to the
Issuer's board.
ECT Merchant directly owns 100,000 shares of Common Stock. It also
beneficially owns 637,000 shares of Common Stock issuable on the exercise of
warrants. The securities of the Issuer beneficially owned by ECT Merchant are
being held for investment purposes. ECT and Enron will review ECT Merchant's
investment 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 ECT, Enron and ECT Merchant,
general stock market and economic conditions, tax considerations and other
factors deemed relevant, may decide to cause ECT Merchant to increase or
decrease the size of its investment in the Issuer.
Sundance directly owns 3,730,000 shares of Common Stock. It also holds the
following instruments that, subject to antidilution adjustments, are exercisable
or convertible within the next sixty days into an aggregate of 6,045,000 shares
of Common Stock: (i) four warrants to purchase 1,000,000, 500,000, 750,000 and
45,000 shares of Common Stock, respectively, which are immediately exercisable,
(ii) 10,000 shares of Series I Preference Shares ("Preference Shares"), which
may be converted into 2,500,000 shares of Common Stock at any time, and (iii)
the Term Loan A Note, which has a principal balance of $10 million that
Page 9 of 18
<PAGE>
may be converted into 1,250,000 shares of Common Stock at any time. In addition,
at any time Sundance may acquire additional shares of Common Stock (the
"Interest Shares") by converting any interest that may have accrued on the
converted principal balance on the Term Loan A Note and, upon converting any
portion of such principal, the holder must convert the interest attributable
thereto. Interest accrues on the Term Loan A Note at the rate of 10.20% per
annum, compounded annually, and can be converted at the lesser of $8.00 or the
trade weighted average of the reported sales prices of the Common Stock for the
30 days preceding the date of conversion.
In addition to the 10,000 Preference Shares referred to above, Sundance
owns 5,000 Preference Shares (the "Optioned Shares") which by their terms are
convertible into an aggregate of 1,250,000 shares of Common Stock. However,
pursuant to the terms of a letter agreement among ECT, Samarac, and the Issuer,
ECT has granted to Samarac an option to purchase the Optioned Shares at a price
of $1,200 per shares (plus accrued dividends). This option is exercisable if the
trade weighted average of the prices for the Common Stock during any period of
30 consecutive days ending on or prior to February 18, 2000 (a "Measurement
Period") exceeds $7.00 per share and the Common Stock is listed on a U.S.
national securities exchange or the NASDAQ National Market throughout such 30-
day period. Because the option must be exercised within ten days after any 30
day period in which such conditions have been met, the option will expire
February 28, 2000. If Samarac exercised the option, Sundance may require Samarac
to pay the exercise price of the option through the delivery of shares of Common
Stock, which shall have a deemed value of $7.00 per share for this purpose.
Pursuant to the terms of the letter agreement, ECT also (i) waived, until
February 18, 2000, its right under the terms of the Preference Shares to require
the Issuer to redeem any of its Preference Shares, (ii) agreed that if the
Common Stock's trade weighted average sales price for the 30 days preceding
February 18, 2000 were less than $7.00, it could put such shares to the Issuer
for an amount per share equal to $1,000 per share plus all accrued dividends,
(iii) agreed to effect conforming changes to the Preference Shares redemption
right set forth in the Issuer's articles of incorporation, and (iv) agreed not
to convert the Option Shares until February 18, 2000.
If Sundance converted or exercised all instruments and securities held by
it that are convertible or exercisable within sixty days into Common Stock, the
9,775,000 shares of Common Stock it would hold (exclusive of the Interest
Shares) would represent approximately 27.8% of the Issuer's outstanding Common
Stock.
Page 10 of 18
<PAGE>
ECT directly holds 750,000 shares of Common Stock. Because of their
control relationships, Enron and ECT may also be deemed to beneficially own the
Common Stock that is beneficially owned by Sundance and ECT Merchant. Further,
ECT, Enron, Ponderosa Assets, L.P., which is Sundance's general partner
("Ponderosa"), and Enron Ponderosa Management Holdings, Inc., which is
Ponderosa's general partner ("EPMH"), may be deemed to share voting and
dispositive power over the Common Stock beneficially owned by Sundance.
Likewise, ECT and Enron may be deemed to share voting and dispositive power over
the Common Stock beneficially owned ECT Merchant. Enron and ECT hereby disclaim
beneficial ownership of any such Common Stock, and the filing of this statement
on Schedule 13D shall not be construed as an admission that ECT Merchant,
Sundance, Ponderosa Assets, L.P., EPMH, ECT, Enron 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. All
percentage ownership calculations utilized herein are calculated in accordance
with Rule 13(d)3(d)(1)(i)(D) and assume that the Issuer's March 3, 1999
representation to ECT Merchant that 25,407,716 shares of Common Stock were
outstanding remains true.
In addition to the shares of Common Stock reported herein, the Reporting
Persons hold convertible promissory notes and other instruments that entitle or
require the Reporting Entities to purchase a substantial number of shares of
Common Stock. Such shares are not reported herein as being beneficially owned
because the instruments do not entitle the holder to acquire shares within 60
days after the filing of this Schedule, except upon the occurrence of
extraordinary and unpredictable events, such as a default on indebtedness. These
arrangements are described in greater detail in the Deferred Payment Purchase
Agreement and the Income Participation Certificate Purchase Agreement contained
in the July filing and in the $11.25 million Exchangeable Promissory Note, the
Subordinated Loan Conversion Agreement, the Income Participation Certificate
Purchase Agreement, the Convertible Promissory Note (Term Loan C), and the $12.5
million Convertible Promissory Note (Advancing Credit Facility) filed herewith.
Other than the
Page 11 of 18
<PAGE>
transactions described herein, none of the Reporting Entities, nor, to their
knowledge, Ponderosa, EPMH or any of the persons named in Schedule I hereto, has
effected any transactions in the Common Stock during the preceding sixty days.
ITEM 7. MATERIAL TO BE FILED AS EXHIBITS.
Exhibit 1. Amended and Restated Note Agreement
Exhibit 2. $7.5 million Convertible Promissory Note (Advancing Credit
Facility)
Exhibit 3. Warrant Agreement
Exhibit 4. Warrant regarding 150,000 Shares of Common Stock
Exhibit 5. Warrant regarding 487,500 Shares of Common Stock
Exhibit 6. Warrant regarding 300,000 Shares of Common Stock
Exhibit 7. Amended and Restated Note Agreement
Exhibit 8. Amended and Restated Convertible Promissory Note (Term B
Loan)
Exhibit 9. Amendment to Warrant Agreement
Exhibit 10. Registration Rights Agreement
Exhibit 11. Amended and Restated Registration Rights Agreement
Exhibit 12. Letter Agreement dated March 16, 1999 regarding the
Shareholders' Agreement Amendment
Exhibit 13. $11.25 million Exchangeable Promissory Note
Exhibit 14. Subordinated Loan Conversion Agreement
Exhibit 15. Income Participation Certificate Purchase Agreement
Exhibit 16. Convertible Promissory Note (Term Loan C)
Exhibit 17. $12.5 million Convertible Promissory Note (Advancing Credit
Facility)
Page 12 of 18
<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: March 22, 1999 SUNDANCE ASSETS, L.P.
By: Ponderosa Assets, L.P.
its general partner
By: Enron Ponderosa Management
Holdings, Inc. its general partner
/s/ PEGGY B. MENCHACA
By ____________________________
Peggy B. Menchaca
Vice President and Secretary
Date: March 22, 1999 ENRON CAPITAL & TRADE RESOURCES, CORP.
/s/ PEGGY B. MENCHACA
By: ______________________________
Peggy B. Menchaca
Vice President and Secretary
Date: March 22, 1999 ENRON CORP.
/s/ PEGGY B. MENCHACA
By: _______________________________
Peggy B. Menchaca
Vice President and Secretary
Page 13 of 18
<PAGE>
SCHEDULE I
DIRECTORS AND EXECUTIVE OFFICERS
ENRON PONDEROSA MANAGEMENT HOLDINGS, INC.
<TABLE>
<CAPTION>
Name and Business Address Citizenship Position and Occupation
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Each of the following
persons' business address is
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
</TABLE>
Page 14 of 18
<PAGE>
SCHEDULE II
DIRECTORS AND EXECUTIVE OFFICERS
ENRON CAPITAL & TRADE RESOURCES CORP.
<TABLE>
<CAPTION>
Name and Business Address Citizenship Position and Occupation
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Mark A. Frevert U.S.A. Director; President--ECT Europe
1400 Smith Street and Managing Director
Houston, TX 77002
Mark E. Haedicke U.S.A. Director; Managing Director and General Counsel
1400 Smith Street
Houston, TX 77002
Kevin P. Hannon U.S.A. Director; President and Chief Operating Officer
1400 Smith Street
Houston, TX 77002
Kenneth D. Rice U.S.A. Director; Chairman of the Board, Chief Executive
1400 Smith Street Officer and Managing Director; Chairman and Chief
Houston, TX 77002 Executive Officer--ECT North America
Gene E. Humphrey U.S.A. Vice Chairman
1400 Smith Street
Houston, TX 77002
Robert J. Hermann U.S.A. Vice President and General Tax Counsel
1400 Smith Street
Houston, TX 77002
</TABLE>
Page 15 of 18
<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 Chief Executive
767 Fifth Avenue, 46th Fl. Officer, Belco Oil & Gas Corp.
New York, NY 10153
Houston, TX 77002
Norman P. Blake, Jr. U.S.A. Director; Chairman, United States Fidelity and
USF&G Corporation Guaranty Company
6225 Smith Ave. LA 0300
Baltimore, MD 21209
Ronnie C. Chan U.S.A. Director; Chairman of Hang Lung Development Group
Hang Lung Development
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. Commodity Futures
P. O. Box 39134 Trading Commission
Washington, D.C. 20016
Ken L. Harrison U.S.A. Director; Vice Chairman of Enron Corp.
121 S. W. Salmon Street
Portland, OR 97204
Robert K. Jaedicke U.S.A. Director; Professor (Emeritus), Graduate School of
Graduate School of Business Business Stanford University
Stanford University
Stanford, CA 94305
</TABLE>
Page 16 of 18
<PAGE>
<TABLE>
<CAPTION>
Name and Business Address Citizenship Position and Occupation
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Charles A. LeMaistre U.S.A. Director; President (Emeritus), University of Texas
13104 Travis View Loop M.D. Anderson Cancer Center
Austin, TX 78732
Jerome J. Meyer U.S.A. Director; Chairman and Chief Executive Officer,
26600 S.W. Parkway Tektronix, Inc.
Building 63; P. O. Box 1000
Wilsonville, OR 97070-1000
John A. Urquhart U.S.A. Director; Senior Advisor to the Chairman of Enron
John A. Urquhart Assoc. Corp.; President, John A. Urquhart Associates
111 Beach Road
Fairfield, CT 06430
John Wakeham U.K. Director; Former U.K. Secretary of State for Energy
Pingleston House and Leader of the Houses of Commons and Lords
Old Alresford
Hampshire S024 9TB
United Kingdom
Charls E. Walker U.S.A. Director; Chairman, Walker & Walker, LLC
Walker & Walker, LLC
10220 River Road, Ste. 105
Potomac, Maryland 20854
Herbert S. Winokur, Jr. U.S.A. Director; President, Winokur & Associates, Inc.
Winokur & Associates, Inc.
30 East Elm Ct.
Greenwich, CT 06830
Kenneth L. Lay U.S.A. Director; Chairman and Chief Executive Officer
1400 Smith Street
Houston, TX 77002
J. Clifford Baxter U.S.A. Senior Vice President, Corporate Development
1400 Smith Street
Houston, TX 77002
Richard B. Buy U.S.A. Senior Vice President and Chief Risk Officer
1400 Smith Street
Houston, TX 77002
Richard A. Causey U.S.A. Senior Vice President, Chief Accounting, Information
1400 Smith Street and Administrative Officer
Houston, TX 77002
</TABLE>
Page 17 of 18
<PAGE>
<TABLE>
<CAPTION>
Name and Business Address Citizenship Position and Occupation
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
James V. Derrick, Jr. U.S.A. Senior Vice President and General Counsel
1400 Smith Street
Houston, TX 77002
Andrew S. Fastow U.S.A. Senior Vice President and Chief Financial Officer
1400 Smith Street
Houston, TX 77002
Mark A. Frevert U.S.A. President and Chief Executive Officer, Enron Europe,
1400 Smith Street Ltd.
Houston, TX 77002
Stanley C. Horton U.S.A. Chairman and Chief Executive Officer, Enron Gas
1400 Smith Street Pipeline Group
Houston, TX 77002
Rebecca P. Mark U.S.A. Vice Chairman; Chairman, Enron International, Inc.
1400 Smith Street
Houston, TX 77002
Lou L. Pai U.S.A. Chairman, President and Chief Executive Officer, Enron
1400 Smith Street Energy Services, Inc.
Houston, TX 77002
Kenneth D. Rice U.S.A. Chairman and Chief Executive Officer, Enron Capital &
1400 Smith Street Trade Resources Corp. - North America
Houston, TX 77002
Jeffrey K. Skilling U.S.A. Director; President and Chief Operating Officer, Enron
1400 Smith Street Corp.
Houston, TX 77002
Joseph W. Sutton U.S.A. President and Chief Executive Officer, Enron
1400 Smith Street International, Inc.
Houston, TX 77002
</TABLE>
Page 18 of 18
<PAGE>
EXHIBIT 1
[Execution Version]
Amended and Restated Note Agreement
(ECT Merchant Investments Corp.)
March 11,1999
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 Note Agreement dated as of December 31, 1998, between
the Company and Enron Capital & Trade Resources Corp. ("ECT"), a Delaware
corporation, which Note Agreement governed certain promissory notes made by
Kafus Environmental Industries Ltd., a British Columbia corporation (the
"Company"), payable to the order of ECT and assigned from ECT to ECT Merchant
Investments Corp. (the "Purchaser"), a Delaware corporation which is a wholly-
owned Subsidiary of ECT. This Amended and Restated 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 of the
CanFibre Group Agreements to the Company and delegation to the Company 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 ECT, 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 by Samarac in favor of
ECT, consenting to the security interests under the Security Agreement.
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<PAGE>
"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 either Purchaser or any predecessor in
interest of either 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 (a) with respect to the Purchaser, this Agreement,
the Notes of the Purchaser, 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 of
the Purchaser, and (b) with respect to the Purchasers, this Agreement, the
Sundance Note 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 (a) with respect to the Purchaser, 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, and (b) with respect to the
Purchasers, any and all amounts now or hereafter owed by the Company to the
Purchasers in connection with the Loan Documents, including principal, interest,
fees, reimbursements, indemnifications, and other amounts, and any increases,
extensions, rearrangements, and other modifications thereof.
"Majority Purchasers" means, at any time, Purchasers holding more than 51%
of the then aggregate unpaid principal amount of the Notes held by the
Purchasers.
"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
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<PAGE>
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, with respect to the Purchaser:
(a) the $7,500,000 Convertible Promissory Note (Advancing Credit
Facility) dated as of March 11,1999 (the "$7,500,000 Advancing Credit
Facility Note"), made by the Company and payable to the Purchaser;
(b) the $12,500,000 Convertible Promissory Note (Advancing Credit
Facility) dated as of December 31, 1998, (the "$12,500,000 Advancing Credit
Facility Note", and collectively with the $7,500,000 Advancing Credit
Facility Note, the "Advancing Credit Facility Notes") made by the Company
and payable to ECT, which note has been assigned by ECT to Sundance
pursuant to the Assignment dated as of December 18, 1998, between ECT as
assignor and Sundance as assignee, and subsequently reassigned by Sundance
to ECT pursuant to the Assignment dated as of March 1, 1999, between
Sundance as assignor and ECT as assignee, and subsequently assigned to the
Purchaser pursuant to the Assignment, Acknowledgment and Consent dated as
of March 1, 1999, among ECT as assignor, the Purchaser as assignee, and
Sundance,
(c) the Amended and Restated $10,000,000 Convertible Promissory Note
(Term Loan B) dated as of March 11,1999 (the "$10,000,000 Term Loan B
Note"), made by the Company and payable to the Purchaser, which $10,000,000
Term Loan B Note was an amendment and restatement of the $10,000,000
Convertible Promissory Note (Term Loan B) dated as of December 31, 1998,
made by the Company and payable to ECT and assigned by ECT to the Purchaser
pursuant to the Assignment dated as of December 31, 1998, between ECT as
assignor and the Purchaser as assignee,
(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 ECT and assigned by ECT to the Purchaser pursuant to
the Assignment dated as of March 1, 1999, between ECT as assignor and the
Purchaser as assignee; and
with respect to the Purchasers, the foregoing instruments together
with 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 ECT and assigned by ECT to Ponderosa Assets, L.P., an
Affiliate of Sundance ("Ponderosa"), pursuant to the Assignment dated as of
March 1, 1999, between ECT as assignor and
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<PAGE>
Ponderosa, as assignee, and subsequently assigned by Ponderosa to Sundance
pursuant to the Assignment dated as of March 1, 1999, between Ponderosa as
assignor and Sundance as assignee.
"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 ECT, pledging 100% of the shares in Kafus
Cement Fibre Industries, Inc., a Delaware corporation, to ECT as collateral for
certain Loan Obligations.
"Purchaser" has the meaning specified in the introduction. "Purchasers"
means the Purchaser and Sundance as Purchaser under the Sundance Note Agreement.
The terms "Purchaser" and "Purchasers" shall include the original Purchasers and
each subsequent holder of any of the Notes.
"Registration Rights Agreement" means the Registration Rights Agreement
dated as of March 11,1999, 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 of ECT, granting ECT a security interest in
the CanFibre Group Agreements and the Asset Purchase Agreement to secure certain
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.
"Sundance" means the Purchaser's Affiliate, Sundance Assets L.P., a
Delaware limited partnership.
"Sundance Note Agreement" means the Amended and Restated Note Agreement
between the Company and Sundance Assets L.P. dated as of March 11,1999.
"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
-5-
<PAGE>
under ordinary circumstances to elect the general partner or other management of
the partnership, and (c) with respect to any other Person, such ownership
interests in such Person having general voting power under ordinary
circumstances to elect the management of such Person, in each case irrespective
of whether at the time any other class of stock, partnership interests, or other
ownership interest might have special voting power or rights by reason of the
happening of any contingency.
"Warrant Agreement" means the Warrant Agreement dated as of March 11,1999,
between the Company and the Purchaser.
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 Majority Purchasers.
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 $7,500,000 Advancing Credit Facility Note.
(a) Effective on the date of this Agreement and in exchange for the
commitment to make advances under the $7,500,000 Advancing Credit Facility Note
as provided for herein, the Company will issue and sell to the Purchaser and, in
reliance upon the representations and warranties of the Company contained
herein, in the Warrant Agreement, and in the other Loan Documents, Purchaser
will purchase from the Company the $7,500,000 Advancing Credit Facility Note and
the March 1999 Warrants (as defined in the Warrant Agreement). The allocation
of the purchase price of the $7,500,000 Advancing Credit Facility Note and the
March 1999 Warrants shall be determined in accordance with Section 2 of the
Warrant Agreement.
(b) Subject to the terms and conditions set forth herein, the
Purchaser agrees to advance principal to the Company under the $7,500,000
Advancing Credit Facility Note from the date of this Agreement through the
Maturity Date of such Note as defined therein provided that the
-6-
<PAGE>
outstanding principal amount of the $7,500,000 Advancing Credit Facility Note
may not exceed the face amount of the $7,500,000 Advancing Credit Facility Note.
(c) Each advance of principal under the $7,500,000 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 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 $7,500,000 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. $12,500,000 Advancing Credit Facility Note. Effective on December 31,
1998, the Company amended and restated the prior outstanding $12,500,000
Convertible Promissory Note dated as of August 18, 1998, made by the Company and
payable to ECT, into the $12,500,000 Advancing Credit Facility Note described
herein. The outstanding principal amount of such prior note was continued under
the $12,500,000 Advancing Credit Facility Note. As of the date of this
Agreement, the $12,500,000 Advancing Credit Facility Note is held by the
Purchaser, and the outstanding principal amount thereof is $12,500,000.
2.3. $10,000,000 Term Loan A Note . Effective on December 31, 1998, the
Company issued the $10,000,000 Term Loan A Note to ECT, 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 ECT.
As of the date of this Agreement, the $10,000,000 Term Loan A Note is held by
Sundance, and the outstanding principal amount thereof is $10,000,000.
-7-
<PAGE>
2.4. $10,000,000 Term Loan B Note . Effective on March 11,1999, the Company
has hereby amended and restated the prior outstanding U.S.$10,000,000
Convertible Promissory Note (Term Loan B) dated as of December 31, 1998 (the
"Prior Note B"), made by the Company and payable to ECT which Prior Note B was
issued 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 ECT, 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 Prior Note B is
continued under the $10,000,000 Term Loan B Note, and as of the date of this
Agreement is $10,000,000.
2.5. $4,250,000 Term Loan C Note . Effective on December 31, 1998, the
Company 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 ECT, into the $4,250,000 Term Loan C Note described herein. The
outstanding principal amount of the prior note was 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 ECT in connection with
ECT's investments in CanFibre of Lackawanna LLC, a subsidiary of the Company. As
of the date of this Agreement, the $4,250,000 Term Loan C Note is held by the
Purchaser, and the outstanding principal amount thereof 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
-8-
<PAGE>
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,
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 25,407,716 shares are issued and outstanding as of March 3, 1999.
(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,
-9-
<PAGE>
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 Purchasers;
(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);
(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
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<PAGE>
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 since December 29, 1998, 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 ("CanFibre Lackawanna"). The
$3,000,000 HSB Note is secured by a pledge of 1,250,000 shares of Common
Stock of the Company pledged by HY Holdco Enterprises No. 2 Inc.. In
addition, the Company is issuing 75,000 shares of Common Stock to HSB in
connection with the $3,000,000 HSB Note;
(xiii) The Company has entered into an Option Agreement with HSB
pursuant to which, among other things: (a) the Company has granted to HSB
the right (the "HSB Equity Interest Put Right"), exercisable from and after
the first anniversary of the Acceptance Date (as defined in the Amended and
Restated Limited Liability Agreement of CanFibre Lackawanna dated as of
December 31, 1998) to the twelfth anniversary of the Acceptance Date, to
require the Company to purchase from HSB HSB's US $9,500,000 equity
interest (consisting of 100% of the preferred interest and 1% of the common
interest) in CanFibre Lackawanna ("HSB's Equity Interest"); and (b) HSB has
granted to the Company the right (the "HSB Equity Interest Call Right"),
exercisable for a term of 12 years following the Acceptance Date, to
purchase HSB's Equity Interest. The price payable upon exercise of the HSB
Equity Interest Put Right or the HSB Equity Interest Call Right, as the
case may be is based on an investment rate of return (33.5% in the case of
the HSB Equity Interest Put Right, and 37% in the case of the HSB Equity
Interest Call Right) calculated with reference to HSB's capital
contributions to CanFibre Lackawanna, subject to certain adjustments giving
effect to any tax benefits and cash distributions. Such price will be
payable in cash, or, at the option of HSB if the HSB Equity Interest Put
Right or the HSB Equity Interest Call Right is exercised between the first
and third anniversaries of the Acceptance Date, all or a portion thereof
not in excess of the greater of (x) fifty percent (50%) of such price and
(y) US$9,500,000, will be payable in and converted into common shares of
the Company at a conversion price equal to a 15% discount to the weighted
average trading price of the Company's common shares for the 30 day period
immediately preceding the date on which the price is payable, subject in
certain circumstances to specified minimum and maximum amounts per share;
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<PAGE>
(xiv) Dieffenbacher Panel Production Systems GmbH has an option
to acquire preference equity in CanFibre Group at an issue value of
$750,000 which becomes exerciseable 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 exerciseable;
(xv) Stone & Webster Development Corp. has an option to acquire
preference equity of CanFibre of Lackawanna LLC which becomes exerciseable
upon deemed funding in connection with draws under a $3,500,000 letter of
credit issued at the request of CanFibre of Lackawanna LLC which may be
converted into preference stock of CanFibre of Lackawanna LLC two years
after the option becomes exercisable. The preference stock of CanFibre of
Lackawanna LLC may be converted to common stock of CanFibre Group three
years after the option becomes exercisable; and
(xvi) Gerhard Spengler and R&S Stanztechnik GmbH have since
December 29, 1998, been 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 Material 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
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Securities Exchange Act of 1934, as amended (the "Exchange Act") (all of the
foregoing filed prior to the date hereof being hereinafter referred to herein as
the "SEC Documents"). The Company has delivered to the Purchaser true and
complete copies of all SEC Documents. As of their respective filing dates, the
SEC Documents complied in all material respects with the requirements of the
Exchange Act and the rules and regulations of the SEC promulgated thereunder and
none of the SEC Documents (when read together with all exhibits included therein
and financial statement schedules thereto and documents, other than exhibits,
incorporated by reference) contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order to make to statements therein, in light of the circumstances under which
they were made, not misleading. The Company, any Person authorized to represent
the Company, and, to the best knowledge of the Company, any other Person in
connection with the issuing of the 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 Ontario, 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.
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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) 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 or the Purchaser's predecessor in interest 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 Majority Purchasers,
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 Purchasers; (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 Majority Purchasers not to
exceed U.S. $5,000,000; and (viii) Debt in the form of the $3,000,000 HSB Note.
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(c) Without the prior written approval of the Majority Purchasers, the
Company shall not, and shall not permit any of its Subsidiaries to, make any
payment on or with respect to, or purchase, redeem, defease, or otherwise
acquire or retire for value any amount of any Permitted Debt permitted pursuant
to paragraph (b)(ii) above prior to the stated due dates or maturities thereof.
The Company shall not, and shall not permit any of its Subsidiaries to, amend,
supplement, or otherwise modify any of the terms or conditions of any such
Permitted Debt (other than any such amendment, supplement, or modification which
would extend the maturities of or reduce the amounts of any payments of
principal, interest, fees, or other amounts, any modification which would render
the terms of such Permitted Debt less restrictive, or any non-material
administrative amendment which imposes no new restrictions).
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 Majority Purchasers, 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
owed to the Purchaser 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
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by reason of negative pledge covenants and other covenants or undertakings of
like nature; (D) Liens in the form of vendors', carriers', warehousemen's,
repairmen's, mechanics', workmen's, materialmen's, construction, or other like
Liens arising by operation of law in the ordinary course of business or incident
to the construction or improvement of any property in respect of obligations
which are not yet due and payable or which are being contested in accordance
with this Agreement; and (E) Liens in the form of zoning restrictions,
easements, licenses, and other restrictions on the use of real property or minor
irregularities in title thereto which do not materially impair the use of such
property in the operation of the business of the Company or the value of such
property.
(c) Without the prior written approval of the Majority Purchasers, 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
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by the Majority Purchasers, but no further investments therein unless such
further investments have been approved by the Majority Purchasers, and (iii)
loans, advances, and other investments in Persons other than those described in
clauses (i) and (ii) in an aggregate outstanding amount not to exceed U.S.
$500,000; (b) investments in the form of loans, guaranties, open accounts, and
other extensions of trade credit in the ordinary course of business; (c)
investments in direct obligations of the United States or Canada, or investments
in any Person which investments are guaranteed by the full faith and credit of
the United States or Canada, in either case maturing in twelve months or less
from the date of acquisition thereof and repurchase agreements having a term of
less than one year and fully collateralized by such obligations which are
entered into with banks or trust companies described 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
Majority Purchasers, 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
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liquidate, wind up, or dissolve itself); provided that the Subsidiary is
the surviving or acquiring Subsidiary;
(iii) Any Subsidiary of the Company may merge, consolidate, or
amalgamate with another Person with the other Person as the surviving
entity or convey, sell, lease, assign, transfer, or otherwise dispose of
any of its assets to another Person (and if such disposition transfers all
or substantially all of the assets of transferring Subsidiary, such
Subsidiary may then liquidate, wind up, or dissolve itself) provided that
the result of such transaction would not cause the net book value of the
assets so merged out of the Subsidiaries of the Company 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
Majority Purchasers.
4.9 Dividends. Without the prior written approval of the Majority
Purchasers, 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 Majority Purchasers 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
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engage in any type of business not reasonably related to its business as
presently and normally conducted.
4.12 Transactions with Affiliates . Without the prior written consent of
the Majority Purchasers, 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
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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.
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
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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
4.18 shall terminate on the date the Purchasers and their respective 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 and the Sundance 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 either 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
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prepayment) prior to the stated maturity thereof, and the aggregate amount of
all such indebtedness so accelerated exceeds U.S. $5,000,000; or (iii) any event
shall occur or condition shall exist under any agreement or instrument relating
to any indebtedness of the Company or any other Credit Party or any Subsidiary
of the Company the effect of which is to accelerate or to permit the
acceleration of the maturity of any such indebtedness, whether or not any such
indebtedness is actually accelerated, and the aggregate amount of all such
indebtedness so in default exceeds U.S. $5,000,000;
(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 Majority
Purchasers may (i) declare by written notice to the Company all of the
commitments of the Purchasers 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 Purchasers shall
terminate immediately and automatically), and (ii) declare by written notice to
the Company all Loan Obligations owed to the Purchasers 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 Majority
Purchasers 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 Purchasers upon demand of the
Majority Purchasers.
(c) During the continuation of an Event of Default, and subject to
Section 6.6 of this Agreement, 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 Majority
Purchasers may exercise all of their rights under the Loan Documents and all
other rights at law or in equity.
(e) Following an acceleration of the Loan Obligations, all payments
and collections shall be applied to the Loan Obligations of the Purchasers in
the following order:
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First, to the accrued but unpaid fees and reimbursable out of pocket
expenses due and payable to the Purchasers under the Loan Documents,
ratably in accordance with the amount of such obligations which are owed to
each Purchaser at the time of disbursement,
Second, to the accrued but unpaid interest and premium due and payable to
Purchasers under the Loan Documents, ratably in accordance with the amount
of such obligations which are owed to each Purchaser at the time of
disbursement,
Third, to the outstanding principal balance of the Notes due and payable to
Purchasers under the Loan Documents, ratably in accordance with the amount
of such obligations which are owed to each Purchaser at the time of
disbursement,
Fourth, to any other accrued but unpaid Loan Obligations due and payable to
the Purchasers under the Loan Documents, ratably in accordance with the
amount of such obligations which are owed to each Purchaser at the time of
disbursement, and
Then, the remainder, if any, to the Company or any other party lawfully
entitled thereto.
Notwithstanding the foregoing, any amounts received by the Purchaser on
realization upon the collateral securing the Advancing Credit Facility Notes
shall be solely for the benefit of the Purchaser and shall not be subject to
ratable application to the Loan Obligations of the Purchasers under this Section
5.2(e).
(f) Except as set forth below or where the remedial action is
automatically provided for in the Loan Documents, and notwithstanding any
provision to the contrary in any Note, the exercise by the Majority Purchasers
of any remedial action, including accelerating any Loan Obligations, or
initiating any enforcement proceedings, shall require an affirmative vote of the
Majority Purchasers; provided, however, that during an Event of Default, the
Purchaser may exercise the rights granted under the Security Agreement and the
Pledge Agreement, including foreclosing on any collateral.
(g) Subject to the foregoing paragraph (f), no right, power, or remedy
conferred to the Purchaser in the Loan Documents or in any documents securing or
supporting the Loan Documents or now or hereafter existing at law, in equity, by
statute, or otherwise shall be exclusive, and each such right, power, or remedy
shall to the full extent permitted by law be cumulative and in addition to every
other such right, power or remedy. No course of dealing and no delay in
exercising any right, power, or remedy conferred to the Purchaser shall operate
as a waiver of or otherwise prejudice any such right, power, or remedy. No
notice to or demand upon the Company shall entitle the Company to similar
notices or demands in the future.
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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 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
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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.
6.4 Waiver, Amendment, and Survival. (a) Performance under the Loan
Documents to may be waived only in a writing signed by Majority Purchasers and,
if the Company is a party to the applicable Loan Document, also by the Company,
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 may be
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amended, supplemented, and otherwise modified only in a writing signed by the
Majority Purchasers and, if the Company is a party to the applicable Loan
Document, also by the Company, and such an amendment, supplement, or other
modification shall be effective only for the purposes and only to the extent
stated in that writing. Any modification, waiver, or consent given or made by
the Majority Purchasers applies equally to all Purchasers (including those
Purchasers that have not signed the writing memorializing such modification,
waiver, or consent) and is binding upon them and upon the Company without regard
to whether any Note has been marked to indicate such modification or waiver.
(b) For the purposes of determining whether the requisite percentage
of Purchasers have approved or consented to any modification, waiver or consent
to be given under this Agreement, or have directed the taking of any action
provided herein to be taken upon the direction of the holders of a specified
percentage of the aggregate principal amount of Notes then outstanding, Notes
directly or indirectly owned by the Company or any of its Affiliates shall be
deemed not to be outstanding.
(c) 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 Purchasers and their respective successors
and assigns. The Company may not assign its rights or delegate its duties under
the Loan Documents. The Purchasers may not assign or participate their
respective rights or delegate their respective 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
Purchasers may assign or participate their respective rights and delegate their
respective 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 Purchasers may, at any time, assign their respective rights
and duties under the Loan Documents to their respective Affiliates.
6.6 Sharing. During the continuation of an Event of Default, if any
Purchasers should receive any payment against the Loan Obligations of such
Purchasers in excess of the ratable payments received by the other Purchasers
(whether by exercise of the right of setoff or banker's lien, counterclaim or
cross action, enforcement of any right under the Loan Documents, or otherwise),
then the Purchasers receiving less than their ratable share of the applicable
payment (the "underpaid Purchasers") shall sell to the other Purchasers (the
"overpaid Purchasers"), and the overpaid Purchasers shall purchase from the
underpaid Purchasers, for cash without recourse, such participations in the Loan
Obligations of the underpaid Purchasers as shall result in a ratable sharing of
the payments received by all Purchasers; provided, that if all or any portion of
any excess payment
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is thereafter recovered from the overpaid Purchasers, such purchases of
participations shall be rescinded and the purchase price restored to the extent
of such recovery. Notwithstanding the foregoing, any amounts received by the
Purchaser on realization upon the collateral securing the Advancing Credit
Facility Notes shall be solely for the benefit of the Purchaser and shall not be
subject to redistribution under this Section 6.6.
6.7 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
Dedham MA 02026
Attn: Mr. Michael A. McCabe
Telephone: 781-326-5001
Telecopier: 781-326-5105
ECT Merchant Investments Corp.
Attn: Tony A. Valentine
1400 Smith Street
Houston, Texas 77002
Telephone: 713-853-6903
Telecopier: 713-646-2654
With a copy to:
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Enron Capital & Trade Resources Corp.
Attn: Donna Lowry
1400 Smith Street
Houston, Texas 77002
telephone: 713-853-1939
telecopier: 713-646-4039
6.8 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.
6.9 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 Company and the Majority Purchasers, 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.
6.10 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 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
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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.
6.11 Counterparts. This Agreement may be executed in multiple
counterparts which together shall constitute one and the same instrument.
6.12 Intended Third Party Beneficiary. The Purchaser agrees and
acknowledges that the provisions of this Agreement which involve sharing of
certain payments, application of payments following the acceleration of the Loan
Obligations, voting rights, waivers and amendments, pursuit of remedies, actions
to be taken upon the determination of the Majority Purchasers, and other actions
or decisions hereunder referring to or affecting the Purchasers are intended to
benefit all Purchasers, and each other Purchaser is an intended third party
beneficiary of this Agreement.
6.13 Reaffirmation of Security and Pledge Agreements. The Company
represents and warrants that it has no defenses to the enforcement of the
Security Agreement or the Pledge Agreement, and acknowledges that the Security
Agreement and Pledge Agreement shall continue to secure the indebtedness of the
Company under the Advancing Credit Facility Notes and the other Loan Documents.
6.14 Amendment and Restatement . This Agreement and the Amended and
Restated Note Agreement dated as of March 11,1999, between the Company and
Sundance represent a full and complete amendment, restatement, and bifurcation
of the Note Agreement dated as of December 31, 1998, between the Company and
ECT, the terms of which superceded the Securities Purchase Agreement dated as of
August 18, 1998, between the Company and ECT, with respect to the Notes
thereunder. The indebtedness under such prior versions of this Agreement and the
Notes continues under this Agreement and the respective Notes, and the execution
of this Agreement and the Notes does not indicate a payment, satisfaction,
novation, or discharge thereof. All support for the indebtedness under the
prior versions of this Agreement and the Notes continues to support the
indebtedness hereunder.
6.15 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.
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THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
EXECUTED as of the date first above written.
Very truly yours,
ECT MERCHANT INVESTMENTS CORP.
By:_________________________
Name:_______________________
Title:______________________
AGREED TO AND ACCEPTED
as of the date first
above written.
KAFUS ENVIRONMENTAL INDUSTRIES LTD.
By:_________________________
Name:_______________________
Title:______________________
[ECTMI Amended and Restated Note Agreement]
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EXHIBIT 2
[Execution Version]
CONVERTIBLE PROMISSORY NOTE
(Advancing Credit Facility)
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. $7,500,000 Vancouver, British Columbia March 11, 1999
KAFUS ENVIRONMENTAL INDUSTRIES LTD., a British Columbia corporation (the
"Borrower"), for value received, hereby promises to pay to the order of ECT
MERCHANT INVESTMENTS CORP., a Delaware corporation (the "Lender"), the principal
sum of SEVEN MILLION FIVE HUNDRED THOUSAND AND NO/100 UNITED STATES DOLLARS
(U.S. $7,500,000) or, if less, the outstanding principal amount of the loans
advanced hereunder in accordance with the terms of this Convertible Promissory
Note (this "Note").
1. Principal.
Principal shall be advanced as requested by the Borrower in accordance with
the terms of the Amended and Restated Note Agreement dated as of March 11, 1999
(as amended from time to time, the "Note Agreement"), between the Borrower and
the Lender providing the lending commitment for this Note.
The Borrower may not prepay the outstanding principal balance of this Note
without the advance written consent of the Lender. Prepayments permitted by the
Lender shall be applied first to accrued but unpaid interest and then to the
outstanding principal balance of this Note.
The Borrower shall pay to the Lender the outstanding principal amount of
this Note on December 31, 2000 (the "Maturity Date").
<PAGE>
2. Interest.
The outstanding principal amount of this Note shall bear interest at 14.00%
per annum, calculated based upon a 365/366 day year for the actual number of
days elapsed. The Borrower shall pay to the Lender all accrued but unpaid
interest on this Note on the Maturity Date.
3. Payments Generally.
The Lender shall record in its records all advances and payments of
principal and interest on this Note. Any failure of the Lender to make such
recordings, however, shall not affect the Borrower's repayment obligations. The
Lender's records shall be presumptive evidence of the principal and interest
owed by the Borrower.
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 sum it would
have received had no such deductions been made; (ii) the Borrower shall make
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<PAGE>
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 or any other
security documents, credit support documents, or other loan documents securing,
supporting, or related to this Note (collectively, the "Loan Documents") so
provide.
During the continuation of any Event of Default, the Lender may (i) declare
by written notice to the Borrower all of its commitments related to this Note
terminated, whereupon such commitments shall terminate, and (ii) declare by
written notice to the Borrower all amounts payable by the Borrower under this
Note to be immediately due and
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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 nonusurious interest rate than applicable laws now allow.
NOTWITHSTANDING the foregoing or any other term in this Note to the contrary, it
is the intention of the Lender and the Borrower to conform strictly to any
applicable usury laws. Accordingly, if the Lender contracts for, charges, or
receives any consideration in connection with this Note which constitutes
interest in excess of the Highest Lawful Rate, then any such excess shall be
canceled automatically and, if previously paid, shall at the Lender's option be
applied to the outstanding amount of the loans made hereunder or be refunded to
the Borrower. In determining whether any interest exceeds the Highest Lawful
Rate, such interest shall, to the extent permitted by applicable law, be
amortized, prorated, allocated, and spread in equal parts throughout the term of
this Note.
During the continuation of an Event of Default, the Lender is authorized at
any time, to the fullest extent permitted by law, to setoff and apply any
indebtedness owed by the Lender to the Borrower against any and all of the
obligations of the Borrower under this Note, irrespective of whether or not the
Lender shall have made any demand under this Note and although such obligations
may be contingent and unmatured.
During the continuation of an Event of Default, the Lender may exercise all
of its rights under the Loan Documents and all other rights at law or in equity.
During the continuation of an Event of Default, the Lender may exercise the
conversion feature of this Note as set forth below.
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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")
"Conversion Price" means U.S. $4.00, subject to adjustment as provided in
this Section 5.
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5.2 Conversion. If on the Maturity Date the Borrower does not fully
repay the outstanding principal amount of this Note and all accrued but unpaid
interest thereon, then at any time thereafter the Lender may convert all (but
not less than all) of the outstanding principal amount of this Note and accrued
but unpaid interest thereon into that number of fully paid and non-assessable
shares of Common Stock obtained by dividing the then outstanding principal
amount of this Note and accrued but unpaid interest thereon by the Conversion
Price. 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. The Lender shall
have no obligation to convert this Note.
5.3 Issuance of Common Stock on Conversion. As promptly as practicable
after the surrender of this Note for conversion, the Borrower shall deliver or
cause to be delivered to the Lender certificates representing the number of
fully paid and nonassessable shares of Common Stock into which this Note may be
converted in accordance with the provisions of this Section 5. Such conversion
shall be deemed to have been made at the close of business on the date that this
Note shall have been surrendered for conversion so that the rights of the Lender
shall cease at such time and, subject to the following provisions of this
Section 5.3, the Lender shall be treated for all purposes as having become the
record holder of such Common Stock at such time and such conversion shall be at
the Conversion Price in effect at such time; provided, however, that no such
surrender on any date when the stock transfer books of the Borrower shall be
closed shall be effective to constitute the Lender as the record holder of such
Common Stock on such date, but such surrender shall be effective to constitute
the Lender as the record holder for all purposes at the close of business on the
next succeeding day on which such stock transfer books are open; and, in that
event such conversion shall be at the Conversion Price in effect on the date
that this Note shall have been surrendered for conversion, as if the stock
transfer books of the Borrower had not been closed. If the last day for the
exercise of the conversion right shall not be a Business Day, then such
conversion right may be exercised on the next succeeding Business Day.
No fractional shares of Common Stock shall be issued upon conversion of
this Note. Instead of any fractional shares of Common Stock which would
otherwise be issuable upon conversion of this Note, the Borrower shall pay a
cash adjustment in respect of such fraction in an amount equal to such fraction
of a share multiplied by the Conversion Price.
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5.4 Antidilution Adjustments. The number and kind of securities issuable
upon the conversion of the Note shall be subject to adjustment from time to time
upon the happening of certain events occurring on or after the date of original
issue of the Note as follows:
(i) In case of any reclassification or change of Common Stock (other
than a change in par value, or from par value to no par value, or from no
par value to par value or as a result of a subdivision or combination), or
in case of any consolidation or merger of the Borrower with or into another
corporation (other than a merger with another corporation in which the
Borrower is the surviving corporation and which does not result in any
reclassification or change -- other than a change in par value, or from par
value to no par value, or from no par value to par value, or as a result of
a subdivision or combination -- of shares of Common Stock issuable upon
exercise of these conversion rights), or in the case of a sale or
conveyance in a single transaction or in a series of related transactions
with the same purchaser or affiliates thereof of all or substantially all
the assets of the Borrower as an entirety, or a statutory share exchange in
which all shares of Common Stock are exchanged for shares of another
corporation or entity, the Lender shall have, and the Borrower, or such
successor entity or purchaser, shall covenant in the constituent documents
effecting any of the foregoing transactions that the Lender has, the right
to obtain upon the exercise of these conversion rights, in lieu of each
share of Common Stock theretofore issuable upon exercise of these
conversion rights, the kind and amount of shares of stock, other
securities, money, and property receivable upon such reclassification,
change, consolidation or merger, conveyance or sale of assets, or share
exchange by a holder of one share of Common Stock issuable upon exercise of
these conversion rights as if they had been exercised immediately prior to
such reclassification, change, consolidation or merger, conveyance or sale
of assets, or share exchange. The constituent documents effecting any
reclassification, change, consolidation or merger, or share exchange shall
provide for adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided in this Section 5.4. The
provisions of this paragraph shall similarly apply to successive
reclassifications, changes, consolidations or mergers, conveyances or sales
of assets, or share exchanges.
(ii) If the Borrower at any time while the Note is outstanding shall
subdivide or combine its Common Stock, the Conversion Price shall be
proportionately reduced, in case of subdivision of shares, as at the
effective date of
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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 (other than in satisfaction
of dividend obligations with respect to the preferred stock of the Borrower
which are payable in Common Stock (A) for which the Common Stock is valued
at the Average Price at the time of issuance, or (B) payable with respect
to (y) preferred stock of the Borrower held by the Lender or an Affiliate
of the Lender or (z) the 2,500 Series VIII 10% Convertible Redeemable
Preference Shares), the Conversion Price shall be adjusted, as of the date
the Borrower shall take a record of the holders of such stock for the
purpose of determining the holders entitled to receive such dividend or
other distribution (or if no such record is taken, as at the date of such
payment or other distribution), to that price determined by multiplying the
Conversion Price in effect immediately prior to such record date (or if no
such record is taken, then immediately prior to such payment or other
distribution) by a fraction (1) the numerator of which shall be the total
number of shares of Common Stock outstanding immediately prior to such
dividend or distribution, and (2) the denominator of which shall be the
total number of shares of Common Stock outstanding immediately after such
dividend or distribution.
(iv) If the Borrower shall issue to all holders of its Common Stock
any warrant, option, or other right to subscribe for or purchase Common
Stock at a price per share less than the Average Price at the time of
issuance, the Conversion Price shall be adjusted, as of the date the
Borrower shall take a record of the holders of its Common Stock for the
purpose of receiving such issuance, to that price determined by multiplying
the Conversion Price by a fraction, the numerator of which shall be the
number of shares of Common Stock outstanding on the date of issuance plus
the number of shares which the aggregate offering price of the total number
of shares so offered would purchase at the Average Price at the time of
issuance, and the denominator of which shall be the number of shares of
Common Stock outstanding
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on the date of issuance plus the number of additional shares of Common
Stock offered for subscription or purchase.
(v) If the Borrower shall distribute to all holders of its Common
Stock evidences of indebtedness of the Borrower, shares of capital stock of
the Borrower (other than Common Stock), or assets, or rights or warrants to
subscribe for or purchase any of its securities (excluding those dividends,
warrants, options, and rights referred to in subparagraph (iv)), then in
each case the Conversion Price shall be adjusted, as of the date the
Borrower shall take a record of the holders of its Common Stock for the
purpose of determining the holders entitled to receive such distribution,
to that price determined by multiplying the Conversion Price by a fraction
the numerator of which shall be the Conversion Price less the fair market
value (as determined by the Board of Directors of the Borrower, whose
determination shall be conclusive) of the evidences of indebtedness of the
Borrower, shares of capital stock of the Borrower (other than Common
Stock), or assets, or rights or warrants to subscribe for or purchase any
of its securities (excluding those dividends, warrants, options, and rights
referred to in subparagraph (iv)), so distributed in respect of one share
of Common Stock and the denominator of which is the Conversion Price.
(vi) No adjustment of the Conversion Price shall be made in an amount
less than $.01 per share, but any such lesser adjustment shall be carried
forward and shall be made at the time together with the next subsequent
adjustment which, together with any adjustments so carried forward, shall
amount to $.01 per share or more.
If any shares of Common Stock required to be reserved for the purposes of
conversion of the Note hereunder require registration with or approval of any
governmental authority under any federal or state law, or listing upon any
national securities exchange, before such shares may be issued upon conversion,
the Borrower will in good faith and as expeditiously as possible endeavor to
cause such shares to be duly registered, approved, or listed, as the case may
be.
5.5 Certain Notices and Calculations. Whenever the Conversion Price is
adjusted as provided in Section 5.4, the Borrower shall promptly deliver to the
holder hereof a certificate signed by two officers of the Borrower setting forth
the Conversion Price after
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such adjustment and setting forth a brief statement of the facts requiring such
adjustment and the computation thereof.
5.6 Reservation of Shares. The Borrower covenants that it will at all
times reserve and keep available, free from preemptive rights, out of its
authorized but unissued shares of Common Stock, solely for the purpose of issue
upon conversion of this Note as herein provided, such number of shares of Common
Stock as shall then be issuable upon the conversion of this Note. The Borrower
covenants that all shares of Common Stock which shall be so issuable shall, upon
issuance, be duly and validly issued and fully paid and non-assessable. The
Borrower shall from time to time, in accordance with applicable law, increase
the authorized amount of its Common Stock if at any time the authorized amount
of shares of Common Stock remaining unissued shall not be sufficient to permit
the conversion of all Notes at the time outstanding.
5.7 Certain Covenants. Before taking any action which would cause an
adjustment reducing the Conversion Price below the then stated or par value of
the Common Stock issuable upon conversion of this Note, the Borrower will take
any corporate action which may, in the opinion of its counsel, be necessary in
order that the Borrower may validly and legally issue fully paid and non-
assessable shares of such Common Stock at such adjusted conversion price.
5.8 Certain Notices. In case:
(i) the Borrower shall authorize the distribution to all holders of
Common Stock of evidences of its indebtedness or assets (other than cash
dividends or other cash distributions paid out of surplus); or
(ii) the Borrower shall authorize the granting to the holders of
Common Stock of rights or warrants to subscribe for or purchase any shares
of capital stock or any class or of any other rights; or
(iii) of any reclassification of the capital stock of the Borrower
(other than a subdivision or combination of its outstanding shares of
Common Stock), or of any consolidation or merger to which the Borrower is a
party and for which approval of any stockholders of the Borrower is
required, or of the sale, lease, or transfer of all or substantially all of
the property of the Borrower; or
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(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.
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:
Title:
[$7,500,000 Note]
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EXHIBIT 3
[Execution Version]
Warrant Agreement
March 11,1999
Kafus Environmental Industries Ltd.
Suite 440, 755 Burrard Street
Vancouver, BC Canada V6Z 1X6
Attn: Mr. Michael A. McCabe
Gentlemen:
Reference is made to (i) the $7,500,000 Convertible Promissory Note (Advancing
Credit Facility) dated as of March 11,1999 (as modified from time to time, the
"$7,500,000 Advancing Credit Facility Note"), made by Kafus Environmental
Industries Ltd., a British Columbia corporation (the "Company"), payable to the
order of ECT Merchant Investments Corp., a Delaware corporation (the
"Purchaser") and (ii) the related warrants issued in connection therewith,
including (a) the Warrant for 487,500 Shares of Common Stock dated as of March
11,1999 (the "487,500 Share Warrant"), made by the Company and issued to the
Purchaser, (b) the Warrant for 300,000 Shares of Common Stock dated as of March
11,1999 (the "300,000 Share Warrant"), made by the Company and issued to the
Purchaser, and (c) the Warrant for 150,000 Shares of Common Stock dated as of
March 11,1999 (the "150,000 Share Warrant"), made by the Company and issued to
the Purchaser, (such Warrants in (a) through (c) being the "March 1999
Warrants"). This Warrant Agreement (this "Agreement") is entered into in
connection with the execution of the Amended and Restated Note Agreement dated
as of March 11,1999 (as amended from time to time, the "Note Agreement"),
between the Company and the Purchaser amending and restating the Note Agreement
dated as of December 31, 1998 (the "Prior Note Agreement") between the Company
and Enron Capital & Trade Resources Corp. ("ECT"), which governed certain Notes
thereunder, made by the Company, payable to the order of ECT and assigned by ECT
to the Purchaser. In consideration of the execution of the Note Agreement and
the Company's delivery of the $7,500,000 Advancing Credit Facility Note in
connection therewith, 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
<PAGE>
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.
"Note Documents" means this Agreement, the Note Agreement, the $7,500,000
Advancing Credit Facility Note, the March 1999 Warrants, the Structuring Fee
Agreement dated as of March 11,1999, made by the Company in favor of ECT
Securities Limited Partnership, and all other agreements delivered in connection
with any of the foregoing.
"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 March 11,1999, between the Company and the Purchaser providing for
the registration of the Common Stock issuable upon exercise of any of the March
1999 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,
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and (c) with respect to any other Person, such ownership interests in such
Person having general voting power under ordinary circumstances to elect the
management of such Person, in each case irrespective of whether at the time any
other class of stock, partnership interests, or other ownership interest might
have special voting power or rights by reason of the happening of any
contingency.
"Warrant Documents" means this Agreement, the March 1999 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 March 1999 Warrants; Certain Amendments. Effective on the
date of this Agreement, and for the Purchaser's commitment to make advances
under the $7,500,000 Advancing Credit Facility Note, the Company will issue and
sell to the Purchaser and, in reliance upon the representations and warranties
of the Company contained herein and in the other Note Documents, Purchaser will
purchase from the Company, the $7,500,000 Advancing Credit Facility Note and the
March 1999 Warrants. The combined purchase price of the $7,500,000 Advancing
Credit Facility Note and the March 1999 Warrants shall be the amount of advances
actually made under the $7,500,000 Advancing Credit Facility Note, with such
purchase price being allocated for U.S. tax purposes only between the $7,500,000
Advancing Credit Facility Note and the March 1999 Warrants with the $7,500,000
Advancing Credit Facility Note receiving 95% of the purchase price and the March
1999 Warrants receiving 5% of the purchase price. For all other purposes,
including the determination of the outstanding principal amount of the
$7,500,000 Advancing Credit Facility Note and the accrual of interest thereon,
all advances of funds by the Purchaser under the Note Agreement with respect to
the $7,500,000 Advancing Credit Facility Note shall be treated as advances of
principal under the $7,500,000 Advancing Credit Facility Note. The sale and
purchase shall be effective upon execution and delivery of this Agreement and
the first advance under the $7,500,000 Advancing Credit Facility Note. All
March 1999 Warrants shall be earned in full upon such sale and purchase.
Section 3. Conditions Precedent. The conditions precedent to the issuance,
sale, and purchase of the March 1999 Warrants were satisfied or waived.
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Section 4. Representations and Warranties. Upon the execution of this
Agreement, and with the issuance of the March1999 Warrants, the Company
represents and warrants to the Purchaser as follows:
4.1 Corporate Organization and Authority. The Company (a) is a
corporation duly incorporated and in good standing under the laws of British
Columbia and is authorized to exercise its corporate powers in such province;
(b) has all requisite corporate power and authority to own and operate its
properties and assets and to carry on its business as currently conducted and as
is currently proposed to be conducted; and (c) has been duly qualified and is in
good standing to do business as a foreign corporation in each jurisdiction where
the nature of its business and assets requires such qualification, except for
those jurisdictions where the failure to qualify would not result in a Material
Adverse Change.
4.2 Authorization. The Company has all requisite corporate power to
execute and deliver Note 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 Note Documents to which
it is a party and the performance by the Company of its obligations thereunder
have been taken. Each Note Document to which the Company or any of its
Affiliates is a party constitutes a legally binding and valid obligation of the
Company and its Affiliates, as applicable, enforceable in accordance with its
respective terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium,
liquidation, or similar laws relating to, or affecting generally the enforcement
of, creditors' rights or by other equitable principles of general application.
4.3 Capitalization. As of the date of this Agreement the authorized
capital stock of the Company consists of:
(a) 50,000,000 Preference Shares, without par value, of which:
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,
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
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(b) 100,000,000 shares of Common Stock, without par value, of which
25,407,716 shares are issued and outstanding as of March 3, 1999.
(c) 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.
(d) 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 4.3(d)(iii);
(iv) outstanding options to purchase shares of Common Stock as
set forth in the attached Schedule 4.3(d)(iv);
(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;
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(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
("CanFibre Lackawanna"). The $3,000,000 HSB Note is secured by a pledge of
1,250,000 shares of Common Stock of the Company pledged by HYHoldco Enterprises
No. 2 Inc. In addition, the Company has since December 29, 1998, issued 75,000
shares of Common Stock to HSB in connection with the $3,000,000 HSB Note;
(xiii) The Company has entered into an Option Agreement with HSB
pursuant to which, among other things: (a) the Company has granted to HSB the
right (the "HSB Equity Interest Put Right"), exercisable from and after the
first anniversary of the Acceptance Date, as defined in the Amended and Restated
Limited Liability Company Agreement of CanFibre of Lackawanna dated as of
December 31, 1998, to the twelfth anniversary of the Acceptance Date, to require
the Company to purchase from HSB HSB's US$9,500,000 equity interest (consisting
of 100% of the preferred interest and 1% of the common interest) in CanFibre
Lackawanna ("HSB's Equity Interest"); and (b) HSB has granted to the Company the
right (the "HSB Equity Interest Call Right"), exercisable for a term of 12 years
following the Acceptance Date, to purchase HSB's Equity Interest. The price
payable upon exercise of the HSB Equity Interest Put Right or the HSB Equity
Interest Call Right, as the case may be is based on an investment rate of return
(33.5% in the case of the HSB Equity Interest Put Right, and 37% in the case of
the HSB Equity Interest Call Right) calculated with reference to HSB's capital
contributions to CanFibre Lackawanna, subject to certain adjustments giving
effect to any tax benefits and cash distributions. Such price will be payable
in cash, or, at the option of HSB if the HSB Equity Interest Put Right or the
HSB Equity Interest Call Right is exercised between the first and third
anniversaries of the Acceptance Date, all or a portion thereof not in excess of
the greater of (x) fifty percent (50%) of such price and (y) US$9,500,000, will
be payable in and converted into common shares of the Company at a conversion
price equal to a 15% discount to the weighted average trading price of the
Company's common shares for the 30 day period immediately preceding the date on
which the price is payable, subject in certain circumstances to specified
minimum and maximum amounts per share.
(xiv) Dieffenbacher Panel Production Systems GmbH has an option
to acquire preference equity in CanFibre Group at an issue value of $750,000
which becomes exerciseable 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 exerciseable;
(xv) Stone & Webster Development Corp. has an option to acquire
preference equity of CanFibre of Lackawanna LLC which becomes exerciseable upon
deemed funding in connection with draws under a $3,500,000 letter of credit
issued at the request of
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CanFibre of Lackawanna LLC and may be converted to preference stock of CanFibre
Group three years after the option becomes exerciseable and may be converted to
common stock of CanFibre of Lackwanna LLC three years after the option becomes
exerciseable; and
(xvi) Gerhard Spengler and R&S Stanztechnik GmbH have been issued
as of December 29, 1998, 25,000 shares of Common Stock for services rendered
4.4 Subsidiaries. As of the date of this Agreement, Schedule 4.4 sets
forth an accurate and complete list of all Subsidiaries of the Company, their
jurisdiction of incorporation, and the ownership by the Company and its
Subsidiaries of the equity interests of each Subsidiary. As of the date of this
Agreement, all of the issued and outstanding shares of capital stock of each
Subsidiary of the Company have been duly and validly authorized and issued and
are fully paid and non-assessable, and such shares were not issued in violation
of any preemptive or similar right and, except as set forth on such Schedule,
are owned by the Company or one of its Subsidiaries, free and clear of any Liens
(as defined in the Note Agreement). 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 Material Subsidiary of the Company, nor any
outstanding securities convertible into such shares or any outstanding warrants,
options, or other rights to acquire any such convertible securities except as
set forth on such Schedule.
4.5 Litigation. There is no pending or, to the best knowledge of the
Company, threatened action, suit, proceeding, or investigation before any court,
governmental agency, or body having jurisdiction over the Company or any of its
Subsidiaries, or before any arbitrator or mediator, that if adversely
determined, would result in a Material Adverse Change or that relates to or
could materially affect the performance by the Company of its obligations under
Note Documents or the Note Agreement.
4.6 SEC Documents, Financial Statements. Since January 1, 1997, the
Company has filed all reports, schedules, forms, statements, and other documents
required to be filed by it with the Securities Exchange Commission (the "SEC")
pursuant to the reporting requirements of the Securities Exchange Act of 1934,
as amended (the "Exchange Act") (all of the foregoing filed prior to the date
hereof being hereinafter referred to herein as the "SEC Documents"). The
Company has delivered to the Purchaser true and complete copies of all SEC
Documents. As of their respective filing dates, the SEC Documents complied in
all material respects with the requirements of the Exchange Act and the rules
and regulations of the SEC promulgated thereunder and none of the SEC Documents
(when read together with all exhibits included therein and financial statement
schedules thereto and documents, other than exhibits, incorporated by reference)
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make to statements
therein, in light of the circumstances under which they were made, not
misleading. The Company, any Person authorized to represent the Company, and,
to the best knowledge of the Company, any other Person in connection with the
issuing of the 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
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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.
4.7 No Change in Condition. Since the date of the Financial Statements,
there has not been any change in the business, properties, prospects, or
financial condition of the Company or its Subsidiaries which would constitute or
reasonably could be expected to result in a Material Adverse Change.
4.8 Taxes.
(a) The Company and each of its Subsidiaries has filed all tax returns
(provincial, federal, foreign, state, and local) required to be filed by it on
or before the date of the 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.
4.9 Title to Assets. All of the assets owned by the Company and its
Subsidiaries are free and clear of all Liens (as defined in the Note Agreement)
except for Permitted Liens (as defined in
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the Note Agreement) and all assessments, covenants, restrictions, reservations,
and other burdens and charges of every kind except for those reflected in the
SEC Documents and the financial statements included therein.
4.10 Compliance with Laws and Agreements. Neither the Company nor any of
its Subsidiaries is in violation of any material term or provision of its
organizational documents or any material term or provision of any indebtedness,
mortgage, indenture, contract, agreement, or judgment or any decree, order,
statute, rule, or regulation the violation of which would, individually or in
the aggregate, constitute a Material Adverse Change. The execution, delivery,
and performance of the Note Documents will not result in any violation of, be in
conflict with, or constitute a default under, with or without the passage of
time or the giving of notice, any provisions of the Company's or any of its
Subsidiaries' organizational documents, or any indebtedness, mortgage,
indenture, or contract, obligation, or commitment to which the Company or any of
its Subsidiaries is a party or by which any of them is bound, or any provision
of any judgment, decree, order, statute, rule, or regulation to which the
Company or any of its Subsidiaries is a party or by which any of them is bound.
4.11 Employee Benefit Plans. All employee welfare or benefit plans
(including any stock option, stock purchase, or ownership plan) with respect to
which the Company or any Subsidiary is a sponsor are set forth in the SEC
Documents.
4.12 Environmental Matters. There has been no storage, disposal,
generation, manufacture, spill, discharge (or any threatened spill or
discharge), refinement, transportation, handling, or treatment of toxic wastes,
medical wastes, hazardous wastes, or hazardous substances by the Company or any
of its Subsidiaries (or to the knowledge of the Company, by any other Person)
at, upon or from any of the property now or previously owned or leased or under
contract for purchase by the Company or any of its Subsidiaries, in violation of
any applicable law, ordinance, rule, regulations, order, judgment, decree, or
permit or which would require remedial action under any applicable law,
ordinance, rule, regulations, order, judgment, decree, or permit; the terms
"hazardous wastes," "toxic wastes," "hazardous substances," and "medical wastes"
shall have the meanings specified in any applicable local, state, provincial,
federal, and foreign laws or regulations with respect to environmental
protection.
4.13 Consents. No consent, approval, order, or authorization of, or
registration, qualification, designation, declaration, or filing with any
federal, provincial, state, or local government authority or any other person is
required in connection with the execution, delivery, and performance by the
Company of its obligations under Note 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 Ontario, 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 $7,500,000
Advancing Credit Facility Note will require listing approval of the American
Stock Exchange prior to being publicly traded.
4.14 Private Offering. The offer, issuance, and sale of the $7,500,000
Advancing Credit Facility Note and the shares of Common Stock issuable upon
conversion of the $7,500,000
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Advancing Credit Facility Note are and will be exempt from the registration and
prospectus delivery requirements of the Securities Act of 1933 and have been
registered or qualified (or are exempt from registration and qualification)
under the registration, permit, or qualification requirements of all applicable
state securities laws.
4.15 Fees. No fees or commissions are or will be payable by the Company
or any of its Subsidiaries (or to its knowledge by any affiliate of the Company)
to advisors, consultants, brokers, finders, investment bankers, or banks with
respect to the offer, issuance, or sale of the $7,500,000 Advancing Credit
Facility Note, and the shares of Common Stock issuable upon conversion of the
$7,500,000 Advancing Credit Facility Note.
4.16 Transactions with Affiliates. Neither the Company nor any of its
Subsidiaries has entered into any transaction directly or indirectly with or for
the benefit of an Affiliate except (a) transactions with an Affiliate for the
leasing of property, the rendering or receipt of services, or the purchase or
sale of inventory or other assets in the ordinary course of business if the
monetary or business consideration arising from such a transaction would be
substantially as advantageous to the Company or such Subsidiary as the monetary
or business consideration which such Person would obtain in a comparable arm's
length transaction and (b) the transactions disclosed in the Company's
Information Circular dated February 6, 1998, and Form 20-F for the year ended
September 30, 1997, each as filed with the SEC.
4.17 True and Complete Disclosure.
(a) All factual information furnished by or on behalf of the Company
in writing to the Purchaser in connection with Note Documents and the
transactions contemplated thereby is true and accurate in all material respects
on the date as of which such information was dated or certified and does not
contain any untrue statement of material fact or omit to state any material fact
necessary to make the statements contained therein not misleading.
(b) The Purchaser acknowledges receipt of that form of Notice attached
hereto as Schedule 4.17(b) regarding issuance shares of Common Stock upon
conversion of the $7,500,000 Advancing Credit Facility 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 5. Covenants. So long as the Purchaser retains any March 1999
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.
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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 March 1999 Warrants. Such shares of
Common Stock: (a) will be upon issuance, free and clear of any Liens created by
the Company or, to the Company's knowledge, any other Person; (b) have been duly
and validly authorized and when issued and paid for in accordance with the terms
of the March 1999 Warrants will be duly and validly issued, fully paid, and non-
assessable; (c) will not have been issued or sold in violation of any preemptive
or similar rights; and (d) 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:
(a) 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;
(b) 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 (a) and (b) 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);
(c) copies of any management letters prepared by the Company's
auditors and the Company's responses thereto promptly after their issuance; and
(d) 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: (a) make and keep public information available, as those terms are defined
in Rule 144; (b) 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 (c)
furnish the Purchaser, so long as the Purchaser owns any March 1999 Warrants
forthwith upon request: (i) a written statement by the Company that it has
complied with the reporting requirements of Rule 144, the Act and the Exchange
Act; (ii) a copy of the most recent annual or quarterly report of the Company
and such other reports and documents filed by the Company; and (iii) 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.
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5.5 HSR Act. The Company agrees that, in the event that exercise of any
March 1999 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. The
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.
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
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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.
7.2 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
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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 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 March 1999 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 March 1999 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.
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If to the Company:
Kafus Environmental Industries Ltd.
270 Bridge Street
Dedham MA 02026
Attn: Mr. Michael A. McCabe
telephone: 781-326-5001
telecopier: 781-326-5105
With a copy to:
Kafus Environmental Industries Ltd.
Attn: Mr. Ken Swaisland
440-755 Burrard Street
Vancouver, British Columbia
Canada V6Z1X6
telephone: 604-602-1981
telecopier: 604-685-2426
If to the Purchaser:
ECT Merchant Investments Corp.
Attn: Tony A. Valentine
1400 Smith Street
Houston, Texas 77002
telephone: 713-853-6903
telecopier: 713-646-2654
With a copy to:
Enron Capital & Trade Resources Corp.
Attn: Donna Lowry
1400 Smith Street
Houston, Texas 77002
telephone: 713-853-1939
telecopier: 713-646-4039
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 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
15
<PAGE>
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.
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.
[The remainder of this page is intentionally left blank]
16
<PAGE>
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
EXECUTED as of the date first above written.
Very truly yours,
ECT MERCHANT INVESTMENTS CORP.
By:
------------------------------
Name:
Title:
AGREED TO AND ACCEPTED
as of the date first
above written.
KAFUS ENVIRONMENTAL INDUSTRIES LTD.
By:
- -----------------------------------
Name:
Title:
[ECTMI Warrant Agreement]
17
<PAGE>
EXHIBIT 4
[Execution Version]
WARRANT
- --------------------------------------------------------------------------------
THE SECURITIES REPRESENTED BY THIS WARRANT AND THE SHARES OF COMMON STOCK
ISSUABLE UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES OR BLUE SKY LAWS AND
MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR IN RELIANCE ON AN AVAILABLE
EXEMPTION FROM THE ACT AND ANY APPLICABLE STATE SECURITIES OR BLUE SKY LAWS.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS ON
TRANSFER SET FORTH IN SECTION 2.
- --------------------------------------------------------------------------------
KAFUS ENVIRONMENTAL INDUSTRIES LTD.
Common Stock Purchase Warrant
Representing Right To Purchase Shares of
Common Stock
of
Kafus Environmental Industries Ltd.
<PAGE>
FOR VALUE RECEIVED, KAFUS ENVIRONMENTAL INDUSTRIES LTD., a British Columbia
corporation (the "Company"), hereby certifies that ECT Merchant Investments
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 April 30, 1999, and ending on 5:00 p.m. (Toronto, Ontario
time) on January 31, 2009 (the "Expiration Date"), 150,000 shares of Common
Stock of the Company (the Common Stock of the Company being referred to herein
as the "Common Stock" and such number of shares of Common Stock as adjusted
pursuant to the terms hereof, being the "Warrant Shares"), at a price per share
equal to U.S. $4.00 (as such price may be adjusted pursuant to the terms hereof,
the "Exercise Price"). This Warrant is issued to the Holder (together with such
other warrants as may be issued in exchange, transfer, or replacement of this
Warrant, the "Warrants") in connection with the U.S. $7,500,000 Convertible
Promissory Note (Advancing Credit Facility) dated as of March 11, 1999 (the
"Note"), made by the Company and payable to the order of the Holder, and
entitles the Holder to purchase the Warrant Shares and to exercise the other
rights, powers, and privileges hereinafter provided.
NOTWITHSTANDING THE FOREGOING, this Warrant shall terminate if prior to the
commencement of the Exercise Period 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 and Enron Capital & Trade
Resources Corp. ("ECT") 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 ECT and assigned by ECT to the Holder
has been prepaid or repaid in full in cash and not by conversion or other
agreement.
Section 1. Exercise of Warrant; Cancellations of Warrant. This Warrant may
be exercised in whole or in part, at any time or from time to time, during the
Exercise Period, by presentation to the Company at its principal office at the
address set forth in Section 9 of (a) this Warrant, with the Purchase Form
annexed hereto as Exhibit A duly executed and (b) a certified bank check equal
to the Exercise Price for the Warrant Shares for which this Warrant is being
exercised (the date of such delivery referred to herein as the "Exercise Date").
Within five business days after payment of the Exercise Price, the Company shall
execute and deliver to the Holder a certificate or certificates for the total
number of Warrant Shares for which this Warrant is being exercised, in such
names and denominations as
2
<PAGE>
requested in writing by the Holder. The Company shall pay any and all
documentary stamp or similar issue taxes payable in respect of the issue of the
Warrant Shares. If this Warrant is exercised in part only, the Company shall,
upon surrender of this Warrant, execute and deliver a new Warrant evidencing the
rights of the Holder thereof to purchase the balance of the Warrant Shares
issuable hereunder.
Section 2. Exchange, Transfer, Assignment, or Loss of Warrant. Upon
surrender of this Warrant to the Company, with the Assignment Form annexed
hereto as Exhibit B duly executed and funds sufficient to pay any transfer tax,
the Company shall, without charge, execute and deliver a new Warrant or Warrants
in the name of the assignee or assignees named in such Assignment Form and, if
the Holder's entire interest is not being assigned, in the name of the Holder,
and this Warrant shall promptly be canceled. This Warrant may be divided or
combined with other Warrants that carry the same rights upon presentation hereof
at the office of the Company, together with a written notice specifying the
names and denominations in which new Warrants are to be issued and signed by the
Holder hereof. Upon receipt by the Company of evidence satisfactory to it of the
loss, theft, destruction, or mutilation of this Warrant, and (in the case of
loss, theft, or destruction) of reasonably satisfactory indemnification
(including, if required in the reasonable judgment of the Company, a statement
of net worth of such Holder that is at a level reasonably satisfactory to the
Company), and upon surrender and cancellation of this Warrant, if mutilated, the
Company shall execute and deliver a new Warrant of like tenor and date.
Section 3. Antidilutive Adjustments. The shares of Common Stock
purchasable on exercise of this Warrant are shares of Common Stock of the
Company as constituted as of the Date of Issue. The number and kind of
securities purchasable on the exercise of this Warrant shall be subject to
adjustment from time to time upon the happening of certain events, as follows:
(a) Mergers, Consolidations, and Reclassifications. In case of any
reclassification or change of outstanding securities issuable upon exercise of
this Warrant at any time (other than a change in par value, or from par value to
no par value, or from no par value to par value or as a result of a subdivision
or combination to which subsection 3(b) applies), or in case of any
consolidation or merger of the Company with or into another corporation (other
than a merger with another corporation in which the Company is the surviving
corporation and which does not result in any reclassification or change (other
than a change in par value, or from par value to no par value, or from no par
value to par value, or as a result of a subdivision or combination to which
subsection 3(b) applies) of outstanding securities issuable upon exercise of
this Warrant), the Holder shall have, and the Company, or such successor
corporation or other entity, shall covenant in the constituent
3
<PAGE>
documents effecting any of the foregoing transactions that such holder does
have, the right to obtain upon the exercise hereof, in lieu of the shares of
Common Stock, other securities, money, or other property theretofore issuable
upon exercise of this Warrant, the kind and amount of shares of stock, other
securities, money, or other property receivable upon such reclassification,
change, consolidation, or merger by a holder of the shares of Common Stock,
other securities, money, or other property issuable upon exercise hereof had
this Warrant been exercised immediately prior to such reclassification, change,
consolidation, or merger. The constituent documents effecting any such
reclassification, change, consolidation, or merger shall provide for any
adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided in this subsection 3(a). The provisions of this subsection
3(a) shall similarly apply to successive reclassifications, changes,
consolidations, or mergers.
(b) Subdivisions and Combinations. If the Company at any time during
the Exercise Period shall subdivide its shares of Common Stock into a greater
number of shares, the number of shares of Common Stock purchasable upon exercise
of this Warrant shall be proportionately increased and the Exercise Price shall
be proportionately decreased, as at the effective date of such subdivision, or
if the Company shall take a record of holders of its Common Stock for the
purpose of so subdividing, as at such record date, whichever is earlier. If the
Company, at any time during the Exercise Period, shall combine its shares of
Common Stock into a smaller number of shares, the number of shares of Common
Stock purchasable upon exercise hereof shall be proportionately reduced and the
Exercise Price shall be proportionately increased, as at the effective date of
such combination, or if the Company shall take a record of holders of its Common
Stock for purposes of such combination, as at such record date, whichever is
earlier.
(c) Dividends and Distributions. If the Company at any time shall
declare a dividend on its Common Stock payable in stock or other securities of
the Company or of any other corporation or other entity, or in property or
otherwise than in cash, to the holders of its Common Stock, the Holder shall,
without additional cost, be entitled to receive upon any exercise hereof, in
addition to the Common Stock to which the Holder would otherwise be entitled
upon such exercise, the number of shares of stock or other securities or
property which the Holder would have been entitled to receive if the Holder had
been a holder immediately prior to the record date for such dividend (or, if no
record date shall have been established, the payment date for such dividend) of
the number of shares of Common Stock purchasable on exercise of this Warrant
immediately prior to such record date or payment date, as the case may be.
4
<PAGE>
(d) Upon any increase or decrease in the number of Warrant Shares
purchasable upon the exercise of this Warrant, the Company shall, within 30 days
thereafter, deliver written notice thereof to the Holder, which notice shall
state the increased or decreased number of Warrant Shares purchasable upon the
exercise of this Warrant and the revised Exercise Price thereof, setting forth
in reasonable detail the method of calculation and the facts upon which such
calculations are based.
Section 4. Notification by the Company. In case at any time while this
Warrant remains outstanding:
(a) the Company shall declare any dividend or make any distribution
upon its Common Stock or any other class of its capital stock; or
(b) the Company shall offer for subscription pro rata to the holders
of its Common Stock or any other class of its capital stock any additional
shares of stock of any class or any other securities convertible into or
exchangeable for shares of stock or any rights or options to subscribe thereto;
or
(c) the Board of Directors of the Company shall authorize any capital
reorganization, reclassification, or similar transaction involving the capital
stock of the Company, or a sale or conveyance of all or a substantial part of
the assets of the Company, or a consolidation, merger, or business combination
of the Company; or
(d) actions or proceedings shall be authorized or commenced for a
voluntary or involuntary dissolution, liquidation, or winding-up of the Company;
then, in any one or more of such cases, the Company shall give written notice to
the Holder, at the earliest time legally practicable (and not less than 20 days
before any record date or other date set for definitive action) of the date on
which (i) the books of the Company shall close or a record shall be taken for
such dividend, distribution, or subscription rights or options or (ii) such
reorganization, reclassification, sale, conveyance, consolidation, merger,
dissolution, liquidation, or winding-up shall take place or be voted on by
shareholders of the Company, as the case may be. Such notice shall also specify
the date as of which the holders of the Common Stock of record shall participate
in said dividend, distribution, subscription rights, or options or shall be
entitled to exchange their Common Stock for securities or other property
deliverable upon such reorganization, reclassification, sale, conveyance,
consolidation, merger, dissolution, liquidation, or winding-up, as the case may
be. If the action in question or the record date is subject to the
effectiveness of a registration statement
5
<PAGE>
under the Securities Act or to a favorable vote of shareholders, the notice
required by this Section 4 shall so state.
Section 5. No Voting Rights: Limitations of Liability. Prior to exercise,
this Warrant will not entitle the Holder to any voting rights or other rights as
a stockholder of the Company. No provision hereof, in the absence of affirmative
action by the Holder to exercise this Warrant, and no enumeration herein of the
rights or privileges of the Holder, shall give rise to any liability of the
Holder for the purchase price of the Warrant Shares pursuant to the exercise
hereof.
Section 6. Amendment and Waiver.
(a) No failure or delay of the Holder in exercising any power or right
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise of such right or power, or any abandonment or discontinuance of steps
to enforce such a right or power, preclude any other or further exercise thereof
or the exercise of any other right or power. The rights and remedies of the
Holder are cumulative and not exclusive of any rights or remedies which it would
otherwise have. The provisions of this Warrant may be amended, modified, or
waived with (and only with) the written consent of the Company and the Holder.
(b) No notice or demand on the Company in any case shall entitle the
Company to any other or further notice or demand in similar or other
circumstances.
Section 7. No Fractional Warrant Shares. The Company shall not be required
to issue stock certificates representing fractions of Warrant Shares, but shall
in respect of any fraction of a Warrant Share make a payment in cash based on
the Value of the Common Stock after giving effect to the full exercise or
conversion of the Warrants.
Section 8. Validity of Warrant Shares. The Company shall reserve and keep
available at all times, free from preemptive rights, a sufficient number of
Warrant Shares to satisfy the requirements of this Warrant. The Warrant Shares:
(i) will be upon issuance, free and clear of any liens, claims, or other
encumbrances ("Liens") created by the Company or, to the Company's knowledge,
any other Person; (ii) have been duly and validly authorized and when issued and
paid for in accordance with the terms of the Warrants will be duly and validly
issued, fully paid, and non-assessable; (iii) will not have been issued or sold
in violation of any preemptive or similar rights; and (iv) will not subject the
holder thereof to personal liability by reason of being such holders.
6
<PAGE>
Section 9. Notices. Unless otherwise specified, all notices and other
communications provided for between the Company and the Holder in this Warrant
shall be in writing, including telecopy, and delivered or transmitted to the
addresses set forth below, or to such other address as shall be designated by
the Company or the Holder in written notice to the other party. Notice sent by
telecopy shall be deemed to be given and received when receipt of such
transmission is acknowledged, and delivered notice shall be deemed to be given
and received when receipted for by, or actually received by, an authorized
officer of the Company or the Holder, as the case may be.
If to the Company:
Kafus Environmental Industries Ltd.
270 Bridge
Street
Dedham MA 02026
Attn: Mr. Michael A. McCabe
telephone: 781-326-5001
telecopier: 781-326-5105
With copies to:
Kafus Environmental Industries Ltd.
Suite 440, 755 Burrard
Vancouver, BC, Canada V6Z 1X6
Attn: Mr. Kenneth Swaisland
telephone: 604-684-0663
telecopier: 604-685-2426
If to the Holder:
ECT Merchant Investments Corp.
Attn: Tony A. Valentine
1400 Smith Street
Houston, Texas 77002
telephone: 713-853-6903
telecopier: 713-646-2654
7
<PAGE>
With copies to:
Enron Capital & Trade Resources Corp.
Attn: Donna Lowry
1400 Smith Street
Houston, Texas 77002
telephone: 713-853-1939
telecopier: 713-646-4039
and
Enron Capital Management
Attn: Ben Glisan
1400 Smith Street
Houston, Texas 77002
telephone: 713-853-6103
telecopier: 713-646-4990
Section 10. Section and Other Headings. The headings contained in this
Warrant are for reference purposes only and will not affect in any way the
meaning or interpretation of this Warrant.
Section 11. Governing Law. THIS WARRANT SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAWS OF BRITISH COLUMBIA AND THE APPLICABLE LAWS OF
CANADA WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW WHICH WOULD SELECT
ANOTHER LAW.
Section 12. Binding Effect. The terms and provisions of this Warrant shall
inure to the benefit of the Holder and its successors and assigns and shall be
binding upon the Company and its successors and assigns, including, without
limitation, any successor to the Company by merger, consolidation, or
acquisition of all or substantially all of the Company's assets.
Section 13. Arbitration. Disputes arising under this Warrant shall be
settled by one arbitrator pursuant to the rules of the American Arbitration
Association (the "AAA") for Commercial Arbitration (the "Rules"). Such
arbitration shall be held in New York, New York, or at such other location as
mutually agreed to by the parties to the dispute. Subject to any applicable
limitations contained in this Warrant, arbitration may be commenced at any time
by any party giving notice to the other party that a dispute has been referred
8
<PAGE>
to arbitration under this Section. The arbitrator shall be selected by the joint
agreement of the parties hereto, but if they do not so agree within twenty (20)
days after the date of the notice referred to above, the selection shall be made
pursuant to the Rules from the panel of arbitrators maintained by the AAA. Any
award of the arbitrator shall be accompanied by a written opinion giving the
reasons for the award. The expense of the arbitration shall be borne by the
parties in the manner determined in writing by the arbitrator. This arbitration
provision shall be specifically enforceable by the parties. The determination of
the arbitrator pursuant to this Section shall be final and binding on the
parties and may be entered for enforcement before any court of competent
jurisdiction.
[The remainder of this page is intentionally left blank.]
9
<PAGE>
IN WITNESS WHEREOF, the seal of the Company and the signature of its duly
authorized officer have been affixed hereto as of March 11,1999.
[SEAL] KAFUS ENVIRONMENTAL INDUSTRIES LTD.
Attest: By:
------------------------------
Name:
Title:
[150,000 Share Warrant]
10
<PAGE>
EXHIBIT A
TO
WARRANT
PURCHASE FORM
To Be Executed by the Holder
Desiring to Exercise a Warrant of
Kafus Environmental Industries Ltd.
The undersigned holder hereby exercises the right to purchase _______
shares of Common Stock covered by the within Warrant, according to the
conditions thereof, and herewith undertakes to make payment in full of the
Exercise Price of such shares or to withdraw this notice of exercise, in
accordance with the terms of the Warrant.
Name of Holder:
Signature:
-----------------------------------
Title:
Address:
Dated: , .
11
<PAGE>
EXHIBIT B
TO
WARRANT
ASSIGNMENT FORM
To Be Executed by the Holder
Desiring to Transfer a Warrant of
Kafus Environmental Industries Ltd.
FOR VALUE RECEIVED, the undersigned holder hereby sells, assigns, and
transfers unto the right to purchase shares of Common Stock
covered by the within Warrant, and does hereby irrevocably constitute and
appoint _________________ Attorney to transfer the said Warrant on the books of
the Company (as defined in such Warrant), with full power of substitution.
Name of Holder:
-----------------------------------------
Signature:
-------------------------------
Title:
Address:
Dated: , .
In the presence of
NOTICE:
The signature to the foregoing Assignment Form must correspond to the name as
written upon the face of the within Warrant in every detail, without alteration
or enlargement or any change whatsoever.
12
<PAGE>
EXHIBIT 5
[Execution Version]
WARRANT
- --------------------------------------------------------------------------------
THE SECURITIES REPRESENTED BY THIS WARRANT AND THE SHARES OF COMMON STOCK
ISSUABLE UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES OR BLUE SKY LAWS AND
MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR IN RELIANCE ON AN AVAILABLE
EXEMPTION FROM THE ACT AND ANY APPLICABLE STATE SECURITIES OR BLUE SKY LAWS.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS ON
TRANSFER SET FORTH IN SECTION 2.
- --------------------------------------------------------------------------------
KAFUS ENVIRONMENTAL INDUSTRIES LTD.
Common Stock Purchase Warrant
Representing Right To Purchase Shares of
Common Stock
of
Kafus Environmental Industries Ltd.
---------------------
[ ]
[ ]
---------------------
<PAGE>
FOR VALUE RECEIVED, KAFUS ENVIRONMENTAL INDUSTRIES LTD., a British Columbia
corporation (the "Company"), hereby certifies that ECT Merchant Investments
Corp., a Delaware corporation (the "Holder"), is entitled to purchase from the
Company at any time or from time to time during the period (the "Exercise
Period") commencing on the date of this Warrant, and ending on 5:00 p.m.
(Toronto, Ontario time) on January 31, 2009 (the "Expiration Date"), 487,500
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. $5.00 (as such price may be adjusted pursuant to
the terms hereof, the "Exercise Price"). This Warrant is issued to the Holder
(together with such other warrants as may be issued in exchange, transfer, or
replacement of this Warrant, the "Warrants") in connection with the U.S.
$7,500,000 Convertible Promissory Note (Advancing Credit Facility) dated as of
March 11, 1999 (the "Note"), made by the Company and payable to the order of the
Holder, and entitles the Holder to purchase the Warrant Shares and to exercise
the other rights, powers, and privileges hereinafter provided.
Section 1. Exercise of Warrant; Cancellations of Warrant. This Warrant may
be exercised in whole or in part, at any time or from time to time, during the
Exercise Period, by presentation to the Company at its principal office at the
address set forth in Section 9 of (a) this Warrant, with the Purchase Form
annexed hereto as Exhibit A duly executed and (b) a certified bank check equal
to the Exercise Price for the Warrant Shares for which this Warrant is being
exercised (the date of such delivery referred to herein as the "Exercise Date").
Within five business days after payment of the Exercise Price, the Company shall
execute and deliver to the Holder a certificate or certificates for the total
number of Warrant Shares for which this Warrant is being exercised, in such
names and denominations as requested in writing by the Holder. The Company shall
pay any and all documentary stamp or similar issue taxes payable in respect of
the issue of the Warrant Shares. If this Warrant is exercised in part only, the
Company shall, upon surrender of this Warrant, execute and deliver a new Warrant
evidencing the rights of the Holder thereof to purchase the balance of the
Warrant Shares issuable hereunder.
Section 2. Exchange, Transfer, Assignment, or Loss of Warrant. Upon
surrender of this Warrant to the Company, with the Assignment Form annexed
hereto as Exhibit B duly executed and funds sufficient to pay any transfer tax,
the Company shall, without charge, execute and deliver a new Warrant or Warrants
in the name of the assignee or assignees named in such Assignment Form and, if
the Holder's entire interest is not being assigned, in the name of the Holder,
and this Warrant shall promptly be canceled. This Warrant may be divided or
combined with other Warrants that carry the same rights upon
-2-
<PAGE>
presentation hereof at the office of the Company, together with a written notice
specifying the names and denominations in which new Warrants are to be issued
and signed by the Holder hereof. Upon receipt by the Company of evidence
satisfactory to it of the loss, theft, destruction, or mutilation of this
Warrant, and (in the case of loss, theft, or destruction) of reasonably
satisfactory indemnification (including, if required in the reasonable judgment
of the Company, a statement of net worth of such Holder that is at a level
reasonably satisfactory to the Company), and upon surrender and cancellation of
this Warrant, if mutilated, the Company shall execute and deliver a new Warrant
of like tenor and date.
Section 3. Antidilutive Adjustments. The shares of Common Stock purchasable
on exercise of this Warrant are shares of Common Stock of the Company as
constituted as of the Date of Issue. The number and kind of securities
purchasable on the exercise of this Warrant shall be subject to adjustment from
time to time upon the happening of certain events, as follows:
(a) Mergers, Consolidations, and Reclassifications. In case of any
reclassification or change of outstanding securities issuable upon exercise of
this Warrant at any time (other than a change in par value, or from par value to
no par value, or from no par value to par value or as a result of a subdivision
or combination to which subsection 3(b) applies), or in case of any
consolidation or merger of the Company with or into another corporation (other
than a merger with another corporation in which the Company is the surviving
corporation and which does not result in any reclassification or change (other
than a change in par value, or from par value to no par value, or from no par
value to par value, or as a result of a subdivision or combination to which
subsection 3(b) applies) of outstanding securities issuable upon exercise of
this Warrant), the Holder shall have, and the Company, or such successor
corporation or other entity, shall covenant in the constituent documents
effecting any of the foregoing transactions that such holder does have, the
right to obtain upon the exercise hereof, in lieu of the shares of Common Stock,
other securities, money, or other property theretofore issuable upon exercise of
this Warrant, the kind and amount of shares of stock, other securities, money,
or other property receivable upon such reclassification, change, consolidation,
or merger by a holder of the shares of Common Stock, other securities, money, or
other property issuable upon exercise hereof had this Warrant been exercised
immediately prior to such reclassification, change, consolidation, or merger.
The constituent documents effecting any such reclassification, change,
consolidation, or merger shall provide for any adjustments which shall be as
nearly equivalent as may be practicable to the adjustments provided in this
subsection 3(a). The provisions of this subsection 3(a) shall similarly apply
to successive reclassifications, changes, consolidations, or mergers.
-3-
<PAGE>
(b) Subdivisions and Combinations. If the Company at any time during
the Exercise Period shall subdivide its shares of Common Stock into a greater
number of shares, the number of shares of Common Stock purchasable upon exercise
of this Warrant shall be proportionately increased and the Exercise Price shall
be proportionately decreased, as at the effective date of such subdivision, or
if the Company shall take a record of holders of its Common Stock for the
purpose of so subdividing, as at such record date, whichever is earlier. If the
Company, at any time during the Exercise Period, shall combine its shares of
Common Stock into a smaller number of shares, the number of shares of Common
Stock purchasable upon exercise hereof shall be proportionately reduced and the
Exercise Price shall be proportionately increased, as at the effective date of
such combination, or if the Company shall take a record of holders of its Common
Stock for purposes of such combination, as at such record date, whichever is
earlier.
(c) Dividends and Distributions. If the Company at any time shall
declare a dividend on its Common Stock payable in stock or other securities of
the Company or of any other corporation or other entity, or in property or
otherwise than in cash, to the holders of its Common Stock, the Holder shall,
without additional cost, be entitled to receive upon any exercise hereof, in
addition to the Common Stock to which the Holder would otherwise be entitled
upon such exercise, the number of shares of stock or other securities or
property which the Holder would have been entitled to receive if the Holder had
been a holder immediately prior to the record date for such dividend (or, if no
record date shall have been established, the payment date for such dividend) of
the number of shares of Common Stock purchasable on exercise of this Warrant
immediately prior to such record date or payment date, as the case may be.
(d) Upon any increase or decrease in the number of Warrant Shares
purchasable upon the exercise of this Warrant, the Company shall, within 30 days
thereafter, deliver written notice thereof to the Holder, which notice shall
state the increased or decreased number of Warrant Shares purchasable upon the
exercise of this Warrant and the revised Exercise Price thereof, setting forth
in reasonable detail the method of calculation and the facts upon which such
calculations are based.
Section 4. Notification by the Company. In case at any time while this
Warrant remains outstanding:
(a) the Company shall declare any dividend or make any distribution
upon its Common Stock or any other class of its capital stock; or
-4-
<PAGE>
(b) the Company shall offer for subscription pro rata to the holders
of its Common Stock or any other class of its capital stock any additional
shares of stock of any class or any other securities convertible into or
exchangeable for shares of stock or any rights or options to subscribe thereto;
or
(c) the Board of Directors of the Company shall authorize any capital
reorganization, reclassification, or similar transaction involving the capital
stock of the Company, or a sale or conveyance of all or a substantial part of
the assets of the Company, or a consolidation, merger, or business combination
of the Company; or
(d) actions or proceedings shall be authorized or commenced for a
voluntary or involuntary dissolution, liquidation, or winding-up of the Company;
then, in any one or more of such cases, the Company shall give written notice to
the Holder, at the earliest time legally practicable (and not less than 20 days
before any record date or other date set for definitive action) of the date on
which (i) the books of the Company shall close or a record shall be taken for
such dividend, distribution, or subscription rights or options or (ii) such
reorganization, reclassification, sale, conveyance, consolidation, merger,
dissolution, liquidation, or winding-up shall take place or be voted on by
shareholders of the Company, as the case may be. Such notice shall also specify
the date as of which the holders of the Common Stock of record shall participate
in said dividend, distribution, subscription rights, or options or shall be
entitled to exchange their Common Stock for securities or other property
deliverable upon such reorganization, reclassification, sale, conveyance,
consolidation, merger, dissolution, liquidation, or winding-up, as the case may
be. If the action in question or the record date is subject to the
effectiveness of a registration statement under the Securities Act or to a
favorable vote of shareholders, the notice required by this Section 4 shall so
state.
Section 5. No Voting Rights: Limitations of Liability. Prior to exercise,
this Warrant will not entitle the Holder to any voting rights or other rights as
a stockholder of the Company. No provision hereof, in the absence of affirmative
action by the Holder to exercise this Warrant, and no enumeration herein of the
rights or privileges of the Holder, shall give rise to any liability of the
Holder for the purchase price of the Warrant Shares pursuant to the exercise
hereof.
Section 6. Amendment and Waiver.
(a) No failure or delay of the Holder in exercising any power or
right hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise of such
-5-
<PAGE>
right or power, or any abandonment or discontinuance of steps to enforce such a
right or power, preclude any other or further exercise thereof or the exercise
of any other right or power. The rights and remedies of the Holder are
cumulative and not exclusive of any rights or remedies which it would otherwise
have. The provisions of this Warrant may be amended, modified, or waived with
(and only with) the written consent of the Company and the Holder.
(b) No notice or demand on the Company in any case shall entitle the
Company to any other or further notice or demand in similar or other
circumstances.
Section 7. No Fractional Warrant Shares. The Company shall not be required
to issue stock certificates representing fractions of Warrant Shares, but shall
in respect of any fraction of a Warrant Share make a payment in cash based on
the Value of the Common Stock after giving effect to the full exercise or
conversion of the Warrants.
Section 8. Validity of Warrant Shares. The Company shall reserve and keep
available at all times, free from preemptive rights, a sufficient number of
Warrant Shares to satisfy the requirements of this Warrant. The Warrant Shares:
(i) will be upon issuance, free and clear of any liens, claims, or other
encumbrances ("Liens") created by the Company or, to the Company's knowledge,
any other Person; (ii) have been duly and validly authorized and when issued and
paid for in accordance with the terms of the Warrants will be duly and validly
issued, fully paid, and non-assessable; (iii) will not have been issued or sold
in violation of any preemptive or similar rights; and (iv) will not subject the
holder thereof to personal liability by reason of being such holders.
Section 9. Notices. Unless otherwise specified, all notices and other
communications provided for between the Company and the Holder in this Warrant
shall be in writing, including telecopy, and delivered or transmitted to the
addresses set forth below, or to such other address as shall be designated by
the Company or the Holder in written notice to the other party. Notice sent by
telecopy shall be deemed to be given and received when receipt of such
transmission is acknowledged, and delivered notice shall be deemed to be given
and received when receipted for by, or actually received by, an authorized
officer of the Company or the Holder, as the case may be.
-6-
<PAGE>
If to the Company:
Kafus Environmental Industries Ltd.
270 Bridge Street
Dedham MA 02026
Attn: Mr. Michael A. McCabe
telephone: 781-326-5001
telecopier: 781-326-5105
With copies to:
Kafus Environmental Industries Ltd.
440-755 Burrard Street
Vancouver, British Columbia
Canada V6X1X6
Attn: Mr. Ken Swaisland
telephone: 604-602-1981
telecopier: 604-685-2426
If to the Holder:
ECT Merchant Investments Corp.
Attn: Tony A. Valentine
1400 Smith Street
Houston, Texas 77002
telephone: 713-853-6903
telecopier: 713-646-2654
With copies to:
Enron Capital & Trade Resources Corp.
Attn: Donna Lowry
1400 Smith Street
Houston, Texas 77002
telephone: 713-853-1939
telecopier: 713-646-4039
and
-7-
<PAGE>
Enron Capital Management
Attn: Ben Glisan
1400 Smith Street
Houston, Texas 77002
telephone: 713-853-6103
telecopier: 713-646-4990
Section 10. Section and Other Headings. The headings contained in this
Warrant are for reference purposes only and will not affect in any way the
meaning or interpretation of this Warrant.
Section 11. Governing Law. THIS WARRANT SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAWS OF BRITISH COLUMBIA AND THE APPLICABLE LAWS OF
CANADA WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW WHICH WOULD SELECT
ANOTHER LAW.
Section 12. Binding Effect. The terms and provisions of this Warrant shall
inure to the benefit of the Holder and its successors and assigns and shall be
binding upon the Company and its successors and assigns, including, without
limitation, any successor to the Company by merger, consolidation, or
acquisition of all or substantially all of the Company's assets.
Section 13. Arbitration. Disputes arising under this Warrant shall be settled
by one arbitrator pursuant to the rules of the American Arbitration Association
(the "AAA") for Commercial Arbitration (the "Rules"). Such arbitration shall be
held in New York, New York, or at such other location as mutually agreed to by
the parties to the dispute. Subject to any applicable limitations contained in
this Warrant, arbitration may be commenced at any time by any party giving
notice to the other party that a dispute has been referred to 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.
-8-
<PAGE>
IN WITNESS WHEREOF, the seal of the Company and the signature of its duly
authorized officer have been affixed hereto as of March 11, 1999.
[SEAL] KAFUS ENVIRONMENTAL INDUSTRIES LTD.
Attest: By:
-------------------- ----------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
[487,500 Share Warrant]
<PAGE>
EXHIBIT A
TO
WARRANT
PURCHASE FORM
To Be Executed by the Holder
Desiring to Exercise a Warrant of
Kafus Environmental Industries Ltd.
The undersigned holder hereby exercises the right to purchase _______
shares of Common Stock covered by the within Warrant, according to the
conditions thereof, and herewith undertakes to make payment in full of the
Exercise Price of such shares or to withdraw this notice of exercise, in
accordance with the terms of the Warrant.
Name of Holder:
-----------------------------------------
Signature:
-------------------------------
Title:
-----------------------------------
Address:
---------------------------------
-----------------------------------------
-----------------------------------------
Dated: , .
-------------- ------
-10-
<PAGE>
EXHIBIT B
TO
WARRANT
ASSIGNMENT FORM
To Be Executed by the Holder
Desiring to Transfer a Warrant of
Kafus Environmental Industries Ltd.
FOR VALUE RECEIVED, the undersigned holder hereby sells, assigns, and
transfers unto ________________ the right to purchase ____ shares of Common
Stock covered by the within Warrant, and does hereby irrevocably constitute and
appoint _________________ Attorney to transfer the said Warrant on the books of
the Company (as defined in such Warrant), with full power of substitution.
Name of Holder:
-----------------------------------------
Signature:
-------------------------------
Title:
-----------------------------------
Address:
---------------------------------
-----------------------------------------
-----------------------------------------
Dated: , .
------------- -----
In the presence of
- ---------------------------------
NOTICE:
The signature to the foregoing Assignment Form must correspond to the name as
written upon the face of the within Warrant in every detail, without alteration
or enlargement or any change whatsoever.
-11-
<PAGE>
EXHIBIT 6
[Execution Version]
WARRANT
- --------------------------------------------------------------------------------
THE SECURITIES REPRESENTED BY THIS WARRANT AND THE SHARES OF COMMON STOCK
ISSUABLE UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES OR BLUE SKY LAWS AND
MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR IN RELIANCE ON AN AVAILABLE
EXEMPTION FROM THE ACT AND ANY APPLICABLE STATE SECURITIES OR BLUE SKY LAWS.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS ON
TRANSFER SET FORTH IN SECTION 2.
- --------------------------------------------------------------------------------
KAFUS ENVIRONMENTAL INDUSTRIES LTD.
Common Stock Purchase Warrant
Representing Right To Purchase Shares of
Common Stock
of
Kafus Environmental Industries Ltd.
--------------------
[ ]
[ ]
--------------------
<PAGE>
FOR VALUE RECEIVED, KAFUS ENVIRONMENTAL INDUSTRIES LTD., a British Columbia
corporation (the "Company"), hereby certifies that ECT Merchant Investments
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 January 31, 2009 (the "Expiration Date"), 300,000 shares of Common
Stock of the Company (the Common Stock of the Company being referred to herein
as the "Common Stock" and such number of shares of Common Stock as adjusted
pursuant to the terms hereof, being the "Warrant Shares"), at a price per share
equal to U.S. $4.00 (as such price may be adjusted pursuant to the terms hereof,
the "Exercise Price"). This Warrant is issued to the Holder (together with such
other warrants as may be issued in exchange, transfer, or replacement of this
Warrant, the "Warrants") in connection with the U.S. $7,500,000 Convertible
Promissory Note (Advancing Credit Facility) dated as of March 11, 1999 (the
"Note"), made by the Company and payable to the order of the Holder, and
entitles the Holder to purchase the Warrant Shares and to exercise the other
rights, powers, and privileges hereinafter provided.
NOTWITHSTANDING THE FOREGOING, this Warrrant shall terminate if prior to the
commencement of the Exercise Period (a) the outstanding principal balance of the
Note and all accrued but unpaid interest thereon is paid in full in cash, and
not by conversion, (b) such payment occurs at a time when no Event of Default
(as such term is defined under the Amended and Restated Note Agreement dated as
of March 11, 1999, between the Company and the Holder) has occurred, and (c) all
commitments of the Holder to lend which are related to the Note have been
terminated.
Section 1. Exercise of Warrant; Cancellations of Warrant. This Warrant may
be exercised in whole or in part, at any time or from time to time, during the
Exercise Period, by presentation to the Company at its principal office at the
address set forth in Section 9 of (a) this Warrant, with the Purchase Form
annexed hereto as Exhibit A duly executed and (b) a certified bank check equal
to the Exercise Price for the Warrant Shares for which this Warrant is being
exercised (the date of such delivery referred to herein as the "Exercise Date").
Within five business days after payment of the Exercise Price, the Company shall
execute and deliver to the Holder a certificate or certificates for the total
number of Warrant Shares for which this Warrant is being exercised, in such
names and denominations as requested in writing by the Holder. The Company shall
pay any and all documentary stamp or similar issue taxes payable in respect of
the issue of the Warrant Shares. If this Warrant is exercised in part only, the
Company shall, upon surrender of this Warrant, execute and deliver a new Warrant
evidencing the rights of the Holder thereof to purchase the balance of the
Warrant Shares issuable hereunder.
-2-
<PAGE>
Section 2. Exchange, Transfer, Assignment, or Loss of Warrant. Upon
surrender of this Warrant to the Company, with the Assignment Form annexed
hereto as Exhibit B duly executed and funds sufficient to pay any transfer tax,
the Company shall, without charge, execute and deliver a new Warrant or Warrants
in the name of the assignee or assignees named in such Assignment Form and, if
the Holder's entire interest is not being assigned, in the name of the Holder,
and this Warrant shall promptly be canceled. This Warrant may be divided or
combined with other Warrants that carry the same rights upon presentation hereof
at the office of the Company, together with a written notice specifying the
names and denominations in which new Warrants are to be issued and signed by the
Holder hereof. Upon receipt by the Company of evidence satisfactory to it of the
loss, theft, destruction, or mutilation of this Warrant, and (in the case of
loss, theft, or destruction) of reasonably satisfactory indemnification
(including, if required in the reasonable judgment of the Company, a statement
of net worth of such Holder that is at a level reasonably satisfactory to the
Company), and upon surrender and cancellation of this Warrant, if mutilated, the
Company shall execute and deliver a new Warrant of like tenor and date.
Section 3. Antidilutive Adjustments. The shares of Common Stock purchasable
on exercise of this Warrant are shares of Common Stock of the Company as
constituted as of the Date of Issue. The number and kind of securities
purchasable on the exercise of this Warrant shall be subject to adjustment from
time to time upon the happening of certain events, as follows:
(a) Mergers, Consolidations, and Reclassifications. In case of any
reclassification or change of outstanding securities issuable upon exercise of
this Warrant at any time (other than a change in par value, or from par value to
no par value, or from no par value to par value or as a result of a subdivision
or combination to which subsection 3(b) applies), or in case of any
consolidation or merger of the Company with or into another corporation (other
than a merger with another corporation in which the Company is the surviving
corporation and which does not result in any reclassification or change (other
than a change in par value, or from par value to no par value, or from no par
value to par value, or as a result of a subdivision or combination to which
subsection 3(b) applies) of outstanding securities issuable upon exercise of
this Warrant), the Holder shall have, and the Company, or such successor
corporation or other entity, shall covenant in the constituent documents
effecting any of the foregoing transactions that such holder does have, the
right to obtain upon the exercise hereof, in lieu of the shares of Common Stock,
other securities, money, or other property theretofore issuable upon exercise of
this Warrant, the kind and amount of shares of stock, other securities, money,
or other property receivable upon such reclassification, change, consolidation,
or merger by a holder of the shares of Common
-3-
<PAGE>
Stock, other securities, money, or other property issuable upon exercise hereof
had this Warrant been exercised immediately prior to such reclassification,
change, consolidation, or merger. The constituent documents effecting any such
reclassification, change, consolidation, or merger shall provide for any
adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided in this subsection 3(a). The provisions of this
subsection 3(a) shall similarly apply to successive reclassifications, changes,
consolidations, or mergers.
(b) Subdivisions and Combinations. If the Company at any time during
the Exercise Period shall subdivide its shares of Common Stock into a greater
number of shares, the number of shares of Common Stock purchasable upon exercise
of this Warrant shall be proportionately increased and the Exercise Price shall
be proportionately decreased, as at the effective date of such subdivision, or
if the Company shall take a record of holders of its Common Stock for the
purpose of so subdividing, as at such record date, whichever is earlier. If the
Company, at any time during the Exercise Period, shall combine its shares of
Common Stock into a smaller number of shares, the number of shares of Common
Stock purchasable upon exercise hereof shall be proportionately reduced and the
Exercise Price shall be proportionately increased, as at the effective date of
such combination, or if the Company shall take a record of holders of its Common
Stock for purposes of such combination, as at such record date, whichever is
earlier.
(c) Dividends and Distributions. If the Company at any time shall
declare a dividend on its Common Stock payable in stock or other securities of
the Company or of any other corporation or other entity, or in property or
otherwise than in cash, to the holders of its Common Stock, the Holder shall,
without additional cost, be entitled to receive upon any exercise hereof, in
addition to the Common Stock to which the Holder would otherwise be entitled
upon such exercise, the number of shares of stock or other securities or
property which the Holder would have been entitled to receive if the Holder had
been a holder immediately prior to the record date for such dividend (or, if no
record date shall have been established, the payment date for such dividend) of
the number of shares of Common Stock purchasable on exercise of this Warrant
immediately prior to such record date or payment date, as the case may be.
(d) Upon any increase or decrease in the number of Warrant Shares
purchasable upon the exercise of this Warrant, the Company shall, within 30 days
thereafter, deliver written notice thereof to the Holder, which notice shall
state the increased or decreased number of Warrant Shares purchasable upon the
exercise of this Warrant and the revised Exercise Price thereof, setting forth
in reasonable detail the method of calculation and the facts upon which such
calculations are based.
-4-
<PAGE>
Section 4. Notification by the Company. In case at any time while this
Warrant remains outstanding:
(a) the Company shall declare any dividend or make any distribution
upon its Common Stock or any other class of its capital stock; or
(b) the Company shall offer for subscription pro rata to the holders
of its Common Stock or any other class of its capital stock any additional
shares of stock of any class or any other securities convertible into or
exchangeable for shares of stock or any rights or options to subscribe thereto;
or
(c) the Board of Directors of the Company shall authorize any capital
reorganization, reclassification, or similar transaction involving the capital
stock of the Company, or a sale or conveyance of all or a substantial part of
the assets of the Company, or a consolidation, merger, or business combination
of the Company; or
(d) actions or proceedings shall be authorized or commenced for a
voluntary or involuntary dissolution, liquidation, or winding-up of the Company;
then, in any one or more of such cases, the Company shall give written notice to
the Holder, at the earliest time legally practicable (and not less than 20 days
before any record date or other date set for definitive action) of the date on
which (i) the books of the Company shall close or a record shall be taken for
such dividend, distribution, or subscription rights or options or (ii) such
reorganization, reclassification, sale, conveyance, consolidation, merger,
dissolution, liquidation, or winding-up shall take place or be voted on by
shareholders of the Company, as the case may be. Such notice shall also specify
the date as of which the holders of the Common Stock of record shall participate
in said dividend, distribution, subscription rights, or options or shall be
entitled to exchange their Common Stock for securities or other property
deliverable upon such reorganization, reclassification, sale, conveyance,
consolidation, merger, dissolution, liquidation, or winding-up, as the case may
be. If the action in question or the record date is subject to the
effectiveness of a registration statement under the Securities Act or to a
favorable vote of shareholders, the notice required by this Section 4 shall so
state.
Section 5. No Voting Rights: Limitations of Liability. Prior to exercise,
this Warrant will not entitle the Holder to any voting rights or other rights as
a stockholder of the Company. No provision hereof, in the absence of affirmative
action by the Holder to exercise this Warrant, and no enumeration herein of the
rights or privileges of the Holder,
-5-
<PAGE>
shall give rise to any liability of the Holder for the purchase price of the
Warrant Shares pursuant to the exercise hereof.
Section 6. Amendment and Waiver.
(a) No failure or delay of the Holder in exercising any power or
right hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise of such right or power, or any abandonment or discontinuance of
steps to enforce such a right or power, preclude any other or further exercise
thereof or the exercise of any other right or power. The rights and remedies of
the Holder are cumulative and not exclusive of any rights or remedies which it
would otherwise have. The provisions of this Warrant may be amended, modified,
or waived with (and only with) the written consent of the Company and the
Holder.
(b) No notice or demand on the Company in any case shall entitle the
Company to any other or further notice or demand in similar or other
circumstances.
Section 7. No Fractional Warrant Shares. The Company shall not be required
to issue stock certificates representing fractions of Warrant Shares, but shall
in respect of any fraction of a Warrant Share make a payment in cash based on
the Value of the Common Stock after giving effect to the full exercise or
conversion of the Warrants.
Section 8. Validity of Warrant Shares. The Company shall reserve and keep
available at all times, free from preemptive rights, a sufficient number of
Warrant Shares to satisfy the requirements of this Warrant. The Warrant Shares:
(i) will be upon issuance, free and clear of any liens, claims, or other
encumbrances ("Liens") created by the Company or, to the Company's knowledge,
any other Person; (ii) have been duly and validly authorized and when issued and
paid for in accordance with the terms of the Warrants will be duly and validly
issued, fully paid, and non-assessable; (iii) will not have been issued or sold
in violation of any preemptive or similar rights; and (iv) will not subject the
holder thereof to personal liability by reason of being such holders.
Section 9. Notices. Unless otherwise specified, all notices and other
communications provided for between the Company and the Holder in this Warrant
shall be in writing, including telecopy, and delivered or transmitted to the
addresses set forth below, or to such other address as shall be designated by
the Company or the Holder in written notice to the other party. Notice sent by
telecopy shall be deemed to be given and received when receipt of such
transmission is acknowledged, and delivered notice shall be deemed
-6-
<PAGE>
to be given and received when receipted for by, or actually received by, an
authorized officer of the Company or the Holder, as the case may be.
If to the Company:
Kafus Environmental Industries Ltd.
270 Bridge Street
Dedham MA 02026
Attn: Mr. Michael A. McCabe
telephone: 781-326-5001
telecopier: 781-326-5105
With copies to:
Kafus Environmental Industries Ltd.
440-755 Burrard Street
Vancouver, British Columbia
Canada V6X1X6
Attn: Mr. Ken Swaisland
telephone: 604-602-1981
telecopier: 604-685-2426
If to the Holder:
ECT Merchant Investments
Attn: Tony A. Valentine
1400 Smith Street
Houston, Texas 77002
telephone: 713-853-6903
telecopier: 713-646-2654
With copies to:
Enron Capital & Trade Resources Corp.
Attn: Donna Lowry, Compliance Officer
1400 Smith Street
Houston, Texas 77002
telephone: 713-853-1939
telecopier: 713-646-4039
-7-
<PAGE>
and
Enron Capital Management
Attn: Ben Glisan
1400 Smith Street
Houston, Texas 77002
telephone: 713-853-6103
telecopier: 713-646-4990
Section 10. Section and Other Headings. The headings contained in this
Warrant are for reference purposes only and will not affect in any way the
meaning or interpretation of this Warrant.
Section 11. Governing Law. THIS WARRANT SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAWS OF BRITISH COLUMBIA AND THE APPLICABLE LAWS OF
CANADA WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW WHICH WOULD SELECT
ANOTHER LAW.
Section 12. Binding Effect. The terms and provisions of this Warrant shall
inure to the benefit of the Holder and its successors and assigns and shall be
binding upon the Company and its successors and assigns, including, without
limitation, any successor to the Company by merger, consolidation, or
acquisition of all or substantially all of the Company's assets.
Section 13. Arbitration. Disputes arising under this Warrant shall be settled
by one arbitrator pursuant to the rules of the American Arbitration Association
(the "AAA") for Commercial Arbitration (the "Rules"). Such arbitration shall be
held in New York, New York, or at such other location as mutually agreed to by
the parties to the dispute. Subject to any applicable limitations contained in
this Warrant, arbitration may be commenced at any time by any party giving
notice to the other party that a dispute has been referred to 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.
-8-
<PAGE>
IN WITNESS WHEREOF, the seal of the Company and the signature of its
duly authorized officer have been affixed hereto as of March 11, 1999.
[SEAL] KAFUS ENVIRONMENTAL INDUSTRIES LTD.
Attest: By:
---------------------- --------------------------------------
Name:
-------------------------------
Title:
------------------------------
[$300,000 Share Warrant]
<PAGE>
EXHIBIT A
TO
WARRANT
PURCHASE FORM
To Be Executed by the Holder
Desiring to Exercise a Warrant of
Kafus Environmental Industries Ltd.
The undersigned holder hereby exercises the right to purchase _______
shares of Common Stock covered by the within Warrant, according to the
conditions thereof, and herewith undertakes to make payment in full of the
Exercise Price of such shares or to withdraw this notice of exercise, in
accordance with the terms of the Warrant.
Name of Holder:
-----------------------------------------
Signature:
-------------------------------
Title:
-----------------------------------
Address:
---------------------------------
-----------------------------------------
-----------------------------------------
Dated: , .
------------ -----
-10-
<PAGE>
EXHIBIT B
TO
WARRANT
ASSIGNMENT FORM
To Be Executed by the Holder
Desiring to Transfer a Warrant of
Kafus Environmental Industries Ltd.
FOR VALUE RECEIVED, the undersigned holder hereby sells, assigns, and
transfers unto ____________________ the right to purchase ____ shares of
Common Stock covered by the within Warrant, and does hereby irrevocably
constitute and appoint _________________ Attorney to transfer the said Warrant
on the books of the Company (as defined in such Warrant), with full power of
substitution.
Name of Holder:
-----------------------------------------
Signature:
-------------------------------
Title:
-----------------------------------
Address:
---------------------------------
-----------------------------------------
-----------------------------------------
Dated: , .
------------- -----
In the presence of
- ---------------------------------
NOTICE:
The signature to the foregoing Assignment Form must correspond to the name as
written upon the face of the within Warrant in every detail, without alteration
or enlargement or any change whatsoever.
-11-
<PAGE>
EXHIBIT 7
[Execution Version]
Amended and Restated Note Agreement
(Sundance Assets, L.P.)
March 11,1999
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 Note Agreement dated as of December 31, 1998, between
the Company and Enron Capital & Trade Resources Corp. ("ECT"), a Delaware
corporation, which Note Agreement governed a certain $10,000,000 Term Loan A
Note made by Kafus Environmental Industries Ltd. (the "Company"), a British
Columbia corporation, and payable to the order of ECT and assigned from ECT to
Sundance Assets, L.P.(the "Purchaser"), a Delaware limited partnership, which is
an Affiliate of ECT. This Amended and Restated 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 of the
CanFibre Group Agreements to the Company and delegation to the Company 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 ECT, 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 by Samarac in favor of
ECT, consenting to the security interests under the Security Agreement.
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"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.
"ECTMI" means the Purchaser's Affiliate, ECT Merchant Investments Corp., a
Delaware corporation.
"ECTMI Note Agreement" means the Note Agreement between the Company and
ECTMI dated as of March 11,1999.
"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 either Purchaser or any predecessor in
interest of either 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 (a) with respect to the Purchaser, this Agreement,
the Notes of the Purchaser, and each other agreement, document, or instrument
now or hereafter executed which secures, supports, or otherwise relates to the
Notes of the Purchaser, and (b) with respect to the Purchasers, this Agreement,
the ECTMI Note 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 (a) with respect to the Purchaser, 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, and (b) with respect to the
Purchasers, any and all amounts now or hereafter owed by the Company to the
Purchasers in connection with the Loan Documents, including principal, interest,
fees, reimbursements, indemnifications, and other amounts, and any increases,
extensions, rearrangements, and other modifications thereof.
"Majority Purchasers" means, at any time, Purchasers holding more than 51%
of the then aggregate unpaid principal amount of the Notes held by the
Purchasers.
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"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, with respect to the Purchaser, 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 ECT and assigned by ECT
to Ponderosa Assets, L.P., an Affiliate of the Purchaser ("Ponderosa"), pursuant
to the Assignment dated as of March 1, 1999, between ECT as assignor and
Ponderosa, as assignee, and subsequently assigned by Ponderosa to the Purchaser
pursuant to the Assignment dated as of March 1, 1999, between Ponderosa as
assignor and the Purchaser as assignee, and with respect to the Purchasers, the
foregoing instrument together with:
(a) the $7,500,000 Convertible Promissory Note (Advancing Credit
Facility) dated as of March 11,1999 (the "$7,500,000 Advancing Credit
Facility Note"), made by the Company and payable to ECTMI;
(b) the $12,500,000 Convertible Promissory Note (Advancing Credit
Facility) dated as of December 31, 1998 (the "$12,500,000 Advancing Credit
Facility Note", and collectively with the $7,500,000 Advancing Credit
Facility Note, the "Advancing Credit Facility Notes") made by the Company
and payable to ECT, which note has been assigned by ECT to the Purchaser
pursuant to the Assignment dated as of December 18, 1998, between ECT as
assignor and the Purchaser as assignee, and subsequently reassigned by the
Purchaser to ECT pursuant to the Assignment dated as of March 1, 1999,
between the Purchaser as assignor and ECT as assignee, and subsequently
assigned to ECTMI pursuant to the Assignment, Acknowledgment and Consent
dated as of March 1, 1999, among ECT as assignor, ECTMI as assignee, and
the Purchaser,
(c) the Amended and Restated $10,000,000 Convertible Promissory Note
(Term Loan B) dated as of March 11,1999 (the "$10,000,000 Term Loan B
Note"), made by the Company and payable to ECTMI, which $10,000,000 Term
Loan B Note was an amendment and restatement of the $10,000,000 Convertible
Promissory Note (Term Loan B) dated as of December 31, 1998, made by the
Company and payable to ECT and assigned by ECT to ECTMI pursuant to the
Assignment dated as of December 31, 1998, between ECT as assignor and ECTMI
as assignee,
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(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 ECT and assigned by ECT to ECTMI pursuant to the
Assignment dated as of March 1, 1999, between ECT as assignor and ECTMI as
assignee.
"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 ECT, pledging 100% of the shares in Kafus
Cement Fibre Industries, Inc., a Delaware corporation, to ECT as collateral for
certain Loan Obligations.
"Purchaser" has the meaning specified in the introduction. "Purchasers"
means the Purchaser and ECTMI as Purchaser under the ECTMI Note Agreement. The
terms "Purchaser" and "Purchasers" shall include the original Purchasers and
each subsequent holder of any of the Notes.
"Registration Rights Agreement" means the Registration Rights Agreement
dated as of March 11,1999, 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 of ECT, granting ECT a security interest in
the CanFibre Group Agreements and the Asset Purchase Agreement to secure certain
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 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.
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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 Majority Purchasers.
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 $7,500,000 Advancing Credit Facility Note . Effective on March 11,
1999, the Company has issued the $7,500,000 Convertible Promissory Note to
ECTMI, in exchange for the commitment of ECTMI to make advances thereunder.
2.2 $12,500,000 Advancing Credit Effective on December 31, 1998,
Facility Note. the Company amended and restated the prior outstanding
$12,500,000 Convertible Promissory Note dated as of August 18, 1998, made by the
Company and payable to ECT, into the $12,500,000 Advancing Credit Facility Note
described herein. The outstanding principal amount of such prior note was
continued under the $12,500,000 Advancing Credit Facility Note. As of the date
of this Agreement, the $12,500,000 Advancing Credit Facility Note is held by
ECTMI, and the outstanding principal amount thereof is $12,500,000.
2.3 $10,000,000 Term Loan A Note. Effective on December 31, 1998, the
Company issued the $10,000,000 Term Loan A Note to ECT, 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 ETC.
As of the date of this Agreement, the $10,000,000 Term Loan A Note is held by
the Purchaser, and the outstanding principal amount thereof is $10,000,000.
2.4 $10,000,000 Term Loan B Note. Effective on March 11,1999, the
Company has amended and restated the prior outstanding U.S.$10,000,000
Convertible Promissory Note (Term Loan B) dated as of December 31, 1998 (the
"Prior Note B"), made by the Company and payable to ECT, which Prior Note B was
issued 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 ECT, releasing certain interests under the CanFibre
Group Agreements so that
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<PAGE>
they might be purchased by the Company under the Asset Purchase Agreement. The
outstanding principal amount of the Prior Note B is continued under the
$10,000,000 Term Loan B Note, and as of the date of this Agreement, is
$10,000,000.
2.5 $4,250,000 Term Loan C Note. Effective on December 31, 1998, the
Company 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 ECT, into the $4,250,000 Term Loan C Note described herein. The
outstanding principal amount of the prior note was 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 ECT in connection with
ECT's investments in CanFibre of Lackawanna LLC, a subsidiary of the Company. As
of the date of this Agreement, the $4,250,000 Term Loan C Note is held by ECTMI,
and the outstanding principal amount thereof 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.
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<PAGE>
(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,
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 25,407,716 shares are issued and outstanding as of March 3, 1999.
(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
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<PAGE>
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 Purchasers;
(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);
(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.;
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<PAGE>
(xii) The Company has since December 29, 1998, 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 ("CanFibre Lackawanna"). The
$3,000,000 HSB Note is secured by a pledge of 1,250,000 shares of Common
Stock of the Company pledged by HY Holdco Enterprises No. 2 Inc.. In
addition, the Company is issuing 75,000 shares of Common Stock to HSB in
connection with the $3,000,000 HSB Note;
(xiii) The Company has entered into an Option Agreement with HSB
pursuant to which, among other things: (a) the Company has granted to HSB
the right (the "HSB Equity Interest Put Right"), exercisable from and after
the first anniversary of the Acceptance Date (as defined in the Amended and
Restated Limited Liability Agreement of CanFibre Lackawanna dated as of
December 31, 1998) to the twelfth anniversary of the Acceptance Date, to
require the Company to purchase from HSB HSB's US $9,500,000 equity
interest (consisting of 100% of the preferred interest and 1% of the common
interest) in CanFibre Lackawanna ("HSB's Equity Interest"); and (b) HSB has
granted to the Company the right (the "HSB Equity Interest Call Right"),
exercisable for a term of 12 years following the Acceptance Date, to
purchase HSB's Equity Interest. The price payable upon exercise of the HSB
Equity Interest Put Right or the HSB Equity Interest Call Right, as the
case may be is based on an investment rate of return (33.5% in the case of
the HSB Equity Interest Put Right, and 37% in the case of the HSB Equity
Interest Call Right) calculated with reference to HSB's capital
contributions to CanFibre Lackawanna, subject to certain adjustments giving
effect to any tax benefits and cash distributions. Such price will be
payable in cash, or, at the option of HSB if the HSB Equity Interest Put
Right or the HSB Equity Interest Call Right is exercised between the first
and third anniversaries of the Acceptance Date, all or a portion thereof
not in excess of the greater of (x) fifty percent (50%) of such price and
(y) US$9,500,000, will be payable in and converted into common shares of
the Company at a conversion price equal to a 15% discount to the weighted
average trading price of the Company's common shares for the 30 day period
immediately preceding the date on which the price is payable, subject in
certain circumstances to specified minimum and maximum amounts per share;
(xiv) Dieffenbacher Panel Production Systems GmbH has an option
to acquire preference equity in CanFibre Group at an issue value of
$750,000 which becomes exerciseable 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 exerciseable;
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(xv) Stone & Webster Development Corp. has an option to acquire
preference equity of CanFibre of Lackawanna LLC which becomes exerciseable
upon deemed funding in connection with draws under a $3,500,000 letter of
credit issued at the request of CanFibre of Lackawanna LLC which may be
converted into preference stock of CanFibre of Lackawanna LLC two years
after the option becomes exercisable. The preference stock of CanFibre of
Lackawanna LLC may be converted to common stock of CanFibre Group three
years after the option becomes exercisable; and
(xvi) Gerhard Spengler and R&S Stanztechnik GmbH have since
December 29, 1998, been 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 Material 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 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
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<PAGE>
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.
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
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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.
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,
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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 Ontario, 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) 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
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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 or the Purchaser's predecessor in interest
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.
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
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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 Majority
Purchasers, 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 Purchasers; (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 Majority Purchasers 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 Majority
Purchasers, the Company shall not, and shall not permit any of its Subsidiaries
to, make any payment on or with respect to, or purchase, redeem, defease, or
otherwise acquire or retire for value any amount of any Permitted Debt permitted
pursuant to paragraph (b)(ii) above prior to the stated due dates or maturities
thereof. The Company shall not, and shall not permit any of its Subsidiaries to,
amend, supplement, or otherwise modify any of the terms or conditions of any
such Permitted Debt (other than any such amendment, supplement, or modification
which would extend the maturities of or reduce the
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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 Majority
Purchasers, 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
owed to the Purchaser 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 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
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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 Majority
Purchasers, 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
Majority Purchasers, but no further investments therein unless such further
investments have been approved by the Majority Purchasers, and (iii) loans,
advances, and other investments in Persons other than those described in clauses
(i) and (ii) in an aggregate outstanding amount not to exceed U.S. $500,000; (b)
investments in the form of loans, guaranties, open accounts, and other
extensions of trade credit in the ordinary course of business; (c) investments
in direct obligations of the United States or Canada, or investments in any
Person which investments are guaranteed by the
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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
Majority Purchasers, the Company shall not, and shall not permit any of its
Subsidiaries to (a) merge, consolidate, or amalgamate with another Person, or
liquidate, wind up, or dissolve itself (or take any action towards any of the
foregoing), (b) convey, sell, lease, assign, transfer, or otherwise dispose of
any of its property, businesses, or other assets outside of the ordinary course
of business, or (c) make any direct or indirect purchase or acquisition, whether
in one or more related transactions, of any Person or group of Persons or any
related group of assets, liabilities, or securities of any Person or group of
Persons (excluding purchases of inventory and equipment in the ordinary course
of business) except that:
(i) The Company or any Subsidiary of the Company may sell the
stock of Subsidiaries of the Company provided that the Subsidiaries whose
stock is sold remain Subsidiaries of the Company;
(ii) Any Subsidiary of the Company may merge, consolidate, or
amalgamate into any Subsidiary of the Company or convey, sell, lease,
assign, transfer, or otherwise dispose of any of its assets to any
Subsidiary of the Company (and if such disposition transfers all or
substantially all of the assets of transferring Subsidiary, such subsidiary
may then liquidate, wind up, or dissolve itself); provided that the
Subsidiary is the surviving or acquiring Subsidiary;
(iii) Any Subsidiary of the Company may merge, consolidate, or
amalgamate with another Person with the other Person as the surviving
entity or convey, sell, lease, assign, transfer, or otherwise dispose of
any of its assets to another Person (and if such disposition transfers all
or substantially all of the assets of transferring Subsidiary, such
Subsidiary may
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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
Majority Purchasers.
4.9 Dividends. Without the prior written approval of the Majority
Purchasers, 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 Majority Purchasers 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.
4.12 Transactions with Affiliates. Without the prior written consent of
the Majority Purchasers, 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
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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);
(iii) copies of any management letters prepared by the Company's
auditors and the Company's responses thereto promptly after their issuance; and
(iv) notice of the occurrence of any Material Adverse Change,
promptly after its occurrence.
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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 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 Purchasers and their respective Affiliates
beneficially own less than 10% of the outstanding Common Stock.
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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 and the ECTMI 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 either 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 or any Subsidiary of the Company the effect of which is to
accelerate or to permit the acceleration of the maturity of any such
indebtedness, whether or not any such indebtedness is actually accelerated, and
the aggregate amount of all such indebtedness so in default exceeds U.S.
$5,000,000;
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(f) (i) There shall have been filed against the Company or any
other Credit Party or any Material Subsidiary of the Company or any of their
respective properties, without such Person's consent, any petition or other
request for relief seeking an arrangement, receivership, reorganization,
liquidation, or similar relief under bankruptcy or other laws for the relief of
debtors and such request for relief (A) remains in effect for 60 or more days,
whether or not consecutive, or (B) is approved by a final nonappealable order,
or (ii) the Company or any other Credit Party or any Material Subsidiary of the
Company consents to or files any petition or other request for relief of the
type described in clause (i) above seeking relief from creditors, makes any
assignment for the benefit of creditors or other arrangement with creditors, or
admits in writing such Person's inability to pay its debts as they become due
(the occurrence of any Event of Default under clause (i) or (ii) being a
"Bankruptcy Event of Default");
(g) A judgment in excess of U.S. $5,000,000 is rendered against
the Company or any other Credit Party or any Subsidiary of the Company and such
judgment is not discharged or stayed pending appeal within 30 days following its
entry; or
(h) (a) There shall occur the direct or indirect acquisition
after the date hereof by any Person or related Persons constituting a group of
(i) beneficial ownership of issued and outstanding shares of Voting Securities
of the Company, the result of which acquisition is that such Person or such
group possesses 20% or more of the combined voting power of all then-issued and
outstanding Voting Securities of the Company or (ii) the power to elect,
appoint, or cause the election or appointment of at least a majority of the
members of the board of directors of the Company, or, (b) 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.
5.2 Remedies.
(a) During the continuation of any Event of Default, the Majority
Purchasers may (i) declare by written notice to the Company all of the
commitments of the Purchasers 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 Purchasers shall
terminate immediately and automatically), and (ii) declare by written notice to
the Company all Loan Obligations owed to the Purchasers to be immediately due
and payable, whereupon such amounts
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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 Majority
Purchasers 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 Purchasers upon demand of the
Majority Purchasers.
(c) During the continuation of an Event of Default, and subject to
Section 6.6 of this Agreement, 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 Majority
Purchasers may exercise all of their rights under the Loan Documents and all
other rights at law or in equity.
(e) Following an acceleration of the Loan Obligations, all payments
and collections shall be applied to the Loan Obligations of the Purchasers in
the following order:
First, to the accrued but unpaid fees and reimbursable out of pocket
expenses due and payable to the Purchasers under the Loan Documents,
ratably in accordance with the amount of such obligations which are owed to
each Purchaser at the time of disbursement,
Second, to the accrued but unpaid interest and premium due and payable to
Purchasers under the Loan Documents, ratably in accordance with the amount
of such obligations which are owed to each Purchaser at the time of
disbursement,
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Third, to the outstanding principal balance of the Notes due and payable to
Purchasers under the Loan Documents, ratably in accordance with the amount
of such obligations which are owed to each Purchaser at the time of
disbursement,
Fourth, to any other accrued but unpaid Loan Obligations due and payable to
the Purchasers under the Loan Documents, ratably in accordance with the
amount of such obligations which are owed to each Purchaser at the time of
disbursement, and
Then, the remainder, if any, to the Company or any other party lawfully
entitled thereto.
Notwithstanding the foregoing, any amounts received by ECTMI on realization upon
the collateral securing the Advancing Credit Facility Notes shall be solely for
the benefit of ECTMI and shall not be subject to ratable application to the Loan
Obligations of the Purchasers under this Section 5.2(e).
(f) Except as set forth below or where the remedial action is
automatically provided for in the Loan Documents, and notwithstanding any
provision to the contrary in any Note, the exercise by the Majority Purchasers
of any remedial action, including accelerating any Loan Obligations, or
initiating any enforcement proceedings, shall require an affirmative vote of the
Majority Purchasers; provided, however, that during an Event of Default, ECTMI
may exercise the rights granted under the Security Agreement and the Pledge
Agreement, including foreclosing on any collateral.
(g) Subject to the foregoing paragraph (f), no right, power, or
remedy conferred to the Purchaser in the Loan Documents or in any documents
securing or supporting the Loan Documents or now or hereafter existing at law,
in equity, by statute, or otherwise shall be exclusive, and each such right,
power, or remedy shall to the full extent permitted by law be cumulative and in
addition to every other such right, power or remedy. No course of dealing and no
delay in exercising any right, power, or remedy conferred to the Purchaser shall
operate as a waiver of or otherwise prejudice any such right, power, or remedy.
No notice to or demand upon the Company shall entitle the Company to similar
notices or demands in the future.
Section 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
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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 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
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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.
6.4 Waiver, Amendment, and Survival. (a) Performance under the Loan
Documents to may be waived only in a writing signed by Majority Purchasers and,
if the Company is a party to the applicable Loan Document, also by the Company,
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 may be amended,
supplemented, and otherwise modified only in a writing signed by the Majority
Purchasers and, if the Company is a party to the applicable Loan Document, also
by the Company, and such an amendment, supplement, or other modification shall
be effective only for the purposes and only to the extent stated in that
writing. Any modification, waiver, or consent given or made by the Majority
Purchasers applies equally to all Purchasers (including those Purchasers that
have not signed the writing memorializing such modification, waiver, or consent)
and is binding upon them and upon the Company without regard to whether any Note
has been marked to indicate such modification or waiver.
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(b) For the purposes of determining whether the requisite
percentage of Purchasers have approved or consented to any modification, waiver
or consent to be given under this Agreement, or have directed the taking of any
action provided herein to be taken upon the direction of the holders of a
specified percentage of the aggregate principal amount of Notes then
outstanding, Notes directly or indirectly owned by the Company or any of its
Affiliates shall be deemed not to be outstanding.
(c) 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 Purchasers and their respective successors
and assigns. The Company may not assign its rights or delegate its duties under
the Loan Documents. The Purchasers may not assign or participate their
respective rights or delegate their respective 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
Purchasers may assign or participate their respective rights and delegate their
respective 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 Purchasers may, at any time, assign their respective rights
and duties under the Loan Documents to their respective Affiliates.
6.6 Sharing. During the continuation of an Event of Default, if any
Purchasers should receive any payment against the Loan Obligations of such
Purchasers in excess of the ratable payments received by the other Purchasers
(whether by exercise of the right of setoff or banker's lien, counterclaim or
cross action, enforcement of any right under the Loan Documents, or otherwise),
then the Purchasers receiving less than their ratable share of the applicable
payment (the "underpaid Purchasers") shall sell to the other Purchasers (the
"overpaid Purchasers"), and the overpaid Purchasers shall purchase from the
underpaid Purchasers, for cash without recourse, such participations in the Loan
Obligations of the underpaid Purchasers as shall result in a ratable sharing of
the payments received by all Purchasers; provided, that if all or any portion of
any excess payment is thereafter recovered from the overpaid Purchasers, such
purchases of participations shall be rescinded and the purchase price restored
to the extent of such recovery. Notwithstanding the foregoing, any amounts
received by ECTMI on realization upon the collateral securing the Advancing
Credit Facility Notes shall be solely for the benefit of ECTMI and shall not be
subject to redistribution under this Section 6.6.
6.7 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
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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
Vancouver, BC Canada V62 1X6
Attn: Mr. Ken Swaisland
Telephone: 604-684-0663
Telecopier: 604-685-2426
and
Kafus Environmental Industries Ltd.
270 Bridge Street
Dedham MA 02026
Attn: Mr. Michael A. McCabe
Telephone: 781-326-5001
Telecopier: 781-326-5105
Sundance Assets, L.P.
Attn: Tony A. Valentine
1400 Smith Street
Houston, Texas 77002
Telephone: 713-853-6903
Telecopier: 713-646-2654
With a copy to:
Enron Capital & Trade Resources Corp.
Attn: Donna Lowry
1400 Smith Street
Houston, Texas 77002
telephone: 713-853-1939
telecopier: 713-646-4039
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<PAGE>
And a copy to:
Enron Capital Management
Attn: Ben Glisan
1400 Smith Street
Houston, Texas 77002
telephone: 713-853-6103
telecopier: 713-646-4990
6.8 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.
6.9 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 Company and the Majority Purchasers, 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.
6.10 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 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
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<PAGE>
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.
6.11 Counterparts. This Agreement may be executed in multiple
counterparts which together shall constitute one and the same instrument.
6.12 Intended Third Party Beneficiary. The Purchaser agrees and
acknowledges that the provisions of this Agreement which involve sharing of
certain payments, application of payments following the acceleration of the Loan
Obligations, voting rights, waivers and amendments, pursuit of remedies, actions
to be taken upon the determination of the Majority Purchasers, and other actions
or decisions hereunder referring to or affecting the Purchasers are intended to
benefit all Purchasers, and each other Purchaser is an intended third party
beneficiary of this Agreement.
6.13 Amendment and Restatement. This Agreement and the Amended and
Restated Note Agreement dated as of March 11,1999, between the Company and ECTMI
represent a full and complete amendment, restatement, and bifurcation of the
Note Agreement dated as of December 31, 1998, between the Company and ECT, the
terms of which superceded the Securities Purchase Agreement dated as of August
18, 1998, between the Company and ECT, with respect to the Notes thereunder. The
indebtedness under such prior versions of this Agreement and the Notes continues
under this Agreement and the respective Notes, and the execution of this
Agreement and the Notes does not indicate a payment, satisfaction, novation, or
discharge thereof. All support for the indebtedness under the prior versions of
this Agreement and the Notes continues to support the indebtedness hereunder.
6.14 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.
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EXECUTED as of the date first above written.
Very truly yours,
SUNDANCE ASSETS, L.P.
By: Ponderosa Assets, L.P., its general partner
By: Enron Ponderosa Management Holdings, Inc.
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
AGREED TO AND ACCEPTED
as of the date first
above written.
KAFUS ENVIRONMENTAL INDUSTRIES LTD.
By:
--------------------------
Name:
- -----------------------------
Title:
-----------------------
[Sundance Amended and Restated Note Agreement]
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EXHIBIT 8
[Execution Version]
AMENDED AND RESTATED CONVERTIBLE PROMISSORY NOTE
(Term Loan B)
THIS AMENDED AND RESTATED CONVERTIBLE PROMISSORY NOTE, WHICH REPRESENTS AN
AMENDMENT AND RESTATEMENT OF THE CONVERTIBLE PROMISSORY NOTE (TERM LOAN B) DATED
AS OF DECEMBER 31, 1998, 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 March 11, 1999
KAFUS ENVIRONMENTAL INDUSTRIES LTD., a British Columbia corporation (the
"Borrower"), for value received, hereby promises to pay to the order of ECT
MERCHANT INVESTMENTS 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 Amended and Restated 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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<PAGE>
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 Amended and Restated Note
Agreement dated as of March 11, 1999 (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 nonusurious interest rate than applicable laws now allow.
NOTWITHSTANDING the foregoing or any other term in this Note to the contrary, it
is the intention of the Lender and the Borrower to conform strictly to any
applicable usury laws. Accordingly, if the Lender contracts for, charges, or
receives any consideration in connection with this Note which constitutes
interest in excess of the Highest Lawful Rate, then any such excess shall be
canceled automatically and, if previously paid, shall at the Lender's option be
applied to the outstanding amount of the loans made hereunder or be refunded to
the Borrower. In determining whether any interest exceeds the Highest Lawful
Rate, such interest shall, to the extent permitted by applicable law, be
amortized, prorated, allocated, and spread in equal parts throughout the term of
this Note.
During the continuation of an Event of Default, the Lender is authorized at
any time, to the fullest extent permitted by law, to setoff and apply any
indebtedness owed by the Lender to the Borrower against any and all of the
obligations of the Borrower under this Note, irrespective of whether or not the
Lender shall have made any demand under this Note and although such obligations
may be contingent and unmatured.
During the continuation of an Event of Default, the Lender may exercise all
of its rights under the Loan Documents and all other rights at law or in equity.
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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").
5
<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
6
<PAGE>
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
7
<PAGE>
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 (other than in satisfaction
of dividend obligations with respect to the preferred stock of the Borrower
which are payable in Common Stock (A) for which the Common Stock is valued
at the Average Price at the time of issuance, or (B) payable with respect
to (y) preferred stock of the Borrower held by the Lender or an Affiliate
of the Lender or (z) the 2,500 Series VIII 10% Convertible Redeemable
Preference Shares), 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
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<PAGE>
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 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
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<PAGE>
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 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
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<PAGE>
validly and legally issue fully paid and non-assessable shares of such Common
Stock at such adjusted conversion price.
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 (a) on or before December
31, 2000 (the "Termination Test Date"), the Borrower has closed and funded three
or more Projects (as defined below), (b) on or before
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<PAGE>
the Termination Test Date (i) the Borrower has prepaid or repaid in full in
cash, and not by conversion or other agreement, the outstanding principal
balance and all accrued but unpaid interest on (a) the U.S. $12,500,000
Convertible Promissory Note (Advancing Credit Facility Note) dated as of
December 31, 1998 (the "$12,500,000 Advancing Credit Facility Note"), made by
the Borrower and payable to the Lender and (B) the U.S. $7,500,000 Convertible
Promissory Note (Advancing Credit Facility Note) dated as of March 11, 1999 (the
"$7,500,000 Advancing Credit Facility Note", and together with the $12,500,000
Advancing Credit Facility Note, the "Advancing Credit Facility Notes"), (ii)
such payments occur at a time when no Event of Default has occurred, and (iii)
all commitments of the Lender to lend which are related to the Advancing Credit
Facility Notes have been terminated, and (c) 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. $7.00. As used in this paragraph,
any of the following shall constitute a "Project": (i) 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.
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8. Amendment and Restatement
This Note evidences an amendment and restatement of certain
indebtedness previously evidenced by the $10,000,000 Convertible Promissory Note
(Term Loan B) dated as of December 31, 1998 (the "Original Note"), made by the
Borrower and payable to Enron Capital & Trade Resources Corp., ("ECT") and
assigned by ECT to the Lender pursuant to the Assignment, dated as of December
31, 1998 , between ECT as assignor and the Lender as assignee. The outstanding
principal amount of and accrued but unpaid interest under the Original Note
continues under this Note and the execution of this Note does not indicate a
payment, satisfaction, novation, or discharge thereof. All security and support
for the Original Note and the indebtedness represented thereby continues to
secure and support this Note and the indebtedness hereunder.
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:
Title:
[Term Loan B Note]
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<PAGE>
EXHIBIT 9
[Execution Version]
AMENDMENT TO WARRANT AGREEMENT
This Amendment to Warrant Agreement dated as of March 11,1999 (this
"Agreement"), is entered into by Kafus Environmental Industries Ltd., a British
Columbia corporation (the "Company"), and Sundance Assets, L.P., a Delaware
limited partnership ("Sundance"). Reference is made to the Warrant Agreement
dated as of December 31, 1998 (as modified from time to time, the "Warrant
Agreement"), between the Company and Enron Capital & Trade Resources
Corp.("ECT"), an Affiliate of Sundance, whose interest under the Warrant
Agreement has transferred to Sundance in connection with the assignment of the
Warrants as described below. The defined terms of the Warrant Agreement, to
which this agreement relates, are used herein unless otherwise defined herein.
INTRODUCTION
The Company and Sundance have entered into the Amended and Restated Registration
Rights Agreement dated as of March 11,1999 (as modified from time to time, the
"Registration Rights Agreement"), amending and restating the Registration Rights
Agreement dated as of December 31, 1998, between the Company and ECT, governing
the registration rights applicable to certain Warrants made by the Company,
issued to ECT, and assigned from ECT to Ponderosa Assets, L.P.("Ponderosa"), an
Affiliate of ECT, pursuant to the Assignment dated as of December 18, 1998,
between ECT as assignor and Ponderosa as assignee, and subsequently assigned
from Ponderosa to Sundance pursuant to the Assignment dated as of December
18,1998, between Ponderosa as assignor and Sundance as assignee. In connection
with the execution of the Registration Rights Agreement, the Company and
Sundance agree as follows:
Section 1. Amendment to Warrant Agreement. To reflect the incorporation of the
Registration Rights Agreement under the Warrant Agreement, the Warrant Agreement
is hereby amended as follows:
Section 1.1 of the Warrant Agreement is amended by replacing the definition
of "Registration Rights Agreement" with following definition:
"Registration Rights Agreement" means the Amended and Restated
Registration Rights Agreement dated as of March 11,1999, between the
Company and Sundance Assets, L.P.
Section 2. Effect on Warrant Documents.
2.1 Except as amended herein, the Warrant Agreement, the Warrants, and the
other Warrant Documents remain in full force and effect. The Company represents
and warrants that it
<PAGE>
has no defenses to the enforcement of the Warrant Agreement, as amended. The
Company further agrees that nothing herein shall act as a waiver of any of
Sundance's rights under the Warrant Documents as amended, including any waiver
of any default or event of default, however denominated. The Company must
continue to comply with the terms of the Warrant Documents, as amended.
2.2 This Agreement is a Warrant Document for the purposes of the
provisions of the other Warrant Documents.
Section 3. Effectiveness. This Agreement shall become effective and the
Warrant Documents shall be amended as provided herein effective as of the date
first set forth above when the Company shall have duly and validly executed
originals of this Agreement.
Section 4. Miscellaneous.
4.1 Expenses. The Company shall pay directly or reimburse Sundance for
all reasonable expenses of Sundance, as applicable, including charges and
disbursements of legal counsel for Sundance, in connection with the amendment,
modification, waiver, or interpretation of this Agreement and the other Warrant
Documents, and the preservation or enforcement of any rights of Sundance
hereunder or thereunder, including the expenses of Sundance prior to the
execution of this Agreement or the other Warrant Documents. The provisions of
this paragraph shall survive any purported termination of this Agreement that
does not expressly reference this paragraph.
4.2 Governing Law. This Agreement shall be governed by, construed, and
enforced in accordance with the laws of British Columbia and the applicable laws
of Canada, without regard to its principles of conflicts of law which would
select another law. This Agreement may be signed in any number of counterparts,
each of which shall be an original, and may be executed and delivered by
telecopier.
4.3 No Further Agreements. THIS WRITTEN AGREEMENT AND THE LOAN DOCUMENTS
REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY
EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE
PARTIES.
2
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THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.
EXECUTED as of the date first above written.
KAFUS ENVIRONMENTAL INDUSTRIES LTD.
By:
------------------------------------
Name:
Title:
SUNDANCE ASSETS, L.P.
By: Ponderosa Assets, L.P., its general partner
By: Enron Ponderosa Management Holdings, Inc.
By:
-------------------------------
Name:
Title:
[Amendment to Warrant Agreement]
3
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EXHIBIT 10
[Execution Version]
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and entered
into as of March 11,1999, by and between Kafus Environmental Industries Ltd., a
British Columbia corporation (the "Company"), and ECT Merchant Investments
Corp., a Delaware corporation (the "Purchaser").
RECITALS
WHEREAS, the Company and the Purchaser are parties to the Amended and
Restated Note Agreement dated as of March 11,1999 (as modified from time to
time, the "Note Agreement"), governing certain Notes as defined therein (the
"Notes"),several of which Notes were originally issued to Enron Capital & Trade
Resources Corp. ("ECT") pursuant to the Note Agreement dated as of December 31,
1998, between the Company and ECT, which Notes have been assigned by ECT to the
Purchaser as described in the Note Agreement.
WHEREAS, the Company and the Purchaser are parties to the Warrant Agreement
dated as of March 11,1999 (as modified from time to time, the "Warrant
Agreement"), governing certain March 1999 Warrants as defined therein (the
"Warrants").
WHEREAS, the Company has issued to ECT 100,000 shares of Common Stock of
the Company in connection with the closing of the CanFibre Lackawanna project
finance (the "CanFibre Lackawanna Shares"), which shares have been assigned by
ECT to the Purchaser..
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.
NOW, THEREFORE, the parties hereto, intending legally to be bound, hereby
agree as follows:
1. DEFINITIONS.
As used in this Agreement, the following terms shall have the meanings
ascribed to them below:
(a) "Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person.
<PAGE>
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, 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.
(i) "Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
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(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:
(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
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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 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;
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(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 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
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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.
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
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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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(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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(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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(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
With a copy to:
Kafus Environmental Industries Ltd.
Attn: Mr. Ken Swaisland
440-755 Burrard Street
Vancouver, British Columbia
Canada V6Z1X6
telephone: 604-602-1981
telecopier: 604-685-2426
(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.
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(e) Headings; Construction. The Section numbers and headings in this
Agreement are for convenience of reference only and shall not limit or otherwise
affect the meaning hereof. Unless the context otherwise requires, all
references to Sections are to sections of this Agreement, and words in the
singular include the plural and vice versa. In computing any period of time
specified in this Agreement or in any notices, the date of the act or event from
which such period of time is to be measured shall be included, any such period
shall expire at 5:00 p.m., New York time, on the last day of such period, and
any such period denominated in months shall expire on the date in the last month
of such period that has the same numerical designation as the date of the act or
event from which such period is to be measured; provided, however, that if there
is no date in the last month of such period 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) Amendment, Restatement, and Bifurcation. This Agreement and the
Amended and Restated Registration Rights Agreement dated as of March 11,1999,
between Sundance Assets, L.P. ("Sundance"), and the Company represent an
amendment, restatement, and bifurcation of the Registration Rights Agreement
dated as of December 31, 1998, between Enron Captial & Trade Resources Corp. and
the Company, which governed certain Conversion Shares and Warrant Shares (as
defined therein) to which ECT was a party and which such Registrable Securities
have been assigned from ECT to Sundance and the Purchaser.
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(j) 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.
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:
ECT MERCHANT INVESTMENTS CORP.
By:
----------------------------------
Name:
Title:
[Registration Rights Agreement]
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EXHIBIT 11
[Execution Version]
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and entered
into as of March 11, 1999, by and between Kafus Environmental Industries Ltd., a
British Columbia corporation (the "Company"), and Sundance Assets, L.P., a
Delaware limited partnership (the "Purchaser").
RECITALS
WHEREAS, the Company and the Purchaser are parties to an Amended and
Restated Note Agreement dated as of March 11, 1999 (as modified from time to
time, the "Note Agreement"), governing a certain Term Loan A Note as defined
therein (the "Note"), which Note has been assigned by Enron Capital & Trade
Resources Corp. ("ECT") to the Purchaser, as described in the Note Agreement.
WHEREAS, the Company and ECT 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"), which Warrants
were made by the Company, issued to ECT and assigned from ECT to Ponderosa
Assets, L.P.("Ponderosa"), an Affiliate of ECT, pursuant to the Assignment dated
as of December 18, 1998, between ECT as assignor and Ponderosa as assignee, and
subsequently assigned from Ponderosa to the Purchaser pursuant to the Assignment
dated as of December 18,1998, between Ponderosa as assignor and the Purchaser as
assignee.
WHEREAS, ECT's rights under the Warrant Agreement have transferred to the
Purchaser in connection with the assignment of the Warrants as described above.
WHEREAS, the Purchaser desires that the Company register the Common Stock
issuable upon conversion of the Note (the "Conversion Shares") and the Common
Stock issuable upon the exercise of the Warrants (the "Warrant Shares") upon the
terms and subject to the conditions set forth in this Agreement.
WHEREAS, the execution and delivery of this Agreement is a condition
precedent to the Purchaser's obligations under the Note Agreement.
NOW, THEREFORE, the parties hereto, intending legally to be bound, hereby
agree as follows:
1. DEFINITIONS.
As used in this Agreement, the following terms shall have the meanings
ascribed to them below:
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(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 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) 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 (d) any
securities issued or issuable in respect of or in exchange for any of the shares
of Common Stock referred to in clauses (a) through (c) above by way of a stock
dividend or stock split or in connection with a combination of shares,
recapitalization, reclassification, merger, consolidation, or exchange offer
("Distribution Securities"). For purposes of this Agreement, a Registrable
Security ceases to constitute a Registrable Security hereunder (i) when such
Registrable Security shall have been effectively registered under the Securities
Act and disposed of in a public market transaction pursuant to a Registration
Statement, (ii) when such Registrable Security shall have been sold pursuant to
Rule 144 (or any successor provision) under the Securities Act, (iii) when such
Registrable Security shall have been otherwise transferred and a new certificate
for such Registrable Security not bearing a legend restricting further transfer
shall have been delivered by the Company, (iv) with respect to a particular
Holder, at any time when all of such Holder's remaining Registrable Securities
can be sold in a single transaction in compliance with Rule 144 under the
Securities Act, (v) on the third anniversary of the original issuance date of
such Registrable Security, provided that the Holder of such Registerable
Security is not an Affiliate of the Company as of such date, and has not been an
Affiliate of the Company for a period of three months preceding such date, or
(vi) when such Registrable Security shall have ceased to be outstanding.
(f) "Registration Statement" shall have the meaning set forth in
Section 2.
(g) "Registration Termination Date" means, the first date on which all
Conversion Shares and Warrant Shares (and any Distribution Securities with
respect thereto) cease to be Registrable Securities.
(h) "Securities Act" means the Securities Act of 1933, as amended.
(i) "Securities Exchange Act" means the Securities Exchange Act of 1934,
as amended.
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(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 and (ii) the Warrant Shares. The Company
shall use its best efforts to cause each Registration Statement to be declared
effective on or prior to the one hundred and fiftieth (150th) day following the
Filing Deadline and shall thereafter keep such Registration Statement
continuously effective until the Registration Termination Date.
(b) Delay in Effectiveness. In the event any Registration Statement is not
declared effective by the SEC within 150 days after the Filing Deadline (the
"Effectiveness Deadline"), or in the event the effectiveness of any Registration
Statement is suspended or terminated at any time after its Effectiveness
Deadline and prior to the Registration Termination Date, then, 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 the Note 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 Note
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:
(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
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<PAGE>
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 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;
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<PAGE>
(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 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
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<PAGE>
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.
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
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<PAGE>
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
With a copy to:
Kafus Environmental Industries Ltd.
Attn: Mr. Ken Swaisland
440-755 Burrard Street
Vancouver, British Columbia
Canada V6Z1X6
telephone: 604-602-1981
telecopier: 604-685-2426
(c) Successors and Assigns. This Agreement shall be binding upon and
shall inure to the benefit of the Company and each Holder and their respective
successors and assigns. The rights provided by this Agreement shall be
transferred automatically from the Purchaser to any Person to whom the Note, any
Warrants, or any Registrable Securities are transferred, provided that (x) the
Company is given written notice of the transfer and the name, address, telephone
number, and facsimile number of the transferees and (y) the subsequent
transferee agrees in writing to be bound by all of the terms of this Agreement
(any transferee referred to in the foregoing clauses being referred to herein as
a "Permitted Transferee").
(d) Counterparts. This Agreement may be executed in any number of
counterparts and by the parties in separate counterparts, each of which when so
executed shall be deemed to be an original and all of which taken together shall
constitute one and the same agreement.
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<PAGE>
(e) Headings; Construction. The Section numbers and headings in this
Agreement are for convenience of reference only and shall not limit or otherwise
affect the meaning hereof. Unless the context otherwise requires, all
references to Sections are to sections of this Agreement, and words in the
singular include the plural and vice versa. In computing any period of time
specified in this Agreement or in any notices, the date of the act or event from
which such period of time is to be measured shall be included, any such period
shall expire at 5:00 p.m., New York time, on the last day of such period, and
any such period denominated in months shall expire on the date in the last month
of such period that has the same numerical designation as the date of the act or
event from which such period is to be measured; provided, however, that if there
is no date in the last month of such period 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) Amendment, Restatement, and Bifurcation. This Agreement and the
Registration Rights Agreement dated as of March 11, 1999, between the Company
and ECT Merchant Investments Corp. represent an amendment, restatement, and
bifurcation of the Registration Rights Agreement dated as of December 31, 1998,
between the Company and ECT.
(j) 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
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<PAGE>
Registrable Securities. This Agreement supersedes all prior agreements and
understandings among the Company and any of the Holders with respect to such
subject matter.
[The remainder of this page is intentionally left blank.]
<PAGE>
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:
----------------------------------------
SUNDANCE ASSETS, L.P.
By: Ponderosa Assets, L.P., its general partner
By: Enron Ponderosa Management Holdings, Inc.
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
[Sundance Amended and Restated Registration Rights Agreement]
<PAGE>
EXHIBIT 12
[SAMARAC LETTERHEAD]
March 19, 1999
Enron Capital & Trade Resources Corp.
1400 Smith Street
Houston, Texas 77002-7361
Attention: Tony Valentine
Dear Tony:
We wish to confirm our undertaking to you in respect of the following matters
relative to the conclusion of a restated shareholders agreement between our
respective companies. We undertake to finalize a restated shareholders
agreement as soon as practical in the New Year based on the following changes
and/or additions:
. The term of the agreement will be extended to two years as of December 31,
1998
. The limitation on sale of 5% of a shareholders Kafus common share ownership
is to include common shares resulting from conversion of the Series VIII
preference shares.
. Samarac has the unfettered right to assign and/or transfer its interest in
the Series VIII preference shares to an affiliate and/or subsidiary
company, and additionally, the right to transfer and/or assign from itself
and/or its affiliate and/or subsidiary to a third party upon receipt of
written permission from Enron. Any transfer or assignment by Samarac will
be subject to continuation of Samarac's shareholders agreement, with such
agreement to be confirmed in writing by the transferee and/or assignee.
Yours sincerely,
Ken Swaisland
President
<PAGE>
EXHIBIT 13
[Execution Version]
EXCHANGEABLE PROMISSORY NOTE
THIS EXCHANGEABLE PROMISSORY NOTE AND THE SHARES OF CAPITAL STOCK ISSUABLE UPON
EXCHANGE 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.
THIS EXCHANGEABLE PROMISSORY NOTE IS SUBJECT TO A HOLD PERIOD AND MAY NOT BE
TRADED EXCEPT AS PERMITTED BY THE SECURITIES ACT (BRITISH COLUMBIA) AND THE
SECURITIES RULES AND REGULATIONS THEREUNDER.
US $ 11,250,000 Houston, Texas March 31, 1998
KAFUS CEMENT FIBRE INDUSTRIES OF TEXAS, INC., a Delaware 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 ELEVEN MILLION TWO HUNDRED FIFTY THOUSAND AND NO/100 UNITED
STATES DOLLARS (US $11,250,000) or, if less, the aggregate outstanding principal
amount of advances (each an "Advance") made under the terms of this Exchangeable
Promissory Note (as modified from time to time, this "Note"). Reference is made
to that letter loan agreement dated as of even date herewith (as modified from
time to time, "Loan Agreement") between the Borrower and the Lender.
Capitalized terms used herein but not defined herein shall have the meanings
specified by the Loan Agreement
1. Advances.
Subject to the terms and conditions of this Note and the Loan Agreement and
for the purposes in Section 4.1 of the Loan Agreement, the Lender agrees to make
the following Advances to the Borrower: (a) an initial Advance of $8,750,000 to
be made in connection with the Acquisition, (b) subsequent Reimbursement
Advances made pursuant to the second paragraph of this Section 1 in an aggregate
amount not to exceed $925,000, and (c)
<PAGE>
subsequent Payment Advances made pursuant to Section 3 below to pay to the
Lender scheduled principal, interest, and fee payments owed under this Note;
provided, however, that the aggregate amount of Advances made hereunder, whether
or not such Advances have been prepaid or repaid, shall not exceed $11,250,000.
The proceeds from Advances made pursuant to this paragraph ("Reimbursement
Advances") shall be used for the payment of reasonable legal, professional, and
other out-of-pocket fees and expenses owed to non-Affiliates of the Borrower
which were incurred in connection with the Acquisition. Reimbursement Advances
shall be made pursuant to a written request ("Borrowing Request") executed by
the Borrower in form and substance satisfactory to the Lender. Each Borrowing
Request shall include the invoices ("Invoices") associated with the fees and
expenses being paid pursuant to the requested Reimbursement Advance. If any
Invoice has not yet been paid, the Lender may elect to disburse the funds
constituting the Reimbursement Advance related to such invoice, directly to
such invoicing party. Notwithstanding anything herein to the contrary, (a) the
aggregate amount of Reimbursement Advances made hereunder shall not exceed
$925,000 and (b) the Lender shall be under no obligation to make any
Reimbursement Advance after June 30, 1998. Provided that the initial Advance
has been made and that all the conditions precedent to a Reimbursement Advance
under Sections 2.5 and 2.6 of the Loan Agreement have been met and subject to
the other terms and conditions contained in this paragraph, the Lender shall
make each requested Reimbursement Advance within 5 Business Days of Lender's
receipt of the Borrowing Request and Invoices related to such Reimbursement
Advance.
The Borrower may from time to time voluntarily prepay the outstanding
principal amount of this Note pursuant to written notice given by the Borrower
to the Lender five (5) days prior to the date of prepayment. Each such notice
shall specify the principal amount which shall be prepaid and the date of the
prepayment, and shall be irrevocable and binding on the Borrower. Partial
prepayments of the outstanding principal balance of this Note must be made in an
amount equal to or greater than $500,000. For each such notice given by the
Borrower, the Borrower shall prepay this Note in the specified amount on the
specified date as set forth in such notice. The Borrower shall have no right to
prepay any principal amount owed under this Note except as provided in this
paragraph. Each prepayment of principal pursuant to this paragraph shall be
accompanied by payment of all accrued but unpaid interest on the principal
amount prepaid, the prepayment premium required under the paragraph below, and
any prepayment make whole amount required under the paragraph below. All
voluntary prepayments under this paragraph shall be applied to the required
principal payments under this Note in the inverse order of maturity. This Note
is not revolving, and, therefore, amounts prepaid or repaid may not be
reborrowed.
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With each voluntary prepayment of any portion of the outstanding principal
balance of this Note, the Borrower shall pay to the Lender a prepayment premium
equal to 3.00% of the amount of principal prepaid. In addition to the foregoing
with each voluntary prepayment of any portion of the outstanding principal
balance of this Note, the Borrower shall pay to the Lender a prepayment make
whole amount equal to the positive difference, if any, between (i) the net
present value of the payments of principal and interest that the Lender would
have received on the prepaid principal if paid as scheduled under this Note
(with such scheduled payment dates being determined assuming the prepaid
principal was scheduled for payment in the amounts and on the dates of the
required principal payments that the prepaid principal is being applied to in
accordance with this Note), such payments being discounted to present value at
the time of prepayment using standard financial techniques with a discount rate
equal to (1) the per annum interest rate applicable to this Note pursuant to
Section 2 below less (2) the positive difference in rates, if any, between the
per annum yield of U.S. Government Treasury Securities of a 14 year maturity on
the date of this Note and the per annum yield of U.S. Government Treasury
Securities of the maturity which most closely approximates the weighted average
maturity date of the prepaid principal payments; and (ii) the amount of the
prepayment. A certificate prepared by the Lender and provided to the Borrower
detailing the calculation of the foregoing shall be conclusive and binding for
all purposes, absent manifest error. If an Event of Default occurs by reason of
any willful action (or inaction) taken (or not taken) by or on behalf of the
Borrower with the intention of avoiding payment of the premium and make whole
payments set forth herein, then upon any acceleration of this Note, an
equivalent premium and make whole payment shall become due and payable in the
amount that would have been due on the date of acceleration had the entire
outstanding principal amount of this Note been voluntarily prepaid on such date.
Beginning March 31, 2006, and on the last day of each March and September
thereafter through and including September 30, 2008 ("Maturity Date"), the
Borrower shall repay to the Lender the outstanding principal amount of this Note
as of March 31, 2006 ("Repayment Principal Amount") in 6 equal payments of
principal, each in an amount equal to 1/6th of the Repayment Principal Amount.
Without limiting the foregoing, the Borrower shall pay to the Lender the entire
outstanding principal balance of this Note on the Maturity Date.
2. Interest and Fees.
All Advances shall bear interest at 14.00% per annum, except for any
default interest as provided below.
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The Borrower shall pay to the Lender all accrued but unpaid interest on the
outstanding principal amount of this Note beginning with a payment on
September 30, 1998, and continuing with payments on the last day of each March
and September thereafter through and including the Maturity Date (each of such
date being an "Interest Payment Date").
The Borrower shall pay to the Lender a commitment fee equal to 2.25% per
annum on the average daily amount by which $11,250,000 exceeds the aggregate
principal amount of Advances made under this Note whether or not such Advances
have been prepaid or repaid. Such commitment fee shall be due and payable in
arrears on each Interest Payment Date.
All calculations of interest under this Note shall be calculated based upon
a 365 day year for the actual number of days elapsed. Whenever any interest
under this Note is calculated using a rate based on a year of 365 days, the rate
determined pursuant to such calculation, when expressed as an annual rate, is
equivalent to (x) the applicable rate based on a year of 365 days, (y)
multiplied by the actual number of days in the calendar year in which the period
for which such interest or fee is payable (or compounded) ends, and (z) divided
by 365; the principle of deemed reinvestment of interest does not apply to any
interest calculation under this Note; and the rates of interest stipulated in
this Note are intended to be nominal rates and not effective rates or yields.
3. Payments Generally.
Provided that all the conditions precedent under Section 2.6 of the Loan
Agreement to make a Payment Advance have been met, on each date (each a "Payment
Date") on which any scheduled payment of principal, interest, or commitment fees
is due hereunder, the Lender shall simultaneously (a) make an Advance ("Payment
Advance") on such Payment Date in the amount equal to the sum of the scheduled
principal, interest, and commitment fees due on such Payment Date and (b) apply
the entire amount of such Advance to such scheduled principal, interest, and
commitment fees due and payable on such Payment Date. If on any such Payment
Date, all the conditions precedent under Section 2.6 of the Loan Agreement to
make a Payment Advance have not been met, (a) the Lender shall not be required
to make any Payment Advance on behalf of any amounts due and payable on such
Payment Date and (b) the Borrower shall pay to Lender all amounts due and
payable on such Payment Date.
The Lender shall record in its records all advances of principal and all
payments of principal and interest on this Note. Any failure of the Lender to
make such recordings,
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however, shall not affect the Borrower's repayment obligations. The Lender's
records shall be presumptive evidence of the principal and interest owed by the
Borrower.
The Borrower shall make all payments required under this Note not later
than 1:00 p.m., Houston, Texas, time on any date when due in lawful money of the
United States of America to the Lender at such location as is specified by the
Lender in writing in immediately available funds. Whenever any payment to be
made under this Note shall be stated to be due on a day other than a day on
which the banks in Vancouver, British Columbia, and Houston, Texas, are required
to be open ("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 nonexcluded
taxes, levies, imposts, deductions, charges, withholdings, and liabilities being
hereinafter referred to as "Taxes"). If the Borrower shall be required by law
to deduct any Taxes from any sum payable to the Lender (i) the sum payable shall
be increased as may be necessary so that, after making all required deductions
(including deductions applicable to additional sums payable under this
paragraph), the Lender receives an amount equal to the sum it would have
received had no such deductions been made; (ii) the Borrower shall make such
deductions; and (iii) the Borrower shall pay the full amount deducted to the
relevant taxation authority or other authority in accordance with applicable
law.
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 (the "first
currency") in which the same is payable hereunder or under such order or
judgment 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
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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 within 10 days 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 that the Loan
Agreement or any other Loan Documents executed in connection with this Note so
provide.
During the continuation of any Event of Default, the Lender may (i) declare
by written notice to the Borrower all of its commitments related to this Note
terminated, whereupon such commitments shall terminate, and (ii) declare by
written notice to the Borrower all amounts payable by the Borrower under this
Note to be immediately due and payable, whereupon such amounts shall become
immediately due and payable. Except as expressly provided for in this Note, 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 a rate per annum equal to the lesser of 17.00% or the Highest
Lawful Rate (as defined below). As used herein, the term "Highest Lawful Rate"
means the maximum lawful interest rate, if any, that at any time or from time to
time may be contracted for, charged, or received under the laws applicable to
the Lender which are presently in effect or, to the extent allowed by law, under
such applicable laws which may hereafter be in effect and which allow a higher
maximum nonusurious interest rate than applicable laws now allow.
NOTWITHSTANDING the foregoing or any other term in this Note to the contrary, it
is the intention of the Lender and the Borrower to conform strictly to any
applicable usury laws. Accordingly, if the Lender contracts for, charges, or
receives any consideration in connection with this Note which constitutes
interest in excess of the Highest Lawful Rate, then any such excess shall be
canceled automatically and, if previously paid, shall at the Lender's option
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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 any documents securing or supporting this Note and all other
rights at law or in equity.
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 loan agreement related to this Note.
5. Exchange.
5.1 Exchange Right and Exchange Price.
(a) Beginning on March 31, 2000 and through March 31, 2002 ("Exchange
Period"), by written notice to the Borrower and the Guarantor (each an "Exchange
Notice") the Lender shall have the right to exchange, such right being granted
in the Limited Guaranty, all or a portion of the aggregate outstanding principal
amount of this Note into that number of fully paid and non-assessable shares of
Common Stock obtained by dividing (i)
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the amount of principal being so exchanged by (ii) the Exchange Price (as
defined below); provided however that the aggregate amount of principal
converted pursuant to this Section 5.1(a) shall not exceed $5,625,000. In
connection with each exchange hereunder, upon Lender's receipt of the Exchange
Shares issued in connection with such exchange in accordance with this
Section 5, the outstanding principal amount so exchanged shall be deemed to have
been prepaid in full (such prepayment not being subject to the second and third
paragraphs of Section 1 of this Note).
(b) As used herein the following capitalized terms shall have the
following meanings:
"Applicable Project" means (i) each of (A) the CanFibre Riverside MDF
Project and (B) the Project (as defined in the Loan Agreement), (ii) any of the
following projects once the project financing for such project has closed: (A)
CanFibre Lakawana, New York MDF Project, (B) Kenaff Newsprint Project (South
Texas), or (C) CanFibre Europe MDF Project, or (iii) any other project which has
obtained project financing and in which the Borrower or any of its Subsidiaries
owns 50% or greater equity interest and which has total project construction and
start-up costs of $50,000,000 or greater.
"Average Price" with respect to the Common Stock means, on any day, the
trade weighted average of the sales prices for such shares as reported on
Bloomberg News Services (i) on the American Stock Exchange or (ii) if such
shares are not so listed, then on the largest national securities exchange
(based on the aggregate dollar value of securities listed) on which such shares
are listed or traded or (iii) if such shares are not listed on any national
securities exchange, then the prices at which transactions are effected through
the NASDAQ National Market as reported by NASDAQ or, (iv) if such shares shall
not be listed thereon, the trade weighted average of all transactions in the
Common Stock in an over-the-counter market.
"Exchange Price" shall mean, as of the date of any determination, the
following prices based upon the number of Applicable Projects existing as of
such date:
Applicable Projects Exchange Price
2 or less $3.00/share
3 $4.00/share
4 $9.00/share
5 or more $12.00/share
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The date of determination of the Exchange Price with respect to any exchange
made pursuant to Note shall be the date the Lender gives notice pursuant to
Section 5.1 with respect to such exchange.
5.2 Issuance of Common Stock on Exchange. As promptly as practicable
after receipt of a Exchange Notice, the Borrower shall cause the Kafus Parent to
deliver or cause to be delivered to the Lender certificates representing the
number of fully paid and nonassessable Common Stock which the Lender is entitled
to in accordance with the provisions of this Section 5. Such exchange shall be
deemed to have been made at the close of business on the date that the Exchange
Notice shall have been given so that, subject to the following provisions of
this Subsection 5.2, the Lender shall be treated for all purposes as having
become the record holder of such Common Stock at such time and such exchange
shall be at the Exchange Price in effect at such time; provided, however, that
no Exchange Notice given on any date when the stock transfer books of the Kafus
Parent shall be closed shall be effective to constitute the Lender as the record
holder of such Common Stock on such date, but such Exchange Notice 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 exchange shall be at the Exchange Price in
effect on the date that such Exchange Notice shall have been given, as if the
stock transfer books of the Kafus Parent had not been closed. If the last day
for the exercise of the exchange right shall not be a Business Day, then such
exchange right may be exercised on the next succeeding Business Day. With
respect to any exchange made pursuant to this Note, upon Lender's receipt of the
Exchange Shares with respect to such exchange, the outstanding principal amount
of this Note shall be deemed to have been prepaid in the amount of the principal
so exchanged on the date on which the Lender becomes record holder of such
Exchange Shares pursuant to this Section 5.2, provided that the Borrower shall
not be liable for any amounts owed pursuant to the third paragraph of Section 1
of this Note with respect to such deemed prepayment.
No fractional share of Common Stock shall be issued upon partial exchange
of this Note. Instead of any fractional share of Common Stock which would
otherwise be issuable upon exchange of this Note, the Borrower shall cause the
Kafus Parent to pay a cash adjustment in respect of such fraction in an amount
equal to such fraction of a share multiplied by the applicable Exchange Price.
5.3 Adjustments of Exchange Price. The number and kind of securities
issuable upon the exchange of this 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 this Note as follows:
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(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 Kafus Parent with or into
another corporation (other than a merger with another corporation in which
the Kafus Parent is the surviving corporation or entity 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 Common Stock
issuable upon exercise of these exchange 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 Kafus Parent as an entirety, or a
statutory share exchange in which all Common Stock is exchanged for shares
of another corporation or entity, the Lender shall have, and the Borrower
shall cause the Kafus Parent, or such successor entity or purchaser, to
covenant in the constituent documents effecting any of the foregoing
transactions that the Lender has, the right to obtain upon the exercise of
these exchange rights, in lieu of each share of Common Stock theretofore
issuable upon exercise of these exchange 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 exchange 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
Subsection 5.3. The provisions of this subparagraph (i) shall similarly
apply to successive reclassifications, changes, consolidations or mergers,
conveyances or sales of assets, or share exchanges.
(ii) If the Kafus Parent at any time while this Note is outstanding
shall subdivide or combine its Common Stock, the Exchange Price shall be
proportionately reduced, in case of subdivision of shares, as at the
effective date of such subdivision, or if the Kafus Parent 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 Kafus Parent shall take a record of holders
of its Common Stock for the purpose of so combining, as at such record
date, whichever is earlier.
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(iii) If the Kafus Parent at any time while this Note is outstanding
shall pay to any holders of stock of the Kafus Parent a dividend payable
in, or make any other distribution of, Common Stock, the Exchange Price
shall be adjusted, as of the date the Kafus Parent 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 Exchange Price in effect
immediately prior to such record date (or if no such record is taken, then
immediately prior to such payment or other distribution) by a fraction (1)
the numerator of which shall be the total number of shares of Common Stock
outstanding immediately prior to such dividend or distribution, and (2)
the denominator of which shall be the total number of shares of Common
Stock outstanding immediately after such dividend or distribution.
(iv) If the Kafus Parent 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 then Average Price of the
Common Stock, the Exchange Price shall be adjusted, as of the date the
Kafus Parent shall take a record of the holders of its Common Stock for the
purpose of receiving such issuance or distribution, to that price
determined by multiplying the Exchange Price by a fraction, the numerator
of which shall be the number of shares of Common Stock outstanding on the
date of issuance of such warrants, options, or rights plus the number of
shares which the aggregate offering price of the total number of shares so
offered would purchase at the then Average Price per share of the Common
Stock, and the denominator of which shall be the number of shares of Common
Stock outstanding on the date of issuance of such warrants, options, or
rights plus the number of additional shares of Common Stock offered for
subscription or purchase.
(v) If the Kafus Parent shall distribute to all holders of its Common
Stock evidences of indebtedness of the Kafus Parent, shares of capital
stock of the Kafus Parent (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 Exchange Price shall be adjusted, as of the
date the Kafus Parent shall take a record of the holders of its Common
Stock for the purpose of determining the holders entitled to receive such
issuance or distribution, to that price determined by multiplying the
Exchange Price by a fraction the numerator of which shall be the Average
Price per share of the Common Stock less the fair market value (as
determined by the Board of Directors of the Kafus Parent, whose
determination shall be conclusive) of the evidences of
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indebtedness of the Kafus Parent, shares of capital stock of the Kafus
Parent, 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 Average price per share
of the Common Stock on the record date for such distribution.
(vi) No adjustment of the Exchange Price shall be made in an amount
less than $.01 per share, but any such lesser adjustment shall be carried
forward and shall be made at the time together with the next subsequent
adjustment which, together with any adjustments so carried forward, shall
amount to $.01 per share or more.
If any Common Stock required to be reserved for the purposes of exchange of
this 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 exchange, the
Borrower shall cause the Kafus Parent in good faith and as expeditiously as
possible to endeavor to cause such shares to be duly registered, approved, or
listed, as the case may be.
5.4 Certain Notices and Calculations. Whenever the Exchange Price is
adjusted as provided in Section 5.3, the Borrower shall cause the Kafus Parent
to promptly deliver to the holder hereof a certificate signed by two officers of
the Kafus Parent setting forth the Exchange Price after such adjustment and
setting forth a brief statement of the facts requiring such adjustment and the
computation thereof.
5.5 Reservation of Shares. The Borrower covenants that it shall cause the
Kafus Parent at all times reserve and keep available, free from preemptive
rights, out of its authorized but unissued Common Stock, solely for the purpose
of issue upon exchange of this Note as herein provided, such amount of Common
Stock as shall then be issuable upon the exchange of this Note. The Borrower
covenants that the Kafus Parent shall cause all Common Stock which shall be so
issuable, upon issuance, to be duly and validly issued and fully paid and non-
assessable. The Borrower shall cause the Kafus Parent, from time to time in
accordance with applicable law, to increase the authorized amount of its Common
Stock if at any time the authorized amount of Common Stock remaining unissued
shall not be sufficient to permit the exchange of this Note.
5.6 Certain Covenants. Before taking any action which would cause an
adjustment reducing the Exchange Price below the then stated or par value of the
Common Stock issuable upon exchange of this Note, the Borrower shall cause the
Kafus Parent to take
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any corporate action which may, in the opinion of its counsel, be necessary in
order that the Kafus Parent may validly and legally issue fully paid and non-
assessable shares of such Common Stock at such adjusted Exchange Price.
5.7 Certain Notices. If any of the following should occur:
(i) the Kafus Parent 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 Kafus Parent 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 Kafus
Parent (other than a subdivision or combination of its outstanding shares
of Common Stock), or of any consolidation or merger to which the Kafus
Parent is a party and for which approval of any stockholders of the Kafus
Parent is required, or of the sale, lease, or transfer of all or
substantially all of the property of the Kafus Parent; or
(iv) of the voluntary or involuntary dissolution, liquidation, or
winding up of the Kafus Parent;
then, in each case, the Borrower shall cause the Kafus Parent to 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 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 the State of Texas and the
applicable laws of the United States of America. This Note shall bind the
Borrower and the Lender and
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their respective successors and assigns. The Borrower may not assign its rights
or delegate its duties under this Note. The Lender may not assign or participate
its rights and delegate its duties under this Note without the consent of the
Borrower, which consent shall not be unreasonably withheld; provided that, in an
Event of Default, the Lender may assign or participate its rights and delegate
its duties under this Note without the consent of the Borrower, following notice
thereof to the Borrower. Notwithstanding any other provision of this Note or the
Loan Documents, the Lender may, at any time, assign its rights and duties under
this Note to an Affiliate of the Lender.
[the remainder of this page is intentionally blank]
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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.
KAFUS CEMENT FIBRE INDUSTRIES OF
TEXAS, INC.
By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
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EXHIBIT 14
[EXECUTION VERSION]
SUBORDINATED LOAN CONVERSION AGREEMENT
This Subordinated Loan Conversion Agreement dated as of December 1, 1998
(this "Agreement"), is made by Kafus Environmental Industries Ltd. ("Kafus") in
favor of Enron Capital & Trade Resources Corp. (the "Lender").
INTRODUCTION
This Agreement is made by Kafus in connection with the Loan Agreement dated
as of December 1, 1998 (as modified from time to time, the "Loan Agreement"),
between the Company and the Lender. The effectiveness of this Agreement is a
condition precedent to the effectiveness of the Loan Agreement and the extension
of credit to the Company provided thereunder. As the Company is a subsidiary of
Kafus, Kafus believes that it will receive substantial benefit from such credit
extended to the Company by the Lender. Therefore, to induce the Lender to enter
into the Loan Agreement, and for other good and valuable consideration, Kafus
and the Lender hereby agree as follows:
Section 1. Definitions. Capitalized terms used herein but not defined herein
shall have the meanings set forth or referred to in the Loan Agreement. As used
herein, the following terms shall have the following meanings:
"Dollars" and "$" means lawful currency of the United States of America.
"Eligible Conversion Principal" means any outstanding principal obligations
on the Loan selected by the Lender provided that (a) the total amount selected
by the Lender does not exceed 50% of the aggregate advances made or deemed made
on the Loan and (b) the total amount selected by the Lender during any 12-month
period beginning on the Completion Date or its annual anniversaries does not
exceed $7,000,000.
"Eligible Deferred Principal" means any payment of principal on the Loan
for which the due date has been deferred pursuant to Section 3.4(b) of the Loan
Agreement, or for which the due date has been accelerated pursuant to Section
7.2 of the Loan Agreement, if one year after the date of deferral or
acceleration the Company has not made payments of principal on the Loan in an
amount at least equal to the amount of the principal payment for which the due
date was deferred or accelerated.
"Loan" means the obligations for the payment of principal on the advances
made or deemed made under the Loan Agreement.
<PAGE>
Section 2. Deferred Payment Purchase Agreement.
2.1 Upon demand by the Lender, Kafus shall (a) purchase any Eligible
Deferred Principal for a price equal to the principal amount of such Eligible
Deferred Principal and (b) following such purchase, forgive the payment of such
Eligible Deferred Principal in favor of the Company. Kafus shall make payment
to the Lender within five business days after presentation to Kafus of an
assignment and termination document in form sufficient to accomplishing the
foregoing.
2.2 Kafus shall make each payment to the Lender due under Section 2.1 in
shares of the common stock of Kafus issued to the Lender with the value of the
shares determined based upon the Price (as defined below) applicable at the time
of payment. As used in this Section 2.2, the "Price" with respect to the common
stock of Kafus means, on any day, (i) 75% of the preceding 20-day average of the
reported "high" and "low" sales prices for such shares as reported (w) on the
American Stock Exchange or (x) 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 (y) if such
shares are not listed on any national securities exchange, then through the
NASDAQ National Market or, (z) if such shares shall not be so listed, the trade
weighted average of all transactions in the Common Stock in an over-the-counter
market; or (ii) in the event the common stock of Kafus is not listed or traded
as described in (i) above, then the Price shall be equal to 75% of the value of
one share of common stock, as determined in good faith by the disinterested
members of the board of directors of Kafus.
Section 3. Conversion of Loan.
3.1 Upon demand by the Lender from time to time during the period
beginning on the Completion Date and ending on the second anniversary of the
Completion Date, Kafus shall (a) purchase any Eligible Conversion Principal for
a price equal to the principal amount of such Eligible Conversion Principal and
(b) following such purchase, forgive the payment of such Eligible Conversion
Principal in favor of the Company. Kafus shall make payment to the Lender
within five business days after presentation to Kafus of an assignment and
termination document in form sufficient to accomplishing the foregoing.
3.2 Kafus shall make each payment to the Lender in shares of the common
stock of Kafus issued to the Lender with the value of the shares to be used in
such application determined based upon the Price (as defined below) applicable
at the time of payment. As used in this Section 3.2, the "Price" shall be
equal to (i) the Price (as defined below), so long as the Price is between the
Minimum Price and the Maximum Price, (ii) the Maximum Price (as defined below)
if the Price is greater than or equal to the Maximum Price, and (iii) the
Minimum Price (as defined below) if the Price is less than or equal to the
Minimum Price.
As used in this Section 3.2, the "Price" with respect to the common stock
of Kafus means, on any day, (i) 85% of the preceding 30-day average of the
reported "high" and "low" sales prices
<PAGE>
for such shares as reported (w) on the American Stock Exchange or (x) 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 (y) if such shares are not listed on any national
securities exchange, then through the NASDAQ National Market or, (z) if such
shares shall not be so listed, the trade weighted average of all transactions in
the common stock of Kafus in an over-the-counter market; or (ii) in the event
the common stock of Kafus is not listed or traded as described in (i) above,
then the Average Stock Price shall be equal to 85% of the value of one share of
the common stock of Kafus, as determined in good faith by the disinterested
members of the board of directors of Kafus.
As used in this Section 3.2, the "Maximum Price" and the "Minimum Price"
shall be set by the table shown below which prices will be determined based on
the number of Eligible Projects (as defined below) which have been completed at
the time of determination:
Number of Eligible Projects 2 3 4 5
Minimum Price ($/share) 3.5 7.0 12 16
Maximum Price ($/share) 7.0 10.5 16 20
As used in this Section 3.2, "Eligible Projects" means (i) each of (A) the
CanFibre Riverside MDF Project, (B) the Fortra Cement Fiberboard Project, and
(C) the CanFibre of Lackawanna MDF Project; (ii) any of the following projects
once the project financing for such project has closed: (A) Kenaf Newsprint
Project (South Texas) and (B) CanFibre Europe MDF Project; and (iii) any other
project in which the Company or any of its affiliates owns a 50% or greater
equity interest which has obtained project financing and has total project
construction and start-up costs of $50,000,000.00 or greater.
3.3 In the event that Kafus purchases any Eligible Conversion Principal
pursuant to Section 3.1 above then the IPC Current Annual Amount (as described
in the Income Participation Certificates) for the then-current and each
succeeding Annual Period will be adjusted pursuant to the terms of the Income
Participation Certificates.
Section 4. Certain Provisions Regarding Payments.
4.1 In the event the Lender is due shares of common stock of Kafus as
described herein, Kafus shall deliver to the Lender certificates representing
the number of fully paid and nonassessable shares of common stock determined in
accordance with this Section, and Kafus and the Lender shall concurrently enter
into a Registration Rights Agreement with respect to such shares, which shall be
in form and substance satisfactory to the Lender and shall provide the Lender
with rights and privileges comparable to those set forth in the Registration
Rights Agreements previously entered into between Kafus and the Lender on or
prior to the date hereof.
<PAGE>
4.2 The Lender is hereby authorized at any time following any demand for
payment hereunder to set off and apply any indebtedness owed by the Lender to
Kafus against any and all of the obligations of Kafus under this Agreement. The
Lender agrees to promptly notify Kafus after any such setoff and application,
but the failure to give such notice shall not affect the validity of such setoff
and application.
Section 5. Obligations Absolute.
5.1 Kafus guarantees that payments due hereunder will be paid strictly in
accordance with the terms of this Agreement, regardless of any law, regulation,
or order now or hereafter in effect in any jurisdiction affecting any of such
terms or the rights of the Lender with respect to the Loan or any of the other
obligations under the Loan Agreement (collectively, the "Loan Obligations").
Kafus agrees that its obligations under this Agreement shall not be released,
diminished, or impaired by, and waives any rights which they might otherwise
have which relate to:
(a) Any lack of validity or enforceability of the Loan Obligations or
any other document or agreement relating thereto; any increase, reduction,
extension, or rearrangement of the Loan Obligations; any amendment,
supplement, or other modification of the documents and agreements relating
to the Loan Obligations; any waiver or consent granted under the documents
and agreements relating to the Loan Obligations; or any sale, assignment,
delegation, or other transfer of the Loan Obligations or the documents and
agreements relating thereto;
(b) Any grant of any security or support for the Loan Obligations or
any impairment of any security or support for the Loan Obligations,
including any full or partial release, exchange, subordination, or waste of
any collateral for the Loan Obligations or any full or partial release of
the Company or any other Person liable for the payment or performance of
the Loan Obligations;
(c) Any change in the organization or structure of the Company, Kafus,
or any other Person liable for the payment or performance of the Loan
Obligations, or the insolvency, bankruptcy, liquidation, or dissolution of
the Company, Kafus, or any other Person liable for the payment or
performance of the Loan Obligations;
(d) The manner of applying payments on the Loan Obligations or the
proceeds of any security or support for the Loan Obligations against the
Loan Obligations;
(e) The failure to give notice of the occurrence of any default or
event of default, however denominated, under the documents and agreements
relating to the Loan Obligations, notice of bringing of action to enforce
the payment or performance of the Loan Obligations, notice of any sale or
foreclosure of any collateral for the Loan Obligations, notice of the
financial condition of or other circumstances regarding the Company, Kafus,
<PAGE>
or any other Person liable for the Loan Obligations, or any other notice of
any kind relating to the Loan Obligations; or
(f) Any other action taken or omitted which affects the Loan
Obligations, including action taken with respect to the enforcement of the
Loan Agreement against the Company or with respect to the enforcement of
any obligations of Kafus to the Lender against Kafus, whether or not such
action or omission prejudices Kafus or increases the likelihood that Kafus
will be required to make payments hereunder pursuant to the terms hereof--
it is the unambiguous and unequivocal intention of Kafus that Kafus shall
be obligated to make payments and perform under this Agreement in
accordance with the terms of this Agreement, notwithstanding any
occurrence, circumstance, event, action, or omission whatsoever, whether
contemplated or uncontemplated, and whether or not particularly described
herein.
5.2 This Agreement shall continue to be effective or be reinstated, as the
case may be, if any payment on the Loan Obligations must be refunded for any
reason including any bankruptcy proceeding. In the event that the Lender must
refund any payment received on the Loan Obligations, any prior release from the
terms of this Agreement given to Kafus under this Agreement by the Lender shall
be without effect, and this Agreement shall be reinstated in full force and
effect. It is the intention of Kafus that its obligations hereunder shall not
be discharged except by final payment of the Loan Obligations or expiration of
the obligations under this Agreement by the terms hereof.
Section 6. Unimpaired Collection. There are no conditions precedent to the
enforcement of this Agreement, except as expressly contained herein. It shall
not be necessary for the Lender, in order to enforce payment under this
Agreement, to show any proof of the Company's default, to exhaust the Lender's
remedies against the Company or any other Person liable for the payment or
performance of the Loan Obligations, to enforce any security or support for the
payment or performance of the Loan Obligations, or to enforce any other means of
obtaining payment or performance of the Loan Obligations. the Lender shall not
be required to mitigate damages or take any other action to reduce, collect, or
enforce the Loan Obligations.
Section 7. Miscellaneous.
7.1 Kafus shall pay to the Lender on demand all costs and expenses of
the Lender in connection with the preservation or enforcement of the Lender's
rights under this Agreement, whether through negotiations, legal proceedings, or
otherwise, including fees and expenses of counsel for the Lender. The
provisions of this paragraph shall survive any purported termination of this
Agreement that does not expressly reference this paragraph.
7.2 (a) Kafus shall at all times protect and hold the Lender and its
respective shareholders, affiliates, directors, officers, employees, agents, and
servants and the persons under their respective control or supervision
(collectively, the "Indemnified Parties") harmless of, from,
<PAGE>
and against any and all claims (whether in tort, contract, or otherwise),
demands, damages, losses, liabilities, costs, or expenses of any kind or nature
whatsoever (each referred to herein as a "Loss") which an Indemnified Party may
incur or which may be claimed against an Indemnified Party by any Person, in
each case by reason of, or arising out of this Agreement and the Eligible
Deferred Payments or any other document or instrument delivered in connection
herewith or therewith or the enforcement of any of the terms or provisions
hereof or thereof or the transactions contemplated hereby or thereby; provided,
however, that the indemnity set forth in this Section shall not extend to any
Loss arising, in the case of any Indemnified Party, as a result of the gross
negligence or willful misconduct of such Indemnified Party. Kafus further
covenants and agrees, to the extent permitted by law, to pay or to reimburse the
Indemnified Parties for any and all costs, reasonable attorneys' fees,
liabilities, or expenses incurred in connection with investigating, defending
against, or otherwise in connection with any such losses, claims, damages,
liabilities, expenses, or actions, except to the extent that the same arise out
of the gross negligence or willful misconduct of the Indemnified Party claiming
such payment or reimbursement.
(b) An Indemnified Party shall promptly notify Kafus in writing of any
claim or action brought against such Indemnified Party in which indemnity may be
sought against Kafus pursuant to this Section; and such notice shall be given in
sufficient time to allow Kafus to defend such claim or action. However, the
failure to give such notice in sufficient time shall not constitute a defense
hereunder nor in any way impair the obligations of Kafus under this Section, if
(i) the Indemnified Party shall not have had knowledge or notice of such claim
or action, (ii) neither Kafus nor any Affiliate thereof shall have had knowledge
or notice of such claim or action, or (iii) Kafus's ability to defend such claim
or action shall not thereby be materially impaired. In the event, however, that
(i) the Indemnified Party shall not have timely notified Kafus of any such claim
or action, (ii) neither Kafus nor any Affiliate thereof shall have had knowledge
or notice of such claim or action, and (iii) Kafus's ability to defend or
participate in such claim or action is materially impaired by reason of not
having received timely notice thereof from the Indemnified Party, then Kafus's
obligation to so defend and indemnify shall be qualified to the extent (and only
to the extent) of such material impairment.
(c) The obligations of Kafus under this Section shall survive the
termination of this Agreement and remain in full force and effect, with respect
to each Loss of each Indemnified Party, until the later of (i) the expiration of
the period stated in the applicable statute of limitations during which a claim
or cause of action may be brought, and (ii) payment in full or the satisfaction
of such claim or cause of action and of all expenses and charges incurred by
such Indemnified Party relating to the enforcement of the provisions herein
specified.
7.3 This Agreement shall be governed by the internal laws of the Province
of British Columbia, Canada (without reference to principles of conflicts of
laws that would select another law). Unless otherwise specified, all monetary
amounts expressed hereunder and all payments required to be made hereunder are
in U.S. Dollars. Any and all payments by Kafus under this Agreement shall be
made free and clear of and without deduction for any and all present or future
<PAGE>
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 by any jurisdiction in which the Lender is
a permanent 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
Kafus shall be required by law to deduct any Taxes from any sum, including
common stock of Kafus, payable to the Lender (i) the sum payable shall be
increased as may be necessary so that, after making all required deductions
(including deductions applicable to additional sums payable under this
paragraph), the Lender receives an amount equal to the sum it would have
received had no such deductions been made, (ii) Kafus shall make such
deductions, and (iii) Kafus shall pay the full amount deducted to the relevant
taxation authority or other authority in accordance with applicable law. Kafus
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 Agreement. Further, If any sum due from Kafus under this
Agreement 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 Kafus with any
governmental authority or in any court, tribunal, or arbitration panel or (ii)
enforcing any order or judgment given in relation hereto, Kafus 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 Kafus distinct from any other obligations
and shall survive the giving or making of any judgment or order in relation to
all or any of such other obligations.
7.4 If any provision in this Agreement is held to be unenforceable, such
provision shall be severed and the remaining provisions shall remain in full
force and effect. All representations, warranties, and covenants of Kafus in
this Agreement shall survive the execution of this Agreement and any other
contract or agreement. If a due date for an amount payable is not specified in
this Agreement, the due date shall be the date on which the Lender demands
payment therefor. The Lender's remedies under this Agreement and other
documents and agreements shall be cumulative, and no delay in enforcing this
Agreement shall act as a waiver of the Lender's rights thereunder. The
provisions of this Agreement may be waived or amended only in a writing signed
by the party against whom enforcement is sought. This Agreement shall bind and
inure to the benefit of Kafus and the Lender and their respective successors and
assigns. Kafus may not assign its rights or delegate its duties under this
Agreement. The Lender may assign its rights and delegate its duties under this
Agreement. This Agreement may be executed in multiple counterparts each of
which shall constitute one and the same agreement.
<PAGE>
7.5 Except as otherwise provided herein, any notice, demand, direction,
certificate, request, instrument, or other communication authorized or required
by this Agreement to be given to or filed with the Lender or Kafus shall be
deemed to have been sufficiently given or filed for all purposes of this
Agreement if and when delivered by messenger or by a recognized courier service
or sent by registered or certified mail, return receipt requested, postage
prepaid or sent by confirmed telecopy, as follows:
(a) To the Lender, to:
Enron Capital & Trade Resources Corp.
1400 Smith Street
Houston, Texas 77002
Attention: Donna Lowry
Telecopy No.: 713-646-8564
<PAGE>
(b) To Kafus, to:
Kafus Environmental Industries, Ltd.
Suite 706, 1155 Robson Street
Vancouver, British Columbia
Canada V6E 1B5
Attention: President
Telecopy No.: 604-685-2426
with a copy to:
Paul, Hastings, Janofsky & Walker LLP
399 Park Avenue, Thirty-First Floor
New York, New York 10022
Attention: Euclid A. Irving, Esq.
Telecopy No.: 212-319-4090
The Lender and Kafus may, by like notice, designate any further or
different addresses or telecopy numbers to which subsequent notices, demands,
directions, certificates, requests, instruments, or other communications
hereunder shall be sent. Any notice, demand, direction, certificate, request,
instrument, or other communication hereunder shall, except as may expressly be
provided herein, be deemed to have been delivered or given as of the date it
shall have been delivered by messenger or courier service or sent by confirmed
telecopy or upon receipt if mailed.
[the remainder of this page is intentionally blank]
<PAGE>
THIS WRITTEN AGREEMENT AND THE LOAN DOCUMENTS AS DEFINED IN THE LOAN AGREEMENT
REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES WITH RESPECT TO THE SUBJECT
MATTER HEREOF 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.
KAFUS ENVIRONMENTAL INDUSTRIES LTD.
By:
--------------------------------------
Name:
Title:
ENRON CAPITAL & TRADE RESOURCES CORP.
By:
--------------------------------------
Name:
Title:
<PAGE>
EXHIBIT 15
[EXECUTION VERSION]
INCOME PARTICIPATION CERTIFICATE
PURCHASE AGREEMENT
This Income Participation Certificate Purchase Agreement dated as of
December 1, 1998 ("Agreement"), is made by Kafus Environmental Industries Ltd.
("Kafus") in favor of Enron Capital & Trade Resources Corp. (the "Lender").
INTRODUCTION
This Agreement is made by Kafus in connection with the Subordinated Loan
Agreement dated as of December 1, 1998 (as modified from time to time, the "Loan
Agreement"), between CanFibre of Lackawanna LLC (the "Company"), and the Lender,
and the related Income Participation Certificate dated as of December 1, 1998
(as modified from time to time, the "Income Participation Certificate"), made by
the Company in favor of the Lender. The effectiveness of this Agreement is a
condition precedent to the effectiveness of the Loan Agreement and the extension
of credit to the Company provided thereunder. As the Company is a subsidiary of
Kafus, Kafus believes that it will receive substantial benefit from such credit
extended to the Company by the Lender. Therefore, to induce the Lender to enter
into the Loan Agreement, and for other good and valuable consideration, Kafus
and the Lender hereby agree as follows:
Section 1. Definitions. Capitalized terms used herein but not defined herein
shall have the meanings set forth or referred to in the Loan Agreement. As used
herein, the following terms shall have the following meanings:
"Annual Period" has the meaning assigned to such term in the Income
Participation Certificate.
"Assumed Income Discount" means, as of any Exercise Date, an amount
equal to the net present value as of the Closing Date of the following stream of
payments which, for purposes of this definition, are assumed to have been
received by the Lender under the Income Participation Certificates on the
following dates and in the following amounts: (a) for each complete Annual
Period which precedes the Exercise Date (including the Annual Period which
includes the Exercise Date, if exercise of the options in Section 2 or 3 hereof
occurs on the last day of an Annual Period), the assumed payment for each such
Annual Period shall be an amount equal to the IPC Current Annual Amount for such
Annual Period, and such assumed payment shall be assumed to have been made on
the last day of such Annual Period and (b) for the Annual Period which includes
the Exercise Date (if such Exercise Date is not the last day of such Annual
Period), the assumed payment shall be an amount equal to the aggregate amount of
the payments actually paid to the
<PAGE>
Lender during such Annual Period in accordance with the Income Participation
Certificates and which were deemed applied to the IPC Current Annual Amount due
with respect to such Annual Period in accordance with the terms of the Income
Participation Certificates, and such assumed payment shall be assumed to have
occurred on the day which is the midpoint of the period from the beginning of
the Annual Period which includes the Exercise Date to the Exercise Date. The net
present value of the above described stream of payments shall be calculated by
discounting such payments back to the Closing Date at a discount rate of 12.00%
per annum using standard financial techniques selected by the Lender (but when
applied as of the Exercise Date in calculating the IPC Put/Call Value, such
amount shall not be adjusted to bring such net present value as of the date of
this Agreement forward to the Exercise Date).
"Available Cash Flow" has the meaning assigned to such term in the
Income Participation Certificate.
"Dollars" and "$" means lawful currency of the United States of
America.
"Exercise Date" means the date upon which either the put (or guaranty)
or call is exercised pursuant to Section 2 or Section 3 hereof.
"IPC Current Annual Amount" has the meaning assigned to such term in
the Income Participation Certificate.
"IPC Put/Call Value" means the sum of (a) the positive difference, if
any, between (i) U.S. $11,000,000 and (ii) the Assumed Income Discount, plus (b)
the amount of any IPC Shortfall Amount which is unpaid as of the Exercise Date
in accordance with the Income Participation Certificates, plus (c) the amount of
any IPC Shortfall Interest Amount as of the Exercise Date determined in
accordance with the Income Participation Certificates. For purposes of
determining the IPC Put/Call Value on any date subsequent to an adjustment under
clause (i) or (ii) of Section 3(e) of the Income Participation Certificates,
there shall be substituted for the amount $11,000,000, which appears in clause
(i) of the preceding sentence, an amount equal to the net present value of the
stream of the IPC Current Annual Amounts that are payable under the Income
Participation Certificates for each of the first twelve Annual Periods, after
giving effect to the adjustment(s) under such clauses (i) and (ii) of such
Section 3(e) of the Income Participation Certificates of the IPC Current Annual
Amounts for the then-current and succeeding Annual Periods (assuming that the
IPC Current Annual Amount for each Annual Period is payable on the last day of
such Annual Period, and with the net present value of each such IPC Current
Annual Amount being determined by discounting such IPC Current Annual Amount
from the date it is so assumed to be payable back to the Closing Date, using a
discount rate of 12.00% per annum).
"IPC Required Payment Amount" has the meaning assigned to such term
in the Income Participation Certificate.
<PAGE>
"IPC Shortfall Amount" has the meaning assigned to such term in the
Income Participation Certificate.
"IPC Shortfall Interest Amount" has the meaning assigned to such
term in the Income Participation Certificate.
"Purchase Activation Date" means the earlier of one calendar year
after the Completion Date or the date of the occurrence of any Event of Default
under the Loan Agreement.
Section 2. Put Agreement. Upon demand by the Lender at any time after the
Purchase Activation Date, Kafus shall purchase all, but not less than all, of
the Income Participation Certificates from the Lender at a price equal to the
IPC Put/Call Value. Any written certificate provided by the Lender to Kafus
showing the calculation of the purchase price shall be conclusive and binding
for all purposes, absent manifest error. Kafus shall make payment to the Lender
within five business days after presentation to Kafus of the Income
Participation Certificate accompanied with such transfer endorsements or
instruments as are necessary to transfer the same to Kafus.
Section 3. Call Agreement. Upon demand by Kafus at any time after the Purchase
Activation Date, the Lender shall sell to Kafus all, but not less than all, of
the Income Participation Certificates at a price equal to the IPC Put/Call
Value. Any written certificate provided by the Lender to Kafus showing the
calculation of the purchase price shall be conclusive and binding for all
purposes, absent manifest error. If Kafus elects to purchase the Income
Participation Certificate at such price, Kafus shall make payment to the Lender
upon presentation to Kafus of the Income Participation Certificate accompanied
with such transfer endorsements or instruments as are necessary to transfer the
same to Kafus.
Section 4. Method of Payment.
4.1 Kafus shall make each payment to the Lender at the option of the
Lender (a) in wire transfer of U.S. Dollars in immediately available funds to
the Lender at such payment location as directed by the Lender, (b) in shares of
the common stock of Kafus issued to the Lender with the value of the shares
determined based upon the Price (as defined below) applicable at the time of
payment, or (c) in any combination of the methods expressed in clauses (a) and
(b) above as determined by the Lender. As used herein, the "Price" with
respect to the common stock of Kafus means, on any day, (i) the preceding 20-day
average of the reported "high" and "low" sales prices for such shares (w) on
the American Stock Exchange or (x) 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 (y) if such
shares are not listed on any national securities exchange, then through the
NASDAQ National Market or, (z) if such shares shall not be so listed, the trade
weighted average of all transactions in the common stock of Kafus in an over-
the-counter market; or (ii) in the event the common stock of Kafus is not listed
or traded as described in (i)
<PAGE>
above, then the Price shall be equal to the value of one share of the common
stock of Kafus, as determined in good faith by the disinterested members of the
board of directors of Kafus.
4.2 In the event the Lender elects to receive shares of common stock of
Kafus as described herein, Kafus shall deliver to the Lender certificates
representing the number of fully paid and nonassessable shares of common stock
determined in accordance with this Section, and Kafus and the Lender shall
concurrently enter into a Registration Rights Agreement with respect to such
shares, which shall be in form and substance satisfactory to the Lender and
shall provide Lender with rights and privileges comparable to those set forth in
the Registration Rights Agreements entered into between Kafus and the Lender on
or prior to the date hereof.
4.3 The Lender is hereby authorized at any time following any demand for
payment hereunder to set off and apply any indebtedness owed by the Lender to
Kafus against any and all of the obligations of Kafus under this Agreement. The
Lender agrees to promptly notify Kafus after any such setoff and application,
but the failure to give such notice shall not affect the validity of such setoff
and application.
Section 5. Obligations Absolute.
5.1 Kafus guarantees that payments due hereunder and under the Income
Participation Certificate will be paid strictly in accordance with the terms of
this Agreement and the Income Participation Certificate, regardless of any law,
regulation, or order now or hereafter in effect in any jurisdiction affecting
any of such terms or the rights of the Lender with respect thereto. Kafus
agrees that its obligations under this Agreement shall not be released,
diminished, or impaired by, and waives any rights which it might otherwise have
which relate to:
(a) Any lack of validity or enforceability of the Income
Participation Certificate or any other agreement or instrument relating
thereto; any increase, reduction, extension, or rearrangement of amounts
due under the Income Participation Certificate; any amendment, supplement,
or other modification of the Income Participation Certificate; any waiver
or consent granted under the Income Participation Certificate; or any sale,
assignment, delegation, or other transfer of the Income Participation
Certificate;
(b) Any grant of any security or support for the amounts due under
the Income Participation Certificate, or any impairment of any security or
support for the amounts due under the Income Participation Certificate,
including any full or partial release, exchange, subordination, or waste of
any collateral for the amounts due under the Income Participation
Certificate or any full or partial release of the Company or any other
Person liable for the payment or performance of the amounts due under the
Income Participation Certificate;
(c) Any change in the organization or structure of the Company,
Kafus, or any other Person liable for the payment or performance of the
amounts due under the Income
<PAGE>
Participation Certificate, or the insolvency, bankruptcy, liquidation, or
dissolution of the Company, Kafus, or any other Person liable for the
payment or performance of the amounts due under the Income Participation
Certificate;
(d) The manner of applying payments on the amounts due under the
Income Participation Certificate or the proceeds of any security or support
for the amounts due under the Income Participation Certificate against the
amounts due under the Income Participation Certificate;
(e) The failure to give notice of the occurrence of any default or
event of default, however denominated, under the Income Participation
Certificate, notice of bringing of action to enforce the payment or
performance of the amounts due under the Income Participation Certificate,
notice of any sale or foreclosure of any collateral for the amounts due
under the Income Participation Certificate, notice of the financial
condition of or other circumstances regarding the Company, Kafus, or any
other Person liable for the amounts due under the Income Participation
Certificate, or any other notice of any kind relating to the amounts due
under the Income Participation Certificate; or
(f) Any other action taken or omitted which affects the Income
Participation Certificate or the capacity of Kafus to perform under this
Agreement, including action taken with respect to the enforcement of the
Loan Agreement against the Company or with respect to the enforcement of
any obligations of Kafus to the Lender against Kafus, whether or not such
action or omission prejudices Kafus or increases the likelihood that Kafus
will be required to make payments or perform hereunder pursuant to the
terms hereof--it is the unambiguous and unequivocal intention of Kafus that
Kafus shall be obligated to make payments and perform under this Agreement
in accordance with the terms of this Agreement, notwithstanding any
occurrence, circumstance, event, action, or omission whatsoever, whether
contemplated or uncontemplated, and whether or not particularly described
herein.
5.2 This Agreement shall continue to be effective or be reinstated, as
the case may be, if any payment on the amounts due under the Income
Participation Certificate must be refunded for any reason including any
bankruptcy proceeding. In the event that the Lender must refund any payment
received against the amounts due under the Income Participation Certificate, any
prior release from the terms of this Agreement given to Kafus by the Lender
shall be without effect, and this Agreement shall be reinstated in full force
and effect. It is the intention of Kafus that Kafus's obligations hereunder
shall not be discharged except by final payment of the amounts due under the
Income Participation Certificate.
Section 6. Unimpaired Collection. There are no conditions precedent to the
enforcement of this Agreement, except as expressly contained herein. It shall
not be necessary for the Lender, in order to enforce payment by Kafus under this
Agreement, to show any proof of the Company's default, to exhaust the Lender's
remedies against the Company or any other Person liable for the payment or
<PAGE>
performance of the amounts due under the Income Participation Certificate, to
enforce any security or support for the payment or performance of the amounts
due under the Income Participation Certificate, or to enforce any other means of
obtaining payment or performance of the amounts due under the Income
Participation Certificate. The Lender shall not be required to mitigate damages
or take any other action to reduce, collect, or enforce the amounts due under
the Income Participation Certificate.
Section 7. Miscellaneous.
7.1 Kafus shall pay to the Lender on demand all costs and expenses of
the Lender in connection with the preservation or enforcement of the Lender's
rights under this Agreement, whether through negotiations, legal proceedings, or
otherwise, including fees and expenses of counsel for the Lender. The
provisions of this paragraph shall survive any purported termination of this
Agreement that does not expressly reference this paragraph.
7.2 (a) Kafus shall at all times protect and hold the Lender and its
respective shareholders, affiliates, directors, officers, employees, agents, and
servants and the persons under their respective control or supervision
(collectively, the "Indemnified Parties") harmless of, from, and against any and
all claims (whether in tort, contract, or otherwise), demands, damages, losses,
liabilities, costs, or expenses of any kind or nature whatsoever (each referred
to herein as a "Loss") which an Indemnified Party may incur or which may be
claimed against an Indemnified Party by any Person, in each case by reason of,
or arising out of this Agreement and the Income Participation Certificate or any
other document or instrument delivered in connection herewith or therewith or
the enforcement of any of the terms or provisions hereof or thereof or the
transactions contemplated hereby or thereby; provided, however, that the
indemnity set forth in this Section shall not extend to any Loss arising, in
the case of any Indemnified Party, as a result of the gross negligence or
willful misconduct of such Indemnified Party. Kafus further covenants and
agrees, to the extent permitted by law, to pay or to reimburse the Indemnified
Parties for any and all costs, reasonable attorneys' fees, liabilities, or
expenses incurred in connection with investigating, defending against, or
otherwise in connection with any such losses, claims, damages, liabilities,
expenses, or actions, except to the extent that the same arise out of the gross
negligence or willful misconduct of the Indemnified Party claiming such payment
or reimbursement.
(b) An Indemnified Party shall promptly notify Kafus in writing
of any claim or action brought against such Indemnified Party in which indemnity
may be sought against Kafus pursuant to this Section; and such notice shall be
given in sufficient time to allow Kafus to defend such claim or action. However,
the failure to give such notice in sufficient time shall not constitute a
defense hereunder nor in any way impair the obligations of Kafus under this
Section, if (i) the Indemnified Party shall not have had knowledge or notice of
such claim or action, (ii) neither Kafus nor any Affiliate thereof shall have
had knowledge or notice of such claim or action, or (iii) Kafus's ability to
defend such claim or action shall not thereby be materially impaired. In the
event, however, that (i) the Indemnified Party shall not have timely notified
Kafus of any such claim or
<PAGE>
action, (ii) neither Kafus nor any Affiliate thereof shall have had knowledge or
notice of such claim or action, and (iii) Kafus's ability to defend or
participate in such claim or action is materially impaired by reason of not
having received timely notice thereof from the Indemnified Party, then Kafus's
obligation to so defend and indemnify shall be qualified to the extent (and only
to the extent) of such material impairment.
(c) The obligations of Kafus under this Section shall survive the
termination of this Agreement and remain in full force and effect, with respect
to each Loss of each Indemnified Party, until the later of (i) the expiration of
the period stated in the applicable statute of limitations during which a claim
or cause of action may be brought, and (ii) payment in full or the satisfaction
of such claim or cause of action and of all expenses and charges incurred by
such Indemnified Party relating to the enforcement of the provisions herein
specified.
7.3 This Agreement shall be governed by the internal laws of the Province
of British Columbia, Canada (without reference to principles of conflicts of
laws that would select another law). Unless otherwise specified, all monetary
amounts expressed hereunder and all payments required to be made hereunder are
in U.S. Dollars. Any and all payments by Kafus under this Agreement 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 by any jurisdiction in which the Lender is
a permanent 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
Kafus shall be required by law to deduct any Taxes from any sum, including
common stock of Kafus, payable to the Lender (i) the sum payable shall be
increased as may be necessary so that, after making all required deductions
(including deductions applicable to additional sums payable under this
paragraph), the Lender receives an amount equal to the sum it would have
received had no such deductions been made, (ii) Kafus shall make such
deductions, and (iii) Kafus shall pay the full amount deducted to the relevant
taxation authority or other authority in accordance with applicable law. Kafus
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 Agreement. Further, If any sum due from Kafus under this
Agreement 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 Kafus with any
governmental authority or in any court, tribunal, or arbitration panel or (ii)
enforcing any order or judgment given in relation hereto, Kafus 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 Kafus distinct
<PAGE>
from any other obligations and shall survive the giving or making of any
judgment or order in relation to all or any of such other obligations.
7.4 If any provision in this Agreement is held to be unenforceable, such
provision shall be severed and the remaining provisions shall remain in full
force and effect. All representations, warranties, and covenants of Kafus in
this Agreement shall survive the execution of this Agreement and any other
contract or agreement. If a due date for an amount payable is not specified in
this Agreement, the due date shall be the date on which the Lender demands
payment therefor. The Lender's remedies under this Agreement and other
documents and agreements shall be cumulative, and no delay in enforcing this
Agreement shall act as a waiver of the Lender's rights thereunder. The
provisions of this Agreement may be waived or amended only in a writing signed
by the party against whom enforcement is sought. This Agreement shall bind and
inure to the benefit of Kafus and the Lender and their respective successors and
assigns. Kafus may not assign its rights or delegate its duties under this
Agreement. The Lender may assign its rights and delegate its duties under this
Agreement. This Agreement may be executed in multiple counterparts each of
which shall constitute one and the same agreement.
7.5 Except as otherwise provided herein, any notice, demand, direction,
certificate, request, instrument, or other communication authorized or required
by this Agreement to be given to or filed with the Lender or Kafus shall be
deemed to have been sufficiently given or filed for all purposes of this
Agreement if and when delivered by messenger or by a recognized courier service
or sent by registered or certified mail, return receipt requested, postage
prepaid or sent by confirmed telecopy, as follows:
(a) To the Lender, to:
Enron Capital & Trade Resources Corp.
1400 Smith Street
Houston, Texas 77002
Attention: Donna Lowry
Telecopy No.: 713-646-8564
(b) To Kafus, to:
Kafus Environmental Industries Ltd.
Suite 706, 1155 Robson Street
Vancouver, British Columbia
Canada V6E 1B5
Attention: Kenneth F. Swaisland
Telecopy No.: 604-685-2426
<PAGE>
with a copy to:
Paul, Hastings, Janofsky & Walker LLP
399 Park Avenue, Thirty-First Floor
New York, New York 10022
Attention: Euclid A. Irving, Esq.
Telecopy No.: 212-319-4090
The Lender and Kafus may, by like notice, designate any further or
different addresses or telecopy numbers to which subsequent notices, demands,
directions, certificates, requests, instruments, or other communications
hereunder shall be sent. Any notice, demand, direction, certificate, request,
instrument, or other communication hereunder shall, except as may expressly be
provided herein, be deemed to have been delivered or given as of the date it
shall have been delivered by messenger or courier service or sent by confirmed
telecopy or upon receipt if mailed.
[the remainder of this page is intentionally blank]
<PAGE>
THIS WRITTEN AGREEMENT AND THE INCOME PARTICIPATION CERTIFICATE REPRESENT THE
FINAL AGREEMENT BETWEEN THE PARTIES WITH RESPECT TO THE SUBJECT MATTER HEREOF
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.
KAFUS ENVIRONMENTAL INDUSTRIES LTD.
By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
ENRON CAPITAL & TRADE RESOURCES CORP.
By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
<PAGE>
EXHIBIT 16
[Execution Version]
CONVERTIBLE PROMISSORY NOTE
(Term Loan C)
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. $4,250,000 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 FOUR MILLION TWO HUNDRED FIFTY THOUSAND AND NO/100 UNITED
STATES DOLLARS (U.S. $4,250,000) 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 Borrower shall prepay to the Lender the outstanding principal amount of
this Note and all accrued but unpaid interest thereon in an amount equal to the
aggregate amount of debt and equity financings above $3,000,000 received by the
Borrower after the date of this Note from sources other than the Lender
("Financings") promptly upon receipt of any Financings, provided that such
prepayments shall be applied first to accrued but unpaid interest and then to
the outstanding principal amount of this Note.
The Borrower shall pay to the Lender the outstanding principal amount of
this Note on June 30, 1999 (the "Maturity Date").
<PAGE>
2. Interest.
[Intentionally Deleted].
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, including
default interest, such obligation shall be payable upon demand.
Any and all payments by the Borrower shall be made free and clear of and
without deduction for any and all present or future taxes, levies, imposts,
deductions, charges, or withholdings, and all liabilities with respect thereto,
other than taxes imposed on the income of and franchise taxes imposed on the
Lender in each case by any jurisdiction in which the Lender is a citizen or
resident or any political subdivision of such jurisdiction (all such non
excluded taxes, levies, imposts, deductions, charges, withholdings, and
liabilities being hereinafter referred to as "Taxes"). If the Borrower shall be
required by law to deduct any Taxes from any sum payable to the Lender (i) the
sum payable shall be increased as may be necessary so that, after making all
required deductions (including deductions applicable to additional sums payable
under this paragraph), the Lender receives an amount equal to the sum it would
have received had no such deductions been made; (ii) the Borrower shall make
such deductions; and (iii) the Borrower shall pay the full amount deducted to
the relevant taxation authority or other authority in accordance with applicable
law.
2
<PAGE>
The Borrower agrees to pay any present or future stamp or documentary taxes
or any other excise or property taxes, charges, or similar levies which arise
from any payment made with respect to, or from the execution, delivery, filing,
or registration of, this Note or any documents securing or supporting this Note.
If any sum due from the Borrower under this Note or any order or judgment
given in relation hereto has to be converted from the currency in which the same
is payable hereunder or under such order or judgment (the "first currency") into
another currency (the "second currency") for the purpose of (i) making or filing
a claim or proof against the Borrower with any governmental authority or in any
court, tribunal, or arbitration panel or (ii) enforcing any order or judgment
given in relation hereto, the Borrower shall indemnify the Lender against any
loss incurred as a result of any discrepancy between (A) the rate of exchange
used when restating the amount in question from the first currency into the
second currency and (B) the rate or rates of exchange at which the Lender
purchased the first currency with the second currency after receipt of a sum
paid to it in the second currency in satisfaction, in whole or in part, of any
such sum due or order or judgment. The foregoing indemnity shall constitute a
separate obligation of the Borrower distinct from its other obligations
hereunder and shall survive the giving or making of any judgment or order in
relation to all or any of such other obligations.
4. Default and Remedies.
It shall be an "Event of Default" under this Note if the Borrower fails to
pay when due any amount due under this Note, including payments of principal,
interest, fees, reimbursements, or indemnifications. It shall also be an "Event
of Default" under this Note to the extent the 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 Borrower all amounts payable by the Borrower under this
Note to be immediately due and
3
<PAGE>
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 10.20% per annum compounded annually, calculated
based upon a 365/366 day year for the actual number of days elapsed, or the
Highest Lawful Rate (as defined below). As used herein, the term "Highest Lawful
Rate" means the maximum lawful interest rate, if any, that at any time or from
time to time may be contracted for, charged, or received under the laws
applicable to the Lender which are presently in effect or, to the extent allowed
by law, under such applicable laws which may hereafter be in effect and which
allow a higher maximum nonusurious interest rate than applicable laws now allow.
NOTWITHSTANDING the foregoing or any other term in this Note to the contrary, it
is the intention of the Lender and the Borrower to conform strictly to any
applicable usury laws. Accordingly, if the Lender contracts for, charges, or
receives any consideration in connection with this Note which constitutes
interest in excess of the Highest Lawful Rate, then any such excess shall be
canceled automatically and, if previously paid, shall at the Lender's option be
applied to the outstanding amount of the loans made hereunder or be refunded to
the Borrower. In determining whether any interest exceeds the Highest Lawful
Rate, such interest shall, to the extent permitted by applicable law, be
amortized, prorated, allocated, and spread in equal parts throughout the term of
this Note.
During the continuation of an Event of Default, the Lender is authorized at
any time, to the fullest extent permitted by law, to setoff and apply any
indebtedness owed by the Lender to the Borrower against any and all of the
obligations of the Borrower under this Note, irrespective of whether or not the
Lender shall have made any demand under this Note and although such obligations
may be contingent and unmatured.
During the continuation of an Event of Default, the Lender may exercise all
of its rights under the Loan Documents and all other rights at law or in equity.
During the continuation of an Event of Default, the Lender may exercise the
conversion feature of this Note as set forth below.
4
<PAGE>
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").
"Conversion Price" means U.S. $4.00, subject to adjustment as provided for
in this Section 5.
5
<PAGE>
5.2 Conversion. If on the Maturity Date the Borrower does not fully
repay the outstanding principal amount of this Note and all accrued but unpaid
interest thereon, then at any time thereafter the Lender may convert all (but
not less than all) of the outstanding principal amount of this Note and accrued
but unpaid interest thereon into that number of fully paid and non-assessable
shares of Common Stock obtained by dividing the then outstanding principal
amount of this Note and accrued but unpaid interest thereon by the Conversion
Price. 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. The Lender shall
have no obligation to convert this Note.
5.3 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 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.
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<PAGE>
5.4 Antidilution Adjustments. The number and kind of securities issuable
upon the conversion of the Note shall be subject to adjustment from time to time
upon the happening of certain events occurring on or after the date of original
issue of the Note as follows:
(i) In case of any reclassification or change of Common Stock (other
than a change in par value, or from par value to no par value, or from no
par value to par value or as a result of a subdivision or combination), or
in case of any consolidation or merger of the Borrower with or into another
corporation (other than a merger with another corporation in which the
Borrower is the surviving corporation and which does not result in any
reclassification or change -- other than a change in par value, or from par
value to no par value, or from no par value to par value, or as a result of
a subdivision or combination -- of shares of Common Stock issuable upon
exercise of these conversion rights), or in the case of a sale or
conveyance in a single transaction or in a series of related transactions
with the same purchaser or affiliates thereof of all or substantially all
the assets of the Borrower as an entirety, or a statutory share exchange in
which all shares of Common Stock are exchanged for shares of another
corporation or entity, the Lender shall have, and the Borrower, or such
successor entity or purchaser, shall covenant in the constituent documents
effecting any of the foregoing transactions that the Lender has, the right
to obtain upon the exercise of these conversion rights, in lieu of each
share of Common Stock theretofore issuable upon exercise of these
conversion rights, the kind and amount of shares of stock, other
securities, money, and property receivable upon such reclassification,
change, consolidation or merger, conveyance or sale of assets, or share
exchange by a holder of one share of Common Stock issuable upon exercise of
these conversion rights as if they had been exercised immediately prior to
such reclassification, change, consolidation or merger, conveyance or sale
of assets, or share exchange. The constituent documents effecting any
reclassification, change, consolidation or merger, or share exchange shall
provide for adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided in this Section 5.5. 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 Conversion Price shall be
proportionately reduced, in case of subdivision of shares, as at the
effective date of such subdivision, or if the
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<PAGE>
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 Conversion Price
shall be adjusted, as of the date the Borrower shall take a record of the
holders of such stock for the purpose of determining the holders entitled
to receive such dividend or other distribution (or if no such record is
taken, as at the date of such payment or other distribution), to that price
determined by multiplying the Conversion Price in effect immediately prior
to such record date (or if no such record is taken, then immediately prior
to such payment or other distribution) by a fraction (1) the numerator of
which shall be the total number of shares of Common Stock outstanding
immediately prior to such dividend or distribution, and (2) the
denominator of which shall be the total number of shares of Common Stock
outstanding immediately after such dividend or distribution.
(iv) If the Borrower shall issue to all holders of its Common Stock
any warrant, option, or other right to subscribe for or purchase Common
Stock at a price per share less than the Average Price at the time of
issuance, the Conversion Price shall be adjusted, as of the date the
Borrower shall take a record of the holders of its Common Stock for the
purpose of receiving such issuance, to that price determined by multiplying
the Conversion Price by a fraction, the numerator of which shall be the
number of shares of Common Stock outstanding on the date of issuance plus
the number of shares which the aggregate offering price of the total number
of shares so offered would purchase at the Average Price at the time of
issuance, and the denominator of which shall be the number of shares of
Common Stock outstanding on the date of issuance plus the number of
additional shares of Common Stock offered for subscription or purchase.
(v) If the Borrower shall distribute to all holders of its Common
Stock evidences of indebtedness of the Borrower, shares of capital stock of
the Borrower (other than Common Stock), or assets, or rights or warrants to
subscribe for or purchase any of its securities (excluding those dividends,
warrants, options, and
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rights referred to in subparagraph (iv)), then in each case the Conversion
Price shall be adjusted, as of the date the Borrower shall take a record of
the holders of its Common Stock for the purpose of determining the holders
entitled to receive such distribution, to that price determined by
multiplying the Conversion Price by a fraction the numerator of which shall
be the Conversion Price less the fair market value (as determined by the
Board of Directors of the Borrower, whose determination shall be
conclusive) of the evidences of indebtedness of the Borrower, shares of
capital stock of the Borrower (other than Common Stock), or assets, or
rights or warrants to subscribe for or purchase any of its securities
(excluding those dividends, warrants, options, and rights referred to in
subparagraph (iv)), so distributed in respect of one share of Common Stock
and the denominator of which is the Conversion Price.
(vi) No adjustment of the Conversion Price shall be made in an amount
less than $.01 per share, but any such lesser adjustment shall be carried
forward and shall be made at the time together with the next subsequent
adjustment which, together with any adjustments so carried forward, shall
amount to $.01 per share or more.
If any shares of Common Stock required to be reserved for the purposes of
conversion of the Note hereunder require registration with or approval of any
governmental authority under any federal or state law, or listing upon any
national securities exchange, before such shares may be issued upon conversion,
the Borrower will in good faith and as expeditiously as possible endeavor to
cause such shares to be duly registered, approved, or listed, as the case may
be.
5.5 Certain Notices and Calculations. Whenever the Conversion Price is
adjusted as provided in Section 5.5, the Borrower shall promptly deliver to the
holder hereof a certificate signed by two officers of the Borrower setting forth
the Conversion Price after such adjustment and setting forth a brief statement
of the facts requiring such adjustment and the computation thereof.
5.6 Reservation of Shares. The Borrower covenants that it will at all
times reserve and keep available, free from preemptive rights, out of its
authorized but unissued shares of Common Stock, solely for the purpose of issue
upon conversion of this Note as herein provided, such number of shares of Common
Stock as shall then be issuable upon the conversion of this Note. The Borrower
covenants that all shares of Common Stock which
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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.
5.7 Certain Covenants. Before taking any action which would cause an
adjustment reducing the Conversion Price below the then stated or par value of
the Common Stock issuable upon conversion of this Note, the Borrower will take
any corporate action which may, in the opinion of its counsel, be necessary in
order that the Borrower may validly and legally issue fully paid and non-
assessable shares of such Common Stock at such adjusted conversion price.
5.8 Certain Notices. In case:
(i) the Borrower shall authorize the distribution to all holders of
Common Stock of evidences of its indebtedness or assets (other than cash
dividends or other cash distributions paid out of surplus); or
(ii) the Borrower shall authorize the granting to the holders of
Common Stock of rights or warrants to subscribe for or purchase any shares
of capital stock or any class or of any other rights; or
(iii) of any reclassification of the capital stock of the Borrower
(other than a subdivision or combination of its outstanding shares of
Common Stock), or of any consolidation or merger to which the Borrower is a
party and for which approval of any stockholders of the Borrower is
required, or of the sale, lease, or transfer of all or substantially all of
the property of the Borrower; or
(iv) of the voluntary or involuntary dissolution, liquidation, or
winding up of the Borrower;
then, in each case, the Borrower shall provide to the Lender at least 20 days,
but not more than 45 days, prior to the applicable record or effective date
hereinafter specified, a notice stating (x) the date on which a record is to be
taken for the purpose of such dividend, distribution, rights, or warrants, or,
if a record is not to be taken, the date as of which the holders of Common Stock
of record to be entitled to such dividend, distribution, rights, or
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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 evidences an amendment and restatement and increase of certain
indebtedness previously evidenced by the $3,000,000 Convertible Promissory Note
dated as of December 31, 1997 (the "Original Note") made by the Borrower and
payable to the Lender. The outstanding principal amount of and accrued but
unpaid interest under the Original Note continues under this Note and the
execution of this Note does not indicate a payment, satisfaction, novation, or
discharge thereof.
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: ________________________________________________
Title: ________________________________________________
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EXHIBIT 17
[Execution Version]
CONVERTIBLE PROMISSORY NOTE
(Advancing Credit Facility)
THIS CONVERTIBLE PROMISSORY NOTE AND THE SHARES OF CAPITAL STOCK ISSUABLE UPON
CONVERSION HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), OR ANY STATE SECURITIES OR BLUE SKY LAWS AND MAY NOT BE
SOLD, PLEDGED, OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE ACT OR IN RELIANCE ON AN AVAILABLE EXEMPTION
FROM THE REGISTRATION PROVISIONS OF THE ACT AND ANY APPLICABLE STATE SECURITIES
OR BLUE SKY LAWS.
U.S. $12,500,000 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 TWELVE MILLION FIVE HUNDRED THOUSAND AND NO/100 UNITED STATES
DOLLARS (U.S. $12,500,000) or, if less, the outstanding principal amount of the
loans advanced hereunder in accordance with the terms of this Convertible
Promissory Note (this "Note").
1. Principal.
Principal shall be advanced as requested by the Borrower in accordance with
the terms of the Note Agreement dated as of December 31, 1998 (as modified from
time to time, the "Note Agreement"), between the Borrower and the Lender
providing the lending commitment for this Note.
The Borrower may not prepay the outstanding principal balance of this Note
without the advance written consent of the Lender. Prepayments permitted by the
Lender shall be applied first to accrued but unpaid interest and then to the
outstanding principal balance of this Note.
The Borrower shall pay to the Lender the outstanding principal amount of
this Note on December 31, 2000 (the "Maturity Date").
<PAGE>
2. Interest.
The outstanding principal amount of this Note shall bear interest at 14.00%
per annum, calculated based upon a 365/366 day year for the actual number of
days elapsed. The Borrower shall pay to the Lender all accrued but unpaid
interest on this Note on the Maturity Date.
3. Payments Generally.
The Lender shall record in its records all advances and payments of
principal and interest on this Note. Any failure of the Lender to make such
recordings, however, shall not affect the Borrower's repayment obligations. The
Lender's records shall be presumptive evidence of the principal and interest
owed by the Borrower.
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 sum it would
have received had no such deductions been made; (ii) the Borrower shall make
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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 or any other
security documents, credit support documents, or other loan documents securing,
supporting, or related to this Note (collectively, the "Loan Documents") so
provide.
During the continuation of any Event of Default, the Lender may (i) declare
by written notice to the Borrower all of its commitments related to this Note
terminated, whereupon such commitments shall terminate, and (ii) declare by
written notice to the Borrower all amounts payable by the Borrower under this
Note to be immediately due and
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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 nonusurious interest rate than applicable laws now allow.
NOTWITHSTANDING the foregoing or any other term in this Note to the contrary, it
is the intention of the Lender and the Borrower to conform strictly to any
applicable usury laws. Accordingly, if the Lender contracts for, charges, or
receives any consideration in connection with this Note which constitutes
interest in excess of the Highest Lawful Rate, then any such excess shall be
canceled automatically and, if previously paid, shall at the Lender's option be
applied to the outstanding amount of the loans made hereunder or be refunded to
the Borrower. In determining whether any interest exceeds the Highest Lawful
Rate, such interest shall, to the extent permitted by applicable law, be
amortized, prorated, allocated, and spread in equal parts throughout the term of
this Note.
During the continuation of an Event of Default, the Lender is authorized at
any time, to the fullest extent permitted by law, to setoff and apply any
indebtedness owed by the Lender to the Borrower against any and all of the
obligations of the Borrower under this Note, irrespective of whether or not the
Lender shall have made any demand under this Note and although such obligations
may be contingent and unmatured.
During the continuation of an Event of Default, the Lender may exercise all
of its rights under the Loan Documents and all other rights at law or in equity.
During the continuation of an Event of Default, the Lender may exercise the
conversion feature of this Note as set forth below.
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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")
"Conversion Price" means U.S. $4.00, subject to adjustment as provided in
this Section 5.
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5.2 Conversion. If on the Maturity Date the Borrower does not fully
repay the outstanding principal amount of this Note and all accrued but unpaid
interest thereon, then at any time thereafter the Lender may convert all (but
not less than all) of the outstanding principal amount of this Note and accrued
but unpaid interest thereon into that number of fully paid and non-assessable
shares of Common Stock obtained by dividing the then outstanding principal
amount of this Note and accrued but unpaid interest thereon by the Conversion
Price. 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. The Lender shall
have no obligation to convert this Note.
5.3 Issuance of Common Stock on Conversion. As promptly as practicable
after the surrender of this Note for conversion, the Borrower shall deliver or
cause to be delivered to the Lender certificates representing the number of
fully paid and nonassessable shares of Common Stock into which this Note may be
converted in accordance with the provisions of this Section 5. Such conversion
shall be deemed to have been made at the close of business on the date that this
Note shall have been surrendered for conversion so that the rights of the Lender
shall cease at such time and, subject to the following provisions of this
Section 5.3, the Lender shall be treated for all purposes as having become the
record holder of such Common Stock at such time and such conversion shall be at
the Conversion Price in effect at such time; provided, however, that no such
surrender on any date when the stock transfer books of the Borrower shall be
closed shall be effective to constitute the Lender as the record holder of such
Common Stock on such date, but such surrender shall be effective to constitute
the Lender as the record holder for all purposes at the close of business on the
next succeeding day on which such stock transfer books are open; and, in that
event such conversion shall be at the Conversion Price in effect on the date
that this Note shall have been surrendered for conversion, as if the stock
transfer books of the Borrower had not been closed. If the last day for the
exercise of the conversion right shall not be a Business Day, then such
conversion right may be exercised on the next succeeding Business Day.
No fractional shares of Common Stock shall be issued upon conversion of
this Note. Instead of any fractional shares of Common Stock which would
otherwise be issuable upon conversion of this Note, the Borrower shall pay a
cash adjustment in respect of such fraction in an amount equal to such fraction
of a share multiplied by the Conversion Price.
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5.4 Antidilution Adjustments. The number and kind of securities issuable
upon the conversion of the Note shall be subject to adjustment from time to time
upon the happening of certain events occurring on or after the date of original
issue of the Note as follows:
(i) In case of any reclassification or change of Common Stock
(other than a change in par value, or from par value to no par value, or
from no par value to par value or as a result of a subdivision or
combination), or in case of any consolidation or merger of the Borrower
with or into another corporation (other than a merger with another
corporation in which the Borrower is the surviving corporation and which
does not result in any reclassification or change -- other than a change in
par value, or from par value to no par value, or from no par value to par
value, or as a result of a subdivision or combination -- of shares of
Common Stock issuable upon exercise of these conversion rights), or in the
case of a sale or conveyance in a single transaction or in a series of
related transactions with the same purchaser or affiliates thereof of all
or substantially all the assets of the Borrower as an entirety, or a
statutory share exchange in which all shares of Common Stock are exchanged
for shares of another corporation or entity, the Lender shall have, and the
Borrower, or such successor entity or purchaser, shall covenant in the
constituent documents effecting any of the foregoing transactions that the
Lender has, the right to obtain upon the exercise of these conversion
rights, in lieu of each share of Common Stock theretofore issuable upon
exercise of these conversion rights, the kind and amount of shares of
stock, other securities, money, and property receivable upon such
reclassification, change, consolidation or merger, conveyance or sale of
assets, or share exchange by a holder of one share of Common Stock issuable
upon exercise of these conversion rights as if they had been exercised
immediately prior to such reclassification, change, consolidation or
merger, conveyance or sale of assets, or share exchange. The constituent
documents effecting any reclassification, change, consolidation or merger,
or share exchange shall provide for adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided in this
Section 5.4. The provisions of this paragraph shall similarly apply to
successive reclassifications, changes, consolidations or mergers,
conveyances or sales of assets, or share exchanges.
(ii) If the Borrower at any time while the Note is outstanding
shall subdivide or combine its Common Stock, the Conversion Price shall be
proportionately reduced, in case of subdivision of shares, as at the
effective date of
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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 Conversion Price
shall be adjusted, as of the date the Borrower shall take a record of the
holders of such stock for the purpose of determining the holders entitled
to receive such dividend or other distribution (or if no such record is
taken, as at the date of such payment or other distribution), to that price
determined by multiplying the Conversion Price in effect immediately prior
to such record date (or if no such record is taken, then immediately prior
to such payment or other distribution) by a fraction (1) the numerator of
which shall be the total number of shares of Common Stock outstanding
immediately prior to such dividend or distribution, and (2) the denominator
of which shall be the total number of shares of Common Stock outstanding
immediately after such dividend or distribution.
(iv) If the Borrower shall issue to all holders of its Common Stock
any warrant, option, or other right to subscribe for or purchase Common
Stock at a price per share less than the Average Price at the time of
issuance, the Conversion Price shall be adjusted, as of the date the
Borrower shall take a record of the holders of its Common Stock for the
purpose of receiving such issuance, to that price determined by multiplying
the Conversion Price by a fraction, the numerator of which shall be the
number of shares of Common Stock outstanding on the date of issuance plus
the number of shares which the aggregate offering price of the total number
of shares so offered would purchase at the Average Price at the time of
issuance, and the denominator of which shall be the number of shares of
Common Stock outstanding on the date of issuance plus the number of
additional shares of Common Stock offered for subscription or purchase.
(v) If the Borrower shall distribute to all holders of its Common
Stock evidences of indebtedness of the Borrower, shares of capital stock of
the Borrower (other than Common Stock), or assets, or rights or warrants to
subscribe for or
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purchase any of its securities (excluding those dividends, warrants,
options, and rights referred to in subparagraph (iv)), then in each case
the Conversion Price shall be adjusted, as of the date the Borrower shall
take a record of the holders of its Common Stock for the purpose of
determining the holders entitled to receive such distribution, to that
price determined by multiplying the Conversion Price by a fraction the
numerator of which shall be the Conversion Price less the fair market value
(as determined by the Board of Directors of the Borrower, whose
determination shall be conclusive) of the evidences of indebtedness of the
Borrower, shares of capital stock of the Borrower (other than Common
Stock), or assets, or rights or warrants to subscribe for or purchase any
of its securities (excluding those dividends, warrants, options, and rights
referred to in subparagraph (iv)), so distributed in respect of one share
of Common Stock and the denominator of which is the Conversion Price.
(vi) No adjustment of the Conversion Price shall be made in an
amount less than $.01 per share, but any such lesser adjustment shall be
carried forward and shall be made at the time together with the next
subsequent adjustment which, together with any adjustments so carried
forward, shall amount to $.01 per share or more.
If any shares of Common Stock required to be reserved for the purposes of
conversion of the Note hereunder require registration with or approval of any
governmental authority under any federal or state law, or listing upon any
national securities exchange, before such shares may be issued upon conversion,
the Borrower will in good faith and as expeditiously as possible endeavor to
cause such shares to be duly registered, approved, or listed, as the case may
be.
5.5 Certain Notices and Calculations. Whenever the Conversion Price is
adjusted as provided in Section 5.4, the Borrower shall promptly deliver to the
holder hereof a certificate signed by two officers of the Borrower setting forth
the Conversion Price after such adjustment and setting forth a brief statement
of the facts requiring such adjustment and the computation thereof.
5.6 Reservation of Shares. The Borrower covenants that it will at all
times reserve and keep available, free from preemptive rights, out of its
authorized but unissued shares of Common Stock, solely for the purpose of issue
upon conversion of this Note as herein provided, such number of shares of Common
Stock as shall then be issuable upon the
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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.
5.7 Certain Covenants. Before taking any action which would cause an
adjustment reducing the Conversion Price below the then stated or par value of
the Common Stock issuable upon conversion of this Note, the Borrower will take
any corporate action which may, in the opinion of its counsel, be necessary in
order that the Borrower may validly and legally issue fully paid and non-
assessable shares of such Common Stock at such adjusted conversion price.
5.8 Certain Notices. In case:
(i) the Borrower shall authorize the distribution to all holders
of Common Stock of evidences of its indebtedness or assets (other than cash
dividends or other cash distributions paid out of surplus); or
(ii) the Borrower shall authorize the granting to the holders of
Common Stock of rights or warrants to subscribe for or purchase any shares
of capital stock or any class or of any other rights; or
(iii) of any reclassification of the capital stock of the Borrower
(other than a subdivision or combination of its outstanding shares of
Common Stock), or of any consolidation or merger to which the Borrower is a
party and for which approval of any stockholders of the Borrower is
required, or of the sale, lease, or transfer of all or substantially all of
the property of the Borrower; or
(iv) of the voluntary or involuntary dissolution, liquidation, or
winding up of the Borrower;
then, in each case, the Borrower shall provide to the Lender at least 20 days,
but not more than 45 days, prior to the applicable record or effective date
hereinafter specified, a notice stating (x) the date on which a record is to be
taken for the purpose of such dividend, distribution, rights, or warrants, or,
if a record is not to be taken, the date as of which the
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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 evidences an amendment and restatement of certain indebtedness
previously evidenced by the $12,500,000 Convertible Promissory Note dated as of
August 18, 1998 (the "Original Note") made by the Borrower and payable to the
Lender. The outstanding principal amount of and accrued but unpaid interest
under the Original Note continues under this Note and the execution of this Note
does not indicate a payment, satisfaction, novation, or discharge thereof.
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:
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Name:
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Title:
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