Exhibit 2
[Execution Version]
Warrant Agreement
December 31, 1998
Kafus Environmental Industries Ltd.
Xxxxx 000, 000 Xxxxxxx Xxxxxx
Xxxxxxxxx, XX Xxxxxx X0X 0X0
Attn: Xx. Xxxxxxx X. XxXxxx
Gentlemen:
Reference is made to the Securities Purchase Agreement dated as of August 18,
1998 (the "Securities Purchase Agreement"), between Kafus Environmental
Industries Ltd., a British Columbia corporation (the "Company"), and Enron
Capital & Trade Resources Corp., a Delaware corporation (the "Purchaser"), and
the related Warrants issued in connection therewith, including (a) the Warrant
for 750,000 Shares of Common Stock of the Company ("Common Stock") dated as of
August 18, 1998 (the "750,000 Share Warrant"), made by the Company and issued to
the Purchaser, (b) the Warrant for 250,000 Shares of Common Stock dated as of
August 18, 1998 (the "250,000 Share Warrant"), made by the Company and issued to
the Purchaser (as amended herein), (c) the Warrant for 500,000 Shares of Common
Stock dated as of August 18, 1998 (the "500,000 Share Warrant"), made by the
Company and issued to the Purchaser (as amended herein), and (d) the Warrant for
45,000 Shares of Common Stock dated as of August 18, 1998 (the "45,000 Share
Warrant"), made by the Company and issued to the Purchaser (such Warrants in (a)
through (d) being the "Warrants"). This Warrant Agreement (this "Agreement") is
entered into in connection with the execution of the Note Agreement dated as of
December 31, 1998 (the "Note Agreement"), between the Company and the Purchaser
the terms of which have superceded the terms of the Securities Purchase
Agreement with respect to certain Notes thereunder. This Agreement supercedes
the Securities Purchase Agreement with respect to the Warrants. In
consideration of the termination of the Securities Purchase Agreement, the
Company and the Purchaser agree as follows:
Section 1. Definitions.
1.1 Terms defined herein shall have the meanings specified in their
definition, including the following terms which shall have the following
meanings:
"Affiliate" means, as to any Person, any other Person that, directly or
indirectly, through one or more intermediaries, controls, is controlled by, or
is under common control with, such Person or any Subsidiary of such Person. The
term "control" (including the terms "controlled by" or "under common control
with") means the possession, directly or indirectly, of the power to direct or
cause the direction of the management and policies of a Person, whether through
ownership, by contract, or otherwise.
"Average Price" with respect to Common Stock means, on any day or for any
period, as applicable, the trade weighted average of the sales prices for such
shares as reported on Bloomberg News Services (i) on the American Stock Exchange
or (ii) if such shares are not so listed, then on the largest national
securities exchange (based on the aggregate dollar value of securities listed)
on which such shares are listed or traded or (iii) if such shares are not listed
on any national securities exchange, then the prices at which transactions are
effected through the NASDAQ National Market as reported by NASDAQ or, (iv) if
such shares shall not be listed thereon, the trade weighted average of all
transactions in Common Stock in an over-the-counter market.
"Business Day" has the meaning specified in Section 7.2(a).
"CanFibre Group" means The CanFibre Group Ltd., an Ontario corporation.
"Financial Statements" means the June 30, 1998, financial statements of the
Company.
"Material Adverse Change" means any material adverse change in the
business, operations, financial condition, or prospects of the Company since the
date of the Financial Statements.
"Person" means an individual, partnership, corporation (including a
business trust), joint stock company, trust, unincorporated association, joint
venture, or other entity, or a government or any political subdivision or agency
thereof, or any trustee, receiver, custodian, or similar official.
"Registration Rights Agreement" means the Registration Rights Agreement
dated as of August 18, 1998, between the Company and the Purchaser providing for
the registration of the Common Stock issuable upon exercise of any of the
Warrants.
"Samarac" means The Samarac Corporation Ltd., an Ontario corporation.
"Subsidiary" means, with respect to any Person, any other Person, a
majority of whose outstanding Voting Securities (other than directors'
qualifying shares) shall at any time be owned by such Person or one or more
Subsidiaries of such Person.
"Voting Securities" means (a) with respect to any corporation, any capital
stock of the corporation having general voting power under ordinary
circumstances to elect directors of such corporation, (b) with respect to any
partnership, any partnership interest having general voting power under ordinary
circumstances to elect the general partner or other management of the
partnership, and (c) with respect to any other Person, such ownership interests
in such Person having general voting power under ordinary circumstances to elect
the management of such Person, in each case
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irrespective of whether at the time any other class of stock, partnership
interests, or other ownership interest might have special voting power or rights
by reason of the happening of any contingency.
"Warrant Documents" means this Agreement, the Warrants, and the
Registration Rights Agreement.
1.2 All accounting terms not specifically defined in this Agreement
shall be construed in accordance with Canadian generally accepted accounting
principles applied on a consistent basis with those applied in the preparation
of the Financial Statements, and the Company shall not change and shall not
permit any change in the method of accounting employed in the preparation of
those financial statements unless required to conform to such principles or
approved in writing by the Purchaser.
1.3 All references to documents and agreements shall refer to such
documents as amended, supplemented, and otherwise modified from time to time,
unless otherwise specified.
1.4 Unless otherwise stated, all monetary amounts expressed under the
Loan Documents and all payments due under the Warrant Documents are expressed in
and shall be due in U.S. Dollars.
Section 2. The Warrants; Certain Amendments.
2.1 In connection with the Securities Purchase Agreement, the Company
issued and sold to the Purchaser and the Purchaser purchased the Warrants, and
the Warrants remain issued and outstanding.
2.2 The 250,000 Share Warrant is amended by replacing the first two
paragraphs thereof immediately preceding Section 1 thereof in their entirety
with the following:
FOR VALUE RECEIVED, KAFUS ENVIRONMENTAL INDUSTRIES LTD., a British
Columbia corporation (the "Company"), hereby certifies that Enron Capital &
Trade Resources Corp., a Delaware corporation (the "Holder"), is entitled
to purchase from the Company at any time or from time to time during the
period (the "Exercise Period") commencing December 31, 2000, and ending on
5:00 p.m. (Toronto, Ontario time) on July 31, 2008 (the "Expiration Date"),
250,000 shares of Common Stock of the Company (the Common Stock of the
Company being referred to herein as the "Common Stock" and such number of
shares of Common Stock as adjusted pursuant to the terms hereof, being the
"Warrant Shares"), at a price per share equal to the weighted average
closing price of Common Stock for the 15 trading days immediately prior to
commencement of the Exercise Period, but with a minimum price of U.S. $3.50
and a maximum price of U.S. $4.00 (as such price may be adjusted pursuant
to the terms hereof, the "Exercise Price"). This Warrant was issued to the
Holder (together with such other warrants as may be issued in exchange,
transfer, or replacement of this Warrant, the "Warrants") in connection
with the U.S. $12,500,000 Promissory Note dated as of August 18, 1998 (the
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"Note"), made by the Company and payable to the order of the Holder, and
entitles the Holder to purchase the Warrant Shares and to exercise the
other rights, powers, and privileges hereinafter provided.
NOTWITHSTANDING THE FOREGOING, this Warrant shall terminate if prior to the
commencement of the Exercise Period both (1) either (a) a third party not
affiliated with the Holder purchases the depreciation of CanFibre of
Riverside, Inc., and invests in CanFibre of Riverside, Inc., in a manner
which has provided at least U.S. $8,000,000 in distributable cash proceeds
to CanFibre U.S. Inc., is subordinate to all of the loans made by the
Holder to CanFibre of Riverside, Inc., and is otherwise reasonably
acceptable to the Holder or (b) the Company has sold interests in the
Company in a manner which has provided at least U.S. $8,000,000 in cash
proceeds to the Company and is otherwise reasonably acceptable to the
Holder and (2) the $4,250,000 Convertible Promissory Note (Term Loan C)
dated as of December 31, 1998, made by the Company and payable to the
Holder has been prepaid or repaid in full in cash and not by conversion or
other agreement.
2.3 The 500,000 Share Warrant is amended by replacing the first two
paragraphs thereof immediately preceding Section 1 thereof in their entirety
with the following:
FOR VALUE RECEIVED, KAFUS ENVIRONMENTAL INDUSTRIES LTD., a British
Columbia corporation (the "Company"), hereby certifies that Enron Capital &
Trade Resources Corp., a Delaware corporation (the "Holder"), is entitled
to purchase from the Company at any time or from time to time during the
period (the "Exercise Period") commencing on December 31, 2000, and ending
on 5:00 p.m. (Toronto, Ontario time) on July 31, 2008 (the "Expiration
Date"), 500,000 shares of Common Stock of the Company (the Common Stock of
the Company being referred to herein as the "Common Stock" and such number
of shares of Common Stock as adjusted pursuant to the terms hereof, being
the "Warrant Shares"), at a price per share equal to U.S. $4.00 (as such
price may be adjusted pursuant to the terms hereof, the "Exercise Price").
This Warrant was issued to the Holder (together with such other warrants as
may be issued in exchange, transfer, or replacement of this Warrant, the
"Warrants") in connection with the U.S. $12,500,000 Promissory Note dated
as of August 18, 1998 (the "Note"), made by the Company and payable to the
order of the Holder, and entitles the Holder to purchase the Warrant Shares
and to exercise the other rights, powers, and privileges hereinafter
provided.
NOTWITHSTANDING THE FOREGOING, this Warrrant shall terminate if prior to
the commencement of the Exercise Period (a) the outstanding principal
balance of the $12,500,000 Convertible Promissory Note (Advancing Credit
Facility) dated as of December 31, 1998 (as modified from time to time, the
"$12,500,000 Advancing Credit Facility Note"), made by the Company and
payable to Enron Capital & Trade Resources Corp. and all accrued but unpaid
interest thereon is prepaid or repaid in full in cash, and not by
conversion or other agreement, (b) such payment occurs at a time when no
Event of Default (as such term is defined under the Note Agreement
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dated as of December 31, 1998, between the Company and the Holder ) has
occurred, and (c) all commitments of the Holder to lend which are related
to the $12,500,000 Advancing Credit Facility Note have been terminated.
Section 3. Conditions Precedent. The conditions precedent to the issuance,
sale, and purchase of the Warrants were satisfied or waived.
Section 4. Representations and Warranties. The Company represents and
warrants to the Purchaser that each of the representations and warranties set
forth in the Securities Purchase Agreement were accurate and complete when made
thereunder.
Section 5. Covenants. So long as the Purchaser retains any Warrants, the
Company covenants as follows:
5.1 Inspection. The Company shall, and shall cause each of its
Subsidiaries to, permit the Purchaser to visit and inspect any of the properties
of such Person, to examine all of such Person's books of account, records,
reports, and other papers, to make copies and extracts therefrom, and to discuss
their respective affairs, finances, and accounts with their respective officers,
employees, and independent public accountants all at such reasonable times and
as often as may be reasonably requested provided that the Company is given at
least one Business Day advance notice thereof and reasonable opportunity to be
present when independent public accountants or other third parties are
contacted.
5.2 Validity of Shares. The Company shall reserve and keep available at
all times, free from preemptive rights, a sufficient number of shares of Common
Stock to satisfy the requirements of the Warrants. Such shares of Common Stock:
(i) will be upon issuance, free and clear of any Liens created by the Company
or, to the Company's knowledge, any other Person; (ii) have been duly and
validly authorized and when issued and paid for in accordance with the terms of
the Warrants will be duly and validly issued, fully paid, and non-assessable;
(iii) will not have been issued or sold in violation of any preemptive or
similar rights; and (iv) will not subject the Purchaser thereof to personal
liability by reason of holding the same.
5.3 Financial Reports. The Company shall deliver to the Purchaser:
(i) within sixty-five (65) days of the end of each fiscal
quarter, an unaudited balance sheet and statement of operations for the Company
and its Subsidiaries on a consolidated basis prepared in accordance with
Canadian Generally Accepted Accounting Principles consistently applied;
(ii) within one hundred eighty (180) of the end of each fiscal
year audited financial statements consisting of a balance sheet and statement of
operations and cash flows statement for the Company and its Subsidiaries on a
consolidated basis prepared in accordance with Canadian Generally Accepted
Accounting Principles consistently applied (provided that with respect to
paragraphs (i) and (ii) of this Section, provision of copies of reports and
financial statements filed with the SEC pursuant to the Company's reporting
requirements which contain such items within
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the time periods required hereunder shall be deemed satisfactory delivery of the
required financial statements);
(iii) copies of any management letters prepared by the Company's
auditors and the Company's responses thereto promptly after their issuance; and
(iv) notice of the occurrence of any Material Adverse Change,
promptly after its occurrence.
5.4 Reports Under Exchange Act; Change in Status. With a view to making
available to the Purchaser the benefits of Rule 144 and any other rule or
regulation of the SEC that may at any time permit the Purchaser to sell
securities of the Company to the public without registration, the Company agrees
to: (i) make and keep public information available, as those terms are defined
in Rule 144; (ii) file with the SEC in a timely manner all reports and other
documents required of the Company under the Act and the Exchange Act, and (iii)
furnish the Purchaser, so long as the Purchaser owns any Warrants forthwith upon
request: (x) a written statement by the Company that it has complied with the
reporting requirements of Rule 144, the Act and the Exchange Act; (y) a copy of
the most recent annual or quarterly report of the Company and such other reports
and documents filed by the Company; and (z) such other information as may be
reasonably requested in availing the Purchaser of any rule or regulation of the
SEC which permits the selling of any such securities without registration. The
Company shall immediately notify the Purchaser in the event the Company ceases
to be a "foreign private issuer," as defined in Rule 3b-4 promulgated by the SEC
under the Exchange Act or if holders of Common Stock of the Company are
otherwise subject to Section 16 of the Act.
5.5 HSR Act. The Company agrees that, in the event that exercise of any
Warrants requires any filing to be made under the Xxxx-Xxxxx-Xxxxxx Antitrust
Improvements Act of 1976 ("HSR Act"), the Company shall, at the request of the
Purchaser and at the expense of the Company, make all filings required by the
HSR Act and shall cooperate with the Purchaser in responding to any request for
information submitted by the Department of Justice or the Federal Trade
Commission.
5.6 Future Stock Sales. The Company shall not (a) issue or sell (i)
shares of the Common Stock at a price less than 85% of the Average Price as of
the date of sale or (ii) any securities convertible into or exchangeable for
Common Stock, with a conversion or exercise price that is less than 85% of the
Average Price of the Common Stock on the date of issuance of such convertible or
exchangeable securities or (b) sell more than U.S. $10 million of Common Stock
at prices less than the Average Price as of the date of the related sale.
Purchaser shall have the right in connection with any issuance of Common Stock
(or any security convertible into or exchangeable for Common Stock) to purchase
its proportionate share (based on its beneficial ownership of the Common Stock
as determined under Rule 13d-3) of the securities proposed to be so issued, on
the same terms as those pursuant to which the Company proposes to sell such
securities to other Persons. This paragraph will not restrict the ability of
the Company to offer or sell securities at or above the Average Price of the
Common Stock during the 30 days preceding the date of sale. This Section 5.18
shall terminate on the date the Purchaser and its Affiliates beneficially own
less than 10% of the outstanding Common Stock.
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Section 6. Default and Remedies. In the event the Company shall breach any
of its representations, warranties, or covenants hereunder, (a) the Purchaser is
authorized at any time, to the fullest extent permitted by law, to setoff and
apply any indebtedness owed by the Purchaser to the Company against any and all
of the obligations of the Company under the Warrant Documents, irrespective of
whether or not the Purchaser shall have made any demand under the Warrant
Documents and although such obligations may be contingent and unmatured and (b)
the Purchaser may exercise all of its rights under the Warrant Documents and all
other rights at law or in equity. No right, power, or remedy conferred to the
Purchaser in the Warrant Documents or in any documents securing or supporting
the Warrant Documents or now or hereafter existing at law, in equity, by
statute, or otherwise shall be exclusive, and each such right, power, or remedy
shall to the full extent permitted by law be cumulative and in addition to every
other such right, power or remedy. No course of dealing and no delay in
exercising any right, power, or remedy conferred to the Purchaser shall operate
as a waiver of or otherwise prejudice any such right, power, or remedy. No
notice to or demand upon the Company shall entitle the Company to similar
notices or demands in the future.
Section 7. Miscellaneous.
7.1 Indemnification of Purchaser. The Company agrees to protect, defend,
indemnify, and hold harmless the Purchaser and its stockholders, directors,
officers, employees, agents, affiliates, successors, and assigns, and their
respective stockholders, directors, officers, employees, and agents (for the
purposes of this Section 7.2, collectively, the "Indemnified Parties"), from and
against all demands, claims, actions, suits, damages, judgments, fines,
penalties, liabilities, and out-of-pocket costs and expenses, including
reasonable costs of attorneys and related costs of experts such as accountants
(collectively, the "Indemnified Liabilities"), actually incurred by any
Indemnified Party which are related to (a) any breach of any representation,
warranty, or covenant of the Company under the Warrant Documents and (b) any
litigation or proceeding relating to the Warrant Documents or the transactions
contemplated thereunder, INCLUDING ANY INDEMNIFIED LIABILITIES CAUSED BY ANY
INDEMNIFIED PARTY'S OWN NEGLIGENCE, but not Indemnified Liabilities which are a
result of any Indemnified Party's gross negligence or willful misconduct. The
amount and nature of any indemnification claim under this Section shall be
presumptively established by a certificate from the applicable Indemnified
Party. The provisions of this paragraph shall survive any purported termination
of this Agreement that does not expressly reference this paragraph.
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7.2 Certain Provisions Regarding Payments.
(a) Unless otherwise specified, the Company shall make all payments
required under the Warrant Documents not later than 1:00 p.m., Houston, Texas,
time on any date when due in lawful money of the United States of America to the
Purchaser at such location as is specified by the Purchaser in writing in
immediately available funds. Whenever any payment to be made under the Warrant
Documents shall be stated to be due on a day other than a day on which the banks
in Vancouver, British Columbia, and Houston, Texas, are required to be open
("Business Day"), such payment shall be due and payable on the next succeeding
Business Day. If the date for payment of any obligation is not specified in the
Warrant Documents, such obligation shall be payable upon demand.
(b) Any and all payments by the Company under the Warrant Documents
shall be made free and clear of and without deduction for any and all present or
future taxes, levies, imposts, deductions, charges, or withholdings, and all
liabilities with respect thereto, other than taxes imposed on the income of and
franchise taxes imposed on the Purchaser by any jurisdiction in which the
Purchaser is a citizen or resident or any political subdivision of such
jurisdiction (all such non-excluded taxes, levies, imposts, deductions,
charges, withholdings, and liabilities being hereinafter referred to as
"Taxes"). If the Company shall be required by law to deduct any Taxes from any
sum payable to the Purchaser (i) the sum payable shall be increased as may be
necessary so that, after making all required deductions (including deductions
applicable to additional sums payable under this paragraph), the Purchaser
receives an amount equal to the sum it would have received had no such
deductions been made; (ii) the Company shall make such deductions; and (iii) the
Company shall pay the full amount deducted to the relevant taxation authority or
other authority in accordance with applicable law.
(c) The Company agrees to pay any present or future stamp or
documentary taxes or any other excise or property taxes, charges, or similar
levies which arise from any payment made with respect to, or from the execution,
delivery, filing, or registration of, the Warrant Documents.
(d) If any sum due from the Company under the Warrant Documents or
any order or judgment given in relation hereto has to be converted from the
currency in which the same is payable hereunder or under such order or judgment
(the "first currency") into another currency (the "second currency") for the
purpose of (i) making or filing a claim or proof against the Company with any
governmental authority or in any court, tribunal, or arbitration panel or (ii)
enforcing any order or judgment given in relation hereto, the Company shall
indemnify the Purchaser against any loss incurred as a result of any discrepancy
between (A) the rate of exchange used when restating the amount in question from
the first currency into the second currency and (B) the rate or rates of
exchange at which the Purchaser purchased the first currency with the second
currency after receipt of a sum paid to it in the second currency in
satisfaction, in whole or in part, of any such sum due or order or judgment. The
foregoing indemnity shall constitute a separate obligation of the Company
distinct from any other obligations and shall survive the giving or making of
any judgment or order in relation to all or any of such other obligations.
7.3 Waiver, Amendment, and Survival. Performance under this Agreement
may be waived only in a writing signed by the party against whom enforcement is
sought, and such a waiver
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shall be effective only for the purposes and only to the extent stated in that
writing. The terms of this Agreement may be amended, supplemented, and otherwise
modified only in a writing signed by the party against whom enforcement is
sought, and such an amendment, supplement, or other modification shall be
effective only for the purposes and only to the extent stated in that writing.
All representations, warranties, and covenants of the Company in the Warrant
Documents shall survive the execution of this Agreement and any other document
or agreement.
7.4 Successors and Assigns.
(a) This Agreement shall bind and inure to the benefit of the
Company and its successors and assigns and the Purchaser and its respective
successors and assigns including successors to any Warrants. The Company may not
assign its rights or delegate its duties under the Warrant Documents. The
Purchaser may assign its rights and delegate its duties to successors and
assigns of the Warrants.
7.5 Notice. Unless otherwise specified, all notices and other
communications provided for between the Company and the Purchaser under this
Agreement shall be in writing, including telecopy, and delivered or transmitted
to the addresses set forth below, or to such other address as shall be
designated by the Company or the Purchaser in written notice to the other party.
Notice sent by telecopy shall be deemed to be given and received when receipt of
such transmission is acknowledged, and delivered notice shall be deemed to be
given and received when receipted for by, or actually received by, an authorized
officer of the Company or the Purchaser, as the case may be.
Kafus Environmental Industries Ltd.
000 Xxxxxx Xxxxxx
Xxxxxx XX 00000
Attn: Xx. Xxxxxxx X. XxXxxx
telephone: 000-000-0000
telecopier: 000-000-0000
Enron Capital & Trade Resources Corp.
Attn: Xxxx X. Xxxxxxxxx
0000 Xxxxx Xxxxxx
Xxxxxxx, Xxxxx 00000
telephone: 000-000-0000
telecopier: 000-000-0000
7.6 Choice of Law. This Agreement shall be governed by and construed and
enforced in accordance with the laws of British Columbia and the applicable laws
of the Canada, without regard to conflicts of law principles which would select
another law.
7.7 Arbitration.
(a) Disputes arising under the Warrant Documents shall be settled by
one arbitrator pursuant to the rules of the American Arbitration Association
(the "AAA") for Commercial Arbitration (the "Rules"). Such arbitration shall be
held in New York, New York, or at such other
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location as mutually agreed to by the parties to the dispute. Subject to any
applicable limitations contained in this Agreement, arbitration may be commenced
at any time by any party giving notice to the other party that a dispute has
been referred to arbitration under this paragraph (a). The arbitrator shall be
selected by the joint agreement of the parties hereto, but if they do not so
agree within twenty (20) days after the date of the notice referred to above,
the selection shall be made pursuant to the Rules from the panel of arbitrators
maintained by the AAA. Any award of the arbitrator shall be accompanied by a
written opinion giving the reasons for the award. The expense of the arbitration
shall be borne by the parties in the manner determined in writing by the
arbitrator. This arbitration provision shall be specifically enforceable by the
parties. The determination of the arbitrator pursuant to this Section shall be
final and binding on the parties and may be entered for enforcement before any
court of competent jurisdiction.
(b) The provisions in the Warrant Documents shall control the
dispute resolution elections under the Warrant Documents.
7.8 Counterparts. This Agreement may be executed in multiple
counterparts which together shall constitute one and the same instrument.
[the remainder of this page is intentionally blank]
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7.9 No Further Agreements. THIS WRITTEN AGREEMENT AND THE OTHER WARRANT
DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
EXECUTED as of the date first above written.
Very truly yours,
ENRON CAPITAL & TRADE RESOURCES
CORP.
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
AGREED TO AND ACCEPTED
as of the date first
above written.
KAFUS ENVIRONMENTAL INDUSTRIES LTD.
By:
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Name:
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Title:
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