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.
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
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.
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,
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,
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
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.
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.
0000 Xxxxx Xxxxxx
Xxxxxxx, Xxxxx 00000
Attention: Xxxxx Xxxxx
Telecopy No.: 000-000-0000
(b) To Kafus, to:
Kafus Environmental Industries, Ltd.
Xxxxx 000, 0000 Xxxxxx Xxxxxx
Xxxxxxxxx, Xxxxxxx Xxxxxxxx
Xxxxxx X0X 0X0
Attention: President
Telecopy No.: 604-685-2426
with a copy to:
Paul, Hastings, Xxxxxxxx & Xxxxxx LLP
000 Xxxx Xxxxxx, Xxxxxx-Xxxxx Xxxxx
Xxx Xxxx, Xxx Xxxx 00000
Attention: Euclid X. Xxxxxx, Esq.
Telecopy No.: 000-000-0000
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]
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:
