UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
For the transition period from ___________________to ________________
Commission file number 0-27803
COVOL TECHNOLOGIES, INC.
(Exact name of registrant specified in its charter)
DELAWARE 87-0547337
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
3280 North Frontage Road, Lehi, Utah 84043
(Address of principal executive offices) (Zip Code)
(801) 768-4481
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 14 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class of Stock Amount Outstanding
$.001 par value Common Stock 7,944,870 Shares of Common Stock
at May 8, 1997
<PAGE>
COVOL TECHNOLOGIES, INC.
TABLE OF CONTENTS
Page No.
Part I - Financial Information
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets........................1
Consolidated Statements of Operations..............2
Consolidated Statements of Cash Flows..............3
Notes to Financial Statements......................4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations.........................................9
Part II - Other Information
Item 1. Legal proceedings................................14
Item 2. Changes in securities............................14
Item 3. Defaults upon senior securities..................15
Item 4. Submission of matters to a vote..................15
of security holders
Item 5. Other information................................15
Item 6. Exhibits and reports on Form 8-K.................16
This report contains forward looking statements within the meaning of the
Private Securities Litigation Reform Act. The cautionary language regarding
forward looking statements set forth in Item 2 of Part I of this report should
be carefully reviewed in connection with the review of any portion of this
report.
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
------------------------------
<TABLE>
<CAPTION>
As of As of
March 31, September 30,
1997 1996
----------------- ------------------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 44,253 $ 490,106
Receivables 32,084 77,744
Inventories 363,594 162,757
Advances on inventory 750,000 0
Notes receivable - current 362,995 0
Notes receivable - related parties, current 1,732 3,733
Prepaid expenses and other current assets 82,535 44,733
----------------- ------------------
Total current assets 1,637,193 779,073
----------------- ------------------
Property, plant and equipment, net of accumulated depreciation 8,031,556 7,125,245
----------------- ------------------
Other assets:
Cash surrender value of life insurance 152,112 152,112
Notes receivable - non-current 3,161,733 0
Notes receivable - related parties, non-current 672,125 700,000
Deposits and other assets 107,010 15,642
----------------- ------------------
Total other assets 4,092,980 867,754
----------------- ------------------
Total assets $ 13,761,729 $ 8,772,072
================= ==================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 1,005,750 $ 2,183,278
Payable for coal briquetting equipment 1,402,040 0
Accrued liabilities 518,617 333,936
Notes payable - current 573,545 958,086
Notes payable - related parties, current 895,470 786,000
----------------- ------------------
Total current liabilities 4,395,422 4,261,300
----------------- ------------------
Long-term liabilities:
Notes payable and convertible debentures - non-current 4,847,133 150,980
Deferred compensation 218,179 212,612
----------------- ------------------
Total long-term liabilities 5,065,312 363,592
----------------- ------------------
Total liabilities 9,460,734 4,624,892
----------------- ------------------
Minority interest in consolidated subsidiaries 4,589,470 4,380,544
----------------- ------------------
Commitments and contingencies (notes 3 and 7)
Stockholders' deficit:
Common stock: $0.001 par value; authorized: 25,000,000
shares issued and outstanding: 7,944,870 at March 31, 1997
and 7,610,373 at September 30, 1996 7,945 7,610
Common stock to be issued: 0 shares at March 31, 1997
and 103,750 at September 30, 1996 0 104
Capital in excess of par value 35,397,078 32,780,515
Capital in excess of par value - common stock to be issued 0 934,896
Accumulated deficit (22,636,787) (21,196,476)
Notes and interest receivable - related parties from issuance of
or collateralized by common stock (net of allowance) (note 4) (7,587,966) (7,580,071)
Deferred compensation from stock options (5,468,745) (5,179,942)
---------------- -----------------
Total stockholders' deficit (288,475) (233,364)
---------------- -----------------
Total liabilities and stockholders' deficit $ 13,761,729 $ 8,772,072
================ =================
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements
1
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
-------------------
<TABLE>
<CAPTION>
Three months Three months Six months Six months
Ended Ended Ended Ended
March 31, March 31, March 31, March 31,
1997 1996 1997 1996
Revenues:
<S> <C> <C> <C> <C>
License fee $ 1,400,000 $ 0 $ 1,400,000 $ 0
Synthetic fuel sales 20,194 0 124,341 3,741
Returns on synthetic fuel sales (82,500) 0 (82,500) 0
Binder sales 4,017 0 4,017 0
--------------- --------------- ---------------- ----------------
Total revenues 1,341,711 0 1,445,858 3,741
Operating costs and expenses:
Cost of briquetting operations 385,112 430,326 749,692 430,326
Research and development 65,396 90,357 170,463 525,251
Selling, general and administrative 422,523 675,618 1,229,837 1,671,590
Compensation expense on stock options 235,739 2,576,910 548,698 2,889,869
Compensation expense on issuance of
common stock 40,500 45,873 40,500 69,123
Minority interest in income of
consolidated subsidiaries 169,078 0 150,926 0
--------------- --------------- ---------------- ----------------
Total operating costs and expenses 1,318,348 3,819,084 2,890,116 5,586,159
--------------- --------------- ---------------- ----------------
Operating income (loss) 23,363 (3,819,084) (1,444,258) (5,582,418)
--------------- --------------- ---------------- ----------------
Other income (expense):
Write-down of note receivable (note 4) (775,000) (199,575) (50,000) (199,575)
Interest income 131,781 92,861 259,587 111,356
Interest expense (140,021) (29,776) (205,897) (44,048)
Other income (expense) 3,064 (144,794) 4,453 (144,198)
Loss on sale of assets (4,196) 0 (4,196) 0
--------------- --------------- ---------------- ----------------
Total other income (expense) (784,372) (281,284) 3,947 (276,465)
--------------- --------------- ---------------- ----------------
Loss from continuing operations before
income taxes (761,009) (4,100,368) (1,440,311) (5,858,883)
Income tax provision 0 (23,000) 0 (23,000)
--------------- --------------- ---------------- ----------------
Loss from continuing operations (761,009) (4,123,368) (1,440,311) (5,881,883)
--------------- --------------- ---------------- ----------------
Discontinued operations:
Loss from discontinued operations 0 (440,588) 0 (590,480)
Loss on disposal of discontinued operations 0 (291,025) 0 (291,025)
--------------- --------------- ---------------- ----------------
Income (loss) from discontinued operations 0 (731,613) 0 (881,505)
--------------- --------------- ---------------- ----------------
Net loss $ (761,009) $ (4,854,981) $ (1,440,311) $ (6,763,388)
=============== =============== ================ ================
Net loss per common share:
Loss per share from continuing operations $ (0.10) $ (0.58) $ (0.19) $ (0.90)
Loss per share from discontinued operations 0.00 (0.10) 0.00 (0.13)
--------------- --------------- ---------------- ----------------
Net loss per share (note 2) $ (0.10) $ (0.69) $ (0.19) $ (1.03)
=============== =============== ================ ================
Weighted average shares outstanding 7,854,178 7,084,704 7,785,579 6,546,244
=============== =============== ================ ================
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements
2
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
---------------------------------
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
Ended Ended
March 31, March 31,
1997 1996
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (1,440,311) $ (6,763,388)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 104,345 86,421
Common stock issued for services 40,500 361,456
Write-down of note receivable 50,000 199,575
Amortization of deferred compensation on stock options 548,698 2,889,869
Loss on disposal of discontinued subsidiaries 0 291,025
Interest earned on notes receivable - related parties,
collateralized by common stock (160,895) (88,594)
Loss on sale of equipment 4,196 0
Deferred income taxes 0 23,000
Gain applicable to minority interests in subsidiaries 150,926 0
Increase (decrease) from changes in assets and liabilities
of continuing operations:
Receivables 45,660 20,562
Inventories (200,837) (22,208)
Advances on inventory (750,000) 0
Prepaid expenses and other current assets (37,802) 5,402
Deposits and other assets (91,368) (42,553)
Accounts payable (1,177,528) 218,872
Payable for coal briquetting equipment 1,402,040 0
Accrued liabilities 184,681 (171,557)
Deferred compensation 5,567 5,287
Discontinued operations non-cash charges and working capital changes 0 (202,259)
------------------- ------------------
Net cash used in operating activities (1,322,128) (3,189,090)
------------------- ------------------
Cash flows from investing activities:
Cash paid for property, plant and equipment (4,514,852) (1,736,669)
Issuance of notes receivable (49,456) 0
Issuance of notes receivable - related parties 0 (8,495)
Proceeds from notes receivable 24,728 0
Proceeds from notes receivable - related parties 29,876 0
Increase in cash surrender value of life insurance 0 (6,250)
------------------- ------------------
Net cash used in investing activities (4,509,704) (1,751,414)
------------------- ------------------
Cash flows from financing activities:
Proceeds from cash overdraft 0 14,464
Proceeds from issuance of limited partnership interests in subsidiaries 350,000 0
Payments on distribution to limited partnership interests in subsidiaries (292,000) 0
Proceeds from notes payable 4,710,721 0
Proceeds from notes payable - related party 109,470 0
Payment on notes payable (260,713) (11,159)
Payment on notes payable - related parties 0 (2,169,339)
Proceeds from note receivable - related parties collateralized by common stock 103,000 164,841
Proceeds from issuance of common stock (net) 665,501 5,650,531
------------------- ------------------
Net cash provided by financing activities 5,385,979 3,649,338
------------------- ------------------
Net decrease in cash (445,853) (1,291,166)
------------------- ------------------
Total cash and cash equivalents, beginning of period 490,106 1,291,166
------------------- ------------------
Total cash and cash equivalents, end of period $ 44,253 $ 0
=================== ==================
Supplemental schedule of noncash investing and financing activities:
Common stock issued for notes receivable $ 0 $ 6,159,375
Common stock issued on payment of notes payable 138,396 0
Obligations assumed in connection with sale of subsidiaries 0 4,636,435
Note receivable for subsidiaries (net of imputed interest) 0 4,349,575
Notes receivable issued for sale of briquetting facility 3,500,000 0
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements
3
<PAGE>
1. Management Opinion:
In the opinion of management, the accompanying financial statements present
fairly the financial position of Covol Technologies, Inc. and Subsidiaries (the
Company) as of September 30, 1996 and March 31, 1997, the results of its
operations for the three months and six months ended March 31, 1996 and March
31, 1997 and its cash flows for the six months ended March 31, 1996 and March
31, 1997. The results of operations for the periods presented are not
necessarily indicative of the results to be expected for the full year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these financial statements
be read in conjunction with the Company's Annual Report included in Form 10-K
for the year ended September 30, 1996.
2. Loss Per Share Calculation
Primary average shares include only common shares outstanding. The computation
of fully diluted net loss per common share was antidilutive in each period for
which a net loss was presented.
3. Inventories and Advances on Inventories
Inventories and advances on inventories are stated at the lower of average cost
or market, and consist of coal fines, synthetic fuel and binder materials.
During the quarter the Company entered into contractual arrangements to acquire
coal fines and to conduct recovery and preparation activities. Total obligations
to acquire the fines are approximately $5,500,000 of which $750,000 has been
paid with the balance due over time. The Company has accounted for the initial
amount paid as an advance payment for inventory. The Company will reflect in
inventory the cost for such fines as they are processed into synthetic fuel.
4. Change in Estimate of Fair Value of Note Receivable
During the three months ended March 31, 1997, the Company increased the
allowance for impairment on the $5,000,000 face value note receivable from two
stockholders by $775,000 to an adjusted loan value of $1,600,000. The increase
in the allowance was based upon a $3.875 per share decrease in the Company's
common stock that collateralizes the note receivable. The estimate is subject to
future fluctuations due to market changes. (See Part II, Item 5 for discussion
of note receivable.)
5. Convertible Debentures
AJG Financial Services, Inc.
In December 1996, the Company entered into a Debenture Agreement and Security
Agreement with AJG Financial Services, Inc., an affiliate of Arthur J.
Gallagher, whereby the Company borrowed $1,100,000, and may, under certain
circumstances, draw down an additional amount of up to $2,900,000 (for a total
borrowed amount of $4,000,000). In consideration for the loan of $1,100,000, the
Company issued a Convertible Subordinated Debenture accruing interest
4
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
-----------------------
5. Convertible Debentures, continued
at 6% per annum and maturing three years from its date of issuance (the
"Subordinated Debenture"). The interest and principal of the Subordinated
Debenture is payable on maturity. The Company does not have the right to prepay
any portion of the principal of the Subordinated Debenture, and the Company is
required to prepay the Subordinated Debenture if a change in control of the
Company occurs. All or a portion of the unpaid principal due on the Subordinated
Debenture is convertible into Company common stock. Subsequent to the March 31,
1997 quarter AJG Financial Services, Inc. executed an option to convert the loan
of $1,100,000 to an equity position.
During the quarter ended March 31, 1997, the Company borrowed $2,792,172 of the
$2,900,000 available under the Debenture Agreement with AJG Financial Services,
Inc. as described above. In consideration for the amount drawn down, the Company
issued Senior Debentures in such amount accruing interest at prime plus two
percent (2%) and maturing three years from the date of issuance (the "Senior
Debentures"). The Senior Debentures are collateralized by all real and personal
property purchased by the Company with the proceeds of the Senior Debentures.
The proceeds of the Subordinated Debentures and the Senior Debentures may be
used to satisfy contractual obligations of the Company, for working capital and
to purchase equipment to be used to construct synthetic fuel facilities to be
managed and/or sold by the Company or affiliates of the Company.
PacifiCorp Financial Services, Inc.
As a part of its Alabama transaction with PacifiCorp, the Company executed a
Convertible Loan and Security Agreement with PacifiCorp Financial Services, Inc.
("PFS") dated March 20, 1997. The agreement provides for the Company to borrow
up to $5,000,000 primarily for: completing construction of the Alabama project,
acquiring coal fines and for other purposes related to the project. To secure
the loan, the Company and Alabama Synfuel #1, Ltd. gave PFS a security interest
in all personal and real property assets connected with the Alabama project. The
loan accrues interest at prime plus two (2%) with interest and principal payable
on March 20, 1998. The agreement provides PFS with the option to convert the
unpaid principal and interest and any remaining loan commitment amount into
shares of the Company's common stock, convertible at $7.00 per share. As of
March 31, 1997 the Company had not drawn down any funds on the $5,000,000 credit
line. As of May 15, 1997, the Company had drawn $1,014,723 of the $5,000,000
credit line.
5
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
-----------------------
6. Stockholders' Deficit
The table below presents the activity in stockholders' deficit from January 1,
1997 through March 31, 1997.
<TABLE>
<CAPTION>
Notes and
interest
receivable-
related
parties from Deferred
Common Stock Common Stock to be issued issuance of, compen-
Capital in Capital in or collater- sation
excess of excess of Accumulated alized by on stock
Shares Amount par value Shares Amount par value Defict common stock options
--------- ------- ----------- ------- ------ --------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 7,734,123 $7,734 $33,952,892 85,000 $85 $632,415 ($21,875,778) ($8,283,480) ($5,129,484)
Common stock issued for cash 60,000 60 584,940 (60,000) (60) (584,940)
received in a prior period
Cash received in payment on notes 1,500
receivable - related parties from
issuance of common stock
Common stock issued for cash, 125,000 125 105,376 (25,000) (25) (47,475)
including exercise of stock
options (net)
Deferred compensation related 575,000 (575,000)
to the issuance of stock options
at below market value to officers,
directors, employees and consultants
Amortization of deferred 235,739
compensation on stock options
Interest earned on notes receivable - (80,986)
related parties from issuance of or
collateralized by common stock
Write-down of notes receivable - 775,000
related party
Common stock issued for services 4,834 5 40,495
Common stock issued to repay note 20,913 21 138,375
payable
Net loss for the quarter ended (761,009)
March 31, 1997
---------- ------ ----------- ----- ----- ------- ------------ ----------- -----------
Balance at March 31, 1997 7,944,870 $7,945 $35,397,078 0 $0 $0 ($22,636,787)($7,587,966) ($5,468,745)
========== ====== =========== ===== ===== ======= ============ =========== ===========
</TABLE>
6
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
--------------------------
7. Contingencies
In connection with construction agreements entered into by the Company in
December 1996, in order to assure the agreements would be considered binding on
the Company, the Company agreed to penalty clauses in the aggregate amount of
$3,012,000 if the Company fails to build the facilities. There can be no
assurance that the facilities will be built. In connection with licensing
agreements entered into by the Company, in December 1996, the Company entered
into indemnity agreements with a contractor which may result in a contingent
liability of up to $4,500,000 on or after June 2, 1998.
The Company entered into a letter of intent with Innovative Technologies in July
of 1995 to apply Covol's briquetting technology to certain metallic ores
supplied by Innovative. The Company conducted numerous tests of the ore through
the fall of 1995, and concluded from the results that the venture was not
economically viable. Accordingly, final agreement to process the ore was never
reached. On March 4, 1997, Innovative Holding Company, Inc., a California
corporation, and ORO Limited, a California limited partnership, filed a civil
complaint against the Company alleging breach of the letter of intent in the
amount of $500,000 plus damages. The Company intends to defend the suit.
On January 30, 1997, S.C. Marketing, Inc., a California corporation, filed a
civil complaint against the Company alleging breach of contract in the amount of
$137,440 plus damages. The Company entered into a settlement agreement with S.C.
Marketing, Inc. whereby it issued 20,913 shares of Company common stock in
settlement of the complaint (valued at $138,396 and previously accrued as a note
payable).
On February 1, 1996, the Company entered into a Stock Purchase Agreement with
former principals of IME, State, CIC and Larson to sell all of the common shares
of the subsidiaries to the Buyers for a $5,000,000 face value 6% promissory
note. The Buyers have raised various contentions regarding the Note and the
Agreement. The Note is collateralized by 100,000 shares of the Company's common
stock owned by the Buyers and held by the Company, 100,000 shares of the
Company's common stock committed by the Buyers to be provided to the Company,
and personal guarantees of the Buyers. The Buyers claim that Covol is
responsible to pay additional amounts beyond the $3,500,000 provided for in the
agreement. Furthermore, the Buyers claim that the Company represented to them
payment terms that are different from the original promissory note. The Company
accrued as of September 30, 1996 approximately $650,000 of additional expenses
related to the discontinued operations for the wind-down period which were paid
or accrued by the subsidiaries. The Company is investigating the claims made by
the Buyers and the Company anticipates that an amicable settlement can be
reached. However, there can be no assurance that a settlement will be reached
with the Buyers.
In connection with the engagement of RAS Securities Corp. as placement agent and
as settlement of a dispute regarding the Letter Agreement, the Company entered
into a Settlement Agreement, dated as of January 27, 1997, with RAS and certain
principals of RAS whereby the Company agreed to issue approximately 26,300
shares of Company common stock to the Individuals in settlement of certain
alleged rights under a Letter Agreement, dated as of April 5, 1996, by and among
RAS and the Company. Under the disputed Letter Agreement, RAS exercised certain
warrants to purchase 65,000 shares of Company common stock. In accordance with
the RAS Settlement Agreement, the parties are mutually released from their
respective rights and obligations, if any, under the Letter Agreement.
7
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
--------------------------
8. Other Matters
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share. This statement
establishes standards for computing and presenting earnings per share ("EPS")
and makes them comparable to international EPS standards. This statement is
effective for financial statements for both interim and annual periods ending
after December 15, 1997. The Company is currently evaluating the impact of the
recently issued statement and will adopt the requirements for the year ending
September 30, 1998.
.
The Company has reviewed other recently issued, but not yet adopted, accounting
standards in order to determine their effects, if any, on the results of
operations or financial position of the Company. Based on that review, the
Company believes that none of these pronouncements will have a significant
effect on current or future earnings or operations.
9. Sale of Utah Briquetting Project.
On March 10, 1997, the coal briquetting facility located near Price, Utah (the
"Utah Project") was sold to Coaltech. The sold property consisted of tangible
personal property used in the manufacture of synthetic coal fuel. The sale was
effective March 7, 1997. The ownership of Coaltech reflects Covol Technologies,
Inc. as general partner (holding a 1% interest), AJG Financial Services, Inc.
and Square D Company. AJG Financial Services, Inc. is a wholly-owned subsidiary
of Arthur J. Gallagher & Co., and Square D Company is a subsidiary of Groupe
Schneider. The Sale was funded by a promissory note of $3,500,000 with quarterly
payments of $130,000 through December 31, 2007.
In connection with the sale to Coaltech No. 1 L.P., Coaltech paid an initial
license fee of $1,400,000 to the Company, for use of the coal briquetting
technology. The license fee has been recognized upon receipt.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Results of Operations
Three months ended March 31, 1997 compared to three months ended March 31, 1996
Revenues
In the three months ended March 31, 1997, total revenues were increased by
$1,341,711 compared to no revenues reported in the comparable period in 1996. A
one-time license fee revenue of $1,400,000 was the primary source of revenue
during the period. The license fee revenue was earned in connection with the
March 10, 1997 sale of the coal briquetting facility located near Price, Utah
(the "Utah Project"). The Company anticipates that it will continue to earn
license fees from the Utah Project and from the sale and operation of similar
plants.
Margins, Costs and Expenses
The Company's operating loss changed to income of $23,363 for the quarter ended
March 31, 1997 compared to a loss of $3,819,084 reported in the comparable
period in 1996. The reduction in operating loss was due principally: to the
increase in revenues of $1,341,711 as discussed above; a reduction in
compensation expense on stock options of $2,341,171 to $235,739; a decrease in
research and development expenses of $24,961 due to the Company's focus on
commercialization of its technology through the construction and startup of its
first full scale briquetting facility; a decrease in selling, general and
administrative expenses of $253,095 related principally to reductions in costs
for outside professional services and travel expenses; a decrease in cost of
briquetting operations of $45,214 to $385,112. Compensation expense on stock
options for the three months ended March 31, 1996 of $2,576,910 is based on the
restated financial statements for that period filed in the Company's Form
10-Q/A, Amendment No. 1 for the period ended March 31, 1996.
The cost for briquetting operations was substantially more than the revenue
generated for the sales of briquettes because the amount includes costs for the
continuing refinement and development of the briquetting process and product.
For a more detailed discussion of the Company's operations see the Company's
Form 10-K for fiscal year ended September 30, 1996 and Form 10-Q for the quarter
ended December 31, 1996.
Net Loss
For the quarter ended March 31, 1997, the Company has a net loss of $761,009 as
compared to a net loss of $4,854,981 for the comparable period in 1996. In
addition to the items described above, the decrease in net loss is also due to
the difference in loss from discontinued operations. For the three months ended
March 31, 1996 the loss from discontinued operations was $731,613. There was no
additional loss for discontinued operations recorded for the quarter ended March
31, 1997. The decrease in operating expenses was offset by an increase in
write-down of the note receivable related to the sale of the Company's
previously owned subsidiaries (discontinued operations) in the amount of
$575,425 to $775,000.
9
<PAGE>
Results of operations
Six months ended March 31, 1997 compared to six months ended March 31, 1996
Revenues
In the six months ended March 31, 1997, total revenues were $1,445,858; an
increase of $1,442,117 from $3,741 reported in the comparable period in 1996. A
one-time license fee of $1,400,000 was the primary reason for the increased
revenue. In addition, the Company had revenue of $124,341 from the sale of
briquettes in the six months ended March 31, 1997 and had returns of $82,500 of
briquette sales during the same period. The sale of briquettes is primarily
attributable to production from the Utah Project. The license fee revenue was
earned in connection with the sale of the Utah Project. The Company anticipates
that it will continue to earn license fees from the Utah Project and from the
sale and operation of similar plants.
Margins, Costs and Expenses
The Company's operating loss decreased to $1,444,258 for the six months ended
March 31, 1997 from $5,582,418 loss reported in the comparable period in 1996.
The change in operating loss was due principally to: the increase in revenues of
$1,442,117; a reduction in compensation expense on stock options of $2,341,171
to $548,698; increase in cost of briquetting operations of $319,366 to $749,692;
a decrease in research and development expenses of $354,788 due to the Company's
focus on commercialization of its technology through the construction and
startup of its first full scale briquetting facility; a decrease in selling,
general and administrative expenses of $441,753 related principally to
reductions in costs for outside professional services and travel expenses; and
an increase in the minority interest in income of consolidated subsidiaries of
$150,926 from $0 for the comparable period in 1996. Compensation expense on
stock options for the six months ended March 31, 1996 of $2,889,869 is based on
the restated financial statements for that period filed in the Company's Form
10-Q/A, Amendment No. 1 for the period ended March 31, 1996.
Cost of briquetting operations for the six months ended March 31, 1997 was
$749,692, an increase of $319,366 from the comparable period in 1996. The cost
for briquetting operations was substantially more than the revenue generated for
the sales of briquettes because the amount includes costs for the continuing
refinement and development of the briquetting process and product. For a more
detailed discussion of the Company's operations, see the Company's Form 10-K for
fiscal year ended September 30, 1996 and Form 10-Q for the quarter ended
December 31, 1996.
Net Loss
For the six months ended March 31, 1997, the Company had a net loss of
$1,440,311 as compared to a net loss of $6,763,388 for the comparable period in
1996. In addition to the items described above, the decrease in net loss is also
due to other income of $3,947 for the six months ended March 31, 1997 compared
to other expenses of $276,465 incurred in the same period for 1996 and no loss
from discontinued operations for the period ended March 31, 1997. For the six
month period ended March 31, 1996 the Company incurred a loss from discontinued
operations of $881,505.
Liquidity and Capital Resources
The Company continues to make progress toward the commercialization of its
technology and movement towards becoming an operating company with less emphasis
on development. Cash used by the Company in operating activities decreased
$1,866,962 during the six months ending March 31, 1997 ($1,322,128 compared to
$3,189,090 for the same period in 1996) principally due to an increase of
revenues and a decrease in research and development expense, selling, general
and administrative expense and compensation expense on stock options.
The Company increased its investment in property, plant and equipment from
$1,736,669 for the six months ended March 31, 1996 to $4,514,852 for the six
months ended March 31, 1997 due principally to the development of the Utah
Project. The Company was able to fund these capital expenditures principally
through the issuance of common stock, funding through limited partners of Utah
Synfuel #1, Ltd. ("Utah Synfuel"), of which the Company is the general partner
and 60% equity owner, and the issuance of notes payable.
10
<PAGE>
In connection with construction agreements entered into by the Company in
December 1996, in order to assure the agreements would be considered binding on
the Company, the Company agreed to penalty clauses in the aggregate amount of
$3,012,000 if they failed to build the facilities. There can be no assurance
that the facilities will be built. In connection with licensing agreements
entered into by the Company, in December 1996, the Company entered into
indemnity agreements with a contractor which may result in a contingent
liability of up to $4,500,000 on or after June 2, 1998. For a more detailed
description of the construction and licensing agreements, see the Company's Form
10-K for fiscal year ended September 30, 1996.
During the quarter, the Company entered into contractual arrangements to acquire
coal fines and to conduct recovery and preparation activities. The total
obligation to acquire the coal fines is approximately $5,500,000 of which
$750,000 has been paid with the balance due over 3 years. $395,833 of such
obligation is due in fiscal year 1997.
On January 27, 1997, the Company engaged RAS Securities Corp., to act as
placement agent on a "best efforts" private offering of a minimum aggregate
principal amount of $1,000,000 ($3,000,000 maximum) of 8% Convertible
Subordinated Debentures of the Company to accredited investors. This offering
was terminated by the Company on March 27, 1997 without the placement of any
debentures.
In connection with the engagement of RAS Securities Corp. ("RAS") as placement
agent and as settlement of a dispute regarding the Letter Agreement (defined
below), the Company entered into a Settlement Agreement, dated as of January 27,
1997 (the "RAS Settlement Agreement"), with RAS and certain principals of RAS
(the "Individuals") whereby the Company agreed to issue approximately 26,300
shares of Company common stock to the Individuals in settlement of certain
alleged rights under a Letter Agreement, dated as of April 5, 1996 (the "Letter
Agreement"), by and among RAS and the Company. Under the disputed Letter
Agreement, RAS exercised certain warrants to purchase 65,000 shares of Company
common stock. In accordance with the RAS Settlement Agreement, the parties are
mutually released from their respective rights and obligations, if any, under
the Letter Agreement.
The Company anticipates that cash flow from (i) the sale of certain coal
facilities, (ii) fees for the operation of facilities owned by third parties,
(iii) licensing and royalty fees from new plants utilizing the briquetting
technology, (iv) the sale of chemical binder to new plants utilizing the
briquetting technology, (v) sale of synthetic fuel product, (vi) fees from port
operations and loading, (vii) cash distributions from its partnership interests
and (viii) collections on notes receivable will be used to fund working capital
and other operating needs. Most of the cash flow from the above sources will not
occur until late 1997 and in subsequent years.
At March 31, 1997, the Company had a working capital deficit of $2,638,316. The
Company is currently in discussions with various sources for equity financing.
The Company believes that the resources described above and the potential equity
financing will be adequate for the Company to meet its obligations in fiscal
year 1997 notwithstanding its working capital deficit at March 31, 1997.
However, there is no assurance that the Company will be able to obtain the
necessary equity financing.
Loan from PacifiCorp
On March 20, 1997, the Company entered into a Convertible Loan and Security
Agreement (the "Loan Agreement") with PacifiCorp Financial Services, Inc., an
Oregon corporation ("PacifiCorp"). Under the Loan Agreement the Company may
borrow up to $5,000,000 as evidenced by a draw down promissory note (the
"Promissory Note") payable to PacifiCorp. As of May 15, 1997, the Company has
drawn $1,014,723 under the Loan Agreement. Principal and accrued interest on the
Promissory Note is due and payable on March 20, 1998 (the "Due Date"), unless
the Promissory Note is converted into Company common stock. Interest due on the
Promissory Note is calculated based on a 360 day year and the actual number of
days lapsed, and will be compounded monthly. The interest rate is a rate per
annum equal to the lesser of (i) the highest rate allowed by law, or (ii) the
sum of the rate of interest publicly announced by Morgan Guaranty Trust Company
of New York in New York City from time to time plus two percent (2%) per annum.
The proceeds of the loan (the "Loan") may be used by the Company to (i) complete
construction of the coal briquetting facility to be located in Birmingham,
Alabama (the "Alabama Project"), (ii) finance the purchase of coal fines for the
Alabama Project, (iii) fund the net working capital needs of the Alabama
Project, (iv) finance the development and construction of a wash plant for coal
fines and (v) other uses related to the Alabama Project approved by PacifiCorp
11
<PAGE>
in its sole discretion. The Company's obligation to repay the Loan is secured by
a security interest and lien on certain property relating to the Alabama Plant.
In addition, PacifiCorp has the right to convert all or a portion of the
principal and unpaid interest on the Loan at any time into shares of Company
common stock at a conversion price of $7.00 per share, subject to certain
adjustments as provided in the Loan Agreement. On May 5, 1997, PacifiCorp filed
a Schedule 13D with the Securities and Exchange Commission reporting its
beneficial ownership of 714,286 shares of Company common stock should PacifiCorp
convert the full amount of the Loan. Pursuant to the Registration Rights
Agreement, dated as of March 20, 1997, between the Company and PacifiCorp,
PacifiCorp has been granted certain "demand" and "piggy-back" registration
rights with respect to shares of Company common stock that could be acquired by
PacifiCorp pursuant to the Loan Agreement.
Pending Sale of Alabama Project
Pursuant to the Alabama Project Purchase Agreement, dated as of March 20, 1997
(the "Purchase Agreement"), by and between the Company, Alabama Synfuel #1 Ltd.,
a Delaware limited partnership ("Alabama Synfuel") and Birmingham Syn Fuel,
L.L.C., an Oregon limited liability company ("Birmingham Syn Fuel"), the Company
and Alabama Synfuel have agreed to sell, and Birmingham Syn Fuel has agreed to
buy, the Alabama Project, subject to the terms and conditions of the Purchase
Agreement. The purchase price for the Alabama Project would be $3,400,000 and
would be payable in the form of a nonrecourse promissory note secured by certain
property of the Alabama Project. There are numerous conditions to the closing of
the sale of the Alabama Project, including, but not limited to, the receipt of
an Internal Revenue Service Letter Ruling (the "Letter Ruling").
In connection with the Loan from PacifiCorp described above and the pending sale
of the Alabama Project, Birmingham Syn Fuel I, Inc., and Birmingham Syn Fuel II,
Inc. (collectively, the "PFS Parties"), PacifiCorp, Alabama Synfuel and the
Company entered into the Conditional Option Agreement, dated as of March 20,
1997 (the "Conditional Option Agreement"). Under the Conditional Option
Agreement, the Company granted to the PFS Parties and to PacifiCorp a put option
to require the Company to simultaneously purchase all of the rights, title and
interest of the PFS Parties in Birmingham Syn Fuel and all of the interest of
PacifiCorp in the Loan and in the other Transactional Documents (as that term is
defined in the Purchase Agreement) excluding shares obtained in conversion of
the Loan if (i) the Alabama Project is not completed consistent with Birmingham
Syn Fuel's approved plans and specifications and placed in service (within the
meaning of Section 29 of the Internal Revenue Code of 1996) by June 30, 1997,
(ii) a Letter Ruling (as defined above) is not received by June 30, 1997 which
is satisfactory to Birmingham Syn Fuel or (iii) if, at any time, there has
occurred and is continuing an "Event of Default" under the Loan Agreement (each
being referred to herein as a "Put Event"). In no event, however, shall a Put
Event occur after receipt of a satisfactory Letter Ruling by Birmingham Syn
Fuel.
Sale of Utah Project
On March 10, 1997, the Utah Project was sold to Coaltech No.1 L.P., a limited
partnership consisting of Covol Technologies, Inc. as a general partner (holding
a 1% interest), AJG Financial Services, Inc. and Square D Company effective as
of March 7, 1997. AJG Financial Services, Inc. is a wholly-owned subsidiary of
Arthur J. Gallagher & Co., and Square D Company is a subsidiary of Groupe
Schneider. See the Company's Current Report on Form 8-K, filed March 24, 1997
for additional information regarding the sale of the Utah Project.
Debentures
In December 1996, the Company entered into a Debenture Agreement and Security
Agreement with AJG Financial Services, Inc. to borrow $4,000,000. In December
1996, $1,100,000 in convertible subordinated debentures (the "Subordinated
Debentures") were issued and funded, with an additional $2,900,000 in credit
available for future draw downs pursuant to Senior Debentures (non-convertible)
to be issued by the Company. On January 2, 1997, the Company drew down $588,683,
on February 4, 1997 the Company drew down an additional $1,313,514, on February
21, 1997 the Company drew down an additional $750,000, and on February 28, 1997
the Company drew down an additional 139,975 of the available $2,900,000. The
balance of the $2,900,000 loan will be used for construction and development of
coal agglomeration facilities. In May 1997, the $1,100,000 Subordinated
Debentures and accrued interest were converted into 140,642 shares of common
stock based on a conversion price of $8.00 per share.
12
<PAGE>
Forward Looking Statements
Statements regarding the Company's expectations as to its liquidity, capital
resources and certain other information presented in this Form 10-Q constitute
forward looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Although the Company believes that its
expectations are based on reasonable assumptions within the bounds of its
knowledge of its business and operations, there can be no assurance that actual
results will not differ materially from its expectations. In addition to matters
affecting the economy and the Company's industry generally, factors which could
cause actual results to differ from expectations include, but are not limited
to, the following:
(i) The commercial success of the Company's briquetting
technology.
(ii) Procurement of necessary equipment to place facilities into
operation.
(iii) Securing of necessary sites and raw materials for facilities
to be constructed and operated.
(iv) Timely construction and completion of facilities.
(v) Ability to obtain needed additional capital on terms
acceptable to the Company in order to finance the
development of the briquetting technology and working
capital needs.
(vi) Changes in governmental regulation or failure to comply with
existing regulation could result in operational shutdowns of
its facilities.
(vii) The ongoing availability of tax credits under Section 29
of the Internal Revenue Code.
(viii) Ability to meet financial commitments under existing
contractual arrangements.
With respect to tax credits under Section 29 of the Internal Revenue Code of
1996, as amended ("Section 29"), on February 6, 1997, the Treasury Department
released the General Explanations of the Administration's Revenue Proposals,
which summarizes the tax-related provisions from the President's Fiscal Year
1998 Budget submission to Congress (the "Proposed Federal Budget"). The initial
version of the Proposed Federal Budget proposes an amendment to a provision of
Section 29. Currently, Section 29 requires that facilities producing certain
qualified fuels (including solid synthetic fuel produced from coal) that are
constructed pursuant to a binding contract in place by December 31, 1996 be
placed in service by June 30, 1998. (The "placed in service date" and "binding
contract date" have been previously extended on several occasions, most recently
by the Small Business Jobs Protection Act of 1996.) The Proposed Federal Budget
proposed that the placed-in-service date be changed to June 30, 1997 (the
"Amendment"). If adopted, the Amendment would have a material adverse effect on
the financial condition of the Company.
On May 2, 1997, the Administration announced a new fiscal year 1998 Budget
Agreement with Congress. The new Budget Agreement reduces by more than 30% the
amount of revenue provisions and does not mention Section 29 or any other
specific revenue provisions, but leaves the fiscal year detail to the
tax-writing committees of Congress.
The Company, together with other interested parties, will continue to oppose the
proposed Amendment. The Company believes that the Amendment will not likely be
included in the final Federal Budget. However, no assurance can be given that
the Amendment will not be included in the final Federal Budget proposed by
Congress and the Administration.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company entered into a letter of intent with Innovative Technologies
("Innovative") in July of 1995 to apply the Company's briquetting technology to
certain metallic ores supplied by Innovative. The Company conducted numerous
tests of the ore through the fall of 1995, and concluded from the results that
the venture was not economically viable. Accordingly, final agreement to process
the ore was never reached. On March 4, 1997, Innovative Holding Company, Inc., a
California corporation, and ORO Limited, a California limited partnership, filed
a civil complaint against the Company alleging breach of the letter of intent in
the amount of $500,000 plus damages. The complaint was filed in the Superior
Court of California, County of Orange (Case No. 776083). The Company intends to
defend the suit.
On January 30, 1997, S.C. Marketing, Inc., a California corporation, filed a
civil complaint against the Company alleging breach of contract in the amount of
$137,440 plus damages (valued at $138,396 and previously accrued as a note
payable). The complaint was filed in the Superior Court of California, County of
Orange (Case No. 774760). On March 26, 1997, the Company entered into a
settlement agreement with S.C. Marketing, Inc. whereby it issued 20,913 shares
of Company common stock in settlement of the complaint.
ITEM 2. CHANGES IN SECURITIES.
Recent Sales of Unregistered Securities
The following sets forth securities issued by the Company within the past fiscal
quarter without registering the securities under the Securities Act of 1933, as
amended. No underwriters were involved in any stock issuances nor were any
commissions or similar fees paid in connection therewith.
The Company believes that the following issuance of shares of common stock,
notes and debentures and other securities were exempt from the registration
requirements of the Securities Act of 1933, as amended, pursuant to the
exemption set forth in Section 4(2) thereof.
On January 1, 1997, the Company granted 50,000 stock options, valued as deferred
compensation of $575,000, to an executive of the Company, at an exercise price
of $1.50/share. The options vest over a two-year period starting January 1, 1997
and ending December 31, 1998.
On January 2, 1997, 25,000 shares of common stock, previously shown as common
stock to be issued, were issued for $47,500, which consisted of 3,000 shares of
common stock issued to an employee of the Company in exercise of options at
$1.50, 10,000 shares of common stock issued to an accredited investor in
exercise of options at $1.50 and 12,000 shares of common stock issued to an
existing shareholder in exercise of warrants at $1.50.
As described in Part I, Item 2 above, on January 2, 1997, February 4, 1997,
February 21, 1997, and on February 28, 1997, the Company issued senior
debentures in the aggregate principal amount of $2,792,172. The senior
debentures accrue interest at prime plus two percent (2%) and maturing three
years from the date of issuance (the "Senior Debentures"). The Senior Debentures
are collateralized by all real and personal property purchased by the Company
with the proceeds of the Senior Debentures. The proceeds of the Subordinated
Debenture and the Senior Debentures may be used to satisfy contractual
obligations of the Company, for working capital and to purchase equipment to be
used to construct coal briquetting facilities to be managed and/or sold by the
Company or affiliates of the Company.
On January 13, 1997, the Company issued 100,000 shares of common stock to a
former executive of the Company in exercise of options at $1.50 per share. The
consideration was paid part in cash and part in offset of amounts owing to the
individual by the Company.
14
<PAGE>
As described in Part I, Item 2 above, on January 27, 1997 the Company agreed to
issue 26,300 shares to certain principals of RAS Securities Corp.
On February 21, 1997 and March 6, 1977, the Company issued 1,905 and 2,929
shares of common stock respectively, to a consultant in exchange for consulting
services in the total amount of $40,500.
On March 14, 1997, the Company issued 60,000 shares of common stock to an
accredited investor in a private placement in connection with the purchase of
property for the Alabama Project. The Company was given a credit of $585,000 for
the purchase of the property in exchange for the 60,000 shares.
As described in Part I, Item 2 above, on March 20, 1997 the Company executed and
delivered a promissory note in the aggregate principal amount of up to
$5,000,000 to PacifiCorp in consideration for a loan of up to $5,000,000. The
loan is convertible into common stock of the Company based on a $7.00 per share
conversion price.
As described in Part I, Item 2 above, on March 20, 1997 the Company executed and
delivered the Conditional Option Agreement to PacifiCorp and affiliates of
PacifiCorp relating to the repurchase of their interest in Birmingham Syn Fuel,
L.L.C. and the loan made by PacifiCorp.
As described in Part II, Item 1 above, on March 26, 1997 the Company issued
20,913 shares of Company common stock, valued at $138,396, in settlement with
S.C. Marketing, Inc.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION
In 1995, the Company made a strategic decision to focus its efforts exclusively
on commercializing the Briquetting Technology and to divest itself of its
construction and limestone subsidiaries ("Subsidiaries"). On February 1, 1996,
the Company entered into a Stock Purchase Agreement (the Agreement) with former
principals of IME, State, CIC and Larson (Buyers) to sell all of the common
shares of the subsidiaries to the Buyers for a $5,000,000 face value 6%
promissory note (the Note). See Item 1 of the Company's Annual Report on Form
10-K for the year ended September 30, 1996 for a detailed discussion of the
terms of the sale.
The Buyers have raised various contentions regarding the Note and the Agreement.
The Buyers claim that Covol is responsible to pay additional amounts beyond the
$3,500,000 provided for in the agreement. Furthermore, the Buyers claim that the
Company represented to them payment terms that are different from the original
promissory note. The Company accrued as of September 30, 1996 approximately
$650,000 of additional expenses related to the discontinued operations for the
wind-down period which were paid or accrued by the subsidiaries. The Company is
investigating the claims made by the Buyers and anticipates that an amicable
settlement can be reached. However, there can be no assurance that a settlement
will be reached with the Buyers.
The results of the construction and limestone operations have been classified as
discontinued operations for all periods presented in the Consolidated Statements
of Operations. The assets and liabilities of the discontinued operations have
been classified in the Consolidated Balance Sheets as "Net assets - discontinued
operations." Discontinued operations have also been segregated for all periods
presented in the Consolidated Statements of Cash Flows.
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Those exhibits previously filed with the Securities and
Exchange Commission as required by Item 601 of Regulation S-K,
are incorporated herein by reference in accordance with the
provisions of Rule 12b- 32.
10.38 Convertible Loan and Security Agreement, dated as of
March 20, 1997, by and between the Company and
PacifiCorp Financial Services, Inc. ("PacifiCorp")
10.39 Alabama Project Purchase Agreement, dated as of
March 20, 1997, by and among the Company, Alabama
Synfuel #1, Ltd ("Alabama Synfuel") and Birmingham
Syn Fuel, L.L.C. ("Birmingham Syn Fuel")
10.40 Conditional Option Agreement, dated as of March 20,
1997, by and among Birmingham Syn Fuel I, Inc.,
Birmingham Syn Fuel II, Inc., PacifiCorp, Alabama
Synfuel and the Company
10.41 Registration Rights Agreement, dated as of March 20,
1997, by and between the Company and PacifiCorp.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
On March 24, 1997, the Company filed a Current Report on Form
8-K with the Securities and Exchange Commission disclosing its
sale of the Utah Project to Coaltech No. 1 L.P., a Delaware
limited partnership. The information was disclosed pursuant to
Item 2 of Form 8-K. Also disclosed in that report pursuant to
Item 5 of the Form 8-K was the appointment of Max E. Sorensen
as a Vice President of the Company.
16
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SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 19, 1997
COVOL TECHNOLOGIES, INC.
By: /s/ Brent M. Cook
--------------------------------------
Brent M. Cook, Chairman of the Board,
Chief Executive Officer and Principal
Executive Officer
By: /s/ Stanley M. Kimball
-----------------------------------------------
Stanley M. Kimball, Principal Financial Officer
17
CONVERTIBLE LOAN AND SECURITY AGREEMENT
between
COVOL TECHNOLOGIES, INC.
and
PACIFICORP FINANCIAL SERVICES, INC.
Dated as of March 20, 1997
- ------------------------------------------------------------------------------
TABLE OF CONTENTS
Page
----
RECITALS...................................................................... 1
ARTICLE I - DEFINITIONS............. ......................................... 1
SECTION 1.01. Certain Defined Terms...................................... 1
SECTION 1.02. Accounting Terms...........................................10
SECTION 1.03. Other Terms................................................10
ARTICLE II - THE INDEBTEDNESS.................................................11
SECTION 2.01. The Commitment and the Term loans; Note....................11
SECTION 2.02. Repayment..................................................13
SECTION 2.03. Payments and Computations..................................13
SECTION 2.04. Taxes.... .................................................14
SECTION 2.05. Late Payments..............................................15
ARTICLE III - ACKNOWLEDGMENT AND CREATION OF SECURITY
INTEREST.............................................................16
SECTION 3.01. Acknowledgment and Creation of
Security Interest........................................16
SECTION 3.02. Duty of Care...............................................16
SECTION 3.03. Release of Liens and Security
Interests................................................16
<PAGE>
SECTION 3.04. Continuation of Liens and Security.........................17
SECTION 3.05. Insurance Proceeds.........................................17
ARTICLE IV - REPRESENTATIONS AND WARRANTIES...................................18
SECTION 4.01. Corporation in Good Standing...............................18
SECTION 4.02. Due Authorization..........................................18
SECTION 4.03. Pending and Threatened Actions.............................18
SECTION 4.04. Disclosure.................................................18
SECTION 4.05. Valid and Binding Obligations..............................19
SECTION 4.06. Payment of Taxes...........................................19
SECTION 4.07. Title to Collateral and Liens..............................19
SECTION 4.08. Defaults...................................................19
SECTION 4.09. Permits.. .................................................19
SECTION 4.10. Principal Place of Business:
Jurisdictions Where Doing Business:
Fiscal Year..............................................19
SECTION 4.11. ERISA.... .................................................20
SECTION 4.12. Subordination..............................................20
i
<PAGE>
SECTION 4.13 Government Approval........................................20
SECTION 4.14 Securities and Exchange Act;
Investment Company Act...................................20
SECTION 4.15 Regulation U...............................................20
SECTION 4.16 Strikes, Etc...............................................20
SECTION 4.17 Adverse Agreements.........................................20
SECTION 4.18 Trade Names and Intellectual Property......................21
SECTION 4.19 Location of Collateral.....................................21
SECTION 4.20 Possession of Collateral...................................21
SECTION 4.21 Validity and Priority of Security
Interests................................................21
SECTION 4.22 Accounts ..................................................21
SECTION 4.23 Agreements with Related Persons............................21
ARTICLE V - COVENANTS OF BORROWERS............................................22
SECTION 5.01. Affirmative Covenants......................................22
SECTION 5.02. Negative Covenants.........................................27
SECTION 5.03. Collateral.................................................30
<PAGE>
ARTICLE VI - DEFAULT................ .........................................32
SECTION 6.01. Events of Default..........................................32
ARTICLE VII - RIGHTS, POWERS AND REMEDIES UPON DEFAULT........................35
SECTION 7.01. Remedies...................................................35
SECTION 7.02. Protection and Preservation of
Collateral and Rights;
Protective Advances......................................37
SECTION 7.03. Election...................................................37
SECTION 7.04. Waiver... .................................................37
SECTION 7.05. Power of Attorney..........................................38
SECTION 7.06. Entry Upon Premises........................................38
SECTION 7.07. Notification of Customers..................................39
SECTION 7.08. Failure to Pay.............................................39
SECTION 7.09. Application of Collateral Proceeds.........................39
SECTION 7.10. Enforcement of Borrower's Rights...........................39
SECTION 7.11. Exercise of Remedies.......................................40
SECTION 7.12. Equitable Remedies.........................................40
ARTICLE XIII GENERAL PROVISIONS...............................................40
SECTION 8.01. Survival of Terms..........................................40
SECTION 8.02. Presentment................................................41
SECTION 8.03. Successors and Assigns.....................................41
SECTION 8.04. Number... .................................................41
ii
<PAGE>
SECTION 8.05. Governing Law..............................................41
SECTION 8.06. Notices and Addresses; Payments............................42
SECTION 8.07. Severability; Independence of Covenants....................42
SECTION 8.08. Time..... .................................................42
SECTION 8.09. Necessity of Writing.......................................42
SECTION 8.10. Integration................................................43
SECTION 8.11. Captions...................................................43
SECTION 8.12. Lender's Expenses and Attorneys' Fees......................43
SECTION 8.13. Indemnification............................................44
SECTION 8.14. Agreement Governs..........................................45
SECTION 8.15. Third Party Beneficiaries..................................45
SECTION 8.16. Jurisdiction...............................................45
SECTION 8.17. Consent to Loan Participation..............................43
SECTION 8.18. Waiver of Jury Trial.......................................46
SECTION 8.19. Execution in Counterparts..................................47
ARTICLE IX - ENVIRONMENTAL PROVISIONS.........................................47
SECTION 9.01. Definitions................................................47
SECTION 9.02. Representations and Warranties.............................48
SECTION 9.03. Covenants..................................................48
SECTION 9.04. Borrower's Remedial Work...................................49
SECTION 9.05. Indemnity..................................................50
SECTION 9.06. Remedies Upon Default......................................51
SECTION 9.07. Continuing Obligations.....................................52
SECTION 9.08. Other Laws.................................................52
SECTION 9.09. Security Interest..........................................52
ARTICLE X - CONVERSION RIGHTS.................................................52
SECTION 10.01. Conversion.................................................52
SECTION 10.02. Mechanics of Conversion....................................53
SECTION 10.03. Current Conversion Price...................................54
SECTION 10.04. Adjustment of Conversion Price.............................55
SECTION 10.05. Issuer's Consolidation or Merger...........................61
SECTION 10.06. Notice to Lender...........................................62
Exhibit l.01.TN - Note
Exhibit 5.01.R - Opinion of Counsel
iii
<PAGE>
CONVERTIBLE LOAN AND SECURITY AGREEMENT
THIS CONVERTIBLE LOAN AND SECURITY AGREEMENT (this "Agreement") is made as
of March 20, 1997, by and between COVOL TECHNOLOGIES, INC., a Delaware
corporation ("Borrower"), and PACIFICORP FINANCIAL SERVICES, INC., an Oregon
corporation ("Lender").
RECITALS
Borrower desires to borrow up to $5,000,000 (i) to complete construction by
Borrower of the coal briquetting facility to be located in Birmingham, Alabama,
known as Alabama Synfuel #1 Ltd. (the "Alabama Project"), (ii) to finance the
acquisition by Borrower for the benefit of the Alabama Project of up to 100,000
tons of coal fines to be stored at the Port Hodder site, (iii) for funding of
net working capital needs of the Alabama Project, as approved by Lender, (iv) to
finance the development and construction of a wash plant for coal fines, at a
location, price and with specifications approved by Lender, and (v) other uses
by Borrower, as approved by the Lender in its sole discretion. In addition, the
parties wish to provide that Lender may elect to convert all or any portion of
the then outstanding principal and interest owing under this Agreement into
shares of common stock, par value $.001 per share ("Borrower Common Stock"), of
Borrower. Upon the terms and subject to the conditions set forth in this
Agreement, and in consideration of the mutual covenants and agreements exchanged
herein, Borrower and Lender agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.01. Certain Defined Terms. As used in this Agreement, the
following terms shall have the following meanings (which meanings shall be
equally applicable to both the singular and plural forms of the terms defined):
"Account" shall have the meaning given to that term in the Code.
"Account Debtor" means any Person who is obligated on an Account.
"Accounts Payable" means the accounts payable of Borrower.
"Additional Common Stock" is defined in Section 10.04.C.
"Alabama Project" is defined in the Recitals.
"Alabama Project Purchase Agreement" means the Alabama Project
Purchase Agreement, dated as of the date hereof, between Borrower and Alabama
Synfuel #1 Ltd., and Birmingham Syn Fuel, L.L.C.
"Attorneys' Fees" means the reasonable fees (and all costs and
expenses related thereto) for the services of the attorneys (and all paralegals
and other staff employed by such attorneys) employed by Lender from time to time
(i) in connection with or arising out of any bankruptcy case, receivership
proceeding, or similar proceeding involving Borrower; (ii) to commence, defend
or intervene in any court proceeding (whether at the trial or appellate level)
or arbitration proceeding, or to file a petition, complaint, answer, motion or
other pleading, or to take any other action in or with respect to any case, suit
or proceeding (bankruptcy or otherwise) relating to the Transaction Documents,
the Collateral, the Obligations, or any other agreement, document or instrument
in any way relating to the Transaction Documents or the relationship between
Borrower and Lender; (iii) after the occurrence and during the continuance of a
Default or Event of Default, to advise Lender with respect to the Transaction
Documents or any other agreement, document or instrument in any way relating
thereto or the relationship between Borrower and Lender; (iv) to protect,
collect, lease, sell, take possession of, or liquidate any of the Collateral and
any other property, rights or interests owned or held by Lender to secure the
payment and performance of the Obligations, to enforce or to attempt to enforce
any security interest in any of the Collateral and any other property, rights or
interests owned or held by Lender to secure the payment and performance of the
Obligations, or to give any advice with respect to such enforcement; and (v) to
enforce any of Lender's rights to collect any of the Obligations.
"Borrower Common Stock" is defined in the Recitals.
"Business Day" means any day other than a Saturday, a Sunday, a public
or bank holiday under the laws of the State of Utah.
"Cash and Cash Equivalents" means the aggregate amount of (i) cash on
hand, (ii) Dollar demand deposits maintained in the United States with any
federally insured or state chartered financial institution, (iii) Dollar time
deposits maintained in the United States with, or certificatesof deposit issued
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by, any federally insured or state chartered financial institution, (iv) direct
obligations of, or unconditionally guaranteed by, the United States and having a
maturity of one year or less, and (v) readily marketable commercial paper having
a maturity of one year or less, issued by any corporation organized and existing
under the laws of the United States or any state thereof or the District of
Columbia.
"Code" means the Uniform Commercial Code as enacted in the State of
Utah.
"Collateral" means (a) all personal property assets of Borrower used
or useful in connection with the Alabama Project, whether now existing or
hereafter acquired or arising, and wherever located, tangible or intangible,
including:
(i) All Equipment used or useful in connection with the Alabama
Project;
(ii) All Inventory produced by, and used or useful in connection
with, the Alabama Project;
(iii) All Computer Hardware and Software used or useful in
connection with the Alabama Project;
(iv) All Accounts, contract rights, notes receivable, chattel paper,
instruments, Intangibles, Cash and Cash Equivalents, stock and other equity
securities, tax refunds and tax refund claims, trademarks, service marks, trade
styles, trade names, copyrights, patents and other intellectual property of
Borrower used or useful in connection with the Alabama Project, all depository
accounts or deposits by Borrower in connection with the Alabama Project with any
Person, documents, documents of title, and other property rights of any kind
used or useful in connection with the Alabama Project, whether now or hereafter
existing, wherever located, together with all rights now or hereafter existing
in and to all security agreements, leases of personal property, leases of real
property, and other contracts securing or otherwise relating to any such
Accounts, contract rights, notes receivable, chattel paper, instruments,
Intangibles, Cash and Cash Equivalents, stock and other equity securities, tax
refunds and tax refund claims, trademarks, service marks, trade styles, trade
names, copyrights, patents and other intellectual property of Borrower used or
useful in connection with the Alabama Project;
(v) All Proceeds and products of any and all of the foregoing
property and, to the extent not otherwise included, all payments under insurance
(whether or not Lender is the loss payee thereof), and all claims, indemnities,
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warranties or guarantees, payable by reason of loss or damage to or otherwise
with respect to any of the foregoing property, and all property of any type
described above that is acquired with any cash proceeds of any of the foregoing
property; and
(b) all interests of Borrower in the real property covered by the Collateral
Assignment of Lease and all other real property assets of Borrower used or
useful in connection with the Alabama Project, and all rents, income, issues and
profits thereof.
"Collateral Assignment of Lease" means a Collateral Assignment of
Lease executed and delivered by Borrower and Lender, securing the Obligations
hereunder, together with the Consent of Parker towing Company, Inc., in form and
substance reasonably satisfactory to Lender.
"Commitment" is defined in Section 2.01.A hereof.
"Commitment Period" is defined in Section 2.01.A hereof.
"Computer Hardware and Software" means all of Borrower's right, title
and interest, now owned or hereafter acquired, in computer equipment and
hardware including all central processing units, terminals, disk drives, tape
drives, electronic memory units, printers, keyboards, screens, peripherals (and
other input/output devices), modems and other communication controllers, and any
and all model conversions, accessions, parts and appurtenances thereto,
substitutions therefor and replacements thereof, all intellectual property used
by Borrower, at any time, in the operation of such computer equipment and
hardware, including all software, all of Borrower's rights (to the extent
assignable) under any licenses, options, warranties, service contracts, program
services, test rights, maintenance rights, support rights, improvement rights,
and renewal rights related to Borrower's use, at any time, of such computer
equipment, hardware or software, and all leases pursuant to which Borrower
leases any computer equipment, hardware or software.
"Construction Assignment Agreement" means a Collateral Assignment of
Construction Agreement to be executed and delivered by Borrower, Alabama Synfuel
#1, Ltd. and Lender, securing the Obligations hereunder, together with a Consent
and Agreement executed and delivered by TIC The Industrial Company, in form and
substance reasonably satisfactory to Lender.
"Conversion" is defined in Section 10.01.B hereof.
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"Conversion Price" is defined in Section 10.03 hereof.
"Current Conversion Price" is defined in Section 10.03 hereof.
"Current Liabilities" means for Borrower, on a consolidated basis in
accordance with GAAP, (i) all Debt which by its terms is payable on demand or
matures within one year from the date of determination (excluding any Debt
renewable or extendable, at the option of the debtor, to a date more than one
year from such date or arising under a revolving credit or similar agreement
which obligates the lender or lenders to extend credit during a period of more
than one year from such date) and (ii) all other items (including taxes accrued
as estimated) which in accordance with GAAP would be included as current
liabilities.
"Debt" means, for any Person, (i) all indebtedness or other
obligations of such Person for borrowed money or for the deferred purchase price
of property or services, (ii) all indebtedness created or arising under any
conditional sale or other title retention agreement with respect to property
acquired by such Person (even though the rights and remedies of the seller or
lender under such agreement in the event of default are limited to repossession
or sale of such property), (iii) all obligations under leases which shall have
been or should be, in accordance with GAAP, recorded as capital leases in
respect of which such Person is liable as lessee, (iv) liabilities in respect of
unfunded vested benefits under any ERISA Plan, (v) all Guaranteed Indebtedness,
and (vi) (to the extent not otherwise covered by clauses (i), (ii) or (iii)
above) all Debt of the type referred to in clauses (i), (ii) or (iii) above
secured by (or for which the holder of such Debt has an existing right,
contingent or otherwise, to be secured by) any lien, security interest or other
charge or encumbrance upon or in property owned by such Person, even though such
Person has not assumed or become liable for the payment of such debt.
"Default" means the occurrence of an act, event or condition which
would constitute an Event of Default under this Agreement but for the
requirement that notice be given or time elapse or both.
"Default Interest Rate" means, for any day, a rate per annum equal to
the lesser of (a) the highest rate allowed by law, or (b) the sum of (i) the
rate of interest publicly announced by Morgan Guaranty Trust Company of New York
in New York City from time to time as its "prime rate", and (ii) five percent
(5%) per annum.
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"Distributions on Common Stock" is defined in Section 10.04.B hereof.
"Dollars" and the sign "$" each means lawful money of the United
States.
"Early Termination Date" is defined in Section 2.01(D) hereof.
"Employee Group" shall include any Person who was, has been or becomes
an officer or director of Borrower at any time on or after the Effective Date.
The Employee Group as of the date of this Agreement is identified on Schedule
1.01.EG attached hereto.
"Environmental Report" means the Phase I Environmental Site
Assessment, dated as of September 18, 1996, prepared by Lockwood Greene
Technologies, Inc.
"Equipment" means all equipment (as defined in the Code) of Borrower
in all of its forms, wherever located, now or hereafter existing.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time.
"ERISA Plan" means, for any Person, an employee benefit plan or other
plan maintained for employees of such Person and covered by Title IV of ERISA.
"Event of Default" is defined in Section 6.01 hereof.
"GAAP" means generally accepted United States accounting principles
consistently applied, as in effect from time to time.
"Good Faith" means honesty in fact in the conduct or transaction
concerned, without regard to whether standards which might be deemed
commercially reasonable have been observed.
"Guaranteed Indebtedness" of any Person means all Debt referred to in
clause (i), (ii) or (iii) of the definition of "Debt" in this Section 1.01 of
any other Person guaranteed directly or indirectly in any manner by such Person,
or in effect guaranteed directly or indirectly by such Person through agreement
(i) to pay or purchase such Debt or to advance or supply funds for the payment
or purchase of such Debt, or (ii) to purchase, sell or lease (as lessee or
lessor) property, or to purchase or sell services, primarily for the purpose of
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enabling the debtor to make payments of such Debt or to assure the holder of
such Debt against loss, or (iii) to supply funds to or in any other manner
invest in the debtor (including any agreement to pay for property or services
irrespective of whether or not such property is received or such services are
rendered) or (iv) otherwise to assure a creditor against loss.
"Intangibles" means (i) goodwill, organizational expenses, research
and development expenses, trademarks, trade names, copyrights, patents, patent
applications, licenses and rights in any thereof, and other similar intangibles,
(ii) all unamortized debt discount and expense, (iii) all reserves carried and
not deducted from assets, (iv) treasury stock and capital stock, obligations or
other securities of, or capital contributions to or investments in, any Related
Person, (v) securities which are not readily marketable, (vi) cash held in a
sinking or other analogous fund established for the purpose of redemption,
retirement or prepayment of capital stock or Debt, (vii) any write-up in the
book value of any asset resulting from a revaluation thereof, and (viii) any
items not included in clauses (i) through (vii) above which are treated as
intangibles in conformity with GAAP.
"Inventory" means all inventory (as defined in the Code) of Borrower,
including without limitation all personal property held for sale, lease or
demonstration, or to be furnished under contracts of sale or service, in all
forms, wherever located, now or hereafter existing, including (i) all inventory,
raw materials, work in process, finished goods, materials and supplies used or
to be consumed in Borrower's business, and all additions and accessions to such
property, (ii) goods in which Borrower has an interest in mass or a joint or
other interest or right of any kind, and (iii) goods which are returned to or
repossessed by Borrower, and all accessions thereto and products thereof.
"issuances" is defined in Section 10.04I hereof.
"Letter Ruling" means a letter ruling from the Internal Revenue
Service setting forth the specific terms of the proposed transaction and
confirming to the satisfaction of Lender, among other things, (a) the
availability and calculation of the credit available under Section 29 of the
Internal Revenue Code of 1986, as amended (the "1986 Code"), (b) that the
construction contract for the Alabama Project satisfies the requirements of the
Section 29 of the 1986 Code, and (c) that the allocation of the Section 29
Credits to the various members of the buyer is valid under the 1986 Code.
"Lien" means any mortgage, pledge, lien, claim, charge, encumbrance,
security interest, conditional sale or title retention agreement, easement, use
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restriction, covenant or reservation against or with respect to any of
Borrower's property or interest in property.
"Loan Documents" means this Agreement, the Note, the Security
Documents, and any and all other documents executed pursuant hereto or thereto,
or contemplated hereby or thereby (other than the Purchase Agreement Documents),
as the same may be modified, extended, renewed, amended or replaced from time to
time.
"Material Adverse Change" means any material and adverse change in (a)
Borrower's business, properties, condition (financial or otherwise), or
operations or results thereof since the date of the most recent financial
statement given to Lender with respect to Borrower, (b) Borrower's ability to
pay and perform the Obligations, with respect to the development, construction
or operation of the Alabama Project or (d) the Collateral, Lender's Liens on the
Collateral or the priority of Lender's Liens on a material portion of the
Collateral.
"Note" means the promissory note of or about even date herewith
executed by Borrower in the principal amount of the Term Loan, in substantially
the form attached hereto as Exhibit l.01.TN, as the same may be amended,
modified, renewed, extended, or replaced from time to time.
"Obligations" means any and all indebtedness and other obligations of
Borrower to Lender, both monetary and non-monetary, whether now existing or
hereafter arising and however acquired, and whether arising under this
Agreement, the Note, the other Transaction Documents or otherwise.
"Other Taxes" is defined in Section 2.04.B hereof.
"Permitted Liens" means:
(i) Liens (but only to the extent not yet delinquent or (a) which
are being contested in good faith by appropriate proceedings with reserves
acceptable to Lender having been set aside and maintained and (b) with respect
to tax liens on the Collateral, as to which Borrower shall have paid the
undisputed amount) securing taxes, assessments or governmental charges or
levies, or arising in connection with workers' compensation, unemployment
insurance or social security obligations, or securing the claims or demands of
materialmen, mechanics, carriers, warehousemen, landlords and other like
Persons;
(ii) Attachment, judgment or similar liens arising in connection
with court proceedings (a) which are discharged or stayed pending appeal within
thirty (30) days of attachment or levy, and, if so stayed, the stay
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remains in effect or (b) payment of which is covered in full (subject only to
customary and reasonable deductibles) by insurance or surety bonds;
(iii) Liens in favor of Lender under the Loan Documents;
(iv) Existing Liens disclosed on Schedule 1.01.PL attached hereto
and Liens affecting real property interests consisting of (a) zoning
regulations, (b) easements, (c) set-back lines, or (d) covenants, conditions or
restrictions, now existing or hereafter arising, which do not in the aggregate
have a material adverse effect on Borrower's use and enjoyment of such real
property interests; and
(v) The rights of Alabama Synfuel #1, Ltd. in the Alabama Project
specifically set forth in Schedule 1.01.PL.
"Person" means any natural person, corporation, limited liability
company, partnership, sole proprietorship, firm, association, government,
governmental agency or any other entity, whether acting in an individual,
fiduciary or other capacity.
"Port Hodder Site" means the 15 acre leased parcel operated by Port
Hodder, Inc., located in the City of Birmingham, Alabama, fronting the Locust
Fork of the Black Warrior River at river mile 399.0 and located at latitude
33.5876 and longitude 87.1048.
"Proceeds" shall have the meaning given to that term in the Code and
shall include whatever is received upon the sale, exchange, collection or other
disposition of Collateral.
"Purchase Agreement Documents" means the Alabama Project Purchase
Agreement, and any and all other documents executed pursuant thereto, or
contemplated thereby (other than the Loan Documents), as the same may be
modified, extended, renewed, amended or replaced from time to time.
"Receiver" means any trustee, receiver, custodian, fiscal agent,
liquidator or similar officer.
"Related Person" means (i) any shareholder who owns or controls more
than five percent (5%) of the voting securities of Borrower, (ii) any officer or
director of Borrower, (iii) any other Person that, directly or indirectly,
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controls, is controlled by or is under common control with or is related to, by
blood or marriage, Borrower or any Person identified in clauses (i) or (ii), and
(iv) any member of the Employee Group and any Person who is related, by blood or
marriage, to any member of the Employee Group.
"Responsible Officer" means each of the Chief Executive Officers,
President, each Vice President, the Treasurer, the Chief Financial Officer and
the Chief Accounting Officer of Borrower, or any other Person, howsoever
designated, performing substantially similar roles for Borrower.
"SEC Filings" means: Borrower's Registration Statement on Form 10/A
Amendment No. 2; and Borrower's Annual Report on Form 10-K for the fiscal year
ended September 30, 1996, and any subsequent filing made by Borrower with the
Securities and Exchange Commissioner.
"Security Documents" means this Agreement, the Collateral Assignment
of Lease, the Construction Assignment Agreement and any financing statements or
other documents or agreements reasonably requested by Lender to secure the
Obligations hereunder.
"Shares" is defined in Section 10.01.A hereof.
"Taxes" is defined in Section 2.04.A hereof.
"Termination Date" means the first anniversary of the date hereof.
"Term Loans" is defined in Section 2.01.A.
"Transaction Documents" means this Agreement, the Loan Documents and
the Purchase Agreement Documents.
SECTION 1.02. Accounting Terms. Any accounting term used in this Agreement
which is not specifically defined herein shall have the meaning customarily
given to it under GAAP as consistently applied by Borrower as promulgated in (i)
the documents of Rule 203 of the Code of Professional Conduct of the American
Institute of Certified Public Accountants, (ii) Statement of Accounting
Standards No. 43 "Omnibus Statement on Auditing Standards" of the Auditing
Standards Board of the American Institute of Certified Public Accountants and
(iii) any superseding or supplemental documentation of equal authority
promulgating generally accepted accounting principles and practices, all as in
effect from time to time.
SECTION 1.03. Other Terms. All other terms contained in this Agreement
which are not defined herein shall, unless the context indicates otherwise, have
the meanings provided for by the Code to the extent such terms are defined
therein.
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ARTICLE II
THE INDEBTEDNESS
SECTION 2.01. The Commitment and the Term Loans; the Note.
A. Subject to the terms and conditions hereof, during the period up to
but not including September 30, 1997 (the "Commitment Period"), Lender shall
make loans to the Borrower in such amounts as Borrower may from time to time
request ("Term Loans") but not exceeding in aggregate principal amount at any
one time outstanding $5,000,000 (the "Commitment"); provided, however, that,
prior to obtaining a satisfactory Letter Ruling, Lender shall not be obligated
to make Term Loans in an aggregate amount exceeding $1,900,000 provided,
further, that any amounts drawn under any letters of credit arranged by Lender
or any or its Affiliates for the purposes described in Section 2.01.B below
shall be deemed "Term Loans" for the purposes of this Section 2.01.A; provided
further; that any payments with respect to the Construction Contract (as defined
in the Alabama Project Purchase Agreement) shall be paid directly by Lender to
the Contractor and shall be deemed "Term Loans" for the purposes of this Section
2.01.A.
B. The Term Loans shall be available in the following amounts and for
the following purposes: (i) up to $25,000 to repay the Demand Promissory Note,
dated as of February 24, 1997, of Borrower in favor of Lender, (ii) up to
$100,000 to be used as a "good faith" deposit pursuant to the Amended and
Restated Supply Agreement, dated as of the date hereof, (iii) up to $3,200,000
to complete construction by Borrower of the Alabama Project, (iv) up to
$1,640,000 to finance the acquisition by Borrower for the benefit of the Alabama
Project of up to 60,000 tons of coal fines to be stored at the Port Hodder Site,
and (v) up to an amount equal to $5,000,000 minus such amounts as are borrowed
pursuant to clauses (i) and (iv) above, to fund the net working capital needs of
the plant operations of the Alabama Project; provided, however, that the
determination of the amount of such net working capital needs shall be subject
to the approval of Lender in its sole discretion; provided, further, that any
amounts available to be drawn under any letters of credit arranged by Lender or
any of its Affiliates for the purposes described in this Section 2.01.B shall
not be available to be drawn as Term Loans hereunder.
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C. Term Loans shall be made upon the written request of Borrower
against invoices for the purposes contemplated in paragraph B above; provided,
however, except in connection with Term Loans pursuant to clauses (i) and (ii)
of Section 2.01.B above, the Lender shall have no obligation to make any Term
Loan hereunder until completion of each of the following: (i) delivery of the
opinions of counsel of Ballard Spahr Andrews & Ingersoll and Lange, Simpson
Robinson & Somerville, in substantially the forms attached hereto as Exhibit
5.01.R, (ii) execution and delivery of a Lease and Lease Option between Borrower
and Parker Towing Company, Inc., in form and substance reasonably satisfactory
to Lender, (iii) delivery of a certificate of an executive officer of the
Borrower certifying that (a) the representations and warranties of the Borrower
and Alabama Synfuel #1 Ltd. in each of the Transaction Documents are true and
complete on and as of the date of such certification as though such
representations and warranties were made on and as of the date of such
certificate, and (b) each of Borrower and Alabama Synfuel #1 Ltd. is in
compliance with the terms of each of the Transaction Documents and no event of
default has occurred under any of the Transaction Documents, (iv) delivery to
Lender of evidence of the release of the lien of AJG Financial Services, Inc. on
the apron drying oven being manufactured by National Dryer Company for use in
the Alabama project, (v) execution and delivery of any Transaction Documents not
previously delivered to Lender, including the Security Documents, (vi) receipt
of confirmation of filing of the Security Documents in the respective
jurisdictions identified by Lender, and (vii) delivery of a certificate of
insurance by Borrower in form and substance reasonably satisfactory to Lender.
D. Subject to Section 10.01 hereof, at any time prior to the
termination of the Commitment Period, by written notice to Lender no later than
11:00 A.M. Portland, Oregon time sixty (60) days prior to such termination (such
period from and after notice to the termination, the "Early Termination
Period"), Borrower may permanently terminate the Commitment. Such notice shall
be in writing or by telephonic communication confirmed by telecopy or other
facsimile transmission on the same day as such notice.
E. Lender may terminate the Commitment to make further Term Loans at
any time Lender determines (in the case of clause (ii), in its sole discretion,
and in the case of each of clause (i), in its reasonable discretion) that (i) a
favorable Letter Ruling will not be obtained, or (ii) an Event of Default has
occurred and is continuing under any of the Transaction Documents.
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F. In the event that no Term Loans have been made prior to the
termination of the Commitment Period (and no simultaneous advances and
conversions contemplated under Article X hereof shall have been made prior to
such time), this Agreement shall automatically terminate as of the end of the
Commitment Period.
SECTION 2.02. Repayment.
A. Obligation to Repay. Subject to Section 10.01 hereof, Borrower
shall repay the principal amount of the Term Loan, together with interest
thereon, in accordance with the terms of this Agreement and the Note. Except
where the time for payment has been set forth in this Section 2.02 or in the
Note, Borrower shall pay all Obligations to Lender immediately upon demand.
B. Repayment of Protective Advances. Notwithstanding anything to the
contrary contained in this Agreement or the other Transaction Documents, until
those amounts which from time to time shall be payable by Borrower pursuant to
the provisions of Section 7.02 hereof ("Protective Advances") shall have been
paid in full, any and all sums (i) paid by Borrower to Lender, or (ii) otherwise
received by Lender for application to payment of any Obligations, may, at
Lender's option, be applied (in lieu of any other application thereof) to pay
Protective Advances.
C. Prepayments.
(i) Optional Prepayments. Subject to Section 10.01 hereof, by
written notice to Lender no later than 11:00 A.M. Portland, Oregon time, sixty
(60) days prior to such prepayment, Borrower may prepay, at any time without
premium or penalty, all Obligations outstanding under the Note.
(ii) Termination of Commitment. Subject to Section 10.01 hereof,
prepayment under this Section 2.02.C shall cause the Commitment to be
immediately and automatically terminated.
SECTION 2.03. Payments and Computations.
A. Borrower shall make each payment hereunder and under the Note not
later than 12:30 p.m. (Portland, Oregon time) on the day when due in U.S.
Dollars to Lender at the address for payments set forth in Section 8.06 hereof
in same day funds, and any funds received after that hour shall be deemed to
have been received by Lender on the next succeeding Business Day. Whenever any
payment hereunder or under the Note shall be stated to be due on a day which is
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not a Business Day, such payment shall be made on the next succeeding Business
Day, and such extension of time shall in such case be included in the
computation of payment of interest or fees, as the case may be.
B. Lender shall record in its records, or at its option on a schedule
attached to the Note, the date and amount of each repayment of the Term Loan.
The aggregate unpaid principal amount so recorded shall be presumed to be
correct and binding on Borrower absent manifest error. The failure to so record
any such amount, or any error in so recording any such amount, shall not,
however, limit or otherwise affect Borrower's obligations hereunder or under the
Note to repay the principal amount of the Term Loan, together with all interest
accruing thereon.
SECTION 2.04. Taxes.
A. Any and all payments by Borrower hereunder or under the Note 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, penalties and interest with respect thereto, excluding, in the case
of Lender, (x) withholding taxes that are creditable against taxes payable by
Lender, (y) periodic taxes upon or with respect to the value of the interest of
Lender in the Note or this Agreement, and (z) taxes imposed on or measured by
Lender's income or receipts and franchise and doing business taxes imposed on
Lender (all such nonexcluded taxes, levies, imposts, deductions, charges,
withholdings, liabilities, penalties and interest being hereinafter referred to
as "Taxes"). If Borrower shall be required by law to deduct any Taxes from or in
respect of any sum payable hereunder or under the Note to Lender, (i) the sum
payable shall be increased as may be necessary so that after making all required
deductions Lender receives an amount equal to the sum it would have received had
no such deductions been made, (ii) Borrower shall make such deductions and (iii)
Borrower shall pay the full amount deducted to the relevant taxation authority
or other authority in accordance with applicable law.
B. In addition, 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 under any of the Transaction Documents
or from the execution, delivery or registration of, or otherwise with respect
to, any of the Transaction Documents, excluding, in the case of Lender, (x)
taxes, charges and similar levies imposed as a result of a voluntary or
involuntary transfer or other disposition of all or any portion of its
respective equitable or legal interests in the Note or this Agreement and (y)
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taxes imposed on or measured by its income or receipts and franchise and doing
business taxes imposed on it (all such non-excluded taxes, charges and levies
being hereinafter referred to as "Other Taxes").
C. Borrower shall, within thirty (30) days from the date Lender makes
written demand therefor, indemnify Lender for the full amount of Taxes or Other
Taxes to the extent such taxes are either due and payable or have been paid by
Lender.
D. Within thirty (30) days after the date of any payment of Taxes,
Borrower will furnish to Lender the original or a certified copy of a receipt
evidencing payment thereof.
E. The provisions of Sections 2.04.A and 2.04.B hereof shall not
extend to any of the following:
(i) Taxes or Other Taxes imposed on Lender as a result of a
voluntary or involuntary transfer or disposition of all or any portion of its
equitable or legal interest in the Note or this Agreement;
(ii) Taxes or Other Taxes imposed on Lender to the extent such
Taxes or Other Taxes result from the failure of Lender to accurately prepare and
file timely and properly any return or form, certificate or other document; or
(iii) Taxes or Other Taxes imposed on Lender by any jurisdiction
as a result of activities or presence in such jurisdiction unrelated to the
transactions contemplated by this Agreement and agreements contemplated hereby.
F. In the event that Lender transfers or assigns any of its rights,
interest or obligations under the Note or this Agreement, Borrower's obligations
under this Section 2.04 shall in no case exceed the amount of Borrower's
obligations had said rights, interest or obligations not been transferred or
assigned.
SECTION 2.05. Late Payments. If any sums owing by Borrower to Lender,
whether principal, interest or otherwise, are not paid on the due date (whether
as a result of scheduled maturity, acceleration or demand), after giving effect
to any applicable grace period, then (i) Borrower shall pay to Lender a late
charge equal to five percent (5%) of such sum(s) and (ii) the interest rate
payable under the Note shall be increased to the Default Interest Rate until
such unpaid sum(s) are paid to Lender. Borrower acknowledges that the actual
expenses incurred by Lender in attending to late payments and the cost of the
loss of use of funds are difficult to ascertain, and agree that the late charge
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and the increase in the rate of interest as set forth above together constitute
a reasonable estimate of these additional losses, expenses and costs to Lender
resulting from such late payments.
ARTICLE III
ACKNOWLEDGMENT AND CREATION
OF SECURITY INTEREST
SECTION 3.01. Acknowledgment and Creation of Security Interest. To secure
payment and performance of the Obligations, Borrower hereby assigns, transfers
and grants to Lender a continuing first priority security interest in and lien
on all of the Collateral (subject only to the Permitted Liens). Borrower further
acknowledges and agrees that the Obligations are secured by security interests
in and liens upon all of the Collateral in accordance with the provisions set
forth herein and in the other Loan Documents.
SECTION 3.02. Duty of Care. Lender shall have no duty of care with respect
to the Collateral, except that Lender shall exercise reasonable care with
respect to the Collateral in Lender's custody, but shall be deemed to have
exercised reasonable care if such property is accorded treatment substantially
equal to that which Lender accords its own property, or if Lender takes such
action with respect to the Collateral as Borrower shall request in writing,
provided, that no failure to comply with any such request nor any omission to do
any such act requested by Borrower shall be deemed a failure to exercise
reasonable care. Lender's failure to take steps to preserve rights against any
parties or property shall not be deemed to be a failure to exercise reasonable
care with respect to the Collateral in Lender's custody.
SECTION 3.03. Release of Liens and Security Interests.
A. Except as expressly required by the terms of this Agreement or
applicable law, Lender shall not be obligated to release its liens and security
interests in any portion of the Collateral so long as any Obligations remain
outstanding; provided, however, that any release by Lender of its liens and
security interests in any portion of the Collateral shall apply only to such of
the Collateral as is specifically described in the release given by Lender and
shall not in any way constitute a release by Lender of its liens and security
interests in the Proceeds, products or accessions of such Collateral in
existence at the time of such release or of any other Collateral.
B. So long as no Default or Event of Default has occurred and is
continuing or would, as a result of or after giving effect to the sale, exist
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or be continuing, (i) Borrower may, in the ordinary course of business, sell to
third parties synthetic coal products; and (ii) Borrower may, in the ordinary
course of business, sell or otherwise dispose of obsolete or excess Equipment
used or useful in connection with the Alabama Project of an aggregate value not
exceeding Five Thousand Dollars ($5,000) during the term of hereof, and Lender
shall, if requested by Borrower, release its security interest in and Lien upon
such Equipment.
C. Lender shall release its liens and security interest in the
Collateral upon the first of the following to occur: (i) the termination of the
Commitments and the satisfaction in full of all Obligations under the Loan
Documents; (ii) the closing of the purchase by Birmingham Syn Fuel, L.L.C. of
the Alabama Project pursuant to the Alabama Project Purchase Agreement, or (iii)
the conversion of all of the outstanding Term Loans and Commitments into Shares
pursuant to Article X hereof.
SECTION 3.04. Continuation of Liens and Security Interests. All of Lender's
rights with respect to the liens and security interests hereunder and under the
other Security Documents shall continue unimpaired, and Borrower shall be and
remain obligated in accordance with the terms hereof and thereof,
notwithstanding the release or substitution of any Collateral at any time(s), or
of any rights or interests therein, or any delay, extension of time, renewal,
compromise, accommodation or other indulgence granted by Lender with respect to
Borrower, any other Person or any of the Obligations, or any promissory note,
draft, bill of exchange or other instrument given in connection therewith.
SECTION 3.05. Insurance Proceeds. Proceeds of any insurance on the
Collateral shall be paid directly to Lender pursuant to the Lender's loss
payable endorsement to Borrower's casualty insurance policies. Lender may deal
directly with the insurance company to adjust or settle the loss: So long as (i)
no Default or Event of Default has occurred and is continuing; and (ii) the
proceeds from insurance and, if needed, additional funds provided by Borrower
are, in the reasonable judgment of Lender, sufficient, Borrower may require the
proceeds be used to rebuild, repair or replace any damaged Collateral. Borrower
shall obtain the prior written consent of Lender to the method of such rebuild,
repair and/or replacement, including, if necessary, approval to any changes to
the plans and specifications approved under the Alabama Project Purchase
Agreement, which approval shall not be unreasonably withheld. Lender shall
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respond to any written request for approval from Borrower within ten (10)
BusinessDays of receipt thereof, indicating approval or setting forth the
reasons for disapproval, as applicable.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
Subject to the specific exceptions set forth in the Schedules referenced in
this Article IV, Borrower makes the following representations and warranties to
Lender, which representations and warranties shall survive the execution of this
Agreement and remain in full force and effect until Borrower has satisfied and
discharged all Obligations under the Loan Documents. The representations and
warranties shall be deemed repeated as of the date of each advance of a Term
Loan; provided, however, that from and after the closing of the transfer of the
Alabama Project pursuant to the Alabama Project Purchase Agreement, the
representations and warranties contained in Sections 4.07, 4.08 (in so far as it
relates to Collateral) and 4.19-4.22 shall not be brought down.
SECTION 4.01. Corporation in Good Standing. Borrower has complied in all
material respects with all laws necessary to conduct its business as presently
conducted and Borrower is a corporation (i) duly organized, validly existing and
in good standing in Delaware, (ii) in good standing and qualified to do business
in the jurisdiction where such Borrower's principal place of business is located
and (iii) in good standing and qualified to do business in all other
jurisdictions to the extent necessary for Borrower to conduct its business as
presently conducted in such jurisdictions.
SECTION 4.02. Due Authorization. Borrower has the authority, and has
completed all proceedings and obtained all approvals and consents necessary, to
execute, deliver and perform this Agreement and the transactions contemplated
hereby. Such execution, delivery and performance will not contravene or
constitute a default under or result in or require the creation of a lien,
security interest, or other charge or encumbrance upon any assets of Borrower
(except the liens created by this Agreement or the other Loan Documents in favor
of Lender) pursuant to any applicable law or regulation, any charter document of
Borrower, or any contract, agreement, judgment, order, decree, or other
instrument binding upon or affecting Borrower.
SECTION 4.03. Pending and Threatened Actions. There is no action, suit or
proceeding pending or, to the best of Borrower's knowledge after due inquiry,
threatened against Borrower where an adverse result could cause a Material
Adverse Change, other than as set forth on Schedule 4.03 hereto.
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SECTION 4.04. Disclosure. No written statement made by Borrower to Lender
in connection with this Agreement contains any untrue statement of a material
fact or omits a material fact necessary to make such statement accurate.
SECTION 4.05. Valid and Binding Obligations. All of the Transaction
Documents are valid and binding obligations of Borrower, fully enforceable in
accordance with their respective terms.
SECTION 4.06. Payment of Taxes. All tax returns and reports of Borrower
required to be filed have been timely filed, and all taxes, assessments, fees,
interest, penalties and other governmental charges upon Borrower and its
properties, assets, income and franchises which are due and payable have been
paid when due and payable except where such taxes, assessments, fees, interest,
penalties or other governmental charges are being contested in good faith by
appropriate proceedings promptly instituted and diligently conducted and where
reserves or other appropriate provisions, if any, as required in accordance with
GAAP, have been made and are being maintained therefor.
SECTION 4.07. Title to Collateral and Liens. Borrower has good and
marketable title to all of the Collateral and, except for the Permitted Liens,
all of the Collateral is free of any and all liens, charges, security interests,
encumbrances and adverse claims.
SECTION 4.08. Defaults. There are (i) no defaults in the payment of any
Debt (other than defaults with respect to trade payables incurred in the
ordinary course of business, the occurrence of which could not cause a Material
Adverse Change) or, (ii) no defaults in the performance of any obligations,
including obligations to deliver synthetic coal product under long-term
contracts or with respect to Debt secured by any of the Permitted Liens against
the Collateral which are or may be senior to any lien thereon or other security
interest therein in favor of Lender, by assignment or otherwise, which, in the
case of any event under this clause (ii), could cause a Material Adverse Change.
SECTION 4.09. Permits. Borrower possesses, and will hereafter possess, all
material permits, memberships, franchises, contracts, patents and licenses
required, and fictitious name rights necessary, to enable it to conduct the
business in which it is now engaged in each jurisdiction where such business is
now being conducted.
SECTION 4.10. Principal Place of Business; Jurisdictions Where Doing
Business; Fiscal Year. Borrower's principal place of business, the offices where
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Borrower keeps its records and the states where Collateral is located are set
forth on Schedule 4.10 attached hereto. The end of the Borrower's fiscal year is
September 30.
SECTION 4.11. ERISA. Borrower does not maintain any ERISA Plan.
SECTION 4.12. Subordination. None of the Obligations are subordinated in
right of payment to any obligations of Borrower to any other Person, including
any Debt of Borrower to any Related Persons. Except as set forth on Schedule
4.12 attached hereto, Borrower is not currently indebted, directly or
indirectly, to any Related Persons.
SECTION 4.13. Government Approval. No authorization or approval or other
action by, and no notice to or filing with, any governmental authority or
regulatory body is required for the due execution, delivery and performance by
Borrower of any of the Transaction Documents.
SECTION 4.14. Securities and Exchange Act; Investment Company Act. No
proceeds of the Term Loan have been used to acquire any security in any
transaction which is subject to Sections 13 and 14 of the Securities Exchange
Act of 1934. Borrower is not an "investment company" or a company "controlled"
by an "investment company" within the meaning of the Investment Company Act of
1940, as amended.
SECTION 4.15. Regulation U. Borrower is not engaged in the business of
extending credit for the purpose of purchasing or carrying margin stock (within
the meaning of Regulation U issued by the Board of Governors of the Federal
Reserve System), and no proceeds of the Term Loan have been or will be used to
purchase or carry any margin stock, to extend credit to others for the purpose
of purchasing or carrying any margin stock, or for any other purpose not
permitted by Regulations G, U, V or X of the Federal Reserve Board.
SECTION 4.16. Strikes Etc. Neither the business nor the properties of
Borrower currently are affected by any fire, explosion, accident, strike,
lockout or other labor dispute, drought, storm, hail, earthquake, embargo, act
of God or other casualty (whether or not covered by insurance), materially
adversely affecting such business or properties or the operations of Borrower.
SECTION 4.17. Adverse Agreements. Borrower is not party to any indenture,
loan or credit agreement or lease or other agreement or instrument or subject to
any charter or corporation restriction which, if performance or compliance
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therewith is effected for its intended purpose by the parties thereto, would
cause a Material Adverse Change in Borrower's business, properties, assets,
operations or condition, financial or otherwise, or on the ability of Borrower
to carry out its obligations under any of the Transaction Documents.
SECTION 4.18. Trade Names and Intellectual Property. Schedule 4.18 attached
hereto contains a complete list of all of Borrower's trade names, trademarks,
trademark applications, patents, patent applications, copyrights and copyright
applications included in the Collateral, and Borrower is not operating or doing
business under any other trade name or utilizing any other trademarks, patents
or copyrights in the conduct of the Alabama Project.
SECTION 4.19. Location of Collateral. All of the items, whether tangible or
intangible, comprising the Collateral are located at the places specified
(detailing account numbers and other information sufficient to permit Lender to
readily locate and identify the Collateral) in Schedule 4.19 attached hereto.
SECTION 4.20. Possession of Collateral. Borrower has exclusive possession
and control of the Collateral, except where (i) Lender is in possession or
control of the Collateral pursuant to the terms of this Agreement, and (ii)
another Person is in possession and control of the Collateral to the extent
necessary to give effect to the Permitted Liens.
SECTION 4.21. Validity and Priority of Security Interests. Except where a
Permitted Lien is senior in priority to Lender's security interest in the
Collateral, this Agreement creates a valid first priority security interest in
the Collateral
SECTION 4.22. Accounts. Unless otherwise disclosed by Borrower to Lender in
writing, each Account listed or referred to on any trial balance, balance sheet
or the books and records of Borrower, or referred to in any report to Lender, is
and will be free and clear of Liens in favor of any Person other than Lender,
will cover a bona fide sale or lease and delivery of goods usually dealt with by
Borrower in the ordinary course of Borrower's business or will cover the
rendition of services by Borrower to customers of a kind ordinarily rendered in
the ordinary course of Borrower's business, and will be for a liquidated amount
from a customer competent to contract therefor and maturing as stated by
Borrower.
SECTION 4.23 Agreements with Related Persons. There are no contracts,
licenses, agreements, arrangements or limitations on the use by Borrower of any
property, tangible or intangible, or assets used or utilizable in the business
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of Borrower with any Related Person other than as disclosed on Schedule 4.23
attached hereto.
ARTICLE V
COVENANTS OF BORROWER
SECTION 5.01. Affirmative Covenants. Until Borrower has satisfied and
discharged all Obligations under the Loan Documents, subject to the provisions
of Section 8.01 hereof, Borrower will:
A. Performance of Obligations. Punctually pay and perform each of the
Obligations in accordance with the terms of the Transaction Documents.
B. Financial Statements and Reports. Furnish Lender:
(i) not later than one hundred (120) days after the end of each
fiscal year of Borrower, consolidated financial statements prepared by Borrower
in accordance with GAAP and audited by independent certified public accountants
as of and for the fiscal year then ended, certified by such independent
certified public accountants in a manner reasonably acceptable to Lender and
including a balance sheet, a statement of operations, a statement of cash flows,
a statement of stockholders' equity, in each case, consistent with the
Securities Exchange Act of 1934, as amended, and the rules and regulations of
the Securities and Exchange Commission;
(ii) not later than forty-five (45) days after the end of each
fiscal quarter of Borrower (other than the fiscal quarter which is Borrower's
fiscal year end), consolidated financial statements prepared by Borrower in
accordance with GAAP as of and for the quarter then ended, to include a balance
sheet, a statement of operations, and a statement of cash flows, in each case,
consistent with the Securities Exchange Act of 1934, as amended, and the rules
and regulations of the Securities and Exchange Commission;
(iii) promptly (in any event within five (5) Business Days), a
copy of any monthly management reports;
(iv) at the time of delivery of the financial statements referred
to in Sections 5.01.B(i), and (ii)hereof, a letter addressed to Lender signed by
the Chief Executive Officer, Chief Financial Officer or the Chief Accounting
Officer of Borrower, certifying that no condition, act or event has occurred and
is continuing which constitutes a Default or an Event of Default under this
Agreement;
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(v) not later than ten (10) Business Days after Lender's request
therefor, copies of all annual federal and state tax returns for taxes based on
Borrower's income, all exhibits and schedules thereto and any additional tax
returns (whether for income or any other taxes and whether filed with state,
federal or other taxing authorities), exhibits and schedules of Borrower;
(vii) at such times and from time to time as Lender may request
of Borrower, such other reports concerning the Collateral or Borrower's
operations as Lender may reasonably request;
(viii) within five (5) days after the filing thereof, all forms,
statements, reports, notices or other filings filed or made by Borrower with the
Securities and Exchange Commission; and
(ix) promptly upon receipt, copies of all management letters,
internal control evaluations and reports and other material letters, memoranda
or reports submitted by Borrower's independent certified public accountants or
consultants with respect to any matter concerning the audits, financial
statement presentation or other accounting matters.
C. Accounting Records. Maintain adequate books and accounts and permit
any representative of Lender, during normal business hours, to inspect, audit,
copy and examine such books and accounts and inspect the properties of Borrower
and to interview Borrower's independent accountants regarding operating results
and financial condition.
D. Collateral Records. Keep accurate and complete records of Accounts,
allow Lender or any of Lender's agents, including consultants hired by Lender,
to call at any of Borrower's places of business (a) prior to the occurrence of a
Default or an Event of Default, on at least one Business Day's advance notice
and (b) after the occurrence of a Default or an Event of Default, without prior
appointment, at intervals determined by Lender (without hindrance or delay) to
inspect the Collateral and to inspect, examine, check and make extracts from the
books, records, journals, order receipts, correspondence and any other data
relating to the Collateral or operations of the Alabama Project or any
transactions (y) between Borrower and Lender, or (z) affecting Lender's rights
under this Agreement, the expenses of which shall be borne by Borrower. If any
such records are held by a third party, Borrower hereby authorizes Lender to
contact such third party and direct such third party to provide access to such
documents to Lender as if such documents were in Borrower's possession. Lender
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may retain one or more consultants in connection with the foregoing, the
expenses of which shall be borne by Borrower. Borrower further agrees to provide
Lender with such information as Lender may from time to time request with
respect to the location of any of the Collateral. In addition, Borrower shall
notify Lender promptly in writing of any change(s) in location of any office
where records concerning any of the Accounts are maintained, of any change(s) in
location of Borrower's places of business and of any change(s) in the location
of any of the Collateral.
E. Additional Information; Board of Director Meetings. Provide such
additional information regarding the business affairs and financial condition of
Borrower as Lender may from time to time request, and provide Lender prompt
notice of, and admittance to, all meetings of the Board of Directors of
Borrower.
F. Maintenance of Property. Keep all of Borrower's properties useful
or necessary to Borrower's business in good repair and condition, reasonable
wear and tear excepted, and from time to time make necessary repairs, renewals
and replacements thereto so that such property shall be fully and efficiently
preserved and maintained, except to the extent it would not cause a Material
Adverse Change.
G. Maintenance of Business. Preserve and maintain Borrower's corporate
existence and all of its licenses, permits, trade names, trade styles,
governmental approvals, rights, privileges and franchises reasonably necessary
to conduct its business; conduct its business in an orderly and regular manner;
comply with the provisions of all documents pursuant to which Borrower is
organized and/or which govern Borrower's continued existence; and comply with
the requirements of all applicable laws, rules, regulations and orders of any
governmental authority and requirements reasonably necessary for the maintenance
of Borrower's insurance, licenses, permits, trade names, trade styles,
governmental approvals, rights, privileges and franchises reasonably necessary
for the continued business of Borrower as currently constituted, except to the
extent it would not cause a Material Adverse Change.
H. Statements Regarding Collateral. Furnish to Lender promptly upon
request therefor statements of the terms, conditions and status of payments on
all Accounts and other instruments, documents and agreements which at the time
of the request constitute a part of the Collateral. Lender may, from time to
time, either before or after an Event of Default, by reasonable means, verify,
in its own name or such other name as Lender may choose, the validity, amount
and any other matters relating to Accounts and other instruments, documents and
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agreements by means of mail, telephone or otherwise, and Borrower shall use its
best efforts to assist Lender in verifying such matters promptly upon Lender's
request therefor.
I. Annual Collateral Report. Provide to Lender as soon as possible,
but in any event within one hundred twenty (120) days after the end of each
fiscal year of Borrower, an asset register update setting forth in reasonable
detail an inventory of all Collateral and such information with respect thereto
as Lender reasonably may request.
J. Litigation. Promptly give notice in writing to Lender of (i) any
litigation pending or instituted against Borrower potentially involving Fifty
Thousand Dollars ($50,000) or more, (ii) any litigation overtly threatened
against Borrower potentially involving Fifty Thousand Dollars ($50,000) or more,
(iii) any litigation involving or affecting the Alabama Project or any of the
Transaction Documents, or (iv) any litigation pending, instituted or overtly
threatened involving a claim for injunctive relief. Not later than one hundred
twenty (120) days after the end of each fiscal year of Borrower, deliver to
Lender a report of all litigation pending or overtly threatened against
Borrower, or to which Borrower is otherwise a party or which involves the
Alabama Project or any of the Transaction Documents, in such detail as Lender
may reasonably request.
K. Taxes and Other Liabilities. Pay and discharge when due any and all
Debt, obligations, assessments and taxes, real and personal, including federal
and state income taxes, except such as Borrower may in good faith contest by
appropriate proceedings promptly instituted and diligently conducted and if such
reserve or other appropriate provisions, if any, as are proper in accordance
with GAAP shall have been made therefor and maintained.
L. Notice to Lender. Promptly, but in no event more than five (5) days
after becoming aware of the occurrence of each such event or matter give notice
in writing to Lender of (i) the occurrence of any Event of Default or any
Default, (ii) any change in name, identity or corporate structure of Borrower or
(iii) any loss through fire, theft, liability, property damage or other casualty
in excess of an aggregate of Fifty Thousand Dollars ($50,000).
M. Insurance.
(i) Obtain, maintain and keep in force insurance of the types and
in amounts customarily carried in lines of business similar to Borrower
including fire, hazard insurance, extended coverage, public liability, property
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damage, extra expense and business interruption and worker's compensation,
carried with companies, as required by law and pursuant to each contract or
agreement entered into by Borrower in connection with the Alabama Project and in
amounts satisfactory to Lender in its reasonable discretion, and obtain,
maintain and keep in force such other insurance as Lender may reasonably request
from time to time, and at all times maintain insurance upon the Collateral
covering such risks and in such amounts as shall be necessary to prevent
Borrower from being a co-insurer; and
(ii) On or about the date of this Agreement and at the time of
issuance or renewal of any insurance policy of Borrower, deliver to Lender
certificates of such insurance, each of which such certificates shall name
Lender as a lender's loss payee or additional insured, as appropriate, in a form
satisfactory to Lender and shall prohibit cancellation or modification except
upon thirty (30) days' prior written notice to Lender.
N. Stock Powers. Grant Lender appropriate stock powers to the extent
any securities become part of the Collateral.
O. Subordination. Immediately notify Lender of the creation of any
Debt or other obligations in favor of any of Borrower's officers, directors or
Related Persons, and immediately cause all such Debt and obligations to be
subordinated, pursuant to subordination agreements in form and substance
reasonably satisfactory to Lender, to the Obligations.
P. Defense of Actions.
(i) At Borrower's sole cost and expense, appear in and defend any
action or proceeding which may adversely affect Lender's interest in the
Obligations or the Transaction Documents or Lender's security interest in and
liens upon the Collateral; and
(ii) At Borrower's sole cost and expense, appear in and defend
any action or proceeding which may adversely affect Borrower's title to any
Collateral.
Q. Collateral. At Borrower's sole cost and expense, at all times
maintain or cause to be maintained, as the case may be, in favor of Lender
valid, continuing and perfected first priority security interests (subject only
to the Permitted Liens relating thereto) in all of the Collateral, take such
actions as Lender deems reasonably necessary and appropriate to protect Lender's
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security interests in such Collateral, and provide to Lender such assurances as
Lender may reasonably require as to Borrower's compliance herewith.
R. Opinion of Counsel. Promptly following execution and delivery of
this Agreement, deliver to Lender an opinion of counsel in the form of Exhibit
5.01.R hereto.
SECTION 5.02. Negative Covenants. Until Borrower has satisfied and
discharged all of the Obligations under the Loan Documents, subject to the
provisions of Section 8.01 hereof, Borrower will not, without the prior written
consent of Lender (which shall not be unreasonably withheld):
A. Use of Proceeds. Use the proceeds of the Term Loans except as
contemplated by Section 2.02.
B. Other Debt. Create, incur or permit to exist any Debt, except (i)
the liabilities of Borrower to Lender, (ii) accrued expenses, accrued
liabilities and Accounts Payable that are in each case also Current Liabilities
incurred in the ordinary course of Borrower's business, (iii) taxes payable,
(iv) the Debt described on Schedule 5.02.B,(v) debt incurred or created to fund
the acquisition, development, building, management and/or maintenance of coal
briquetting facilities and related expenditures, whether the facilities are
intended to be developed by the Borrower or affiliated entities or sold to third
party entities (provided that, except for Liens with respect to the specific
facility or equipment related to such specific facility, such Debt shall be
unsecured), (vi) Debt created or incurred to fund working capital needs or
obligations in aggregate outstanding amount not to exceed $1,000,000, and (vii)
Debt created or incurred solely to refinance existing Debt of Borrower (which
Debt was otherwise permitted pursuant to the foregoing clauses (i) through (vi).
C. Merger, Consolidation, Pledge of Assets. Make any substantial
change in the nature of Borrower's business; merge into or consolidate with any
Person; pledge, encumber, allow the creation of any Lien (other than Permitted
Liens) or grant any security interest in or to any of its assets other than
security interests on specific coal briquetting facilities or equipment related
to such specific facilities to secure the Debt allowed under Section 5.02B; or
do business in any corporate, trade or fictitious name other than as listed on
Schedule 4.18, except for any name used by an affiliated entity formed to
facilitate the financing, acquisition, development, building, management and/or
maintenance of coal briquetting facilities.
D. Sale of Assets. Sell, lease, assign, transfer or otherwise dispose
of a substantial portion of Borrower's
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property, real or personal, outside of the ordinary course of Borrower's
business, except as contemplated by the Transaction Documents, the sale of coal
briquetting facilities or the licensing of technology related to the coal
briquetting facilities, or the sale of equity in an affiliated entity formed to
facilitate the financing, acquisition, development, building, management and/or
maintenance of coal briquetting facilities
E. Guarantees. Guarantee or become liable in any way, as surety,
endorser (other than as endorser of negotiable instruments in the ordinary
course of business), accommodation endorser or otherwise for the Debts or
obligations of any other Person (other than a subsidiary or other affiliate
controlled by Borrower to the extent such Debt is permitted under Section
5.02.B), including without limitation any Hazardous Materials Claims (as defined
in Article IX hereof), except as to any Obligation.
F. Auditor. Permit the replacement of Coopers & Lybran as Borrower's
independent certified public accountants, except by independent certified
accountants satisfactory to Lender in its sole discretion.
G. Loans, Advances, Investments. Make any loans or advances to, or
investments in, any Person, other than (i) credit terms offered to customers and
advances to suppliers in the ordinary course of Borrower's business, (ii)
deposits (other than certificates of deposit) held by federally-insured banks,
(iii) investments in commercial paper maturing in two hundred-seventy (270) days
or less from the date of issuance which is rated Al or better by Standard &
Poor's Corporation or P1 or better by Moody's Investors Services, Inc., (iv)
investments in direct obligations of the United States of America or obligations
of any agency thereof which are guaranteed by the United States of America,
provided that such obligations mature within twelve months of the date of
acquisition thereof, (v) investments in certificates of deposit maturing within
one year from the date of acquisition thereof, issued by a bank or trust company
organized under the laws of the United States or any state thereof, having
capital, surplus and undivided profits aggregating at least One Hundred Million
Dollars ($100,000,000) and the long-term deposits of which are rated A or better
by Moody's Investors Services, Inc. or equivalent by Standard & Poor's
Corporation, (vi) investments in banker's acceptances maturing within five (5)
days from the date of acquisition thereof, issued by a bank which meets the
criteria set forth in clause (v) of this Section 5.02.G, (vii) investments in or
loans and advances to an Affiliate of Borrower formed to facilitate the
financing, acquisition, development, building, management and/or maintenance of
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coal briquetting facilities, or (viii) agreements with a third party to purchase
a coal briquetting facility from the Borrower or an affiliate of Borrower on an
installment basis.
H. Salarie and Other Compensation and Perquisites; Payments to
Related Persons. Make any payments to a Related Person, other than pay
compensation in any fiscal year of Borrower in the amounts and to the Persons
listed on Schedule 5.02.H.
I. Pension Plans. Create an ERISA Plan.
J. No Material Adverse Change. Permit any Material Adverse Change to
occur or enter into any transaction, contract or agreement or make any material
change in or to any of Borrower's business objectives, purposes or operations
which in any respect may reasonably be expected to cause a Material Adverse
Change.
K. Removal, Storage and Preparation of Records. Either (i) remove any
of Borrower's records from the locations set forth on Schedule 4.10 attached
hereto, other than in the ordinary course of business or (ii) enter into, modify
or terminate any agreement with an accounting firm or service bureau for the
preparation or maintenance of Borrower's accounting records.
L. Stock Transactions. Distribute, sell, issue or convey any shares of
Borrower's capital stock except in compliance with all applicable state and
federal securities laws.
M. Fiscal Year. Change the fiscal year end of Borrower from
September 30.
N. Assignment of Rents. Assign, as lessor or sublessor as the case may
be, the rents, royalties or income of the Collateral or any part thereof (other
than to Lender or as a consequence of the grant of Permitted Liens).
O. Acquisitions. Purchase or otherwise acquire (i) all or
substantially all of the assets of or (ii) any class of stock of or (iii) any
partnership or joint venture interest in or with, any Person, except in
connection with the construction, financing, maintenance, operation or sale of a
briquetting facility in the ordinary course of Borrower's business.
P. Affiliate Transactions. Enter into, or be a party to, any
transaction with any of Borrower's Related Persons, except in the ordinary
course of business pursuant to the reasonable requirements of Borrower's
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business and upon fair and reasonable terms which were fully disclosed in
writing to Lender and are no less favorable to Borrower than Borrower could
obtain in a comparable arm's length transaction with a Person who is not a
Related Person.
Q. Sales. Back date, post date or redate any Account, invoice or sale.
R. Prepayments. Voluntarily prepay any Debt prior to the stated
maturity thereof.
SECTION 5.03. Collateral. Borrower further agrees and covenants to:
A. Promptly deliver possession to Lender, and assign for security
purposes to Lender, all chattel paper, instruments, certificated securities and
documents necessary for the perfection of Lender's senior security interests in
the Collateral, subject to Permitted Liens; provided, however, that until the
occurrence of an Event of Default or the occurrence and continuance of a
Default, Lender will, upon Borrower's request, return possession of such chattel
paper, instruments and documents to Borrower, as Lender's bailee or agent, but
only to the extent reasonably necessary for Borrower to enforce or collect the
goods or obligations evidenced by such chattel paper, instruments and documents.
B. If Lender requests, (i) promptly execute and deliver to Lender any
notice, financing or continuation statement, instrument, document, agreement or
other papers (including any assignment of claim form under or pursuant to the
federal Assignment of Claims Act, 31 USC ss. 3726, or any successor or amended
version thereof, or any regulation promulgated under or pursuant to any version
thereof), (ii) stamp on its records concerning the Collateral (and/or enter in
its computer records concerning the Collateral) and add on all chattel paper
constituting a portion of the Collateral a notation, in form satisfactory to
Lender, of Lender's security interest hereunder and/or (iii) perform any act
reasonably requested by Lender that may be necessary or that Lender may deem
advisable to create, perfect, preserve, validate or otherwise protect any of
Lender's security interests in the Collateral, subject to Permitted Liens, or to
enable Lender to exercise and enforce Lender's rights hereunder or with respect
to any such security interests.
C. Refrain from signing or filing or authorizing the signing or filing
of any financing statement(s) under the Uniform Commercial Code of any
jurisdiction with respect to the Collateral or any portion thereof in which
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Borrower is named as debtor, except as herein provided or in connection with
Permitted Liens, and refrain from delivering possession of any of Borrower's
assets to any Person, except as herein provided or in the ordinary course of
Borrower's business.
D. Provide Lender with ten (10) Business Days' prior written notice of
any proposed transfer or change in any of Borrower's sites or facilities from
the jurisdictions set forth in Schedule 4.10 hereof, and/or the addition or
creation of new sites, facilities or places of business in jurisdictions other
than those set forth in Schedule 4.10, in each case, wherein any Collateral is
to be located for any period of time whatsoever. In addition, Borrower agrees to
provide Lender with ten (10) Business Days' prior written notice if any
Collateral is or will be removed from the jurisdictions set forth in Schedule
4.10 for a period of more than one (1) month. Borrower further agrees (i) to
execute and deliver to Lender, prior to (A) any such change in jurisdiction, (B)
the use or operation of any such site, facility or place of business by or on
behalf of Borrower, or (C) such removal of any such Collateral, all instruments,
documents and other agreements (including financing statements and/or amendments
thereto or documents or certificates of title) as Lender may require to perfect,
or assure the continued perfection of, a first priority lien and/or security
interest in all such Collateral (except for Permitted Liens), and (ii) to pay to
Lender, upon demand, all reasonable costs and expenses (including Attorneys'
Fees and disbursements) incurred by Lender in connection with the preparation,
execution and delivery of such documents.
E. Promptly notify Lender in writing if Borrower acquires an item of
Collateral worth in excess of Fifty Thousand Dollars ($50,000) that is covered
by a document or certificate of title or similar document or instrument.
F. Cause the Collateral to be maintained and preserved in the same
condition, repair and working order as when acquired by Borrower, ordinary wear
and tear excepted, and forthwith, or in the case of any loss or damage to any of
the Collateral, promptly after the occurrence thereof, make or cause to be made
all repairs, replacements, and other improvements in connection therewith which
are necessary or desirable to such end and which are economically reasonable,
and not permit any material item of Collateral to become a fixture to real
estate or an accession to any personal property which is not part of the
Collateral.
G. Pay promptly when due all property and other taxes, assessments and
governmental charges or levies imposed upon, and all claims (including claims
for labor, materials and supplies) against, the Collateral, except to the extent
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the validity thereof is being contested by appropriate proceedings, promptly
initiated and conducted in good faith and with due diligence and so long as
Lender's interest in the Collateral is not impaired or jeopardized.
H. Until Lender exercises its rights to collect Accounts, collect with
diligence all of Borrower's Accounts.
ARTICLE VI
DEFAULT
SECTION 6.01. Events of Default. The occurrence of any of the following
acts, events or conditions shall, without any notice, grace or right to cure
except as expressly provided in this Agreement, constitute an event of default
("Event of Default") hereunder:
A. Borrower shall fail to pay (i) without demand, any principal or
interest due for any of the Obligations owing to Lender (whether under this
Agreement, the Note) which failure continues for three (3) days from when due,
or (ii) within ten (10) days following demand, any other amounts owing to Lender
(whether under this Agreement, the Note, or any other of the Loan Documents) not
referred to in clause (i) due for any of the Obligations or any other fees or
other amounts not referred to in clause (i).
B. Borrower shall fail to perform or observe any covenant set forth in
Sections 5.01.C, or Section 5.02.A, 5.02.B, 5.02.C, 5.02.D, 5.02.E, 5.02.F, or
5.02R hereof.
C. Borrower shall fail to perform or observe any term, covenant or
condition (i) set forth in Sections 5.01.B, or 5.01.J within fifteen (15) days
after a Responsible Officer has knowledge thereof, or (ii) otherwise contained
herein and not specified in clauses (A), (B) or (C)(i) of this Section 6.01,
which continues for fifteen (15) days after written notice thereof to Borrower;
provided, however, that if such failure is curable and a delay in exercising
Lender's rights under Article VII will not materially and adversely affect the
Collateral or the rights of Lender, so long as Borrower is diligently pursuing
such cure, Borrower shall have an additional period after the initial written
notice to cure such failure, not to exceed seventy-five (75) days; provided,
further however, that Borrower shall not be entitled to any notice or
opportunity to cure under this Section 6.01.C if Lender has, on two (2)
occasions in the previous six (6) month period, given Borrower notice under this
Section 6.01.C.
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D. Any representation or warranty hereunder or under any of the other
Transaction Documents shall have been untrue or misleading in any material
respect when made.
E. A default shall occur under any agreement, document or instrument
(other than the Transaction Documents), to which Borrower is a party, the
consequences of which would have an adverse effect potentially involving Fifty
Thousand Dollars ($50,000) or more relating to the business of Borrower, on the
Collateral, relating to Lender's interest in the Collateral, or relating to
Borrower's ability to pay or perform the Obligations.
F. The entry of an order for relief under Title 11 of the United
States Code as to Borrower or the determination of such Borrower as insolvent or
bankrupt pursuant to the provisions of any state insolvency or bankruptcy laws;
the commencement by Borrower of any case, proceeding or other action seeking any
reorganization, arrangement, composition, adjustment, liquidation, dissolution
or similar relief for itself under any present or future statute, law or
regulation relating to bankruptcy, insolvency, reorganization or other relief
for debtors; Borrower's consent to, acquiescence in or attempt to secure the
appointment of any Receiver of all or any part of its properties or of the
Collateral; Borrower shall generally not pay its debts as they become due or
shall admit in writing its inability to pay its debts or shall make a general
assignment for the benefit of creditors; or Borrower (including the board of
directors of Borrower) shall take any corporate action to authorize any of the
acts set forth above in this paragraph.
G. Any case, proceeding or other action against Borrower shall be
commenced seeking to have an order for relief entered against it as a debtor or
seeking any reorganization, arrangement, composition, adjustment, liquidation,
dissolution or similar relief under any present or future statute, law or
regulation relating to bankruptcy, insolvency, reorganization or other relief
for debtors, or seeking appointment of any Receiver for Borrower or for all or
any substantial part of its property, and such case, proceeding or other action
is not dismissed within sixty (60) days after it is filed.
H. The filing of any claim or Lien (other than Permitted Liens)
against the Collateral or any part thereof, and the continued maintenance of
such claim or Lien for a period of thirty (30) days without discharge,
satisfaction or adequate bonding thereof, or the sale, hypothecation, conveyance
or other disposition of any of the Collateral other than within the ordinary
course of Borrower's business.
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I. Any of the Transaction Documents, at any time after their
respective execution and delivery and for any reason, shall cease to be in full
force and effect as executed and delivered in their entirety or be declared null
and void, or the validity or enforceability thereof shall be contested by
Borrower or any stockholder of Borrower, or Borrower shall deny any liability or
obligation ascribed to it under any of the Transaction Documents.
J. Any of the Security Documents, at any time after their respective
execution and delivery and for any reason, shall cease to constitute valid and
subsisting liens and/or valid and perfected security interests in and to the
property purported to be subject thereto.
K. A judgment, order or decree has been entered or otherwise made
effective against Borrower in an amount equal to or greater than Fifty Thousand
Dollars ($50,000) and either (i) such judgment, order or decree is not vacated
or stayed pending appeal within thirty (30) days after the date of entry or the
effective date thereof, or (ii) if so stayed, the stay is lifted or the appeal
is unsuccessful, or (iii) such judgment is not paid, settled or otherwise
discharged or satisfied within thirty (30) days.
L. Lender declares an Event of Default pursuant to Section 9.06
hereof.
M. Any (i) event of default (howsoever designated) shall occur under
any other Transaction Document which permits Lender or any of its Affiliates to
accelerate the Obligations or terminate such Transaction Document, or (ii) other
default (howsoever designated) shall occur under any other Transaction Document
and such default shall continue after any applicable grace and notice periods
applicable thereto, or, if no grace or notice period is provided, such default
is not remedied within thirty (30) days after written notice thereof.
N. Borrower shall fail to pay any amount of principal on any Debt (but
excluding Debt evidenced by the Note) of Borrower in an aggregate amount of more
than Fifty Thousand Dollars ($50,000), or any interest or premium thereon, when
due (whether by scheduled maturity, required prepayment, acceleration, demand or
otherwise) and such failure shall continue after the applicable grace period, if
any, specified in the agreement or instrument relating to such Debt; or any
default under any agreement or instrument relating to any such Debt, or any
other event, shall occur and shall continue after the applicable grace period,
if any, specified in such agreement or instrument, if the effect of such default
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or event is to accelerate, or to permit the acceleration of, the maturity of
such Debt; or any such Debt shall be declared to be due and payable, or required
to be prepaid (other than by a regularly scheduled required prepayment), prior
to the stated maturity thereof.
P. Any Person or related group of Persons acquires, or obtains the
right to acquire, whether pursuant to options, warrants or otherwise, more than
fifty percent (50%) of any class of the then outstanding voting common stock of
Borrower (calculated, in the case of any options, warrants or similar rights, as
if such Person's or group's right to acquire voting stock, and no other
unrelated Person's rights, were exercised).
ARTICLE VII
RIGHTS, POWERS AND REMEDIES UPON DEFAULT
SECTION 7.01. Remedies. If any Event of Default shall occur and continue,
Lender may, at its election, and without demand or notice of any kind, do any
one or more of the following:
(i) Declare all of Borrower's Obligations to Lender to be
immediately due and payable, whereupon all unpaid principal, interest and fees
in respect of such Obligations, together with all of Lender's costs, expenses
and Attorneys' Fees related thereto, whether under the terms of this Agreement,
the other Transaction Documents or otherwise, shall be immediately due and
payable;
(ii) Exercise any and all rights and remedies available to Lender
under any applicable law, including without limitation all remedies of a secured
party under the Code (whether or not the Code applies to the affected
Collateral) and also (a) require Borrower, at Borrower's sole expense, to
promptly assemble all or part of the Collateral as directed by Lender and make
it available to Lender at a place or places to be designated by Lender (which
may include Borrower's place of business, where the Collateral may be stored at
Borrower's expense), and (b) without notice except as specified below, sell the
Collateral or any part thereof in one or more parcels at public or private sale,
at Borrower's place of business, at any of Lender's offices or elsewhere, for
cash, on credit or for future delivery, and upon such other terms as Lender may
deem commercially reasonable; provided, that (a) to the extent notice of such
sales shall be required by law, at least ten (10) day's notice to Borrower of
the times and places of any public sale or the time after which any private sale
is to be made shall constitute reasonable notification, (b) Lender shall not be
obligated to make any sale of Collateral regardless of notice of sale having
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been given and, (c) Lender may adjourn any public or private sale from time to
time by announcement at the time and place fixed therefor, and such sale may,
without further notice, be made at the time and place to which it was so
adjourned;
(iii) Exercise any and all rights and remedies granted to Lender
under the terms of this Agreement or any of the other Transaction Documents;
(iv) Instruct any warehouseman then in possession or custody of
any of the Collateral to act thenceforth only on instructions of Lender;
(v) Foreclose or otherwise enforce any or all of Lender's
security interests in any manner permitted by law, or provided for in this
Agreement or the other Loan Documents or in any security agreement entered into
by Lender and Borrower, in such order as Lender in its sole and absolute
discretion may determine;
(vi) Exercise, to the extent permitted by applicable law, the
following rights and remedies regarding the appointment of a Receiver: (a)
Lender may have a Receiver appointed as a matter of right; (b) the Receiver may
be an employee of Lender and may serve without bond; and (c) all fees of the
Receiver and his or her attorney shall become part of the Obligations and shall
be payable on demand, with interest at the Default Interest Rate from date of
expenditure until repaid;
(vii) At any time, without prior notice to Borrower, collect
Collateral Proceeds and give notice of Lender's security interest to any and all
Persons, and Borrower does hereby irrevocably make, constitute and appoint
Lender its true and lawful attorney-in-fact, coupled with an interest and with
power of substitution, with power: to receive, open and dispose of all mail
addressed to Borrower; to endorse the names of Borrower upon any checks or other
evidences of payment that may come into the possession of Lender upon the
Collateral or as proceeds of Collateral; to endorse on behalf of Borrower any
document or instrument constituting or relating to the Collateral; in Borrower's
name or otherwise, to demand, sue for, collect and give acquittance for, any and
all moneys due or to become due upon the Collateral; to compromise, prosecute or
defend any action, claim or proceeding with respect thereto; and to do any and
all things necessary and proper to carry out the purpose herein contemplated; at
any time in Lender's discretion, transfer any Collateral into its own name or
that of its nominee and receive the payments, rents, income, and revenues
therefrom, hold the same as security for the Obligations and, at Lender's option
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or upon Borrower's written request, apply it to payment of the Obligations in
such order of preference as Lender may determine; and insofar as the Collateral
consists of Intangibles, insurance policies, instruments, chattel paper, choses
in action, or similar property, Lender may demand, collect, receipt for, settle,
compromise, adjust, sue for, foreclose, or realize on the Collateral as Lender
may in Good Faith determine, whether or not any Obligations are then due; and
(viii) apply any proceeds of insurance toward payment of the
Obligations, whether or not due, in such order of application as Lender may
determine.
SECTION 7.02. Protection and Preservation of Collateral and Rights;
Protective Advances. Upon the occurrence and during the continuance of any
Default or upon the occurrence and during the continuance of an Event of
Default, if Borrower shall fail to make any payment or perform any act provided
in this Agreement or any of the other Transaction Documents, Lender may, but
shall not be obligated to, without notice to or demand upon Borrower, make any
such payment or perform any such act, and further may pay, purchase, contest or
compromise any Lien on any of the Collateral that in the reasonable judgment of
Lender appears to affect said property. Borrower hereby irrevocably appoints
Lender as its true and lawful attorney-in-fact, coupled with an interest and
with power of substitution, to make any such payment and/or perform any such
act. In exercising any of said powers, Lender may, but shall not be obligated
to, incur any liabilities and expend whatever amounts which Lender in Good Faith
may deem necessary therefor. All sums so incurred or expended by Lender shall be
part of the Obligations and shall be due and payable by Borrower to Lender,
together with interest thereon from the date of expenditure at the Default
Interest Rate, together with all costs and expenses, including Attorneys' Fees,
incurred by Lender in connection with the exercise of its rights hereunder,
immediately on demand by Lender.
SECTION 7.03. Election. Lender shall have the right to enforce one or
more remedies hereunder, successively or concurrently, and such action shall not
operate as an election of remedies or otherwise operate to estop or prevent
Lender from pursuing any further remedies which it may have.
SECTION 7.04. Waiver. No failure or delay on the part of Lender, or of
any holder of any instrument delivered to Lender in connection with this
Agreement, in the exercise of any power, right or privilege hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of any
such power, right or privilege preclude other or further exercise of any other
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power, right or privilege. All rights and remedies existing under this Agreement
or any other agreement, document or instrument executed and delivered by
Borrower to Lender are cumulative to, and not exclusive of, any rights or
remedies otherwise available under any applicable law.
SECTION 7.05. Power of Attorney. Borrower hereby irrevocably appoints
Lender as its true and lawful attorney-in-fact, coupled with an interest and
with power of substitution, to do any and all of the following after the
occurrence and during the continuance of an Event of Default: to take control in
any manner of any cash and noncash items of payment or Proceeds of Collateral
which come into Lender's possession; to endorse the name of Borrower on any
notes, acceptances, checks, drafts, money orders, chattel paper or other
evidences of payment that may come into Lender's possession; to sign Borrower's
name on any invoice or document relating to any Collateral, on drafts against
customers, and on notices to customers; to notify the post office authorities to
change the address for delivery of Borrower's mail to an address designated by
Lender; to receive, open and process all mail addressed to Borrower; and to do
all things necessary to preserve or protect the Collateral and to otherwise
carry out this Agreement. Provided Lender acts in Good Faith, Borrower ratifies
and approves all acts of such attorney, and neither Lender nor the attorney
shall be liable for any acts or omissions nor for any error of judgment or
mistake of fact or law absent gross negligence or willful misconduct by Lender.
All checks or other forms of remittance so received by Lender shall be endorsed
in such manner as Lender may designate. Borrower's signature or name, as may be
appropriate, may be inserted by Lender in longhand, in typewriting or by rubber
stamp. Every such endorsement, however signed or made, shall be deemed to be the
valid endorsement of Borrower. Borrower further hereby irrevocably appoints
Lender as its true and lawful attorney-in-fact, coupled with an interest and
with power of substitution, for the purpose, at any time or times, of executing
for Borrower, and in Borrower's name, financing statements and amendments
thereto with respect to any of the Collateral and filing any of the same.
Borrower further agrees that a copy of this Agreement may be filed as a
financing statement.
SECTION 7.06. Entry Upon Premises. Upon the occurrence and during the
continuance of a Default or upon the occurrence and during the continuance of an
Event of Default, Lender shall have the right to enter upon the premises of
Borrower and upon any premises where Collateral located or believed to be
located and to receive and open all mail directed to Borrower; provided,
however, that Lender shall use reasonable efforts to turn over to Borrower all
such mail which does not relate to the Collateral. Lender shall have the right
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to obtain access to Borrower's data processing equipment, computer hardware and
computer software relating to or containing information regarding the Collateral
and to use all of the foregoing and the information contained therein in any
manner Lender in Good Faith deems appropriate. Lender is hereby granted a
license and right to use, without charge, until the Obligations are fully and
finally paid in cash, Borrower's labels, patents, copyrights and rights of use
of any name, trade secrets, trade names, trademarks, service marks, advertising
material or any property of a similar nature in completing the production,
advertising for sale and sale of any Collateral.
SECTION 7.07. Notification of Customers. At any time or times after the
occurrence and during the continuance of any Event of Default, Lender shall have
the right to contact any Person obligated to Borrower on any Account or other
right to payment and to instruct such Account Debtor or other person to deliver
all payments directly to Lender.
SECTION 7.08. Failure to Pay. If Borrower fails to make any payment or
deposit, furnish the required proof or take the required action, as provided in
this Agreement or any of the other Transaction Documents, Lender may, in its
sole and absolute discretion after notice to Borrower, make payment of the same
or part thereof or take the required action. Lender may conclusively rely on the
usual statements of the amount owing or other official statements issued by the
appropriate governmental agency. Each amount so paid by Lender and cost or
expense incurred by Lender shall be part of the Obligations and shall be due and
payable by Borrower to Lender, together with interest thereon from the date of
expenditure at the Default Interest Rate, together with all costs and expenses,
including Attorneys' Fees, incurred by Lender in connection with the exercise of
its rights hereunder, immediately on demand by Lender. No payment made by Lender
or cost or expense incurred by Lender shall constitute (i) an agreement by it to
make similar payments or incur any similar cost or expense in the future, or
(ii) a waiver by Lender of any Default or Event of Default under this Agreement.
Lender need not inquire as to, or contest the validity of, any expense, tax,
security interest, encumbrance or Lien, and receipt of the usual official notice
of the payment thereof shall be conclusive evidence that the same was validly
due and owing.
SECTION 7.09. Application of Collateral Proceeds. After the occurrence and
during the continuance of an Event of Default, Borrower hereby grants to Lender
the right to, and upon Borrower's written request Lender shall, apply any and
all Proceeds from the sale or disposition of the Collateral towards the payment
of the Obligations in such order as Lender from time to time may elect. Lender
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shall have no obligation to reconvey any of the Collateral unless and until all
of the Obligations have been satisfied and discharged in full.
SECTION 7.10. Enforcement of Borrower's Rights. Lender shall have no
obligation to take any action to enforce any rights running to the benefit of
Borrower in respect of any items of Collateral, to preserve any rights in or to
the Collateral against any Person, to make any demand upon or pursue or exhaust
any rights or remedies against Borrower or others with respect to payment of the
Obligations, to pursue or exhaust any rights or remedies with respect to any of
the Collateral or any other security for the Obligations, or to marshall any
assets in favor of Borrower or any other Person against or in payment of any or
all of the Obligations. To the extent that Borrower makes a payment to Lender or
Lender enforces a security interest or exercises its rights of set off and such
payment or the proceeds of such enforcement or setoff or any part thereof are
subsequently invalidated, declared to be fraudulent or preferential, set aside,
avoided and/or required to be repaid under any bankruptcy law, state or federal
law, common law or equitable cause, then, to the extent of such recovery, the
Obligations or part thereof originally intended to be satisfied shall be revived
and continued in full force and effect with all Collateral as security therefor,
as if such payment had not been made or such enforcement or setoff had not
occurred.
SECTION 7.11. Exercise of Remedies. Borrower acknowledges that portions of
the Collateral may be difficult to preserve and dispose of and may be subject to
complex maintenance and management; accordingly, Borrower agrees that Lender
shall have the widest possible latitude in the method and manner of the exercise
of its rights, powers and remedies under this Agreement.
SECTION 7.12. Equitable Remedies. Borrower recognizes that if it fails to
perform, observe or discharge of its obligations or liabilities under this
Agreement, any remedy at law may prove to be inadequate relief to Lender.
Therefore, Borrower agrees that Lender, if Lender so requests, shall be entitled
to temporary and permanent injunctive relief in any such case without the
necessity of proving, but without waiving, actual damages.
ARTICLE XIII
GENERAL PROVISIONS
SECTION 8.01. Survival of Terms. The warranties, representations, covenants
and agreements set forth herein and in any other Loan Documents executed in
conjunction herewith or contemplated hereby shall be cumulative and in addition
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to any and all warranties, representations, covenants and agreements which
Borrower may give, or cause to be given, to Lender hereafter, and shall remain
effective until the first of the following to occur: (i) the termination of the
Commitments and the satisfaction in full of all of the Obligations under the
Loan Documents, or (ii) the conversion of all of the outstanding Term Loans and
Commitments into Shares pursuant to Article X hereof; provided, however, that
the Registration Rights Agreement and all of the Purchase Agreement Documents
shall survive; provided, further, that the obligations under Section 8.13 and
Article IX shall survive. Notwithstanding the foregoing, from and after the
closing of the transfer of the Alabama Project pursuant to the Alabama Project
Purchase Agreement, the covenants contained in Sections 5.01.D, 5.01.H, 5.01.I,
5.01.M and 5.03 shall terminate.
SECTION 8.02. Presentment. Lender shall not be required to make
presentment, demand or protest or, except as may otherwise be expressly provided
in this Agreement or in any other agreements, documents and instruments executed
in conjunction herewith or contemplated hereby, give any notice or take any
action to preserve rights against Borrower or any other Person or the Collateral
in connection with any provision of the Loan Documents.
SECTION 8.03. Successors and Assigns. This Agreement shall bind and inure
to the benefit of the respective successors and assigns of each of the parties;
provided, however, that neither party may assign this Agreement or any rights
hereunder without the other party's prior written consent, and any prohibited
assignment shall be absolutely void; provided, further, that such prohibition on
assignment shall in no event apply to the transfer of Shares after Conversion
pursuant to Article X hereof, which shall remain in the sole control and
discretion of Lender (subject to the representations and warranties contained in
Article XI hereof); provided, further, that such prohibition on assignment shall
in no event apply to the assignment by Lender of all or any portion of its
rights hereunder after the occurrence of an Event of Default. All references to
"Lender" herein shall be deemed to refer to and include Lender's respective
successors and assigns. No consent to any assignment by Lender shall release
Borrower of any of the Obligations.
SECTION 8.04. Number. The singular includes the plural and the plural
includes the singular, if the context so requires.
SECTION 8.05. Governing Law. Without regard to principles of conflicts of
law, the Transaction Documents, including without limitation this Agreement,
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shall be construed in accordance with and governed by the laws of the State of
Utah, and all matters or disputes directly or indirectly relating to or arising
in connection with the Transaction Documents, or otherwise relating to the
debtor-creditor relationship between Borrower and Lender, shall be governed by
the laws of the State of Utah; provided, however, that where applicable (and
except as otherwise defined herein), terms used herein shall have the meanings
given them in the Code; provided further, that with respect to enforcement by
Lender of remedies against any Collateral which is real property, nothing in
this paragraph shall bar application of the law of the jurisdiction where such
real property Collateral is situated.
SECTION 8.06. Notices and Addresses; Payments.
A. All notices required or permitted to be given under this Agreement
shall be in writing. Notices may be served by certified or registered mail,
postage paid with return receipt requested; by private courier, prepaid; by
telex, facsimile, or other telecommunication device capable of transmitting or
creating a written record; or personally. Mailed notices shall be deemed
delivered five days after mailing, properly addressed. Couriered notices shall
be deemed delivered when delivered as addressed, or if the addressee refuses
delivery, when presented for delivery notwithstanding such refusal. Telex or
telecommunicated notices shall be deemed delivered when receipt is either
confirmed by confirming transmission equipment or acknowledged by the addressee
or its office. Personal delivery shall be effective when accomplished. Unless a
party changes its address by giving notice to the other party as provided
herein, notices shall be delivered to the parties at the addresses set forth in
Schedule 8.06.
B. All payments provided for in this Agreement or the other
Transaction Documents shall be delivered, in the manner set forth in such
documents, to Lender by wire transfer in accordance with the instructions set
forth in Schedule 8.06.
SECTION 8.07. Severability; Independence of Covenants. Each provision of
this Agreement shall be severable from each other provision of this Agreement
for the purpose of determining the legal enforceability of any specific
provision. All covenants under this Agreement shall be given independent effect
so that if a particular action, event or condition is not permitted by any of
such covenants, then the fact that it would be permitted by an exception to, or
be otherwise within the limitations of, another covenant shall not avoid the
occurrence of a Default or an Event of Default if such action is taken, event
occurs, or condition exists.
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SECTION 8.08. Time. Time is of the essence of this Agreement and the other
Transaction Documents.
SECTION 8.09. Necessity of Writing. Any consent, modification, amendment,
notice or waiver hereof or hereunder must be in writing and signed by an
authorized officer of Lender to be effective and enforceable against Lender, and
this Agreement cannot be changed orally or by conduct of the parties.
SECTION 8.10. Integration. This Agreement, together with the Schedules and
Exhibits referred to herein and the other Transaction Documents, is intended by
the parties as a final expression of their agreement, as a complete and
exclusive statement of the terms and conditions thereof, and fully to integrate
the parties' agreement. No prior understandings, proposals or agreements not
contained herein or in the Transaction Documents shall be binding upon or
enforceable against the parties. Acceptance of or acquiescence in a course of
performance under the Transaction Documents shall not be relevant in determining
the meaning of the Transaction Documents, even though the accepting or
acquiescing party had knowledge of the nature of the performance and opportunity
for objection. The rule of law that ambiguities in a document are to be
construed against the drafter shall not apply to the interpretation of this
Agreement or the Transaction Documents.
SECTION 8.11. Captions. The captions in this Agreement and on the Exhibits
hereto are for convenience of reference only and shall not modify or alter the
operative provisions hereof.
SECTION 8.12. Lender's Expenses and Attorneys' Fees.
A. Following any Event of Default or Default, Borrower shall pay to
Lender, promptly on demand therefor, all of Lender's costs and expenses
resulting from such Default or Event of Default. Without limiting the generality
of the foregoing, such sums shall include all Attorneys' Fees and reasonable
consultants' fees or accountants' fees incurred by Lender following such Default
or Event of Default in exercising, supervising, enforcing or defending any of
its rights, powers or remedies provided by this Agreement, by any of the other
Transaction Documents, or by law, whether or not suit is filed. Borrower agrees
that neither any of Borrower's obligations hereunder nor any payments made by
them hereunder shall result in any waiver by Lender of its attorney-client
privilege or any other of its privileges with respect to the legal
representation for which reimbursement is to be made pursuant hereto.
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B. All sums so incurred or expended by Lender pursuant to subsection A
of this Section 8.12 shall be part of the Obligations and shall be due and
payable by Borrower to Lender, together with interest thereon from the date of
expenditure at the Default Interest Rate, immediately on demand by Lender.
SECTION 8.13. Indemnification.
A. Borrower hereby agrees to indemnify and defend Lender and the
officers, directors, employees and agents of Lender (herein collectively called
the "Indemnitees" and individually each called an "Indemnitee") from, and hold
the Indemnitees harmless against, any and all losses, liabilities, claims,
damages or expenses, including attorneys' fees and disbursements (all of the
foregoing being herein collectively called the "Indemnified Liabilities")
incurred by any Indemnitee in connection with any investigation, litigation or
proceedings arising out of, or relating to, the Term Loan; provided, however,
that the foregoing indemnity shall not apply to any litigation brought by an
Indemnitee against Borrower which is determined adversely to such Indemnitee or
to losses, liabilities, claims, damages or expenses arising out of any violation
by an Indemnitee of a statutory duty or the gross negligence or willful
misconduct of such Indemnitee. If and to the extent that the foregoing indemnity
may be unenforceable for any reason, Borrower hereby agrees to make the maximum
contribution to the payment and satisfaction of each of the Indemnified
Liabilities which is permissible under applicable law.
B. Lender hereby agrees to indemnify and defend Borrower and the
officers, directors, employees and agents of Borrower (herein collectively
called the "Borrower Indemnitees" and individually each called a "Borrower
Indemnitee") from, and hold the Borrower Indemnitees harmless against, any and
all losses, liabilities, claims, damages or expenses, including attorneys' fees
and disbursements (all of the foregoing being herein collectively called the
"Indemnified Liabilities") incurred by any Borrower Indemnitee in connection
with any investigation, litigation or proceedings arising out of a breach of the
representations of Lender under Section 11.1 hereof; provided, however, that the
foregoing indemnity shall not apply to any litigation brought by any Borrower
Indemnitee against Borrower which is determined adversely to such Borrower
Indemnitee or to losses, liabilities, claims, damages or expenses arising out of
any violation by a Borrower Indemnitee of a statutory duty or the gross
negligence or willful misconduct of such Borrower Indemnitee. If and to the
extent that the foregoing indemnity may be unenforceable for any reason,
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Borrower hereby agrees to make the maximum contribution to the payment and
satisfaction of each of the Indemnified Liabilities which is permissible under
applicable law.
C. All obligations provided for in this Section 8.13 shall survive any
termination of this Agreement.
SECTION 8.14. Agreement Governs. In the event of any inconsistency between
the provisions of this Agreement and any other Transaction Documents other than
the Note, the provisions of this Agreement shall govern and control. In the
event of any inconsistency between the provisions of this Agreement and the
provisions of the Note, the provisions of the Note shall govern and control.
SECTION 8.15. Third Party Beneficiaries. This Agreement is made and entered
into for the sole protection and benefit of the parties hereto and their
permitted successors and assigns, and neither this Agreement nor any of the
other Transaction Documents is intended to operate as, directly or indirectly,
nor shall be construed as effecting in any way, directly or indirectly, a
waiver, estoppel, discharge, release, or other modification of the parties'
rights against any Person, nor shall any other Person have any right of action
hereunder or be entitled to rely hereon or on the existence hereof or claim any
rights or benefits hereunder.
SECTION 8.16. Jurisdiction.
A. Borrower hereby irrevocably agrees that any legal action, suit, or
proceedings against any of them with respect to any of the Obligations or any
other matter under or arising out of or in connection with this Agreement, the
Note or the other Transaction Documents or for recognition or enforcement of any
judgment rendered in any such action, suit or proceedings may be brought in the
United States Courts sitting in the State of Utah, or in the courts of the State
of Utah, as Lender may elect, and, by execution and delivery of this Agreement,
Borrower hereby irrevocably accepts and submits to the non-exclusive
jurisdiction of the aforesaid courts in personam generally and unconditionally
with respect to any such action, suit, or proceeding for itself and in respect
to of any of its property.
B. Borrower further agrees that final judgment against it in any
action, suit, or proceeding referred to herein shall be conclusive and may be
enforced in any other jurisdiction, within or outside the United States of
America, by suit on the judgment, a certified or exemplified copy of which shall
be conclusive evidence of the fact and of the amount of Borrower's obligations
and liabilities. Borrower hereby irrevocably appoints the Person so designated
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on Schedule 8.06 hereto as its agent for service of process in any action, suit
or proceeding referred to herein. Should the Person designated by Borrower under
this Section 8.16.B cease to be available for service of process, Borrower will
forthwith irrevocably designate a designee, appointee and agent within the City
of Salt Lake City, State of Utah, which shall irrevocably consent to act as
such, with the powers and for the purposes specified in this subsection.
C. Borrower further irrevocably consents and agrees to the service of
any and all legal process, summons, notices, and documents out of any of the
aforesaid courts in any such action, suit or proceeding by mailing copies
thereof by registered or certified mail, postage prepaid, to the Borrower at its
address referred to in Section 8.06 hereof, or to any other address of which
Borrower shall have given notice pursuant to said Section 8.06 hereof, or to its
then designee, appointee and agent for service. Borrower agrees that service
upon Borrower or any such designee, appointee and agent as provided for herein
shall constitute valid and effective personal service upon Borrower and that the
failure of any such designee, appointee and agent to give any notice of such
service to Borrower shall not impair or affect in any way the validity of such
service or any judgment rendered in any action or proceeding based thereon.
D. Nothing in this Section 8.16 shall, or shall be construed so as to,
limit the right of Lender to bring actions, suits or proceedings with respect to
the Obligations of Borrower under, or any other matter arising out of or in
connection with, this Agreement, the Note or the other Transaction Documents, or
for recognition or enforcement of any judgment rendered in any such action, suit
or proceeding, in the courts of whatever jurisdiction in which the office of
Lender may be located or the property of Borrower may be found or as otherwise
shall to Lender seem appropriate, or to affect the right to service of process
in any jurisdiction in any other manner permitted by law.
E. In addition, Borrower hereby irrevocably and unconditionally waives
any objection which Borrower may now or hereafter have to the laying of venue of
any of the aforesaid action, suits or proceedings arising out of or in
connection with this Agreement, the Note, or the other Transaction Documents
brought in any of the aforesaid courts, and hereby further irrevocably and
unconditionally waives and agrees not to plead or claim that any such action,
suit or proceeding brought in any such court has been brought in an inconvenient
forum.
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SECTION 8.17. WAIVER OF JURY TRIAL. EACH OF BORROWER AND LENDER HEREBY
IRREVOCABLY WAIVES ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
COUNTERCLAIM (WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR
RELATING TO THE OBLIGATIONS, THE TRANSACTION DOCUMENTS, THE DEBTOR-CREDITOR
RELATIONSHIP OF BORROWER AND LENDER OR THE ACTIONS OF LENDER IN THE NEGOTIATION,
ADMINISTRATION, PERFORMANCE OR ENFORCEMENT THEREOF.
SECTION 8.18. Execution in Counterparts. This Agreement may be executed in
any number of counterparts, each of which when so executed shall be deemed to be
an original and all of which when taken together shall constitute one and the
same Agreement.
ARTICLE IX
ENVIRONMENTAL PROVISIONS
SECTION 9.01. Definitions. For the purposes of this Article IX, the
following terms shall have the following meanings:
"Business" is defined as the business and operations conducted by
Borrower in connection with the Real Property Collateral.
"Environmental Obligations" is defined in Section 9.07 hereof.
"Expenses" is defined in Section 9.05 hereof.
"Hazardous Materials" means any (a) asbestos in any form, urea
formaldehyde foam insulation, transformers or other equipment which contain
dielectric fluid containing levels of polychlorinated byphenyls or radon gas;
(c) any chemical, material or substance defined as or included in the definition
of "hazardous substances", "hazardous wastes", "hazardous materials", "extremely
hazardous waste", "restricted hazardous waste", "toxic substances" or words of
similar import under any applicable Hazardous Materials Laws.
"Hazardous Materials Claims" means any enforcement, cleanup, removal,
remedial or other governmental or regulatory demand, actions, agreements or
orders threatened, instituted, pending or completed pursuant to any Hazardous
Materials Laws, together with any claims made or threatened by any third party
against any of Borrower, Lender or any Collateral relating to damage,
contribution, cost recovery, compensation, loss or injury resulting from the
presence, release or discharge of any Hazardous Materials.
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"Hazardous Materials Laws" means the following Federal laws, and their
implementing regulations, as well as any amendments to such laws, and all State
and local laws and ordinances which apply to the Real Property Collateral and
which regulate the same subject matter: (a) the Comprehensive Environmental
Response, Compensation and Liability Act (CERCLA), 42 USC 9601 et seq.; (b) the
Solid Waste Disposal Act, 42 USC 6901 et seq., including the Resource
Conservation and Recovery Act (RCRA) and the laws governing Underground Storage
Tanks; (c) the Toxic Substances Control Act (TSCA), 15 USC 2601 et seq.,
including those provisions governing use and disposal of Polychlorinated
Biphenyls (PCBs); (d) the Hazardous Materials Transportation Act (HMTA), 49 USC
1801, et seq.; (e) the Federal Insecticide, Fungicide and Rodenticide Act
(FIFRA), 7 USC 136 et seq.; (f) those portions of the Clean Air Act governing
toxic air emissions, 42 USC 7401 et seq.; (g) those portions of the Clean Water
Act governing toxic water pollutants and oil spills, 33 USC 1251 et seq.; (h)
the Emergency Planning and Community Right-to-know Act (EPCRA, SARA Title III),
42 USC 11001 et seq.; and (i) those portions of the Occupational Safety and
Health Act (OSHA) governing worker safety with respect to hazards from chemical
substances, including requirements for Material Safety Data Sheets, 29 USC 651,
et seq.
"Remedial Work" is defined in Section 9.04 hereof.
"Tenant" means any tenant under any lease or occupancy agreement
affecting any part of the Real Property Collateral.
SECTION 9.02. Representations and Warranties. Borrower hereby represents
and warrants that, to the best of its knowledge after due inquiry, except as
otherwise specifically disclosed to Lender in a writing dated the date hereof:
(a) except as described on Schedule 9.02 hereto, no Hazardous Materials exist
on, under or about any of the Collateral or Borrower's business premises in
violation of any Hazardous Materials Laws, to the satisfaction of the relevant
government agency that enforces such laws, (b) the Business is and has been in
compliance with all Hazardous Materials Laws, to the satsifaction of the
relevant government agency that enforces such laws, (c) Borrower has not
received any notice of, and to the best knowledge of Borrower after due
investigation, there are no existing or threatened Hazardous Materials Claims,
(d) all Hazardous Materials generated in connection with the Business are and
have been transported and disposed of on or off-site in compliance with all
Hazardous Materials Laws, to the satsifaction of the relevant government agency
that enforces such laws, and (e) no storage tanks are or have been located on or
under the Collateral within the last five years.
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SECTION 9.03. Covenants. Until it has satisfied and discharged all
Obligations, Borrower shall (or shall cause its Affiliates to, as the case may
be):
A. Compliance with Laws. Comply with all Hazardous Materials Laws, to
the satisfaction of the relevant government agency that enforces such laws.
B. Presence of Materials. Without limiting the generality of Section
9.02 hereof, except where done in compliance with all applicable Hazardous
Materials Laws, not install, use, generate, manufacture, store, release or
dispose of, nor permit the installation, use, generation, storage, release or
disposal of Hazardous Materials on, under or about any Collateral or Borrower's
business premises, nor transport or permit the transportation of Hazardous
Materials to or from any Collateral or Borrower's business premises.
C. Notification. Promptly advise Lender in writing of (i) any and all
Hazardous Materials Claims, (ii) Borrower's discovery of any release, discharge
or disposal of any Hazardous Materials on, under or about any Collateral, (iii)
Remedial Work taken by Borrower in response to any Hazardous Materials on, under
or about any Collateral or to any Hazardous Materials Claims, (iv) Borrower's
discovery of any release, discharge or disposal of any Hazardous Materials on,
under or about any real property adjoining or in the vicinity of any Collateral,
or (v) Borrower's discovery of any occurrence or condition on any Collateral or
any real property adjoining or in the vicinity of any Collateral that could
cause any Collateral to be subject to any restrictions on the ownership,
occupancy, transferability or use under any Hazardous Materials Laws.
D. Environmental Condition. Promptly provide Lender with copies of all
reports, analyses, notices, licenses, permits, approvals, orders,
correspondences or other written materials relating to the environmental
condition of any Collateral or Hazardous Materials Claims promptly upon receipt,
completion or delivery of such materials.
F. Tanks. Not install or allow to be installed any additional
underground tanks on any Collateral.
G. Liens. Not create or permit to continue in existence any lien upon
any Collateral imposed pursuant to any Hazardous Materials Laws.
SECTION 9.04. Borrower's Remedial Work. Borrower shall undertake any and
all remedial work ("Remedial Work") (i) required by any governmental
authority(ties) in connection with any Hazardous Materials Claims instituted or
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completed by such governmental authority(ies) or (ii) reasonably required to
respond to any other Hazardous Materials Claims; provided however, that Borrower
shall undertake such Remedial Work in good faith so as to minimize any
impairment to Lender's security under the Loan Documents. All Remedial Work
shall be conducted (a) in a diligent and timely fashion; (b) pursuant to a
detailed written plan for the Remedial Work approved by any public or private
agencies or persons from which such approval is required; (c) with such
insurance coverage pertaining to liabilities arising out of the Remedial Work as
is then customarily maintained by companies similarly situated to Borrower with
respect to such activities; and (d) only following receipt of any required
permits, licenses or approvals. Borrower shall submit to Lender, promptly upon
receipt or preparation, copies of any and all reports, studies, analyses,
correspondence, governmental comments or approvals, proposed removal or other
Remedial Work contracts and similar information prepared or received by Borrower
in connection with any Remedial Work or Hazardous Materials relating to any
Property Collateral. All costs and expenses of such Remedial Work shall be paid
by Borrower, including the charges of the Remedial Work contractors and any
consulting environmental engineer, any taxes or penalties assessed in connection
with the Remedial Work and Lender's reasonable fees and costs (including
Attorneys' Fees and consultant fees) incurred in connection with monitoring or
review of such Remedial Work. Lender shall have the right, but not the
obligation, to join and participate in, as a party if Lender so elects, any
legal proceedings or actions initiated in connection with any Hazardous
Materials Claims.
SECTION 9.05. Indemnity. Borrower shall protect, defend, indemnify and hold
Lender, and its directors, officers, employees and agents, and any successors to
any of Lender's interests in the Obligations or any portion thereof or any
interest therein, and any Person who acquires any Collateral at a foreclosure
sale or otherwise through the exercise of Lender's rights and remedies under the
Transaction Documents, and any successors to any such Person, and all directors,
officers, employees and agents of all of the aforementioned indemnified parties,
harmless from and against any and all claims, liabilities, obligations, damages,
losses, fines, penalties, judgments, awards, costs and expenses (including
attorneys' fees and costs and expenses of investigation) which arise out of or
relate in any way to any Hazardous Materials Claims or any use, handling,
production, transportation, disposal, release or storage of any Hazardous
Materials in, under or on any Collateral or Borrower's business premises,
whether by Borrower or by any Tenant or any other Person, including (a) all
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foreseeable and all unforeseeable consequential damages directly or indirectly
arising out of (i) Hazardous Materials Claims or the use, generation, storage,
discharge or disposal of Hazardous Materials by any Borrower, any prior owner or
operator of any Collateral or Borrower's business premises, or the business or
operations of Borrower, or any Person on or about any Collateral or Borrower's
business premises; (ii) any residual contamination affecting any natural
resource or the environment; (iii) any exercise by Lender of any of its rights
and remedies hereunder; and (iv) Lender's reliance on any representation or
warranty made herein or in any certificate delivered after the date hereof
pursuant hereto, if such representation or warranty proves to be materially
false or misleading; and (b) the costs of any required or necessary repair,
cleanup, closure or detoxification of any Collateral or Borrower's business
premises and the preparation of any closure or other required plans. All such
costs, damages, claims and expenses heretofore described and/or referred to in
this Section 9.05 are hereinafter referred to as "Expenses". In the event any
Hazardous Material is caused to be removed from any of the Collateral or
Borrower's business premises by Borrower, Lender or any other Person, the number
assigned by the Environmental Protection Agency to such Hazardous Material or
any similar identification shall be solely in the name of Borrower, and Borrower
shall assume any and all liability for such removed Hazardous Material.
SECTION 9.06. Remedies Upon Default. In addition to any other rights or
remedies Lender may have under this Agreement, at law or in equity, in the event
that: (i) Borrower shall fail timely to comply with any of the provisions of
this Article IX; (ii) any representation or warranty made herein or in any
certificate delivered after the date hereof pursuant hereto proves to be
materially false or misleading; or (iii) Borrower changes or alters the present
use of any Collateral or Borrower's business premises in a manner which will
result in the presence of Hazardous Materials on any Collateral or Borrower's
business premises at a level which may increase the potential liability for
Hazardous Materials Claims, then, in such event Lender may, after (a) delivering
written notice to Borrower, which notice specifically states that Borrower have
failed to comply with the provisions of this Article IX and (b) the expiration
of the earlier to occur of (x) the thirty (30) day period after giving of such
notice or, if Borrower commences cure during such thirty (30) day period, such
longer period as is reasonably required by Borrower to effect such cure using
reasonable diligence, but in any event no longer than one hundred and twenty
(120) days, or (y) the cure period, if any, permitted under the applicable law,
rule, regulation or order with which Borrower shall have failed to comply, (i)
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declare an Event of Default under this Agreement and exercise any and all
remedies provided for therein, and/or (ii) do or cause to be done whatever is
necessary to cause the Collateral or Borrower's business premises to comply with
all Hazardous Materials Laws and other applicable law, rule, regulation or order
and the cost thereof shall constitute an Expense hereunder and shall become
immediately due and payable without notice and with interest thereon at the
Default Interest Rate until paid. Borrower shall give Lender and its agents and
employees access to the Collateral or Borrower's business premises for the
purpose of effecting such compliance and hereby specifically grant to Lender a
license, effective upon expiration of the applicable cure period, if any, to do
whatever is necessary to cause the Collateral or Borrower's business premises to
so comply, including to enter the Collateral or Borrower's business premises and
remove therefrom any Hazardous Materials.
SECTION 9.07. Continuing Obligations. The obligations set forth in this
Article IX, including Borrower's obligation to pay Expenses hereunder
(collectively, the "Environmental Obligations"), are secured by the Collateral.
Notwithstanding any term or provision contained herein or in the Transaction
Documents, the Environmental Obligations shall not be limited to the original
principal amount of the Term Loan. The Environmental Obligations shall survive
the termination of this Agreement, the repayment of the Obligations and any
foreclosure, deed in lieu of foreclosure or similar proceedings by or through
which Lender or any successors or assigns or any other Person bidding at a
foreclosure sale may obtain title to the Collateral or any portion thereof.
SECTION 9.08. Other Laws. Nothing in this Article IX, and no exercise by
Lender of its rights or remedies under this Article IX or this Agreement, shall
impair, constitute a waiver of, or in any way affect Lender's rights and
remedies with respect to Borrower under any Hazardous Materials Laws, including
without limitation, contribution provisions or private right of action
provisions under such Hazardous Materials Laws.
SECTION 9.09. Security Interest. The parties acknowledge that if any
indicia of title is held by Lender under the Loan Documents, it is held by
Lender solely to protect Lender's liens and security interests.
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ARTICLE X
CONVERSION RIGHTS
SECTION 10.01. Conversion.
A. Lender shall have the right, subject to the terms and provisions of
this ARTICLE X, at the option of the Lender, (i) at any time, to convert, the
unpaid principal amount of the Term Loans or any portion thereof, and any
accrued and unpaid interest on such Term Loans, and (ii) at any time prior to
the Termination Date, to simultaneously advance and convert all or any portion
of the remaining Commitment, or after the Commitment Period, to simultaneously
advance and convert an amount equal to the amount of the Commitment, if any,
which was not advanced as a Term Loan during the Commitment Period (it being
acknowledged that this does not extend the Commitment Period), into fully paid
and non-assessable shares of Borrower Common Stock or any capital stock or other
securities into which such Borrower Common Stock shall have been changed or any
capital stock or other securities resulting from a reclassification thereof
("Shares"). Such conversion of Term Loans and simultaneous advance and
conversion of the Commitment to Shares shall be made at an amount per Share
which is equal to the then Current Conversion Price, as further described below.
The Term Loans and Commitment shall continue to be convertible, in whole or in
part, even though Borrower may have given notice of prepayment of the Term Loans
or termination of the Commitment pursuant to Sections 2.01.D and 2.02.C, so long
as Lender's notice of election to convert has been delivered to Borrower within
the Early Termination period.
B. For convenience, the conversion pursuant to this Article X of all
or a portion of the principal amount of Term Loans (and/or of accrued and unpaid
interest if elected by Lender) and/or Commitment into Shares is herein sometimes
referred to as the "conversion" of the Term Loans/Commitment.
SECTION 10.02. Mechanics of Conversion.
A. Election and Payment. The then unpaid principal amount of the Term
Loans/Commitment (and/or, in the event of a conversion of any Term Loan, any
accrued and unpaid interest on such Term Loan) may be converted by Lender, in
whole or in part, during normal business hours on any Business Day during the
period such election can be made by written notice of Lender's election to
convert the Term Loans/Commitment or portion thereof, to Borrower at its office
designated pursuant to Section 8.06 hereof. Payment of the Conversion Price for
the Shares specified in such election shall be made by applying an aggregate
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amount of unpaid principal of the Term Loans/Commitment (and/or, in the event of
a conversion of any Term Loan, any accrued and unpaid interest on such Term
Loan) equal to the amount obtained by multiplying (i) the number of Shares
specified in such election by (ii) the then Current Conversion Price. Lender
shall thereupon be entitled to receive the number of Shares specified in such
election (plus cash in lieu of any fractional share as provided in Section
10.02.C hereof).
B. Effective Date. Each conversion of the Term Loans/Commitment
(and/or, in the event of a conversion of any Term Loan, any accrued and unpaid
interest on such Term Loan) pursuant to Section 10.02.A hereof shall be deemed
to have been effected immediately prior to the close of business on the Business
Day on which notice of Lender's election to convert the Term Loans/Commitment
shall have been given to Borrower as provided in Section 10.02.A hereof, and
such conversion shall be at the Current Conversion Price in effect at such time.
On each such day that the conversion of the Term Loans/Commitment (and/or, in
the event of a conversion of any Term Loan, any accrued and unpaid interest on
such Term Loan) is deemed effected, Lender shall be deemed to have become the
holder of record of such Shares.
C. Share Certificates and Cash for Fractional Shares. As promptly as
practicable after the conversion of the Term Loans/Commitment (and/or, in the
event of a conversion of any Term Loan, any accrued and unpaid interest on such
Term Loan), and in any event within five (5) Business Days thereafter, Borrower
at its expense (including the payment by it of any applicable issue, stamp or
other taxes, other than any income taxes) will cause to be issued in the name of
and delivered to Lender or as Lender may direct, a certificate or certificates
for the number of Shares to which Lender shall be entitled upon such conversion
plus, in lieu of any fractional share to which such holder would otherwise be
entitled, cash in an amount equal to the same fraction of the Conversion Price.
Lender shall return to Borrower the original promissory note on conversion of
all Term Loans and termination of the Commitment.
D. Payment of Accrued Interest. Within five (5) Business Days after
receipt of notice of Lender's election to convert all or a portion of the
principal amount of any Term Loan under Section 10.02.A hereof, Borrower will
pay to Lender any unpaid interest, accrued to the date of conversion of the Term
Loan, on the principal amount so converted, except to the extent that the amount
of such interest has also been converted into Shares.
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SECTION 10.03. Current Conversion Price.
The term "Conversion Price" shall mean initially $7.00 per Share,
subject to adjustment as set forth in Section 10.04 hereof. The term "Current
Conversion Price" as used herein shall mean the Conversion Price, as the same
may be adjusted from time to time as hereinafter provided, in effect at any
given time. In determining the Current Conversion Price, the result shall be
expressed to the nearest $0.01, but any such lesser amount shall be carried
forward and shall be considered at the time of (and together with) the next
subsequent adjustment which, together with any adjustments to be carried
forward, shall amount to $0.01 per Share or more.
SECTION 10.04. Adjustment of Conversion Price. The Conversion Price shall
be subject to adjustment, from time to time, as follows:
A. Adjustments for Stock Dividends, Recapitali zations, Etc. In case
Borrower shall, after August 26, 1996, (i) pay a stock dividend or make a
distribution (on or in respect of its Borrower Common Stock) in shares of its
Borrower Common Stock, (ii) subdivide the outstanding shares of its Borrower
Common Stock, (iii) combine the outstanding shares of its Borrower Common Stock
into a smaller number of shares, or (iv) issue by reclassification of shares of
its Borrower Common Stock, any shares of capital stock of Borrower, then, in any
such case, the Current Conversion Price in effect immediately prior to such
action shall be adjusted to a price such that if Lender were to convert the Term
Loans/Obligations in full immediately after such action, Lender would be
entitled to receive the number of shares of capital stock of Borrower, which
Lender would have owned immediately following such action had such Term
Loans/Obligations been converted immediately prior thereto (with any record date
requirement being deemed to have been satisfied), and, in any such case, such
Conversion Price shall thereafter be subject to further adjustments under this
Article X. An adjustment made pursuant to this subsection (a) shall become
effective retroactively immediately after the record date in the case of a
dividend or distribution and shall become effective immediately after the
effective date in the case of a subdivision, combination or reclassification.
B. Adjustments for Certain Other Distributions. In case Borrower
shall, after August 26, 1996 fix a record date for the making of a distribution
to holders of its Borrower Common Stock (including any such distribution made in
connection with a consolidation or merger in which Borrower is the continuing
corporation) of (i) assets, (ii) evidences of indebtedness or other securities
(except for its Borrower Common Stock) of Borrower or of any entity other than
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Borrower, or (iii) subscription rights, options or warrants to purchase any of
the foregoing assets or securities, whether or not such rights, options or
warrants are immediately exercisable (all such distributions referred to in
clauses (i), (ii) and (iii) being hereinafter collectively referred to as
"Distributions on Common Stock"), Borrower shall set aside in an escrow
reasonably acceptable to Lender, and suitably invested for the benefit of
Lender, the Distribution on Common Stock to which Lender would have been
entitled if Lender had converted all of the Term Loans/Commitment for the
Borrower Common Stock immediately prior to the record date for the purpose of
determining stockholders entitled to receive such Distribution on Common Stock
and any such Distribution on Common Stock (together with any earnings while
escrowed) shall thereafter be distributed from out of such escrow to Lender
(immediately upon conversion) to the extent such Distribution on Common Stock
relates to the portion of the Term Loans/Commitment then being converted.
C. Adjustments for Issuances of Additional Stock. Subject to the
exceptions referred to in Section 10.04.E hereof, in case Borrower shall at any
time or from time to time after the date hereof issue any additional shares of
the Borrower Common Stock ("Additional Common Stock"), for a consideration per
share either (i) less than the then Current Conversion Price per share of the
Borrower Common Stock immediately prior to the issuance of such Additional
Common Stock, or (ii) without consideration, then (in the case of either clause
(i) or (ii)), and thereafter successively upon each such issuance, the Current
Conversion Price shall forthwith be reduced to a price equal to the price
determined by multiplying such Current Conversion Price by a fraction, of which
(1) the numerator shall be (i) the number of shares of the
Borrower Common Stock outstanding when the then Current Conversion
Price became effective plus (ii) the number of shares of the Borrower
Common Stock which the aggregate amount of consideration, if any,
received by Borrower upon all issuances of the Borrower Common Stock,
since the Current Conversion Price became effective (including the
consideration, if any, received for such Additional Common Stock)
would purchase at the then Current Conversion Price per share of the
Borrower Common Stock, and
(2) the denominator shall be (i) the number of shares of the
Borrower Common Stock outstanding when the Current Conversion Price
became effective plus (ii) the number of shares of the Borrower Common
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Stock issued since the Current Conversion Price became effective
(including the number of shares of such Additional Common Stock.
provided, however, that such adjustment shall be made only if such
adjustment results in a Current Conversion Price less than the Current
Conversion Price in effect immediately prior to the issuance of such
Additional Common Stock. Borrower may, but shall not be required to, make
any adjustment of the Current Conversion Price if the amount of such
adjustment shall be less than one percent (1%) of the Current Conversion
Price immediately prior to such adjustment, but any adjustment that would
otherwise be required then to be made which is not so made shall be carried
forward and shall be made at the time of (and together with) the next
subsequent adjustment which, together with any adjustments so carried
forward, shall amount to not less than one percent (1%) of the Current
Conversion Price immediately prior to such adjustment.
D. Certain Rules in Applying the Adjustment for Additional Stock
Issuances. For purposes of any adjustment as provided in Section 10.04.C hereof,
the following provisions shall also be applicable:
(i) Cash Consideration. In case of the issuance of Additional
Common Stock for cash, the consideration received by Borrower therefor shall be
deemed to be the net cash proceeds received by Borrower for such Additional
Common Stock after deducting any commissions or other expenses paid or incurred
by Borrower for any underwriting of, or otherwise in connection with the
issuance of, such Additional Common Stock.
(ii) Non-Cash Consideration. In case of the issuance of
Additional Common Stock for a consideration other than cash, or a consideration
a part of which shall be other than cash, (A) if value of Additional Common
Stock to be issued for such consideration is less than Fifty Thousand Dollars
($50,000), the amount of the consideration other than cash so received or to be
received by Borrower shall be deemed to be the value of such consideration at
the time of its receipt by Borrower as determined in good faith by the Board of
Directors of Borrower, and (B) if value of Additional Common Stock to be issued
for such consideration is equal to or greater than Fifty Thousand Dollars
($50,000), the amount of the consideration other than cash so received or to be
received by Borrower shall be deemed to be the value of such consideration at
the time of its receipt by Borrower as determined in good faith by an
independent appraiser approved by the Lender; provided, however, that where the
non-cash consideration consists of the cancellation, surrender or exchange of
outstanding obligations of Borrower (or where such obligations are otherwise
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converted into shares of the Borrower Common Stock), the value of the non-cash
consideration shall be deemed to be the principal and unpaid interest amount of
the obligations canceled, surrendered, satisfied, exchanged or converted. If
Borrower receives consideration, part or all of which consists of publicly
traded securities (i.e., in lieu of cash), the value of such non-cash
consideration shall be the aggregate market value of such securities (based on
the latest reported sale price, standard settlement) as of the close of the day
immediately preceding the date of its receipt by Borrower.
(iii) Options, Warrants, Convertibles, Etc. In case of the
issuance, whether by distribution or sale to holders of Borrower Common Stock or
to others, by Borrower of (i) any security that is convertible into Borrower
Common Stock or (ii) any rights, options or warrants to purchase the Borrower
Common Stock (except as stated in Section 10.04.E hereof), if inclusion thereof
in calculating adjustments under this Section 10.04 would result in a Current
Conversion Price lower than if excluded, Borrower shall be deemed to have
issued, for the consideration described below, the number of shares of the
Borrower Common Stock into which such convertible security may be converted when
first convertible, or the number of shares of the Borrower Common Stock
deliverable upon the exercise of such rights, options or warrants when first
exercisable, as the case may be (and such shares shall be deemed to be
Additional Common Stock for purposes of Section 10.04.C hereof). The
consideration deemed to be received by the Borrower at the time of the issuance
of such convertible securities or such rights, options or warrants shall be the
consideration so received determined as provided in Section 10.04.D(i) and (ii)
hereof after deducting any commissions or other expenses paid or incurred by
Borrower for any underwriting of, or otherwise in connection with, the issuance
of such convertible securities or rights, options or warrants, plus (x) any
consideration or adjustment payment to be received by Borrower in connection
with such conversion or, as applicable, (y) the aggregate price at which shares
of the Borrower Common Stock are to be delivered upon the exercise of such
rights, options or warrants when first exercisable (or, if no price is specified
and such shares are to be delivered at an option price related to the market
value of the subject Borrower Common Stock an aggregate option price bearing the
same relation to the market value of the subject Borrower Common Stock at the
time such rights, options or warrants were granted). If, subsequently, such
convertible security, rights, options or warrants is converted or exercised or
the Term Loans/Commitment is converted hereunder (1) such number of shares into
which such convertible security is convertible, or which are deliverable upon
the exercise of such rights, options or warrants, is increased or (2) the
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conversion or exercise price of such convertible security, rights, options or
warrants is decreased, then the calculations under the preceding two sentences
(and any resulting adjustment to the Current Conversion Price under Section
10.04.C hereof) with respect to such convertible security, rights, options or
warrants, as the case may be, shall be recalculated as of the time of such
exercise or conversion but giving effect to such changes (but any such
recalculation shall not result in the Current Conversion Price being higher than
that which would be calculated without regard to such issuance). On the
expiration or termination of such rights, options or warrants, or rights to
convert, the Conversion Price hereunder shall be readjusted (up or down as the
case may be) to such Current Conversion Price as would have been obtained had
the adjustments made with respect to the issuance of such rights, options,
warrants or convertible securities been made upon the basis of the delivery of
only the number of shares of the Borrower Common Stock actually delivered upon
the exercise of such rights, options or warrants or upon the conversion of any
such securities and at the actual exercise or Conversion Prices (but any such
recalculation shall not result in the Current Conversion Price being higher than
that which would be calculated without regard to such issuance).
(iv) Number of Shares Outstanding. The number of shares of the
Borrower Common Stock has at the time outstanding shall exclude all shares of
the Borrower Common Stock then owned or held by or for the account of Borrower
but shall include the aggregate number of shares of Borrower Common Stock at the
time deliverable in respect of the convertible securities, rights, options and
warrants referred to in Section 10.04.D(iii) and 10.04.E hereof; provided, that
to the extent that such rights, options, warrants or conversion privileges are
not exercised, such shares of Borrower Common Stock shall be deemed to be
outstanding only until the expiration dates of the rights, warrants, options or
conversion privileges or the prior cancellation thereof.
E. Exclusions from the Adjustment for Additional Stock Issuances. No
adjustment of the Current Conversion Price under Section 10.04.C hereof shall be
made as a result of or in connection with:
(i) the issuance of Shares upon conversion of the Term
Loans/Commitment;
(ii) the issuance of Borrower Common Stock to officers and
employees of Borrower or any Subsidiary, or the grant to or exercise by any such
persons of options to purchase Borrower Common Stock, all pursuant to the
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Borrower's stock option and stock purchase plans described on Schedule 10.04.E
hereto; or
(iii) the issuance of Borrower Common Stock pursuant to any
convertible securities described on Schedule 10.04.E hereto.
To the extent that the issuance (or deemed issuance) of Borrower Common Stock
shall not result in any adjustment of the Current Conversion Price pursuant to
the provisions of this Section 10.04.E then such Borrower Common Stock shall not
be taken into account for purposes of determining any adjustment under clause
(B) of Section 10.04.C hereof.
F. Officer's Certification. Whenever the Current Conversion Price is
adjusted as provided in this Section 10.04, Borrower will promptly deliver to
Lender a certificate of its Chief Accounting Officer or Chief Financial Officer
setting forth the Current Conversion Price as so adjusted, the computation of
such adjustment and a brief statement of the facts accounting for such
adjustment. Upon the request of Lender, Borrower shall promptly (in any event,
within thirty (30) days of such request) obtain a certificate of a firm of
independent public accountants of recognized national standing selected by the
Board of Directors of Borrower (who may be the regular auditors of Borrower)
(the "Accountant Certificate") setting forth the Current Conversion Price as so
adjusted, the computation of such adjustment and a brief statement of the facts
accounting for such adjustment, and will mail to Lender a copy of such
Accountant Certificate. The determination set forth in the Accountant
Certificate shall be final and binding on both parties. If there is no change in
the amount of the original proposed adjustment or if the change (whether
increased or decreased) is less than five percent (5%) of the original proposed
adjustment, the cost of such Accountant Certificate shall be for the account of
Lender. In all other events, the cost of such Accountant Certificate shall be
for the account of Borrower.
G. Antidilution Adjustments under other Securities. Without limiting
any other rights available hereunder to Lender, if there is an antidilution
adjustment (x) under any security which is convertible into Borrower Common
Stock whether issued prior to or after the date hereof or (y) under any right,
option or warrant to purchase Borrower Common Stock whether issued prior to or
after the date hereof which (in the case of clause (x) or (y)) results in a
reduction in the exercise or purchase price with respect to such security,
right, option or warrant or results in an increase in the number of shares
obtainable under such security, right, option or warrant, then an adjustment
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shall be made under this Section 10.04.G to the Current Conversion Price
hereunder. Any such adjustment under this Section 10.04.G shall be whichever of
the following results in a lower Current Conversion Price: (A) a reduction in
the Current Conversion Price equal to the percentage reduction in such exercise
or purchase price with respect to such security, right, option or warrant or (B)
a reduction in the Current Conversion Price which will result in the same
percentage increase in the number of Shares available under this Article X as
the percentage increase in the number of shares available under such security,
right, option or warrant. Any such adjustment under this Section 10.04.G shall
only be made if it would result in a lower Current Conversion Price than that
which would be determined pursuant to any other antidilution adjustment
otherwise required under this Article X as a result of the event or circumstance
which triggered the adjustment to the security, right, option or warrant
described in clause (x) or (y) above (and if any such adjustment is so made
under this Section 10.04.G, then such other antidilution adjustment otherwise
required under this Article X shall not be made as a result of such event or
circumstance).
H. Other Adjustments. In case any event shall occur as to which any of
the provisions of this Section 10.04 are not strictly applicable but the failure
to make any adjustment would not fairly protect the conversion rights
represented hereby in accordance with the essential intent and principles of
this Section 10.04, then, in each such case, Borrower shall make an adjustment
consistent with the intent and principles of this Section 10.04, provided,
however, that any such adjustment under this Section 10.04.H shall only be made
if it would result in a lower Current Conversion Price. Upon the request of
Lender, Borrower shall promptly (in any event, within thirty (30) days of such
request) appoint a firm of independent public accountants of recognized national
standing selected by the Board of Directors of Borrower (who may be the regular
auditors of Borrower), which shall give their opinion upon the adjustment, if
any, on a basis consistent with the essential intent and principles established
in this Section 10.04, necessary to preserve, without dilution, the conversion
rights represented hereby. Upon receipt of such opinion, Borrower will promptly
mail copies thereof to Lender and shall make the adjustments described therein.
If there is no change in the amount of the original proposed adjustment or if
the change (whether increased or decreased) is less than five percent (5%) of
the original proposed adjustment, the cost of such opinion shall be for the
account of Lender. In all other events, the cost of such Accountant Certificate
shall be for the account of Borrower.
I. Meaning of "Issuance". References in this Agreement to "issuances"
of stock by Borrower include issuances by Borrower of previously unissued
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shares and issuances or other transfers by Borrower of treasury stock not
specifically identified on Schedule 10.04(E).
SECTION 10.05. Issuer's Consolidation or Merger.
Without limiting Section 5.02 hereof, if Borrower shall at any time
consolidate with or merge into another corporation (where Borrower is not the
continuing corporation after such merger or consolidation), or Borrower shall
sell, transfer or lease all or substantially all of its assets, or Borrower
shall change its Shares into property other than capital stock, then, in any
such case, Lender shall thereupon (and thereafter) be entitled to receive, upon
the conversion of the Term loans/Commitment, the securities or other property to
which (and upon the same terms and with the same rights as) Lender would have
been entitled if such conversion had occurred immediately prior to such
consolidation or merger, such sale of assets or such change (with any record
date requirement being deemed to have been satisfied), and such conversion
rights shall thereafter continue to be subject to further adjustments under this
Article X. Borrower shall take such steps in connection with such consolidation
or merger, such sale of assets or such change as may be necessary to assure
Lender that the provisions hereof shall thereafter be applicable in relation to
any securities or property thereafter deliverable upon the conversion of the
Term Loans/Commitment, including obtaining a written obligation to supply such
securities or property upon such conversion and to be so bound hereby.
SECTION 10.06. Notice to Lender.
In case at any time
(i) Borrower shall take any action which would require an adjustment
in the Current Conversion Price pursuant to Section 10.04.A, C or G; or
(ii) Borrower shall authorize the granting to the holders of Borrower
Common Stock of any Distributions on Common Stock as set forth in Section
10.04.B; or
(iii) there shall be any reorganization, reclassification or change of
Borrower Common Stock, or any consolidation or merger to which Borrower is
a party and for which approval of any stockholders of Borrower is required,
or any sale, transfer or lease of all or substantially all of the assets of
Borrower; or
(iv) there shall be a voluntary or involuntary dissolution,
liquidation or winding-up of Borrower;
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then, in any one or more of such cases, Borrower shall give written notice to
Lender, not less than twenty (20) days before any record date or other date set
for definitive action, of the date on which such action, distribution,
reorganization, reclassification, change, sale, transfer, lease, consolidation,
merger, dissolution, liquidation or winding-up shall take place, as the case may
be. Such notice shall also set forth such facts as shall indicate the effect of
any such action (to the extent such effect may be known at the date of such
notice) on the Current Conversion Price and the kind and amount of the shares
and other securities and property deliverable upon conversion of the Term
Loans/Commitment. Such notice shall also specify any date as of which the
holders of Borrower Common Stock of record shall be entitled to exchange their
Borrower Common Stock for securities or other property deliverable upon any such
reorganization, reclassification, change, sale, transfer, lease, consolidation,
merger, dissolution, liquidation or winding-up, as the case may be.
ARTICLE XI
REPRESENTATIONS OF LENDER
SECTION 11.01. Representations of Lender. Lender hereby represents and
warrants to Borrower as follows:
A. Lender is an Accredited Investor as defined under the Securities
Act of 1933, as amended (the "Act"). Lender has been provided with and reviewed
the SEC Filings and has made its own independent due diligence investigation of
Borrower; provided, however, that such investigation shall not impact in any
manner Borrower's responsibility for the representations and warranties made
hereunder. Lender is qualified to analyze the merits of an investment in
Borrower.
B. Lender acknowledges that the Term Loans and any Shares received by
it upon conversion of the Term Loans and/or Commitments have not been registered
under the Act and may not be transferred, assigned or resold unless registered
pursuant to the Act or pursuant to an exemption under the Act; provided,
however, that the foregoing shall not impact in any manner Borrower's
obligations under the Act.
C. Lender has entered into this Agreement, issued the Commitments to
make the Term Loans and acquired the Conversion rights hereunder without a view
towards sale or distribution thereof; provided, however, that, as set forth in
Section 8.03 hereof, the distribution of any Shares acquired after Conversion of
the Term Loans and/or Commitments shall be in the sole control and discretion of
Lender.
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D. On each date of Conversion of the Term Loans and/or Commitments
pursuant to Article X hereof, the representations and warranties of Lender
contained in this Article XI shall be deemed repeated.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
COVOL TECHNOLOGIES, INC.
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
PACIFICORP FINANCIAL SERVICES, INC.
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
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Exhibit 1.01.TN
PROMISSORY NOTE
U.S. $5,000,0000 Dated as of March 20, 1997
or such amount thereof
as has been advanced
FOR VALUE RECEIVED, the undersigned, COVOL TECHNOLOGIES, INC., a
Delaware corporation ("Borrower"), PROMISES TO PAY to the order of PACIFICORP
FINANCIAL SERVICES, INC., an Oregon corporation ("Lender"), the principal amount
of Five Million Dollars ($5,000,000), or such amount thereof as has been
advanced, together with interest thereon at the Interest Rate (as hereinafter
defined) (collectively, the "Term Loan") from the date hereof until paid in
full, all in accordance with the terms of the Loan Agreement (as hereinafter
defined) and this Note.
For purposes of this Note, the following terms shall have the meanings
set forth below. Capitalized terms used but not otherwise defined herein shall
have the meanings ascribed thereto in the Loan Agreement.
"Default Interest Rate" means a rate per annum equal to the lesser of
(a) the highest rate allowed by law, or (b) the sum of the Interest Rate plus
three percent (3%).
"Interest Rate" means, for any day, a rate per annum equal to the
lesser of (a) the highest rate allowed by law, or (b) the sum of (i) the rate of
interest publicly announced by Morgan Guaranty Trust Company of New York in New
York City from time to time as its "prime rate" and (ii) two percent (2%) per
annum.
"Loan Agreement" means the Loan and Security Agreement dated as of
even date herewith by and between Borrower and Lender, as the same may be
amended, supplemented or otherwise modified from time to time.
Borrower shall pay interest on the unpaid principal balance of this
Note from the date hereof until the repayment in full thereof at the Interest
Rate. Interest shall be calculated based on a 365/366-day year and the actual
number of days elapsed, and shall be compounded monthly. Principal and accrued
and unpaid interest thereon, shall be due and payable on the Termination Date,
or on such earlier date as such sum shall become due and payable hereunder or
under the Loan Documents by virtue of acceleration in accordance with the
provisions hereof or of the Loan Agreement.
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In no contingency or event whatsoever shall the rate or amount of
interest paid by the Borrower under this Note exceed the maximum amount
permissible under the law which a court of competent jurisdiction shall, in a
final determination, deem applicable hereto. In the event that such court
determines that Lender has received interest under this Note in excess of the
maximum amount permitted by such law (i) Lender shall apply such excess to any
unpaid principal owed by Borrower to Lender or, if the amount of such excess
exceeds the unpaid balance of such principal, Lender shall promptly refund such
excess interest to Borrower and (ii) the provisions of this Note shall be deemed
amended to provide for such permissible rate. All sums paid, or agreed to be
paid, by Borrower which are, or hereafter may be construed to be, compensation
for the use, forbearance or detention of money shall, to the extent permitted by
applicable law, be amortized, spread and allocated throughout the full term of
such indebtedness until the indebtedness is paid in full.
Both principal and interest are payable in United States Dollars in
immediately available funds. All principal, interest and late charges shall be
paid to Lender pursuant to the payment provisions in the Loan Agreement.
The terms and provisions of the Loan Agreement are hereby incorporated
herein by this reference, and reference is made to the Loan Agreement for the
basic terms of the Term Loan. The Loan Agreement, among other things, contains
provisions for (i) acceleration of the maturity hereof upon the happening of
certain stated events and (ii) prepayments on account of principal hereof prior
to the maturity hereof upon the terms and conditions therein specified, which
prepayments shall be applied by Lender to payment of principal on the Term Loan
in inverse order of maturity.
Time is of the essence hereof, and upon the occurrence of an Event of
Default then this Note and any note(s) or other instrument(s) that may be taken
in renewal or extension of all or any part of the indebtedness evidenced hereby
or in replacement of this Note shall, at Lender's option, become immediately due
and payable without any further presentment, demand, protest or notice of any
kind, and thereafter interest shall continue to accrue at the Default Interest
Rate.
Furthermore, upon the occurrence of an Event of Default, Lender shall
have all of the rights and remedies granted to Lender under the Loan Agreement
and under all other Loan Documents, and notwithstanding anything to the contrary
contained herein, any amount of principal which is not paid when due (whether at
2
<PAGE>
stated maturity, by acceleration or otherwise) shall bear interest at the
Default Interest Rate from the date due until paid.
This Note shall bind and inure to the benefit of the Lender's
successors and permitted assigns; provided, however, that Lender may not assign
this Note without Borrower's prior written consent, and any prohibited
assignment shall be absolutely void; provided, further, that such prohibition on
assignment shall in no event apply to the assignment by Lender of all or any
portion of its rights hereunder after the occurrence of an Event of Default.
Borrower hereby waives presentment for payment, demand, notice of
dishonor and protest of this Note and further agrees that this Note shall be
deemed to have been made under and shall be governed by the laws of the State of
Oregon in all respects, including matters of construction, validity and
performance, and that none of its terms or provisions may be waived, altered,
modified or amended except as Lender may consent thereto in writing duly signed
by Lender or its authorized agent. No failure to exercise, and no delay in
exercising, any rights hereunder on the part of the holder hereof shall operate
as a waiver of such rights.
This Note is secured by the Collateral under the terms of the Loan
Agreement and is subject to the terms and conditions and entitled to the
benefits of the Loan Agreement and the other Loan Documents.
This Note shall be binding upon and inure to the benefit of the Lender
and its respective heirs, executors, administrators, personal representatives
and permitted successors and assigns.
WAIVER OF JURY TRIAL: THE UNDERSIGNED HEREBY IRREVOCABLY WAIVES ALL
RIGHTS TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED
UPON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THE OBLIGATIONS,
THE TRANSACTION DOCUMENTS, THE DEBTOR-CREDITOR RELATIONSHIP OF BORROWER AND
LENDER OR THE ACTIONS OF LENDER IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE
OR ENFORCEMENT THEREOF.
IN WITNESS WHEREOF, Borrower has caused this Note to be executed as of the
date and year first above written.
COVOL TECHNOLOGIES, INC.
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
3
ALABAMA PROJECT PURCHASE AGREEMENT
Dated as of March 20, 1997
Covol Technologies, Inc.
and
Alabama Synfuel #1 Ltd.
SELLERS
Birmingham Syn Fuel, L.L.C.
BUYER
ARTICLE I
DEFINITIONS............................................................... 1
1.1 Certain Definitions................................................ 1
ARTICLE II
AGREEMENT TO PURCHASE AND SELL; PURCHASE PRICE............................ 7
2.1 Agreement to Purchase and Sell..................................... 7
2.2 Purchase Price..................................................... 7
ARTICLE III
ASSETS AND LIABILITIES TO BE SOLD AND RETAINED............................ 8
3.1 Assets to be Sold.................................................. 8
3.2 Assets to be Retained.............................................. 8
3.3 Liabilities to be Assumed by Buyer................................. 8
3.4 Liabilities to be Retained by Sellers.............................. 8
ARTICLE IV
REPRESENTATIONS AND WARRANTIES............................................ 9
4.1 Representations and Warranties of Sellers.......................... 9
4.2 Changes Prior to Closing...........................................15
4.3 Representations and Warranties of Buyer............................15
4.4 Changes Prior to Closing...........................................16
4.5 Joint Obligations..................................................16
ARTICLE V
CONDUCT OF BUSINESS ......................................................17
5.1 Operations by Sellers..............................................17
5.2 Negative Covenants.................................................18
5.3 Additional Covenants...............................................18
ARTICLE VI
DESTRUCTION OF ASSETS.....................................................20
ARTICLE VII
CONDITIONS PRECEDENT TO CLOSING; TERMINATION..............................20
7.1 Conditions Precedent to the Obligations
of Buyer...........................................................20
7.2 Conditions Precedent to the Obligations
of Sellers.........................................................22
7.3 Termination........................................................23
ARTICLE VIII
CLOSING...................................................................24
8.1 Time and Place of Closing..........................................24
8.2 Actions at Closing.................................................25
ARTICLE IX
APPROVALS AND CONSENTS....................................................26
<PAGE>
ARTICLE X
CROSS INDEMNIFICATION.....................................................26
10.1 Obligations of Sellers.............................................26
10.2 Obligations of Buyer...............................................27
10.3 Indemnity Procedures...............................................27
ARTICLE XI
REMEDIES AND SURVIVAL.....................................................28
11.1 Survival of Representations, etc...................................28
11.2 Procedure..........................................................29
ARTICLE XII
MISCELLANEOUS.............................................................30
12.1 Books, Records and Assistance by Personnel.........................30
12.2 Assignment.........................................................31
12.3 Notices............................................................31
12.4 Expenses and Fees..................................................32
12.5 Successors and Assigns.............................................32
12.6 Waiver.............................................................32
12.7 Entire Agreement...................................................33
12.8 Amendments, Supplements and Etc....................................33
12.9 Applicable Law.....................................................33
12.10 Execution and Counterparts.........................................33
12.11 Titles and Headings................................................33
12.12 Third Parties......................................................33
12.13 Further Assurances.................................................34
<PAGE>
THIS ALABAMA PROJECT PURCHASE AGREEMENT is made as of March 20, 1997
between Covol Technologies, Inc., a Utah corporation ("Covol"), Alabama Synfuel
#1 Ltd., a Delaware limited partnership ("Alabama Synfuel," and together with
Covol, "Sellers"); Birmingham Syn Fuel, L.L.C., an Oregon limited liability
company ("Buyer").
WHEREAS Covol has assigned to Alabama Synfuel ownership of a coal
briquetting facility to be located in Birmingham, Alabama (the "Alabama
Project"), including certain contracts entered into by Covol and certain
third-parties in connection with the conduct of the construction, maintenance
and operation thereof.
WHEREAS Sellers desire to sell to Buyer, and Buyer desires to purchase from
Sellers, the Alabama Project, all subject to the terms and conditions of this
Agreement.
NOW, THEREFORE, in consideration of the foregoing premises, the mutual
covenants and agreements hereinafter set forth, and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged,
Sellers and Buyer agree as follows:
ARTICLE I
DEFINITIONS
1.1 Certain Definitions. In this Agreement, capitalized terms and other
defined terms described below shall have the meanings set forth or
cross-referenced below:
"Affiliate" means any person, partnership, joint venture, corporation
or other form of enterprise which directly or indirectly controls, is controlled
by, or is under common control with, a party hereto. For purposes of the
preceding sentence, "control" means possession, directly or indirectly, of the
power to direct or cause direction of management and policies through ownership
of voting securities, contract rights, voting trust, or otherwise.
"Agreement" means this Alabama Project Purchase Agreement, the
Exhibits, and the Schedules attached hereto (all of which Exhibits and Schedules
shall be deemed to be incorporated herein by reference and made a part hereof as
<PAGE>
2
if set out in full herein), and all agreements or instruments executed in
connection herewith or delivered pursuant hereto.
"Alabama Project" has the meaning given in the preamble of this
Agreement.
"Buyer" has the meaning given in the preamble of this Agreement.
"Buyer's Disclosure List" has the meaning given in Section 4.4.
"Closing" means the closing of this transaction which is described in
more detail in Section 8.1.
"Closing Date" has the meaning given in Section 8.1.
"Construction Contract" means the Standard For of Agreement between
Owner and Contractor, dated as of December 26, 1996, by an between Covol
Technologies, Inc. and TIC The Industrial Company.
"Contracts" means the contracts, leases, purchase orders, and other
agreements pertaining to the conduct of the construction, maintenance and
operation of the Alabama Project as described on Schedule 4.1(m), including the
Construction Contract.
"Effective Time" means 12:01 a.m., Mountain Time, on the Closing Date.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time.
"ERISA Plan" means, for any Person, an employee benefit plan or other
plan maintained for employees of such Person and covered by Title IV of ERISA.
"Files and Records" means all files, reports, data and records
relating to the Purchased Assets and the conduct of the construction,
maintenance and operation of the Alabama Project, including those relating to
engineering, permitting, maintenance, inventory and supply, property and excise
taxes, title, corporate accounting, market studies, coal fines purchases, coal
sales, income tax, Sellers' general files relating to the Alabama Project,
<PAGE>
3
economic analyses, and documents related to general policies and procedures of
Sellers with respect to the Purchased Assets and the conduct of the
construction, maintenance and operation of the Alabama Project.
"GAAP" means generally accepted United States accounting principles
consistently applied, as in effect from time to time.
"Governmental Entity" means any Federal, state or local government or
any court, administrative or regulatory agency, whether domestic or foreign.
"Hazardous Materials" means any (a) asbestos in any form, urea
formaldehyde foam insulation, transformers or other equipment which contain
dielectric fluid containing levels of polychlorinated byphenyls or radon gas;
(c) any chemical, material or substance defined as or included in the definition
of "hazardous substances", "hazardous wastes", "hazardous materials", "extremely
hazardous waste", "restricted hazardous waste", "toxic substances" or words of
similar import under any applicable Hazardous Materials Laws.
"Hazardous Materials Claims" means any enforcement, cleanup, removal,
remedial or other governmental or regulatory demand, actions, agreements or
orders threatened, instituted, pending or completed by any Governmental Entity
pursuant to any Hazardous Materials Laws, together with any claims made or
threatened by any third party against either of the Sellers or any Purchased
Assets or in connection with the conduct of the construction, maintenance and
operation of the Alabama Project relating to damage, contribution, cost
recovery, compensation, loss or injury resulting from the presence, release or
discharge of any Hazardous Materials.
"Hazardous Materials Laws" means the following Federal laws, and their
implementing regulations, as well as any amendments to such laws, and all State
and local laws and ordinances which regulate the same subject matter: (a) the
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA),
42 USC 9601 et seq.; (b) the Solid Waste Disposal Act, 42 USC 6901 et seq.,
including the Resource Conservation and Recovery Act (RCRA) and the laws
governing Underground Storage Tanks; (c) the Toxic Substances Control Act
(TSCA), 15 USC 2601 et seq., including those provisions governing use and
disposal of Polychlorinated Biphenyls (PCBs); (d) the Hazardous Materials
<PAGE>
4
Transportation Act (HMTA), 49 USC 1801, et seq.;(e) the Federal Insecticide,
Fungicide and Rodenticide Act (FIFRA), 7 USC 136 et seq.; (f) those portions of
the Clean Air Act governing toxic air emissions, 42 USC 7401 et seq.; (g) those
portions of the Clean Water Act governing toxic water pollutants and oil spills,
33 USC 1251 et seq.; (h) the Emergency Planning and Community Right-to-know Act
(EPCRA, SARA Title III), 42 USC 11001 et seq.; and (i) those portions of the
Occupational Safety and Health Act (OSHA) governing worker safety with respect
to hazards from chemical substances, including requirements for Material Safety
Data Sheets, 29 USC 651, et seq.
"Indemnitee" has the meaning given in Section 10.3(b).
"Indemnitor" has the meaning given in Section 10.3(b).
"Inventory" means all inventory (as defined in the UCC) of Sellers
held for sale, lease or demonstration, or to be furnished under contracts of
sale or service in connection with the Alabama Project, in all forms, wherever
located, now or hereafter existing, including (i) all inventory, raw materials,
work in process, finished goods, materials and supplies used or to be consumed
in connection with the conduct of the construction, maintenance and operation of
the Alabama Project, and all additions and accessions to such property, (ii)
goods in which Sellers have an interest in mass or a joint or other interest or
right of any kind, and (iii) goods which are returned to or repossessed by
Sellers, and all accessions thereto and products thereof.
"Letter Ruling" has the meaning given in Section 7.1(i).
"Lien" means any interest in property securing an obligation, whether
such interest is based on common law, statute or contract, and including any
restriction on the use, voting, transfer, receipt of income or other exercise of
any attributes of ownership, any security interest or lien arising from a
mortgage, claims, encumbrance, pledge, charge, easement, servitude, security
agreement, conditional sale or trust receipt or a lease, consignment or bailment
for security purposes. The term "Lien" shall also include reservations,
exceptions, covenants, conditions, restrictions, leases, subleases, licenses,
occupancy agreements, pledges, equities, charges, assessments, covenants,
reservations, defects in title, encroachments and other burdens, and other title
<PAGE>
5
exceptions and encumbrances affecting property of any nature, whether accrued or
unaccrued, or absolute or contingent.
"Loan Documents" means the Convertible Loan and Security Agreement,
dated as of the date hereof, by and between Covol and PacifiCorp Financial
Services, Inc., and the other Loan Documents (as such term are defined in the
Convertible Loan and Security Agreement), and any and all other documents
executed pursuant thereto, or contemplated thereby (other than the Purchase
Agreement Documents), as the same may be modified, extended, renewed, amended or
replaced from time to time.
"1986 Code" has the meaning given in Section 7.1(i).
"Party" or "Parties" means Buyer and Sellers and their successors, as
parties to this Agreement.
"Permitted Liens" means:
(i) Liens (but only to the extent not yet delinquent or (a) which are
being contested in good faith by appropriate proceedings with reserves
acceptable to Buyer having been set aside and maintained and (b) with respect to
tax liens on the Purchased Assets, as to which Sellers shall have paid the
undisputed amount) securing taxes, assessments or governmental charges or
levies, or arising in connection with workers' compensation, unemployment
insurance or social security obligations, or securing the claims or demands of
materialmen, mechanics, carriers, warehousemen, landlords and other like
Persons;
(ii) Attachment, judgment or similar liens arising in connection with
court proceedings (a) which are discharged or stayed pending appeal within
thirty (30) days of attachment or levy, and, if so stayed, the stay remains in
effect or (b) payment of which is covered in full (subject only to customary and
reasonable deductibles) by insurance or surety bonds;
(iii) Liens in favor of PacifiCorp Financial Services, Inc. under the
Loan Documents; and
(iv) Existing Liens disclosed on Schedule 4.1(q) attached hereto and
Liens affecting real property interests consisting of (a) zoning regulations,
(b) easements, (c) set-back lines, or (d) covenants, conditions or restrictions,
<PAGE>
6
now existing or hereafter arising, which do not in the aggregate have a
material adverse effect on the construction, operation or maintenance of the
Alabama Project.
"Permits" means any existing permit, license, franchise,
authorization, variance, exemption, concession, lease, instrument, order or
approval of any Governmental Entity and any applications therefor appurtenant or
relating to the Purchased Assets or otherwise held by Sellers in connection with
the conduct of the construction, maintenance and operation of the Alabama
Project as described on Schedule 4.1(n).
"Person" means any natural person, corporation, partnership, sole
proprietorship, firm, association, government, governmental agency or any other
entity, whether acting in an individual, fiduciary or other capacity.
"Personal Property" means all tangible and intangible personal
property owned by Sellers and used or held in connection with the conduct of the
construction, maintenance and operation of the Alabama Project Alabama Project
as described on Schedule 4.1(q).
"Promissory Note" has the meaning given in Section 2.2.
"Property Leases" means the real property leases, rights-of-way,
easements, licenses and agreements held by Sellers in connection with the
conduct of the construction, maintenance and operation of the Alabama Project as
described on Schedule 4.1(o).
"Purchase Agreement Documents" means this Agreement, and any and all
other documents executed pursuant hereto, or contemplated hereby (other than the
Loan Documents), as the same may be modified, extended, renewed, amended or
replaced from time to time.
"Purchase Price" has the meaning given in Section 2.2.
"Purchased Assets" means all of Sellers' right, title, and interest in
the assets set forth on Schedule 2.1.
"Related Person" means (i) any shareholder who owns or controls more
than five percent (5%) of the voting securities of either Seller, (ii) any
officer or director of either Seller, and (iii) any other Person that, directly
<PAGE>
7
or indirectly, controls, is controlled by or is under common control with or is
related to, by blood or marriage, either Seller or any Person identified in
clauses (i) or (ii).
"Retained Assets" means those assets retained by the Sellers as
described in Section 3.2.
"Retained Liabilities" means those liabilities retained by Sellers as
described in Section 3.4.
"Section 29 Credits" has the meaning given in Section 7.1(i).
"Sellers" has the meaning given in the preamble of the Agreement.
"Sellers' Disclosure List" has the meaning given in Section 4.2.
"Transaction Documents" means the Loan Documents and the Purchase
Agreement Documents.
"UCC" means the Uniform Commercial Code as enacted in the State of
Alabama.
ARTICLE II
AGREEMENT TO PURCHASE AND SELL; PURCHASE PRICE
2.1 Agreement to Purchase and Sell. Subject to the terms and conditions of
this Agreement, Sellers agree to sell to Buyer and Buyer agrees to purchase from
Sellers, the Purchased Assets, free and clear of all Liens.
2.2 Purchase Price. The total consideration for the Purchased Assets shall
be a promissory note in the principal amount of Three Million Four Hundred
Thousand Dollars ($4,800,000)(the "Purchase Price"), in the form attached hereto
as Exhibit A-1 (the "Promissory Note"). The Promissory Note shall be secured by
a Security Agreement and Collateral Assignment of Sublease in the form attached
hereto as Exhibit A-2 and Exhibit A-3, respectively.
<PAGE>
8
ARTICLE III
ASSETS AND LIABILITIES TO BE SOLD AND RETAINED
3.1 Assets to be Sold. The assets to be sold are the Purchased Assets.
3.2 Assets to be Retained. The assets to be retained by Sellers are all
assets of the Sellers other than the Purchased Assets.
3.3 Liabilities to be Assumed by Buyer. Subject to the terms of this
Article III and upon completion of the Closing, Buyer covenants and agrees to
assume, fulfill, perform and in due course discharge, all obligations and
liabilities of any kind or character whatsoever resulting from, relating to,
arising out of, or incurred in connection with the Purchased Assets, which
obligations and liabilities result from, relate to, arise out of, or are
incurred in connection with actions taken after completion of the Closing;
provided, however, Buyer shall not assume any liability or obligation arising
from or relating to a breach by Sellers of a representation, warranty or
covenant set forth in this Agreement; provided, further, Buyer shall not assume
any liability or obligation retained by Sellers under Section 3.4; provided,
further, Buyer shall not assume any liability or obligation incurred by Covol
under the Operation and Maintenance Agreement.
3.4 Liabilities to be Retained by Sellers. Subject to the terms of Article
III and upon completion of the Closing, Sellers covenant and agree to assume,
fulfill, perform, and in due course discharge, indemnify, defend and hold
harmless Buyer and its directors, officers, agents, representatives,
subsidiaries and Affiliates from and against (i) all obligations and liabilities
of any kind or character whatsoever resulting from, relating to, arising out of,
or incurred in connection with the Retained Assets and (ii) all obligations and
liabilities of any kind or character whatsoever resulting from, relating to,
arising out of, or incurred in connection with the Purchased Assets to the
extent such obligations and liabilities resulted from, related to, arose out of,
or were incurred in connection with actions prior to completion of the Closing.
<PAGE>
9
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
4.1 Representations and Warranties of Sellers. Sellers jointly and
severally represent and warrant to Buyer that as of the date of this Agreement,
the facts set forth below in this Section 4.1 are and shall be true:
(a) Corporate Standing. Covol is a corporation duly organized and
validly existing and in good standing under the laws of the State of Delaware.
Alabama Synfuel is a limited partnership duly organized, validly existing and in
good standing under the laws of the State of Delaware. Each Seller has corporate
power to own its property, and to execute, deliver and perform this Agreement
and each of the Transaction Documents, and to carry on its business as now being
conducted. Each Seller is duly qualified to do business in and is in good
standing as a foreign corporation authorized to do business under the laws of
the State of Alabama.
(b) Authorizations; Binding Agreements. The execution, delivery and
performance of this Agreement and the other Transaction Documents by Sellers and
each conveyance, assignment, agreement, and other document herein contemplated
to be executed by Sellers, has been duly authorized by all necessary corporate
action. This Agreement and the other Transaction Documents and the conveyances,
assignments, agreements, and other documents herein contemplated to be executed,
delivered and performed by Sellers are, or will be upon execution, legal, valid
and binding obligations of Sellers, duly enforceable against Sellers in
accordance with their terms (subject, however, to the effects of bankruptcy,
insolvency, reorganization, moratorium, and similar laws from time to time in
effect relating to the rights and remedies of creditors as well as to general
principles of equity), do not and will not result in any violation of, conflict
with or default under the terms of Sellers' organizational documents (nor, to
the best of each Seller's knowledge after due inquiry, does there exist any
condition which upon the passage of time or the giving of notice would cause
such violation, conflict or default), and, subject only to such consents as are
set forth on Schedule 4.1(c), do not and will not result in any violation of,
conflict with or default under any material permit, lease, venture, mortgage,
agreement, contract, judgment, order or other obligation or restriction to which
Sellers, the Purchased Assets or the conduct of the construction, maintenance
<PAGE>
10
and operation of the Alabama Project may be bound or encumbered (nor, to the
best of each Seller's knowledge after due inquiry, does there exist any
condition which upon the passage of time or the giving of notice would cause
such violation, conflict or default).
(c) No Actions Affecting Enforcement of the Agreement and the other
Transaction Documents. There are no actions, suits, or proceedings pending, or,
to the best of either Seller's knowledge after due inquiry, threatened, against
either Seller in any court, or administrative governmental body or agency which
will affect in any adverse manner the ability of Sellers to execute, deliver and
perform this Agreement and the other Transaction Documents. Subject only to such
consents as are set forth on Schedule 4.1(c), and such consents which the
failure to obtain could not reasonably be expected to have a material adverse
effect on the Purchase Assets or the construction, maintenance and operation of
the Alabama Project, Sellers have obtained all permits, licenses, franchises,
authorizations, variances, exemptions, concessions, leases, instruments, orders,
consents or approvals of Governmental Entities and third parties necessary to
execute, deliver and perform this Agreement and the other Transaction Documents.
(d) Taxes. All tax returns and reports relating to the Purchased
Assets and the conduct of the construction, maintenance and operation of the
Alabama Project required by law (including all federal, state, and local
property tax, severance and franchise tax laws) to be filed by Sellers prior to
the Closing have been timely filed or will be caused to be timely filed, except
for such returns and reports which the failure to file could not reasonably be
expected to have a material adverse effect on the Purchase Assets or the
construction, maintenance and operation of the Alabama Project. All taxes,
assessments, fees, interest, penalties and other governmental charges relating
to the Purchased Assets and the conduct of the construction, maintenance and
operation of the Alabama Project which are due and payable have been paid when
due and payable, except for such taxes, assessments, fees, interest, penalties
and other governmental charges which the failure to pay could not reasonably be
expected to have a material adverse effect on the Purchase Assets or the
construction, maintenance and operation of the Alabama Project.
(e) Brokers or Finders Fees. Except as set forth on Schedule 4.1(e),
no obligation or liability, contingent or otherwise, for brokers or finders fees
<PAGE>
11
created by Sellers with respect to the matters provided for in this Agreement
and the other Transaction Documents shall be imposed upon Buyer or the Purchased
Assets.
(f) No Imposition of Liens. The execution, delivery and performance of
this Agreement and the other Transaction Documents by Sellers shall not result
in the imposition of any Lien, other than Permitted Liens, upon any of the
Purchase Assets or by which the construction, maintenance and operation of the
Alabama Project may be bound or encumbered.
(g) Completeness of Schedules. The Schedules made a part of this
Agreement are true, correct and complete. No information furnished by or on
behalf of Sellers to Buyer in connection with this Agreement and the other
Transaction Documents or on any such Schedule contains any untrue statement of a
material fact or omits to state a material fact necessary to make such
statements accurate.
(h) Title to Purchased Assets. Sellers have marketable title to and
possession of the Purchased Assets free and clear of all Liens, other than
Permitted Liens.
(i) Applicable Contracts and Permits. The Contracts, the Permits and
the Property Leases set forth on Schedules 4.1(m), 4.1(n) and 4.1(o)),
respectively, are the only material agreements, contracts, leases, purchase
orders, permits, licenses, franchises, authorizations, variances, exemptions,
concessions, leases, instruments, orders or approvals of any Governmental Entity
to which the Purchased Assets or the conduct of the construction, maintenance
and operation of the Alabama Project are bound.
(j) Pending Litigation. Except as disclosed on Schedule 4.1(j), there
are no actions, suits, arbitrations, claims, grievances, or proceedings
currently pending or, to the best of Sellers' knowledge after due inquiry,
threatened against or affecting the Purchased Assets or the conduct of the
construction, maintenance and operation of the Alabama Project, the consequence
of which could reasonably be expected to have a material adverse effect on the
construction, operation or maintenance of the Alabama Project. There are no
outstanding or unsatisfied judgements, orders or decrees to which the Purchased
Assets or the conduct of the construction, maintenance and operation of the
Alabama Project are bound.
<PAGE>
12
(k) Compliance with Laws. Sellers are in compliance with all material
orders, writs, injunctions, decrees, judgments, rulings, laws, rules or
regulations of any Governmental Entity to which the Purchased Assets or the
construction, maintenance and operation of the Alabama Project are bound. There
are no outstanding "notices of violation" with respect to the Purchased Assets
or the construction, maintenance and operation of the Alabama Project. The
construction, maintenance and operation of the Alabama Project are in compliance
with, and neither Seller is in violation of, conflict with or default under
(nor, to the best of either Seller's knowledge after due inquiry, does there
exist any condition which upon the passage of time or the giving of notice would
cause such violation, conflict or default), any order, writ, injunction, decree,
judgment, ruling, law, rule or regulation of any Governmental Entity, the
consequence of which could reasonably be expected to have a material adverse
effect on the construction, operation or maintenance of the Alabama Project.
(l) Hazardous Materials. Except as disclosed on Schedule 4.1(l), no
Hazardous Materials exist on, under or about any of the Purchased Assets or the
Alabama Project in violation of any Hazardous Materials Laws to the satisfaction
of the relevant governmental agency that enforces such laws. The construction,
maintenance and operation of the Alabama Project is and has been in compliance
with all Hazardous Materials Laws. Neither Seller has received any notice of,
and to the best knowledge of each Seller after due inquiry, there are no
existing or threatened Hazardous Materials Claims. The construction, maintenance
and operation of the Alabama Project do not generate any Hazardous Materials. No
storage tanks are or have been located on or under the Purchased Assets or the
Alabama Project within the last five (5) years.
(m) Status of Contracts. Schedule 4.1(m) is a true, correct and
complete list of all the material contracts, leases, mortgages, credit
agreements, indentures, sales contracts, purchase orders, and other agreements
entered into by the Sellers to which the Purchased Assets and the construction,
maintenance and operation of the Alabama Project are bound. The Contracts are
valid and in good standing, and there is no violation of, conflict with or
default under the Contracts (nor, to the best of either Seller's knowledge after
due inquiry, does there exist any condition which upon the passage of time or
the giving of notice would cause such violation, conflict or default), the
<PAGE>
13
consequence of which could reasonably be expected to have a material adverse
effect on the construction, operation or maintenance of the Alabama Project. The
Sellers have not received any notice from any party to any Contract that such
party intends to terminate, cancel or refuse to renew the same or that such
party intends to offset any amount due thereunder or assert any defense to the
enforceability thereof. No action other than the execution of appropriate
transfer documents by Sellers and Buyer is required to transfer such Contracts
to Buyer, subject only to such consents as are set forth on Schedule 4.1(c).
(n) Governmental Approvals, Licenses, Orders, Agreements and Permits.
Schedule 4.1(n) is a true, correct and complete list of all material permits,
licenses, franchises, authorizations, variances, exemptions, concessions,
leases, instruments, orders or approvals of any Governmental Entity to which the
Purchased Assets are bound or are held or used by Sellers in connection with the
conduct of the construction, maintenance and operation of the Alabama Project.
The construction, maintenance and operation of the Alabama Project are in
compliance with the Permits, the consequence of which could not reasonably be
expected to have a material adverse effect on the Purchase Assets or the
construction, operation or maintenance of the Alabama Project, and no additional
permits, licenses, franchises, authorizations, variances, exemptions,
concessions, leases, instruments, orders or approvals of any Governmental Entity
are necessary to lawfully conduct the construction, maintenance and operation of
the Alabama Project. The Sellers have not received any notice from any party to
any Permit that such party intends to terminate, cancel or refuse to renew the
same or that such party intends to assert any defense to the enforceability
thereof. No action other than the execution of appropriate transfer documents by
Sellers and Buyer is required to transfer such Permits to Buyer, subject only to
such consents as are set forth on Schedule 4.1(c).
(o) Leases. Schedule 4.1(o) contains a true, correct and complete list
of the Property Leases. There is no violation of, conflict with or default under
the Property Leases (nor, to the best of either Seller's knowledge after due
inquiry, does there exist any condition which upon the passage of time or the
giving of notice would cause such violation, conflict or default), except for
such violations, conflicts and defaults the consequences of which could not
reasonably be expected to have a material adverse effect on the Purchased Assets
or the construction, maintenance or operation of the Alabama Project. The
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Sellers have not received any notice from any party to any Property Lease that
such party intends to terminate, cancel or refuse to renew the same or that such
party intends to assert any defense to the enforceability thereof. No action
other than the execution of appropriate transfer documents by Sellers and Buyer
is required to transfer such Property Leases to Buyer, subject only to such
consents as are set forth on Schedule 4.1(c).
(p) No Fee Property. The Purchased Assets do not include any interest
in real property other than the Property Leases, and no other interest in real
property is held or used by the Sellers in connection with the construction,
maintenance and operation of the Alabama Project.
(q) Personal Property. Schedule 4.1(q) is a true, correct and complete
list of the Personal Property (excluding Inventory) used or held by Sellers in
connection with the Purchased Assets and the construction, maintenance and
operation of the Alabama Project. Sellers are the beneficial owners of and have
title to the Personal Property (including Inventory) free and clear of all
Liens, other than Permitted Liens. No action other than the execution of
appropriate transfer documents by Sellers and Buyer is required to transfer such
Personal Property (including Inventory) to Buyer.
(r) Inventory. The Inventory (i) is reflected on Schedule 4.1(r)
hereto in accordance with GAAP, and (b) all unusable Inventory has been written
off in accordance with GAAP. The values at which such Inventories are carried
reflect an inventory valuation policy stating inventory based on actual physical
count and at the lower of Sellers' cost or fair market value, in accordance with
GAAP.
(s) Complete Project. The Purchased Assets will constitute, upon
completion of construction in accordance with the Contracts and Permits, a fully
operational coal briquette and extrusion manufacturing facility with all real
property, personal property, agreements, contracts, leases, purchase orders,
files, reports, records, data, permits, licenses, franchises, authorizations,
variances, exemptions, concessions, leases, instruments, orders or approvals of
any Governmental Entity necessary to conduct the construction, maintenance and
operation of the Alabama Project.
(t) ERISA and Labor Matters. Neither Seller has initiated any ERISA
Plans, nor is either Seller party to any collective bargaining agreements. The
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15
transfer of the Purchased Assets does not obligate Buyer to employ any of
Sellers' employees or require Buyer's assumption of any liabilities, obligations
or costs incurred as a result of, in connection with, arising under or related
to Sellers' employment of any employee.
(u) Agreements with Related Persons. There are no contracts, licenses,
agreements or arrangements with any Related Person in connection with the
construction, maintenance and operation of the Alabama Project, other than as
disclosed on Schedule 4.1(u).
4.2 Changes Prior to Closing. Prior to and at the Closing, Sellers shall
provide Buyer with a list ("Sellers' Disclosure List") of any knowledge acquired
or events occurring after the date hereof that cause Sellers' representations
and warranties in Section 4.1 to be untrue in any respect, or are reasonably
likely to cause them to be untrue in any respect, if such representations and
warranties were to be made on and as of the Effective Time.
4.3 Representations and Warranties of Buyer. Buyer represents and warrants
that as of the date hereof, the facts set forth below in this Section 4.3 are
and shall be true:
(a) Corporate Standing. Buyer is a limited liability company duly
organized, validly existing, and in good standing under the laws of the State of
Oregon, has power to own its own property, and to execute, deliver and perform
this Agreement and each of the other Transaction Documents, and to carry on its
business as now being conducted. Buyer is qualified to do business and is in
good standing as a foreign limited liability company authorized to do business
under the laws of the State of Alabama.
(b) Authorizations; Binding Agreements. The execution, delivery, and
performance of this Agreement and the other Transaction Documents by Buyer and
of each conveyance, assignment, agreement, and other document herein
contemplated to be executed by Buyer have been fully authorized by all necessary
corporate actions. This Agreement and the other Transaction Documents and the
conveyances, assignments, agreements, and other documents herein contemplated to
be executed, delivered and performed by Buyer are, or will be upon execution,
legal, valid and binding obligations of Buyer, duly enforceable against Buyer in
accordance with their terms (subject, however, to the effects of bankruptcy,
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16
insolvency, reorganization, moratorium, and similar laws from time to time in
effect relating to the rights and remedies of creditors as well as to general
principles of equity), do not and will not result in any violation of, conflict
with or default under the terms of Buyer's organizational documents, and do not
and will not do not result in any violation of, conflict with or default under
the terms of any permit, lease, venture, indenture, mortgage, agreement,
contract, judgment, order or other obligation or restriction to which Buyer is
bound (nor, to the best of Buyer's knowledge after due inquiry, does there exist
any condition which upon the passage of time or the giving of notice would cause
such violation, conflict or default).
(c) No Brokers or Finders Fees. No obligation or liability, contingent
or otherwise, for brokers or finders fees created by Buyer with respect to the
matters provided for in this Agreement shall be imposed upon Sellers.
(d) Single Purpose Entity. Buyer was formed for the purpose of
acquiring the Purchased Assets and does not conduct any operations other than in
connection with acquisition and operation of the Alabama project in accordance
with the Transaction Documents.
4.4 Changes Prior to Closing. Prior to and at the Closing, Buyer shall
provide Sellers with a list ("Buyer's Disclosure List") of any knowledge
acquired or events occurring after the date hereof that cause Buyer's
representations and warranties in Section 4.3 to be untrue in any respect, or is
reasonably likely to be untrue in any respect, if such representations and
warranties were to be made on and as of the Effective Time.
4.5 Joint Obligations. The following shall apply with equal force to
Sellers and Buyer:
(a) Buyer and Sellers shall each promptly give the other written
notice of the existence or occurrence of any item to be reflected on Sellers'
Disclosure Statement or Buyer's Disclosure Statement.
(b) Neither Party shall intentionally perform any act which, if
performed (or omit to perform any act which, if omitted to be performed) would
prevent or excuse the performance of this Agreement by either party hereto or
which, except as a result of the conduct of the business in the usual and
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17
ordinary course, would result in any representation or warranty herein contained
being untrue in any respect if made on and as of the Closing.
ARTICLE V
CONDUCT OF BUSINESS
5.1 Operations by Sellers. During the period from the date hereof to the
Effective Time:
(a) Sellers shall maintain the Purchased Assets and conduct the
construction, maintenance and operation of the Alabama Project in compliance
with this Agreement and the other Transaction Documents, the Contracts, the
Property Leases and the Permits and each applicable order, writ, injunction,
decree, judgment, ruling, law, rule or regulation of any Governmental Entity,
and pay all fees, assessments and costs arising in connection with the
execution, delivery and performance of this Agreement and the Transaction
Documents and the construction, maintenance and operation of the Alabama
Project.
(b) Sellers may remove any items included in the Retained Assets;
provided, however, such removal does not damage or impair the Purchased Assets
or interfere with the conduct of the construction, maintenance and operation of
the Alabama Project in any manner.
(c) Buyer and its duly authorized agents, employees, and
representatives, at their sole risk and expense, shall have access to the
Purchased Assets and the Alabama Project for familiarization and orientation
purposes; provided, however, that such access and observation does not
unreasonably interfere with or delay the conduct of construction, maintenance
and operation of the Alabama Project. Sellers shall cooperate in orienting
Buyer's personnel to the construction, maintenance and operation of the Alabama
Project.
(d) Sellers shall use reasonable efforts to preserve intact Sellers'
relationships with suppliers, customers and others having business dealings with
respect to the Purchased Assets and the construction, maintenance and operation
of the Alabama Project.
(e) Sellers shall take all necessary actions to maintain the Purchased
Assets in their present condition, quantity and state of repair, reasonable wear
and tear excepted.
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18
(f) Sellers shall take all commercially reasonable actions (i) to
construct the Alabama Project as soon as practicable, (ii) to secure the
consents and permits identified in Schedule 4.1(c), and (iii) to conduct the
construction, maintenance and operation of the Alabama Project in accordance
with commercially reasonable practices.
(g) Sellers shall continue to carry and maintain in full force and
effect the existing casualty and liability insurance as provided in the Loan
Document through and including the Effective Time.
(h) Sellers shall comply with all applicable bulk sales laws, if any,
in effect in any jurisdiction in which the Purchased Assets are located and
where Sellers have their place of business.
5.2 Negative Covenants. During th period from the date hereof and the
Effective Time, Sellers shall:
(a) not sell, lease, assign, hypothecate or agree to sell, lease,
assign, hypothecate or otherwise transfer or dispose of, any of the Purchased
Assets;
(b) not enter into any lease, contract, agreement, commitment,
arrangement or transaction relating to the Purchased Assets or the Alabama
Project except in the normal course of construction, maintenance and operation
of the Alabama Project and in accordance with past practice, or terminate,
cancel or modify or in any way impair any of the Contracts, Property Leases or
Permits;
(c) not subject to any Lien, other than Permitted Liens, any of the
Purchased Assets, or permit or allow any of the Purchased Assets to become
subject to any Lien, other than Permitted Liens;
(d) not fail to pay any taxes, debts or other obligations relating to
the Purchased Assets, as the same become due and payable;
(e) not enter into any lease, contract, agreement, commitment,
arrangement or transaction or do any other act or omit to do any act that might
adversely affect the Purchased Assets or the construction, maintenance and
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19
operation of the Alabama Project or the consummation of the transactions
contemplated by this Agreement and the other Transaction Documents; and
5.3 Additional Covenants.
(a) None of the Sellers and Buyer shall issue any public statement
with respect to the Alabama Project or the transactions contemplated by this
Agreement and the other Transaction Documents without the prior written consent
of the other parties, which consent shall not be unreasonably withheld;
provided, however, that the consenting party shall have two (2) Business Days to
review the proposed public statement.
(b) Seller shall do or cause to be done all things necessary to
preserve, renew and keep in full force and effect the Contracts, including the
Construction Contract, and shall not breach, violate or commit any event of
default under the same. In the event of any breach, violation or event of
default with respect to the Contracts, Sellers shall give immediate notice
thereof to Buyer.
(c) Prior to June 30, 1997, Sellers shall construct the Alabama
Project to conform with the representations set forth in the Letter Ruling.
(d) So long as the Promissory Note is outstanding, Buyer shall (i) not
engage in any other business other than the operation and maintenance of the
Alabama Project, (ii) not transfer the Purchased Assets or any assets acquired
by Buyer to be used in connection with the operation and maintenance of the
Alabama Project, and (iii) maintain in full force and effect hazard and
liability insurance with respect to the Alabama Project, in such amounts as are
commercially reasonable in accordance with industry standards.
(e) Sellers shall not issue any public statement that, either directly
or indirectly, makes reference to PacifiCorp or any of its directors, officers,
agents, representatives, subsidiaries and Affiliates without the prior written
consent of Buyer, which consent shall not be unreasonably withheld.
(f) During the term of the Operation and Maintenance Agreement, and
subject to clauses (a) and (e) of this Section 5.3, Sellers shall have the right
to (i) make and use photographs and videotapes of the Alabama Project for
promotional purposes and (ii) conduct tours of the Alabama Project for potential
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20
investors and purchasers of Covol's products and services; provided, however,
that such activities shall not interfere with the construction, operation or
maintenance of the Alabama Project; provided, further, that Covol shall
reimburse Buyer for any cost incurred by Buyer as a result of such activities,
including any incremental increase in insurance costs.
ARTICLE VI
DESTRUCTION OF ASSETS
If, prior to the Closing, all or any material part of the Purchased Assets
shall be destroyed by fire, flood, or other casualty (including condemnation),
and the items affected by such destruction have not been effectively restored
before the Closing Date at least to their condition immediately prior to such
destruction, either Buyer or Sellers may elect not to proceed with the Closing
and to terminate this Agreement. If Buyer and Sellers nonetheless elect to
proceed with the Closing, or if less than a material part of the Purchased
Assets shall have been destroyed, then notwithstanding any such destruction, the
Closing shall take place and the Purchase Price shall be reduced by an amount
equal to the amount of such destruction measured by the costs of restoring such
Purchased Assets as are destroyed to their condition immediately prior to such
destruction, less the amount of any insurance proceeds paid or payable without
contingency to Sellers on account of such destruction (which Sellers shall make
available to Buyer). If Sellers elect not to proceed with the Closing as
provided in the first sentence of this Article VI, Buyer may, within ten (10)
days after receiving notice of such election from Sellers, elect to proceed with
the Closing without any restoration of destroyed Purchased Assets or reduction
in the Purchase Price. For purposes of this Article VI, any of the Purchased
Assets shall be considered material if the loss of such assets would materially
adversely affect the ability of Buyer to operate the Alabama Project.
ARTICLE VII
CONDITIONS PRECEDENT TO CLOSING; TERMINATION
7.1 Conditions Precedent to the Obligations of Buyer. All obligations of
Buyer under this Agreement are subject to the fulfillment on or before the
Closing Date of each of the following conditions:
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21
(a) Correctness of Representations and Warranties. The representations
and warranties of Sellers contained in this Agreement and in the related
Exhibits and Schedules, to be delivered to Buyer pursuant hereto and in
connection herewith shall be true on the date hereof and on the Closing Date as
though such representations and warranties were made on and as of the Closing
Date.
(b) No Adverse Change in Purchased Assets and Alabama Project. The
Purchased Assets and the Alabama Project shall not be or shall not have been
threatened or affected, or interfered with, in a material adverse way, whether
or not covered by insurance, as a result of fire, explosion, earthquake,
disaster, accident, labor dispute, any action of the United States or other
governmental authority, riots, civil disturbances, uprising, activity of the
Armed Forces, or act of God or the public enemy.
(c) Compliance with Agreement. Sellers shall have performed and
complied in all material respects with all obligations under this Agreement
which are to be performed or complied with by them prior to the Closing Date.
(d) Certification of Compliance. Sellers shall have delivered to Buyer
a certificate dated the Closing Date, certifying as to the fulfillment of the
conditions set forth in this Section 7.1.
(e) Absence of Litigation. No suit, action or other proceeding or
investigation shall be threatened or pending before any court or governmental
agency to restrain or prohibit, or to obtain damages or other relief in
connection with this Agreement or the other Transaction Documents, or the
consummation of the transactions contemplated by this Agreement or the
Transaction Documents.
(f) Consents. Sellers shall have obtained (and delivered copies
thereof to Buyer) all permits, licenses, franchises, authorizations, variances,
exemptions, concessions, leases, instruments, orders, consents or approvals of
Governmental Entities and third parties necessary to execute, deliver and
perform this Agreement and the other Transaction Documents as set forth on
Schedule 4.1(c).
(g) Further Assurances. Buyer shall have received such further
instruments and documents as it may reasonably require to carry out effectively
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22
the transactions contemplated by this Agreement and the Transaction Documents
and to evidence the fulfillment of the agreements contained in this Agreement
and the Transaction Documents and the performance of all conditions to the
consummation of such transactions.
(h) Opinion of Counsel. Buyer shall have received from counsel to
Sellers, opinions of counsel to the Sellers, dated as of the Closing Date, in
form and substance reasonably satisfactory to Buyer and its counsel.
(i) Letter Ruling; Initial Production. Buyer shall have received
either (i) a letter ruling (the "Letter Ruling") from the Internal Revenue
Service setting forth the specific terms of the proposed transaction and
confirming to the satisfaction of Buyer, among other things, (a) the
availability and calculation of the credit available under Section 29 (the
"Section 29 Credits") of the Internal Revenue Code of 1986, as amended (the
"1986 Code"), (b) that the construction contract for the Alabama Project
satisfies the requirements of the Section 29 Credits, and (c) that the
allocation of the Section 29 Credits to the various members of Buyer is valid
under the 1986 Code, or (ii) a certificate of the Sellers (together with such
other evidence as Buyer requests) certifying that the Alabama Project is ready
to be placed into commercial operation.
(j) Covol shall be the general partner of Alabama Synfuel, with an 80%
partnership interest.
(k) Covol shall assign to Buyer the coal sale contracts set forth on
Schedule 7.1(l).
(l) Sellers shall have assigned the Construction Contract to Buyer as
a Purchased Asset and Contract under the terms of this Agreement.
(m) Other Deliveries. The other deliveries referred to in Section 8.2
shall be made at Closing.
7.2 Conditions Precedent to the Obligations of Sellers. All obligations of
Sellers under this Agreement are subject to fulfillment on or before the Closing
Date of each of the following conditions:
(a) Correctness of Warranties and Representations. The representations
and warranties of Buyer contained in this Agreement and in the related Exhibits
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23
and Schedules, to be delivered to Sellers pursuant hereto and in connection
herewith shall be true on the date hereof and on the Closing Date as though such
representations and warranties were made on and as of the Closing Date.
(b) Compliance with Agreement. Buyer shall have performed and complied
in all material respects with all obligations under this Agreement which are to
be formed or complied with by it prior to the Closing Date.
(c) Certification of Compliance. Buyer shall have delivered to Seller
a certificate dated the Closing Date, certifying as to the fulfillment of the
conditions set forth in this Section 8.1.
(d) Absence of Litigation. No suit, action or other proceeding or
investigation shall be threatened or pending before any court or governmental
agency to restrain or prohibit, or to obtain damages or other relief in
connection with this Agreement or the Transaction Documents, or the consummation
of the transactions contemplated by this Agreement or the Transaction Documents.
(e) Opinion of Counsel. Sellers shall have received an opinion of
Stoel Rives LLP, counsel to the Buyer, dated as of the Closing Date, in form and
substance reasonably satisfactory to Sellers and their counsel.
(f) Other Deliveries. The other deliveries referred to in Section 8.2
shall be made at Closing.
(g) Further Assurances. Sellers shall have received such further
instruments and documents as it may reasonably require to carry out effectively
the transactions contemplated by this Agreement and the other Transaction
Documents and to evidence the fulfillment of the agreements contained in this
Agreement and the other Transaction Documents and the performance of all
conditions to the consummation of such transactions.
7.3 Termination. This Agreement may be terminated prior to the Closing as
follows:
(a) at the election of the Sellers, if any one or more of the
conditions to the obligation of Sellers to close has not been fulfilled as of
the Closing Date;
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(b) at the election of the Buyer, if any one or more of the conditions
to the obligation of Buyer to close has not been fulfilled as of the Closing
Date;
(c) at the election of the Sellers, if the Buyer has breached any
representation, warranty, covenant or agreement contained in this Agreement,
which breach cannot be or is not cured within thirty (30) days after the
occurrence of such breach, but in no event after December 31, 1997;
(d) at the election of the Buyer, if either of the Sellers has
breached any representation, warranty, covenant, or agreement contained in this
Agreement, which breach cannot be or is not cured within thirty (30) days after
the occurrence of such breach, but in no event after December 31, 1997;
(e) at the election of the Buyer or Sellers, if any legal proceeding
is commenced or threatened by any Governmental Entity or other person directed
against the consummation of the Closing and either the Buyer or the Sellers, as
the case may be, reasonably and in good faith deem it impractical or inadvisable
to proceed in view of such legal proceeding or threat thereof;
(f) upon the election of Buyer or Sellers pursuant to Article VI, if
there has been damage or destruction of the Purchased Assets giving them an
election to terminate this Agreement if such damage or destruction is not or
cannot be cured within thirty (30) days of the occurrence thereof, but in no
event after December 31, 1997; or
(g) at any time on or prior to the Effective Time, by mutual written
consent of the Sellers and the Buyer.
A party who terminates this Agreement in accordance with this Section
7.3 shall have no liability to the other party in respect of such termination,
but any cause of action held by a party related to a breach of this Agreement
prior to such termination shall survive.
ARTICLE VIII
CLOSING
8.1 Time and Place of Closing. The closing of the transaction contemplated
by this Agreement (the "Closing") shall be at 9:00 a.m., Mountain Time, on such
date as the parties shall mutually agree, not later than the earlier of (i) ten
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(10) business days following the satisfaction or waiver of the condition set
forth in Section 7.1(i) hereto or (ii) December 31, 1997 (the "Closing Date"),
at the offices of Stoel Rives, LLP, 201 South Main Street, Suite 11, Salt Lake
City, Utah 84111-2215, or at such other time or place as the parties shall
mutually agree.
8.2 Actions at Closing. At the Closing, the following events shall occur,
each being a condition precedent to the other and each being declared to have
occurred simultaneously with the other:
(a) Buyer shall pay to Sellers the Purchase Price by executing and
delivering to Alabama Synfuel the Promissory Note.
(b) Sellers shall execute, acknowledge and deliver to Buyer the deeds,
bills of sale, assignments and other documents necessary to transfer all of
Sellers' right, title, and interest in and to the Purchased Assets to Buyer.
(c) The Parties shall execute, acknowledge and deliver to each other
the Operation and Maintenance Agreement substantially in the form attached
hereto as Exhibit D.
(d) The Parties shall execute, acknowledge and deliver to each other
the Licensing and Binder Purchase Agreement substantially in the form attached
hereto as Exhibit E.
(e) The Parties shall execute, acknowledge and deliver to each other
the Covenant Not to Compete substantially in the form attached hereto as Exhibit
F.
(f) The Parties shall execute, acknowledge and deliver to each other
the Call Option Agreement substantially in the form attached hereto as Exhibit
G.
(g) The Parties shall enter into a sublease, license agreement,
easement or such other arrangement as is mutually agreeable to the Parties, with
respect to locating a facility in which to conduct the manufacture of the
proprietary binder material used in connection with the operation of the Alabama
Project.
(h) Sellers shall deliver original executed copies of all required
permits, licenses, franchises, authorizations, variances, exemptions,
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26
concessions, leases, instruments, orders, consents and approvals of Governmental
Entities and third parties necessary to execute, deliver and perform this
Agreement and the Transaction Documents as set forth on Schedule 4.1(c).
(i) Sellers shall take all steps necessary to put Buyer in actual
possession and control of the Purchased Assets and the Alabama Project.
(j) Sellers shall deliver to Buyer, at agreed locations, the Files and
Records.
ARTICLE IX
APPROVALS AND CONSENTS
Sellers, at their sole expense, shall make every reasonable effort prior to
the Closing to obtain all required permits, licenses, franchises,
authorizations, variances, exemptions, concessions, leases, instruments, orders,
consents and approvals of Governmental Entities and third parties necessary to
execute, deliver and perform this Agreement and the Transaction Documents as set
forth on Schedule 4.1(c). Buyer shall make every reasonable effort to cooperate
in connection with obtaining all required permits, licenses, franchises,
authorizations, variances, exemptions, concessions, leases, instruments, orders,
consents and approvals of Governmental Entities and third parties necessary to
execute, deliver and perform this Agreement and the Transaction Documents as set
forth on Schedule 4.1(c); provided, however, that Buyer shall not be obligated
to incur any cost or expense associated with such transfer or application.
ARTICLE X
CROSS INDEMNIFICATION
10.1 Obligations of Sellers. Sellers shall indemnify, defend and hold
harmless Buyer and its directors, officers, agents, representatives,
subsidiaries and Affiliates from and against any and all claims, demands or
suits (by any party, including any Governmental Entity), losses, liabilities,
damages, obligations, payments, costs and expenses (including the costs and
expenses of defending any and all actions, suits, proceedings, demands and
assessments which shall include reasonable attorneys' fees and court costs)
resulting from, relating to, arising out of, or incurred in connection with any
of the following:
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(a) Any breach by either Seller of any of Sellers' representations,
warranties and covenants contained in this Agreement; and
(b) All liabilities and obligations assumed or retained by Sellers
under this Agreement.
10.2 Obligations of Buyer. Buyer shall indemnify, defend, and hold harmless
Sellers, and their respective directors, officers, agents, representatives,
subsidiaries and Affiliates, from and against any and all claims, demands, or
suits (by any party including any Governmental Entity), losses, liabilities,
damages, obligations, payments, costs and expenses (including the original costs
of defending any and all actions, suits, proceedings, demands and assessment
which shall include reasonable attorneys' fees and court costs) resulting from,
relating to, arising out of or incurred in connection with any of the following:
(a) Any breach by Buyer of any of Buyer's representations, warranties
and covenants contained in this Agreement; and
(b) All obligations and liabilities assumed by Buyer under this
Agreement.
10.3 Indemnity Procedures.
(a) Notwithstanding any provision to the contrary included in this
Article X, each party hereto waives the right, for itself and its respective
Affiliates, to be indemnified by the other party hereto to the extent of any
insurance proceeds or other recovery it receives with respect to the liabilities
for which indemnification would otherwise be required hereunder. (For the
purposes of this paragraph, insurance proceeds shall not include any payments
received pursuant to an insurance program under which the party seeking
indemnification or an Affiliate of such party bears the ultimate cost.)
(b) A party claiming indemnification under this Article X (the
"Indemnitee") shall notify in writing the party from whom indemnification is
claimed (the "Indemnitor") in reasonable detail of the nature, basis and
estimated amount of the claim within a reasonable time after discovery by the
Indemnitee of the basis therefor or the assertion thereof by a third party
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against the Indemnitee. Notice of a claim filed in any court or administrative
agency, or submitted to arbitration, shall be given the Indemnitor within ten
(10) days of the Indemnitee's receipt of knowledge of such filing but failure to
provide notice within the 10 days shall not result in forfeiture of
indemnification rights except to the extent that the ability of the Indemnitor
to defend against the claim is materially impaired. In the event of such notice
by the Indemnitee to the Indemnitor of a third party claim, the Indemnitor shall
have twenty (20) days after receipt thereof in which to admit or deny
responsibility for indemnification of the Indemnitee by written notice to the
Indemnitee, and
(i) as to claims with respect to which the Indemnitee and the
Indemnitor may share responsibility, each party may elect to participate in the
defense of the claim through counsel of its choice and at its expense, and
neither party shall settle or compromise the claim without the consent of the
other;
(ii) if the Indemnitor denies responsibility or fails to admit or deny
responsibility for a claim within twenty (20) days of the notice, the Indemnitee
shall have the sole option and right to defend the claim, including the right to
settle or compromise the claim without consent of the Indemnitor, by counsel of
its choice; and
(iii) except with respect to a claim as to which the Indemnitee and
the Indemnitor share responsibility, if the Indemnitor admits responsibility for
indemnification, the Indemnitor may at the same time elect to control the
defense of the claim by counsel of its choice and at its expense, which counsel
shall consult with the Indemnitee or its counsel at the Indemnitee's expense,
and except as limited herein shall in such case have the right to settle or
compromise the claim as the Indemnitor deems fit, and the Indemnitee shall
cooperate in such defense and agree to and accept any money settlement or
compromise approved by the Indemnitor. If the Indemnitor does not so elect to
control the defense, the Indemnitee shall appear and defend the claim by counsel
of its choice, and the Indemnitor may participate in such defense by counsel of
its choice at its expense, which counsel shall be consulted by and shall assist
counsel for the Indemnitee, in which case the Indemnitor shall reimburse the
Indemnitee for its reasonable legal fees and expenses on a monthly basis.
<PAGE>
29
ARTICLE XI
REMEDIES AND SURVIVAL
11.1 Survival of Representations, etc.. All of the warranties, covenants
and agreements of the parties hereto contained in this Agreement and in any
certificates or documents delivered at Closing in connection with the
transactions contemplated hereby shall survive Closing of this transaction, the
sale and purchase herein, and any reorganization, or merger by any of the
parties hereto or permitted assignment of this Agreement. No examination or
investigation by or on behalf of any party shall in any way modify, affect or
diminish the obligations of the party with respect to the representations,
warranties and covenants contained herein or in any of the other Transaction
Documents. No warranty or representation of any party herein or in any of the
other Transaction Documents shall be deemed waived or modified by any fact or
matter within the actual or imputed knowledge any party hereto, nor shall any
party hereto be estopped from claiming damages for breach of any warranty or
representation herein or in any other Transaction Document by virtue of such
knowledge, as it is the expressed intention of the parties that each party shall
be fully responsible for the falsity of any warranty or representation herein or
in any other Transaction Document notwithstanding such knowledge. Each party
hereto expressly waives all defenses based on such knowledge to any claim by
party to this Agreement or the other Transaction Documents for breach of
warranties and representations of such party in this Agreement or any other
Transaction Documents.
11.2 Procedure. Notice of any claim shall be given by a party (for purposes
of this Article XI the "claiming party")to the other party (for purposes of this
Article XI the "defaulting party") as soon as reasonably practicable after the
claiming party becomes aware thereof and, if the claim in question is as a
result of or in connection with a liability to or from, or a dispute with, any
other third party, the claiming party shall take reasonable steps in connection
with such liability or dispute so as to recover or minimize or resolve such
liability or dispute. The claiming party shall give to the defaulting party full
facilities to investigate the subject matter of the claim and, at the request of
the defaulting party, to allow it at its own expense to participate in, or have
the conduct of (as it may elect), all proceedings of whatsoever nature against
the relevant third party arising out of, or in connection with, such liability
<PAGE>
30
or dispute, in the name of the claiming party as it may consider necessary in
order to mitigate any such claim. The claiming party shall not accept or pay or
compromise any such liability or claim without providing the defaulting party a
reasonable opportunity to dispute the same.
ARTICLE XII
MISCELLANEOUS
12.1 Books, Records and Assistance by Personnel.
(a) Buyer agrees that for a period of four (4) years following the
Closing, Buyer shall take all necessary actions to ensure that all relevant
records relating to the Purchased Assets, with respect to periods ending on or
before the Effective Time that are in the possession or control of Buyer or its
Affiliates (whether acquired before or after the Closing) shall be retained
intact and shall be opened for inspection by representatives of Sellers at any
time during regular business hours, and that Sellers may, during such period at
its expense, make such excerpts therefrom as Sellers may reasonably request.
(b) Sellers agree that for a period of four (4) years following the
Closing, Sellers shall take all necessary actions to ensure that all of their
relevant records relating to the Purchased Assets that are not required to be
delivered to Buyer hereunder, shall be retained intact and shall be opened for
inspection by representatives of Buyer at any time during regular business hours
and that Buyer may during such periods at its own expense make such excerpts
therefrom as Buyer may reasonably request.
(c) Buyer and Sellers shall each use their respective best efforts to
cooperate with the other as requested from time to time and make their employees
available to the other at requesting party's expense (including the fully
allocated costs and out-of-pocket expenses of the party of whom cooperation is
being requested) to the extent that the requesting party may reasonably require
for its corporate purposes including attendance at depositions or legal
proceedings, or audits requested by the requesting party to be performed by
their employees or independent accountants relating to any period through or
including the Closing.
(d) Each party shall provide the other party with reasonable access to
all relevant documents, data and other information which may be required by
<PAGE>
31
the other party for the purpose of preparing tax returns and responding to any
audit by any taxing jurisdiction. Each party shall cooperate with all reasonable
requests of the other party made in connection with contesting the imposition of
taxes. Notwithstanding anything to the contrary in this Agreement, neither party
to this Agreement shall be required at any time to disclose to the other party
any tax return or other confidential tax information.
12.2 Assignment. This Agreement shall not be assigned in whole or in part
by Sellers without the prior written consent of Buyer, or assigned in whole or
in part by Buyer without the prior written consent of Sellers.
12.3 Notices. All notices required or permitted to be given under this
Agreement shall be in writing. Notices may be served by certified or registered
mail, postage paid with return receipt requested; by private courier, prepaid;
by telex, facsimile, or other telecommunication device capable of transmitting
or creating a written record; or personally. Mailed notices shall be deemed
delivered five days after mailing, property addressed. Couriered notices shall
be deemed delivered when delivered as addressed, or if the addressee refuses
delivery, when presented for delivery notwithstanding such refusal. Telex or
telecommunicated notices shall be deemed delivered when receipt is either
confirmed by confirming transmission equipment or acknowledged by the addressee
or its office. Personal delivery shall be effective when accomplished. Unless a
party changes its address by giving notice to the other party as provided
herein, notices shall be delivered to the parties at the following addresses:
Sellers: Covol Technologies, Inc.
3280 North Frontage Road
Lehi, Utah 84043
Telephone: (801)768-4481
Telecopier: (801)768-4483
Attn.: Mr. Asael T. Sorensen
<PAGE>
32
Alabama Synfuel #1 Ltd.
c/o Covol Technologies, Inc.
3280 North Frontage Road
Lehi, Utah 84043
Telephone: (801)768-4481
Telecopier: (801)768-4483
Attn.: Mr. Asael T. Sorensen
With a copy
to: Ballard Spahr Andrews & Ingersoll
201 South Main Street, Suite 1200
Salt Lake City, Utah 84111-2215
Telephone: (801) 531-3000
Telecopier: (801) 531-3001
Attn.: Mr. William Marsh
Buyer: Birmingham Syn Fuel, L.L.C.
c/o PacifiCorp Financial Services, Inc.
775 NE Multnomah
Suite 775
Portland, Oregon 97232
Telephone: (503)7977222
Telecopier: (503)797-7246
Attn.: Mr. Reynold Roeder
With a copy
to: Stoel Rives LLP
700 NE Multnomah
Suite 950
Portland, Oregon 97232-4109
Telephone: (503)294-9100
Telecopier: (503)230-1907
Attn.: Gary R. Barnum, Esq.
12.4 Expenses and Fees. Each party hereto agrees to pay, without right of
reimbursement from the other, the costs incurred by it incident to the
preparation of this Agreement, and the fees and disbursements of counsel,
accountants and consultants employed by it in connection with the negotiation of
this Agreement and the consummation of the transaction contemplated herein. All
sales, use, or similar taxes imposed by or due to any taxing authority in
connection with, or as a result of, the sale by Seller of the Purchased Assets
shall be the sole responsibility of Seller.
<PAGE>
33
12.5 Successors and Assigns. Except as otherwise provided herein, this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and permitted assigns.
12.6 Waiver. Buyer or Sellers, by written notice to the other, may: (i)
extend a time for performance of any of the obligations or other actions under
this Agreement; (ii) waive by express written waiver any inaccuracy in the
representations or warranties contained in this Agreement or any document
delivered pursuant to this Agreement; (iii) waive by express written waiver any
compliance with the conditions or covenants contained in this Agreement; or (iv)
waive or modify by express written waiver or agreement performance of any of the
obligations performed under this Agreement; provided, however, that neither such
party may without the consent of the other grant such extension of time, waiver
of inaccuracies or compliance or waiver or modification of warranties,
conditions or covenants hereunder. Except as provided in this section, no action
taken pursuant to this Agreement (including without limitation the acts taken at
the Closing) shall be deemed to constitute a waiver of compliance with any
representations, warranties or covenants contained in this Agreement and shall
not operate or be construed as a waiver of any subsequent breach of a similar or
dissimilar nature.
12.7 Entire Agreement. This Agreement, together with the other Transaction
Documents, constitutes the entire agreement of the parties relating to the
subject matter hereof. There are no promises, terms, conditions, obligations, or
warranties other than those contained herein and/or in the Transaction
Documents. The Transaction documents supersede all prior communications,
representations, or agreements, verbal or written, among the parties relating to
the subject matter hereof.
12.8 Amendments, Supplements and Etc. This Agreement may be amended or
supplemented at any time only by an additional written agreement executed by the
parties hereto.
12.9 Applicable Law. This Agreement and the legal relations among the
parties hereto shall be governed by and construed in accordance with the
substantive laws of the State of Utah without giving effect to the principles of
conflict of laws thereof.
12.10 Execution and Counterparts. This Agreement may be executed in two or
more counterparts, each which shall be deemed an original, but all of which
together shall constitute one and the same agreement.
<PAGE>
34
12.11 Titles and Headings. Titles and headings to paragraphs herein are
inserted for convenience of reference only and are not intended to be a part of
or to affect the meaning or interpretation of this Agreement.
12.12 Third Parties. Nothing herein expressed or implied is intended or
shall be construed to confer upon or give any person or entity other than the
parties hereto and their successors and assigns any right or remedies by reason
of this Agreement as a third party beneficiary or otherwise.
12.13 Further Assurances. The parties agree from time to time to execute
such additional documents as are necessary to effect the intent of the parties
as manifested by this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement by
their duly authorized representatives the day and year first above written.
SELLERS:
COVOL TECHNOLOGIES, INC.
By:______________________________________
Name:
Title:
ALABAMA SYNFUEL #1 LTD.
By:______________________________________
Name:
Title:
<PAGE>
35
BUYER:
BIRMINGHAM SYN FUEL, L.L.C.
By:_______________________________________
Name:
Title:
CONDITIONAL OPTION AGREEMENT
BIRMINGHAM SYN FUEL, L.L.C.
THIS CONDITIONAL OPTION AGREEMENT (this "Agreement"), dated as of
March 20, 1997, between Birmingham Syn Fuel I, Inc., an Oregon corporation, and
Birmingham Syn Fuel II, Inc., an Oregon corporation (collectively, the "PFS
Parties "), and PacifiCorp Financial Services, Inc., an Oregon
corporation("PFS") on the one hand, and Alabama Synfuel #1, Ltd., a Delaware
limited partnership ("Alabama Synfuel"), and Covol Technologies, Inc., a
Delaware corporation ("Covol"), on the other hand.
WHEREAS, simultaneously with the execution and delivery hereof, (i)
Birmingham Syn Fuel, L.L.C., an Oregon limited liability company in which the
PFS Parties are the sole members, as Buyer ("Buyer"), and Alabama Synfuel and
Covol, jointly as Sellers, have entered into that certain Alabama Project
Purchase Agreement, dated as of March 20, 1997(the "Purchase Agreement"), and
(ii) Covol, as Borrower and PFS, as Lender, have entered into that certain
Convertible Loan and Security Agreement (the "Loan Agreement"). Capitalized
terms used herein and not otherwise defined shall have the meanings ascribed to
such terms in the Purchase Agreement.
WHEREAS, pursuant to the Purchase Agreement, Covol and Alabama Synfuel
have agreed to complete the construction of the Alabama Project and to transfer
the Alabama Project to Buyer. To provide funds for the construction and other
items relating to the Alabama Project, PFS has agreed to loan up to $5,000,000
(the "Loan") to Covol pursuant to the Loan Agreement.
WHEREAS, the parties are mutually unwilling to enter into the Purchase
Agreement, the Loan Agreement or the other Transaction Documents, or to
consummate or to permit the consummation of the transactions contemplated
thereby, unless each of the parties hereto executes and delivers, and agrees to
be bound by the terms of this Agreement.
WHEREAS, each party hereto has received and will receive material,
direct or indirect benefits, by virtue of the execution, delivery and
performance by the other parties of the Purchase Agreement, the Loan Agreement
and the other Transaction Documents, it being acknowledged by each party hereto
that this Agreement is given in consideration of, among other things, such
benefits received and to be received by each party hereto and is not gratuitous.
<PAGE>
NOW THEREFORE, in consideration of the foregoing and the mutual
promises and undertakings in this Agreement and the other Transaction Documents,
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:
1. Grant of Put Option. Covol hereby grants to the PFS Parties and PFS a
put option to require Covol to simultaneously purchase all of the right, title
and interest of the PFS Parties in Buyer and all of the interest of PFS in the
Loan and in the other Transaction Documents (excluding (i) any Shares (as such
term is defined in the Loan Agreement) received pursuant to the exercise of
conversion rights under the Loan Agreement, and (ii) all rights under the
Registration Rights Agreement (as such term is defined in the Loan Agreement);
such non-excluded interests collectively referred to as the "Interest") on the
following terms and conditions (it being acknowledged by the parties hereto that
all of the Interests must be purchased and no partial purchase shall be
permitted):
(a) The put option granted hereby (the "Option") may only be exercised
during the Option Period (as defined below) after the occurrence of a Put Event
(as defined below).
(b) For purposes hereof, the occurrence of any of the following shall
constitute a "Put Event":
(i) if, by June 30, 1997, the Alabama Project is not completed
consistent with Buyer-approved plans and specifications and
placed in service(for purposes of the 1986 Code and Section 29 of
the 1986 Code);
(ii) if, by June 30, 1997, a Letter Ruling satisfactory to Buyer
(as contemplated under Section 7.1(i) of the Purchase Agreement)
is not obtained by Buyer; or
(iii) if, at any time, there has occurred and is continuing an
Event of Default under the Loan Agreement (unless such Event of
Default has been waived by the PFS Parties; it being acknowledged
by the parties hereto that any such waiver shall be in the sole
discretion of the PFS Parties);
provided, however, that in no event shall a Put Event occur after the receipt by
Buyer of a Letter Ruling satisfactory to Buyer.
2
<PAGE>
(c) For purposes hereof, the period beginning the first Business Day
immediately succeeding the Put Event and ending 120 days thereafter shall be the
"Option Period".
(d) The Option shall be exercisable by irrevocable written notice
given to Covol by PFS on its behalf and on behalf of the PFS Parties at any time
during the Option Period. The Option Price (defined below) shall be paid within
thirty (30) days after delivery of the notice of exercise.
(e) The "Option Price" for the Interest of PFS and the PFS Parties
shall be an amount equal to the sum of the following:
(i) all capital contributions of the PFS Parties to Buyer;
(ii) all obligations of Covol and Alabama Synfuel under the Loan
Documents, including, without limitation, the outstanding
principal and interest on the Loan; and
(iii) all of the out-of-pocket expenses of PFS and the PFS
Investors in connection with the Transaction Documents, whether
or not such expenses were otherwise reimbursable.
The Option Price shall be payable to PFS and PFS Parties by Covol in immediately
available U.S. funds.
2. Releases. Upon the exercise of the Option, PFS and the PFS Parties(and
any Affiliate of any such parties) shall be automatically released from any
further obligations under the Transaction Documents (except for the obligations
under this Agreement). Upon payment in full of the Option Price pursuant to the
terms hereof, Covol and Alabama Synfuel(and any Affiliate of any such parties)
shall be automatically released from any further obligations to PFS and/or the
PFS Parties(and any Affiliate of any such parties) under the Transaction
Documents (except for the obligations under this Agreement).
3. Delivery of Interests; AS-IS. Upon payment in full of the Option Price,
(i) PFS shall transfer to Covol all of its interest in the Loan and related
"Loan Documents" (as such term is defined in the Loan Agreement), and (ii) the
PFS Parties shall transfer to Covol all of their respective interest in the
Buyer. PFS and the PFS Parties shall only be required to represent that they are
transferring their entire Interest, that they have made no prior transfers with
respect to their Interest and that they have not encumbered their Interest with
3
<PAGE>
any liens. EXCEPT AS EXPRESSLY SET FORTH IN THE IMMEDIATELY PRECEDING SENTENCE,
THE TRANSFER OF THE INTERESTS SHALL BE MADE "AS IS," AND NONE OF PFS, THE PFS
PARTIES NOR ANY AFFILIATE THEREOF SHALL BE DEEMED TO HAVE MADE ANY
REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, NOW OR HEREAFTER AS TO ANY OTHER
MATTER RELATING TO THE INTERESTS, INCLUDING, WITHOUT LIMITATION, (A) AS TO THE
VALUE OF THE INTERESTS, OR THE VALUE, CONDITION, DESIGN, OPERATION,
MERCHANTABILITY, QUALITY OF MATERIAL OR WORKMANSHIP, FITNESS FOR USE OR FOR A
PARTICULAR PURPOSE, MAINTENANCE, OR MARKETABILITY OF THE ALABAMA PROJECT, (B) AS
TO THE CREDITWORTHINESS OF ANY OBLIGOR UNDER ANY DOCUMENT, OR (C) AS TO THE
ENFORCEABILITY OF ANY TRANSACTION DOCUMENT.
4. Further Assurances. Each party agrees, at the request of the other
party, at any time and from time to time after the exercise of the Option, to
execute and deliver all such further documents, and to take and forbear from all
such action, as may be reasonably necessary or appropriate in order more
effectively to perfect the transfers of rights contemplated herein or otherwise
to confirm or carry out the provisions of this Agreement.
5. Notices. All notices to or demands or requests of the parties hereto
shall be given pursuant to the terms of the Purchase Agreement.
6. Interpretation.
(a) Ambiguities. The parties acknowledge that each party and its
counsel has materially participated in the drafting of this Agreement and the
other Transaction Documents; consequently, the rule of contract interpretation,
that ambiguities, if any, in a writing be construed against the drafter, shall
not apply.
(b) Headings. The section headings in this Agreement are included for
convenience only; they do not give full notice of the terms of any portion of
this Agreement and are not relevant to the interpretation of any provision of
this Agreement.
(c) Governing Law. The parties intend that this Agreement shall be
governed by and construed in accordance with the laws of the State of Utah
applicable to contracts made and wholly performed within Utah by persons
domiciled in Utah (without regard to choice of law rules).
(d) Calculation of Time Periods. In the computation of any period of
time provided for in this Agreement, the day of the act or event from which the
4
<PAGE>
period of time runs shall be excluded, and the last day of the period shall be
included, unless it is a Saturday, Sunday, or bank holiday under federal or Utah
law, in which case the period shall be deemed to run until the end of the next
day that is not a Saturday, Sunday, or bank holiday under federal or Utah law.
(e) Severability. Any provision of this Agreement that is deemed
invalid or unenforceable shall be ineffective to the extent of such invalidity
or unenforceability, without rendering invalid or unenforceable the remaining
provisions of this Agreement. Furthermore, in lieu of each such invalid or
unenforceable provision, there shall be added automatically as a part of this
Agreement a provision as similar in terms to such invalid or unenforceable
provision as may be possible and be valid and enforceable.
7. Integration; Amendment. This Agreement, together with the other
Transaction Documents, constitutes the entire agreement of the parties relating
to the subject matter hereof. There are no promises, terms, conditions,
obligations, or warranties other than those contained herein and/or in the
Transaction Documents. The Transaction Documents supersede all prior
communications, representations, or agreements, verbal or written, among the
parties relating to the subject matter hereof. This Agreement may not be amended
except in writing signed by the parties hereto.
8. Waiver. No provision of this Agreement shall be deemed to have been
waived unless such waiver is in writing signed by the waiving party. No failure
by any party to insist upon the strict performance of any provision of this
Agreement, or to exercise any right or remedy consequent upon a breach thereof,
shall constitute a waiver of any such breach, of such provision or of any other
provision. No waiver of any provision of this Agreement shall be deemed a waiver
of any other provision of this Agreement or a waiver of such provision with
respect to any subsequent breach, unless expressly provided in writing.
9. Expenses; Sales Taxes; Attorneys' Fees.
(a) Expenses. Covol shall pay to PFS and the PFS Parties on demand all
reasonable out-of-pocket costs and expenses incurred by PFS and the PFS Parties,
or any of them (including the fees and charges of counsel) in connection with
the preparation, execution and delivery of any documentation required to effect
the provisions of this Agreement.
(b) Sales Taxes. Covol shall be responsible for and shall indemnify,
reimburse, and hold PFS and PFS Parties harmless against all sales, use,
5
<PAGE>
transfer or similar taxes which may be imposed by any Federal, State or local
authority in connection with the exercise of the Option and the transfer of the
Interests hereunder.
(c) Attorneys' Fees. If any suit or action arising out of or related
to the this Agreement is brought by any party to any such document, the
prevailing party or parties shall be entitled to recover the costs and fees
(including without limitation reasonable attorneys' fees, the fees and costs of
experts and consultants, copying, courier and telecommunication costs, and
deposition costs and all other costs of discovery) incurred by such party or
parties in such suit or action, including without limitation any post-trial or
appellate proceeding.
10. Late Payments. Any amount payable by any party hereunder not paid when
due shall bear interest at the lesser of the maximum rate permitted by
applicable law or the "Default Interest Rate" (as such term is defined in the
Loan Agreement) payable on demand, from the date when due until paid in full.
11. Binding Effect; Termination. This Agreement shall bind and inure to the
benefit of, and be enforceable by, the parties hereto and their respective
successors, heirs, and permitted assigns. In the event that no Put Event has
occurred and the Buyer has received a Letter Ruling satisfactory to Buyer, then
this Agreement shall terminate and be of no further force and effect.
12. Third-Party Beneficiary Rights. No person not a party to this Agreement
is an intended beneficiary of this Agreement, and no person not a party to this
Agreement shall have any right to enforce any term of this Agreement.
13. Counterparts. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one agreement binding
on all the parties, notwithstanding that all parties are not signatories to the
same counterpart.
6
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the day and year first above written.
COVOL TECHNOLOGIES, INC.
By:
-------------------------------------
Name:
Title:
ALABAMA SYNFUEL #1, LTD.
By:
-------------------------------------
Name:
Title:
PACIFICORP FINANCIAL SERVICES, INC.
By:
-------------------------------------
Name:
Title:
BIRMINGHAM SYN FUEL I, INC.
By:
-------------------------------------
Name:
Title:
BIRMINGHAM SYN FUEL II, INC.
By:
-------------------------------------
Name:
Title:
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement"), dated as of March 20,
1997, by and between Covol Technologies, Inc., a Delaware corporation (the
"Company"), and PacifiCorp Financial Services, Inc., an Oregon corporation
("PFS").
WHEREAS this Agreement is made pursuant to the Convertible Loan and
Security Agreement, dated as of the date hereof (the "Loan Agreement"), by and
between the Company and PFS, whereby the Company has agreed, among other things,
to issue shares of its Common Stock, par value $.001 per share (the "Common
Stock"), to PFS upon conversion of indebtedness outstanding thereunder.
WHEREAS to induce PFS to enter into the Loan Agreement, the Company has
agreed to provide the registration rights set forth in this Agreement.
NOW, THEREFORE, in consideration of the foregoing premises, the mutual
covenants and agreements hereinafter set forth, and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
Company and PFS agree as follows:
ARTICLE I
DEFINITIONS
1.1 Certain Definitions. In this Agreement, capitalized terms and other
defined terms described below shall have the meanings set forth or
cross-referenced below:
"Blue Sky Filing" has the meaning set forth in Section 2.7(a) of this
Agreement.
"Commission" means the Securities and Exchange Commission or any other
federal agency at the time administering the Securities Act.
"Common Stock" has the meaning set forth in the introduction to this
Agreement.
"Company" has the meaning set forth in the introduction to this
Agreement.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
or any successor federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time. Reference
to a particular section therein shall include a reference to the comparable
section, if any, of any such successor federal statute.
<PAGE>
2
"Holder" means any Person owning or having a right to acquire
Registrable Securities, including any assignee thereof in accordance with
Article VII hereof.
"Initiating Holders" has the meaning set forth in Section 2.1(a) of
this Agreement.
"Loan Agreement" has the meaning set forth in the introduction to this
Agreement.
"Person" means a corporation, an association, a partnership, an
organization, a business, an individual, a governmental or political subdivision
thereof or a governmental agency.
"Registrable Securities" means any shares of Common Stock issued
pursuant to the Loan Agreement, or issued, with respect to such Common Stock, as
a stock dividend, stock split or other distribution or in connection with a
combination of shares, recapitalization, merger, consolidation or other
reorganization or otherwise. As to any particular Registrable Securities, once
issued such securities shall cease to be Registrable Securities when (i) a
registration statement with respect to the sale of such securities shall have
become effective under the Securities Act and such securities shall have been
disposed of in accordance with such registration statement, (ii) they shall have
been sold pursuant to Rule 144 (or any successor provision) under the Securities
Act, (iii) they represent less than one percent (1%) of the issued and
outstanding Common Stock and they shall be eligible for sale pursuant to Rule
144 (or any successor provision) under the Securities Act, (iv) they shall have
been otherwise transferred, new certificates for them not bearing a legend
restricting further transfer shall have been delivered by the Company and
subsequent public distribution of them shall not require registration or
qualification of them under the Securities Act or any similar state law then in
force, or (v) they shall have ceased to be outstanding. Calculations of required
percentages of Registrable Securities herein shall be determined by the number
of shares of Common Stock included in, and the number of shares of Common Stock
issuable with respect to, the Registrable Securities that are the subject of
such calculation.
"Registration Expenses" has the meaning set forth in Section 2.9 of
this Agreement.
"Securities Act" means the Securities Act of 1933, as amended, or any
successor federal statute, and the rules and regulations of the Commission
<PAGE>
3
thereunder, all as the same shall be in effect at the time. References to a
particular section therein shall include a reference to the comparable section,
if any, of any such successor federal statute.
ARTICLE II
REGISTRATION UNDER SECURITIES ACT, ETC.
2.1 Demand Registration.
(a) Request. At any time on or after the date of this Agreement, upon
the written request of the Holder or Holders of at least twenty-five percent
(25%) of the Registrable Securities then outstanding (the "Initiating Holders")
that the Company effect the registration under the Securities Act of all or part
of such Holders' Registrable Securities specifying the types of Registrable
Securities to be registered and the intended method of disposition thereof, the
Company will give prompt written notice of such request to all registered
Holders of Registrable Securities, and thereupon the Company will use its best
efforts to effect the registration under the Securities Act of:
(i) Registrable Securities which the Company has been requested to
register by the Initiating Holders, and
(ii) all other Registrable Securities which the Company has been
requested to register by written request of the Holders thereof given to the
Company within thirty (30) days after the giving of the aforesaid written notice
by the Company (specifying the intended method of disposition of such
Registrable Securities), all to the extent requisite to permit the intended
disposition of the Registrable Securities to be so registered.
(b) Registration of Other Securities. Whenever the Company shall
effect a registration pursuant to this Section 2.1 in connection with an
underwritten offering, securities other than Registrable Securities may be
included among the securities covered by such registration unless the managing
underwriter of such offering shall in writing have advised the Company and the
Holders requesting registration that the inclusion of such other securities
would adversely affect such offering.
(c) Registration Statement Form. Registrations under this Section 2.1
shall be o such appropriate registration form of the Commission (i) as shall
<PAGE>
4
be selected by the Company and as shall be reasonably acceptable to the
Initiating Holders and (ii) as shall permit the disposition of such Registrable
Securities in accordance with the intended method or methods of disposition
specified in the requests for such registration. The Company agrees to include
in any such registration statement all information which, in the opinion of both
counsel to the Initiating Holders and counsel to the Company, is required to be
included.
(d) Effective Registration Statement. A registration requested
pursuant to this Section 2.1 shall not be deemed to have been effected and will
not be considered one of the three (3) demand registrations which may be
requested pursuant to this Section 2.1 (i) unless a registration statement with
respect thereto has become effective, (ii) if after it has become effective, it
does not remain effective for a period of at least sixty (60) days (unless the
Registrable Securities registered thereunder have been sold or disposed of prior
to the expiration of such sixty (60) day period) or such registration is
interfered with by any stop order, injunction or other order or requirement of
the Commission or other governmental agency or court for any reason and has not
thereafter become effective, or (iii) if the conditions to closing specified in
the underwriting agreement entered into in connection with such registration are
not satisfied or waived other than by reason of the failure or refusal of a
Holder of Registrable Securities to satisfy or perform a condition to such
closing.
(e) Priority in Demand Registrations. If a demand registration
pursuant to this Section 2.1 involves an underwritten offering, and the managing
underwriter shall advise the Company in writing (with a copy sent to each Holder
of the Registrable Securities requesting registration) that the number of
securities requested to be included in such registration exceeds the number
which can be sold in such offering within a price range acceptable to the
Initiating Holders, such registration will include only that number of the
Registrable Securities which the Company is so advised can be sold in such
offering, drawn pro rata from the Holders of the Registrable Securities
requesting such registration on the basis of the percentage of Registrable
Securities held by the Holders of Registrable Securities which have requested
that such securities be included. In connection with any such registration, no
securities other than the Registrable Securities shall be covered by such
registration.
<PAGE>
5
(f) Three Demand Registrations. Demand registrations may only be
requested by one or more Holders, and notwithstanding anything in this Section
2.1 to the contrary, the Company shall not be required to effect (i) more than a
total of three (3) registrations pursuant to this Section 2.1 or (ii) more than
one registration pursuant to this Section 2.1 in any consecutive twelve (12)
month period.
2.2 Incidental Registration.
(a) Right to Include the Registrable Securities. Each time the Company
proposes to register any of its securities under the Securities Act by
registration on Forms S-1, S-2 or S-3 or any successor or similar form(s)
(except registrations on such Forms solely for registration of shares in
connection with any employee benefit plan on Form S-8 or an acquisition,
exchange, merger or consolidation on Form S-4), whether or not for sale for its
own account, it will give prompt written notice to all Holders of the
Registrable Securities of its intention to do so and of such Holders' rights
under this Section 2.2. Upon the written request of any such Holder (specifying
the Registrable Securities intended to be disposed of by such Holder and the
intended method of disposition thereof), made within ten (10) days after the
receipt of any such notice, the Company will use its best efforts to effect the
registration under the Securities Act of all Registrable Securities which the
Company has been so requested to register by the Holders thereof, to the extent
requisite to permit the disposition (in accordance with the intended methods
thereof as aforesaid) of such Registrable Securities to be so registered. If the
Company thereafter determines for any reason not to register or to delay
registration of such securities, the Company may, at its election, give written
notice of such determination to each Holder of the Registrable Securities and,
thereupon, (i) in the case of a determination not to register, shall be relieved
of the obligation to register such Registrable Securities in connection with
such registration (but not from any obligation of the Company to pay the
Registration Expenses in connection therewith), without prejudice, however, to
the rights (if any) of Holders to request that such registration be effected as
a registration under Section 2.1, and (ii) in the case of a determination to
delay registration, shall be permitted to delay registering any Registrable
Securities, for the same period as the delay in registration of such other
securities. No registration effected under this Section 2.2 shall relieve the
Company of its obligation to effect any registration upon request under Section
2.1.
<PAGE>
6
(b) Priority in Incidental Registrations. In a registration pursuant
to this Section 2.2 involving an underwritten offering of the securities so
being registered, whether or not for sale for the account of the Company, by or
through one or more underwriters of recognized standing, if the managing
underwriter of such underwritten offering shall inform the Company and the
Holders of the Registrable Securities requesting registration in such offering
by letter of its belief that the number or type of securities to be included in
such registration would materially adversely affect its ability to effect such
offering, then the Company will be required to include in such registration only
that number and type of Registrable Securities which it is so advised can be
sold in such offering, drawn pro rata from the Holders of the Registrable
Securities requesting such registration on the basis of the percentage of the
Registrable Securities held by the Holders of Registrable Securities which have
requested that such securities be included, without prejudice, however, to the
rights (if any) of Holders to request that such registration be effected as a
registration under Section 2.1.
2.3 Registration Procedures. In connection with the Company's obligations
pursuant to Sections 2.1 and 2.2 hereof, the Company will use best efforts to
effect such registrations to permit the sale of Registrable Securities in
accordance with the intended method or methods of disposition thereof, and
pursuant thereto the Company will as expeditiously as reasonably possible:
(a) prepare and file with the Commission, a registration statement or
registration statements on any appropriate form under the Securities Act, which
form shall be available for the sale of the Registrable Securities by the
Holders thereof in accordance with the intended method or methods of
distribution thereof, and use its best efforts to cause such registration
statement to become effective and to remain continuously effective for a period
of sixty (60) days following the date on which such registration statement is
declared effective; provided, however, that the Company shall have no obligation
to maintain the effectiveness of such registration statement after the sale of
all Registrable Securities registered thereunder;
(b) prepare and file with the Commission such amendments and
post-effective amendments to a registration statement as may be necessary to
keep such registration statement effective for the applicable period; and cause
<PAGE>
7
the related prospectus to be supplemented by any required prospectus supplement,
and as so supplemented to be filed pursuant to Rule 424 under the Securities
Act;
(c) notify the selling Holders of Registrable Securities, and the
managing underwriters, if any, promptly, and (if requested by any such Person)
confirm such advice in writing, (i) when a prospectus or any prospectus
supplement or post-effective amendment has been filed, and, with respect to a
registration statement or any post-effective amendment when the same has become
effective, (ii) of any request by the Commission for amendments or supplements
to a registration statement or related prospectus or for additional information,
(iii) of the issuance by the Commission of any stop order suspending the
effectiveness of a registration statement or the initiation of any proceedings
for that purpose, (iv) if at any time the representations and warranties of the
Company made as contemplated by paragraph (l) below cease to be true and
correct, (v) of the receipt by the Company of any notification with respect to
the suspension of the qualification of any of the Registrable Securities for
sale in any jurisdiction or the initiation or threatening of any proceeding for
such purpose, (vi) of the happening of any event which requires the making of
any changes in a registration statement or related prospectus so that such
documents will 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 (vii) of the Company's reasonable
determination that a post-effective amendment to a registration statement would
be appropriate;
(d) make every best effort to obtain the withdrawal of any order
suspending the effectiveness of a registration statement, or the lifting of any
suspension of the qualification of any of the Registrable Securities for sale in
any jurisdiction, at the earliest possible moment;
(e) if requested by the managing underwriters or any Holder of
Registrable Securities being sold in connection with an underwritten offering,
immediately incorporate in a prospectus supplement or post-effective amendment
such information as the managing underwriters and such Holder agree should be
included therein relating to the sale and distribution of Registrable
Securities, including information with respect to the number of Registrable
Securities being sold to such underwriters, the purchase price being paid
therefor by such underwriters and any other terms of the offering; make all
required filings of such prospectus supplement or post-effective amendment as
soon as notified of the matters to be incorporated in such prospectus supplement
<PAGE>
8
or post-effective amendment; and supplement or make amendments to any
registration statement relating to the sale and distribution of the Registrable
Securities if requested by any Holder of Registrable Securities covered by such
registration statement or any underwriter of such Registrable Securities;
(f) furnish to each selling Holder of Registrable Securities and each
managing underwriter, without charge, at least one signed copy of the
registration statement or statements and any post-effective amendment thereto,
including financial statements and schedules, all documents incorporated therein
by reference and all exhibits (including those incorporated by reference);
(g) deliver to each Holder of Registrable Securities and the
underwriters, if any, without charge, as many copies of the prospectus or
prospectuses (including each preliminary prospectus) and any amendment or
supplement thereto as such Persons may reasonably request; the Company consents
to the use of such prospectus or any amendment or supplement thereto by each of
the selling Holders of Registrable Securities and the underwriters, if any, in
connection with the offering and sale of the Registrable Securities covered by
such prospectus or any amendment or supplement thereto;
(h) prior to any public offering of Registrable Securities, use its
best efforts to register or qualify or cooperate with the selling Holders of
Registrable Securities, the underwriters, if any, and their respective counsel
in connection with the registration or qualification of such Registrable
Securities for offer and sale under the securities or Blue Sky laws of such
jurisdictions as the managing underwriter, in the case of an underwritten
offering, or the selling Holder, in the case of any other offering, reasonably
requests in writing; keep each such registration or qualification effective
during the period such registration statement is required to be kept effective
and do any and all other reasonable acts or things necessary or advisable to
enable the disposition in such jurisdictions of the Registrable Securities
covered by the applicable registration statement; provided, however, that the
Company will not be required to qualify generally to do business in any
jurisdiction where it is not then so qualified or to take any action which would
subject it to general service of process in any such jurisdiction where it is
not then so subject;
(i) cooperate with the selling Holders of Registrable Securities and
the managing underwriters, if any, to facilitate the timely preparation and
delivery of certificates representing Registrable Securities to be sold and not
<PAGE>
9
bearing any restrictive legends unless required by applicable law; and enable
such Registrable Securities to be in such denominations and registered in such
names as the managing underwriters may request at least two business days prior
to any sale of Registrable Securities to the underwriters;
(j) use its best efforts to cause the Registrable Securities covered
by the applicable registration statement to be registered with or approved by
such other governmental agencies or authorities as may be necessary to enable
the seller or sellers thereof or the underwriters, if any, to consummate the
disposition of such Registrable Securities;
(k) upon the occurrence of any event contemplated by paragraph (c)(vi)
above, prepare a supplement or post-effective amendment to the applicable
registration statement or related prospectus or any document incorporated
therein by reference or file any other required document so that, as thereafter
delivered to the purchasers of the Registrable Securities being sold thereunder,
such prospectus will not contain any untrue statement of a material fact or omit
to state any material fact necessary to make the statements therein not
misleading;
(l) enter into such agreements and take all such other reasonable
actions in connection therewith in order to expedite or facilitate the
disposition of such Registrable Securities and in such connection, whether or
not an underwriting agreement is entered into and whether or not the
registration is an underwritten registration, (i) make such representations and
warranties to the Holders of such Registrable Securities with respect to the
registration statement, prospectus and documents incorporated by reference, if
any, in form, substance and scope as are customarily made by issuers to
underwriters in underwritten offerings, and confirm the same if and when
requested; (ii) obtain the opinions of counsel to the Company and updates
thereof with respect to the registration statement and the prospectus in the
form, scope and substance which are customarily made in underwritten offerings;
(iii) in the case of an underwritten offering, enter into an underwriting
agreement in form, scope and substance as is customary in underwritten offerings
and obtain opinions of counsel to the Company and updates thereof addressed to
each selling Holder and the underwriters, if any, covering the matters
customarily covered in opinions requested in underwritten offerings and such
other matters as may be reasonably requested by such Holders and underwriters;
(iv) furnish to each seller of Registrable Securities a signed counterpart,
<PAGE>
10
addressed to such seller (and the underwriters, if any) of (x) an opinion of
counsel for the Company, dated the effective date of such registration statement
(or, if such registration includes an underwritten public offering, dated the
date of the closing under the underwriting agreement), and (y) a "comfort"
letter, dated the effective date of such registration statement (and, if such
registration includes an underwritten public offering, dated the date of the
closing under the underwriting agreement), signed by the independent public
accountants who have audited the Company's financial statements included in such
registration statement, covering substantially the same matters with respect to
such registration statement (and the prospectus included therein) and in the
case of the accountants' letter, with respect to events subsequent to the date
of such financial statements, as are customarily covered in opinions of issuer's
counsel and in accountants' letters delivered to the underwriters in
underwritten public offerings of securities and, in the case of the accountants'
letter, such other financial matters, and, in the case of the legal opinion,
such other legal matters, as such seller (or the underwriters, if any) may
reasonably request; (v) if an underwriting agreement is entered into, the same
shall set forth in full the indemnification and contribution provisions and
procedures of Section 2.7 hereof with respect to all parties to be indemnified
pursuant to said section, with such other provisions regarding indemnification
and contribution as are customary and acceptable to the underwriters, the
Holders of a majority of the Registrable Securities to be sold and the Company;
and (vi) the Company shall deliver such certificates of its officers as may be
reasonably requested by the Holders of a majority of the Registrable Securities
to be sold and the managing underwriters, if any, to evidence compliance with
this clause (l) and with any customary conditions contained in the underwriting
agreement or other agreement entered into by the Company. The above shall be
done at each closing under such underwriting or similar agreement or as and to
the extent required thereunder;
(m) otherwise use its best efforts to comply with all applicable rules
and regulations of the Commission and make generally available to its security
holders earnings statements satisfying the provisions of Section 11(a) of the
Securities Act, no later than ninety (90) days after the end of any twelve (12)
month period (i) commencing at the end of any fiscal quarter in which
Registrable Securities are sold to underwriters in a firm or best efforts
underwriting offering and (ii) beginning with the first day of the Company's
first fiscal quarter next succeeding each sale of Registrable Securities after
the effective date of a registration statement, which statements shall cover
said twelve (12) month periods;
<PAGE>
11
(n) use its best efforts to cause all such Registrable Securities to
be listed on each securities exchange (including for this purpose the National
Association of Securities Dealers Automated Quotation System), if any, on which
Registrable Securities of the type then being registered are listed;
(o) provide and cause to be maintained a transfer agent and registrar
for all Registrable Securities covered by such registration statement from and
after a date not later than the effective date of such registration statement;
and
(p) cause its officers to participate in such information and
marketing meetings as the managing underwriter, in case of an underwritten
offering, or the selling Holders, in the case of any other offering, reasonably
request.
Each Holder of Registrable Securities as to which any registration is being
effected shall furnish to the Company in writing such information regarding such
Holder and the distribution of such Registrable Securities as the Company may
from time to time reasonably request in writing in order to comply with the
Securities Act, which writing shall state that such information is being
provided specifically for use in the preparation of the related registration
statement. Each Holder of Registrable Securities as to which any registration is
being effected agrees to notify the Company as promptly as practicable of any
inaccuracy or change in information previously furnished by such Holder to the
Company or of the happening of any event in either case as a result of which any
prospectus relating to such registration contains an untrue statement of a
material fact regarding such Holder or the distribution of such Registrable
Securities or omits to state any material fact regarding such Holder or the
distribution of such Registrable Securities required to be stated therein or
necessary to make the statements therein not misleading in light of the
circumstances then existing, and to promptly furnish to the Company any
additional information required to correct and update any previously furnished
information or required such that such prospectus shall not contain, with
respect to such Holder or the distribution of such Registrable Securities, an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading in
light of the circumstances then existing.
<PAGE>
12
Each Holder of Registrable Securities agrees that, upon receipt of any
notice from the Company of the happening of any event of the kind described in
Section 2.3(c)(ii), (iii), (v), (vi) or (vii) hereof, such Holder will forthwith
discontinue disposition of such Registrable Securities covered by such
registration statement or prospectus until such Holder's receipt of the copies
of the supplemented or amended prospectus relating to such registration
statement or prospectus, or until it is advised in writing by the Company that
the use of the applicable prospectus may be resumed, and has received copies of
any additional or supplemental filings which are incorporated by reference in
such Prospectus, and, if so directed by the Company, such Holder will deliver to
the Company (at the Company's expense) all copies, other than permanent file
copies then in such Holder's possession, of the prospectus covering the
Registrable Securities current at the time of receipt of such notice.
2.4 Underwritten Offerings.
(a) Demand Underwritten Offerings. In the event that a registration
pursuant to Section 2.1 is for a registered public offering involving an
underwriting, the Company shall so advise each Holder of Registrable Securities
as part of the notice given pursuant to Section 2.1(a). In such event, the right
of any such Holder pursuant to Section 2.1 shall be conditioned upon such
Holder's participation in the underwriting arrangements required by this Section
2.4.
In any such underwritten offering, sales shall be made through a nationally
recognized investment banking firm (or syndicate managed by such firm) selected
by the Initiating Holders pursuant to Section 2.1 and approved by the Company
and the Company shall enter into an underwriting agreement as provided in
Section 2.3(l). The Holders of Registrable Securities to be distributed by such
underwriters shall be parties to such underwriting agreement and may, at their
option, require that any or all of the representations and warranties by, and
the other agreements on the part of, the Company to and for the benefit of such
underwriters shall also be made to and for the benefit of such Holders of
Registrable Securities and that any or all of the conditions precedent to the
obligations of such underwriters under such underwriting agreement be conditions
precedent to the obligations of such Holders of Registrable Securities. Any such
Holder of Registrable Securities shall be required to make representations and
warranties to and agreements with the Company and the underwriters regarding
only such Holder, such Holder's Registrable Securities and such Holder's
intended method of distribution and any other representation required by law.
<PAGE>
13
(b) Incidental Underwritten Offerings. If the Company at any time
proposes to register any of its securities under the Securities Act as
contemplated by Section 2.2 and such securities are to be distributed by or
through one or more underwriters, the Company will, if requested by any Holder
of Registrable Securities as provided in Section 2.2 and subject to the
provisions of Section 2.2(b), use best efforts to arrange for such underwriters
to include all the Registrable Securities to be offered and sold by such Holder
among the securities to be distributed by such underwriters. The Holders of
Registrable Securities to be distributed by such underwriters shall be parties
to the underwriting agreement between the Company and such underwriters and may,
at their option, require that any or all of the representations and warranties
by, and the other agreements on the part of, the Company to and for the benefit
of such underwriters shall also be made to and for the benefit of such Holders
of Registrable Securities and that any or all of the conditions precedent to the
obligations of such underwriters under such underwriting agreement be conditions
precedent to the obligations of such Holders of Registrable Securities. Any such
Holder of Registrable Securities shall be required to make representations and
warranties to and agreements with the Company and the underwriters regarding
only such Holder, such Holder's Registrable Securities and such Holder's
intended method of distribution and any other representation required by law.
2.5 Preparation; Reasonable Investigation. In connection with the
preparation and filing of each registration statement under the Securities Act
pursuant to this Agreement, and upon the request of the Holders of Registrable
Securities to be registered under such registration statement after notice
thereof by the Company, the Company will give the Holders of Registrable
Securities to be registered under such registration statement, their
underwriters, and their respective counsel and accountants the opportunity to
participate in the preparation of such registration statement, each prospectus
included therein or filed with the Commission, and each amendment thereof or
supplement thereto, and will give each of them such reasonable access to its
books and records and such opportunities to discuss the business of the Company
with its officers and the independent public accountants who have certified its
financial statements as shall be necessary, in the reasonable opinion of such
Holders' and such underwriters' respective counsel, to conduct a reasonable
investigation within the meaning of the Securities Act.
<PAGE>
14
2.6 Limitations, Conditions and Qualifications to Obligations Under
Registration Covenants. The obligations of the Company to use its best efforts
to cause the Registrable Securities to be registered under the Securities Act
are subject to each of the following limitations, conditions and qualifications:
(a) The Company shall be entitled to postpone for a reasonable period
of time (but not exceeding ninety (90) days) the filing or effectiveness of any
registration statement otherwise required to be prepared and filed by it
pursuant to Section 2.1 if the Company determines, in its reasonable judgment,
that (i) the Company is in possession of material information that has not been
disclosed to the public and the Company reasonably deems it to be advisable not
to disclose such information at such time in a registration statement or (ii)
such registration and offering would materially and adversely affect any
financing, acquisition, corporate reorganization or other material transaction
involving the Company or any of its Affiliates (as defined in the rules and
regulations adopted under the Exchange Act) and, in any such case, the Company
promptly gives the requesting Holders of Registrable Securities written notice
of such determination, containing a general statement of the reasons for such
postponement and an approximation of the anticipated delay or (iii) such other
cause as the Company shall have been advised by its investment banker make it
undesirable or unpracticable to proceed with the offering. If the Company shall
so postpone the filing of a registration statement, the requesting Holders of
Registrable Securities shall have the right to withdraw the request for
registration by giving written notice to the Company within thirty (30) days
after receipt of the notice of postponement and, in the event of such
withdrawal, such request shall not be counted for purposes of the requests for
registration to which Holders are entitled pursuant to Section 2.1 hereof.
(b) Holders of Registrable Securities shall use all reasonable efforts
to effect as wide a distribution of the Registrable Securities as reasonably
practicable, including, if such distribution is pursuant to any underwritten
offering, using reasonable efforts to secure the agreement of the underwriters
to the same effect.
(c) No Holder of Registrable Securities may participate in any
underwritten offering hereunder unless such Holder (i) agrees to sell such
<PAGE>
15
Holder's Registrable Securities on the basis provided in any underwriting
arrangements approved by the persons entitled hereunder to approve such
arrangements, (ii) agrees not to sell Common Stock of the Company in a public
offering for a period of ninety (90) days after the date of the offering,
without the prior consent of the managing underwriter of the offering, and (iii)
completes and executes all questionnaires, custody agreements, powers of
attorney, indemnities, underwriting agreements and other documents reasonably
required under the terms of such underwriting arrangements.
2.7 Indemnification and Contribution.
(a) Indemnification by the Company. In the event of a registration of
any Registrable Securities under the Securities Act pursuant to this Agreement
at a time that the Holders own in the aggregate (prior to such registration)
less than twenty-five (25) percent of outstanding Common Stock of the Company,
the Company will, and hereby does, indemnify and hold harmless, to the fullest
extent permitted by law, the Holder of any Registrable Securities whose
Registrable Securities are covered by such registration statement, its directors
and officers, each other Person who participates as an underwriter in the
offering or sale of such securities and each other Person, if any, who controls
such seller or any such underwriter within the meaning of the Securities Act,
against any and all losses, claims, damages, liabilities and expenses, joint or
several, (or actions or proceedings, whether commenced or threatened, in respect
thereof) to which they or any of them may become subject under the Securities
Act or any other statute or common law, including any amount paid in settlement
of any litigation, commenced or threatened, and to reimburse them for any legal
or other expenses incurred by them in connection with investigating any claims
and defending any actions, insofar as any such losses, claims, damages,
liabilities, expenses or actions arise out of or are based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in the
registration statement relating to the sale of such securities or any
post-effective amendment thereto or in any filing made in connection with the
qualification of the offering under Blue Sky or other securities laws of
jurisdictions in which the Registrable Securities are offered ("Blue Sky
Filing"), or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading or (ii) any untrue statement or alleged untrue statement of a
material fact contained in any preliminary prospectus, if used prior to the
<PAGE>
16
effective date of such registration statement (unless such statement is
corrected in the final prospectus and the Company has previously furnished
copies thereof to the Holder of Registrable Securities seeking such
indemnification and the underwriters), or contained in the final prospectus (as
amended or supplemented if the Company shall have filed with the Commission any
amendment thereof or supplement thereto) if used within the period during which
the Company is required to keep the registration statement to which such
prospectus relates current, or the omission or alleged omission to state therein
(if so used) a material fact necessary in order to make the statements therein,
in light of the circumstances under which they were made, not misleading;
provided, however, that the indemnification agreement contained herein shall not
(i) apply to such losses, claims, damages, liabilities, expenses or actions
arising out of, or based upon, any such untrue statement or alleged untrue
statement, or any such omission or alleged omission, if such statement or
omission was made in reliance upon and in conformity with written information
furnished to the Company by such seller or such underwriter specifically stating
that it is for use in connection with preparation of the registration statement,
any preliminary prospectus or final prospectus contained in the registration
statement, any such amendment or supplement thereto or any Blue Sky Filing or
(ii) inure to the benefit of any underwriter or any person controlling such
underwriter, to the extent that any such loss, claim, damage, liability (or
action or proceeding in respect thereof) or expense arises out of such person's
failure to send or give a copy of the final prospectus, as the same may be then
supplemented or amended, to the person asserting an untrue statement or alleged
untrue statement or omission or alleged omission at or prior to the written
confirmation of the sale of Registrable Securities to such person if such
statement or omission was corrected in such final prospectus.
Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of such seller or any such director, officer,
controlling person or underwriter and shall survive the transfer of such
securities by such seller.
(b) Indemnification by the Company of Costs and Expenses of Defense.
In the event of any registration of any Registrable Securities under the
Securities Act pursuant to this Agreement, the Company will and hereby does
indemnify and hold harmless, to the fullest extent permitted by law, the Holder
of any Registrable Securities whose Registrable Securities are covered by such
registration statement, its directors and officers, each other Person who
<PAGE>
17
participates as an underwriter in the offering or sale of such securities and
each other Person, if any, who controls such seller or any such underwriter
within the meaning of the Securities Act, against the costs and expenses of
defending any claims, joint or several, (or actions or proceedings, whether
commenced or threatened, in respect thereof) to which they or any of them may
become subject under the Securities Act or any other statute or common law, and
to reimburse them for any legal or other expenses incurred by them in connection
with investigating any claims and defending any actions, insofar as any such
claims, expenses or actions arise out of or are based upon matters of the type
indemnified for in subdivision (a) of this Section 2.7 (without regard to the
percentage ownership by the Holders of the outstanding Common Stock of the
Company).
(c) Indemnification by the Sellers. Each Holder selling Registrable
Securities in any registration statement filed pursuant to Section 2.1 or 2.2
will, and hereby does, indemnify and hold harmless (in the same manner and to
the same extent as set forth in Section 2.7(a)) the Company, each director of
the Company, each officer of the Company and each other Person, if any, who
controls the Company within the meaning of the Securities Act, with respect to
any untrue statement or alleged untrue statement in, or omission or alleged
omission from, such registration statement, any preliminary prospectus or final
prospectus contained therein, or any amendment or supplement thereto, if such
statement or omission was made in reliance upon and in conformity with written
information furnished to the Company by such seller specifically stating that it
is for use in the preparation of such registration statement, preliminary
prospectus, final prospectus, amendment or supplement. Such indemnity shall
remain in full force and effect, regardless of any investigation made by or on
behalf of the Company or any such director, officer or controlling person and
shall survive the transfer of such securities by such seller. In no event shall
any indemnity paid by a Holder to the Company pursuant to this Section 2.7(c),
or otherwise, exceed the proceeds received by such Holder in such offering.
(d) Notices of Claims, etc. Promptly after receipt by an indemnified
party of notice of the commencement of any action or proceeding involving a
claim referred to in the preceding subdivisions of this Section 2.7, such
indemnified party will, if a claim in respect thereof is to be made against an
indemnifying party, give written notice to the latter of the commencement of
such action, provided that the failure of any indemnified party to give notice
as provided herein shall not relieve the indemnifying party of its obligations
<PAGE>
18
under the preceding subdivisions of this Section 2.7, except to the extent that
the indemnifying party is actually prejudiced in any material respect by such
failure to give notice. In case any such action is brought against an
indemnified party, the indemnifying party shall be entitled to participate in
and, unless in such indemnified party's reasonable judgment a conflict of
interest between such indemnified and indemnifying parties may exist in respect
of such claim, to assume the defense thereof, jointly with any other
indemnifying party similarly notified to the extent that it may wish, with
counsel reasonably satisfactory to such indemnified party, and after notice from
the indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party shall not be liable to such
indemnified party for any legal or other expenses subsequently incurred by the
latter in connection with the defense thereof other than reasonable costs of
reasonable investigation. In the event that the indemnifying party advises an
indemnified party that it will contest a claim for indemnification hereunder, or
fails, within thirty (30) days of receipt of any indemnification notice to
notify, in writing, such person of its election to defend, settle or compromise,
at its sole cost and expense, any action, proceeding or claim (or discontinues
its defense at any time after it commences such defense), then the indemnified
party may, at its option, defend, settle or otherwise compromise or pay such
action or claim. In any event, unless and until the indemnifying party elects in
writing to assume and does so assume the defense of any such claim, proceeding
or action, the indemnified party's costs and expenses arising out of the
defense, settlement or compromise of any such action, claim or proceeding shall
be losses subject to indemnification hereunder. The indemnified party shall
cooperate fully with the indemnifying party in connection with any negotiation
or defense of any such action or claim by the indemnifying party and shall
furnish to the indemnifying party all information reasonably available to the
indemnified party which relates to such action or claim. The indemnifying party
shall keep the indemnified party fully informed at all times as to the status of
the defense or any settlement negotiations with respect thereto. If the
indemnifying party elects to defend any such action or claim, then the
indemnified party shall be entitled to participate in such defense with counsel
of its choice at its sole cost and expense, except that the indemnifying party
shall be liable for such costs and expenses if, in such indemnified party's
reasonable judgment, a conflict of interest between such indemnified and
indemnifying parties may exist as described above. If the indemnifying party
does not assume such defense, the indemnified party shall keep the indemnifying
party informed at all times as to the status of the defense; provided, however,
<PAGE>
19
that the failure to keep the indemnifying party so informed shall not affect the
obligations of the indemnifying party hereunder. No indemnifying party shall be
liable for any settlement of any action, claim or proceeding effected without
its written consent; provided, however, that the indemnifying party shall not
unreasonably withhold, delay or condition its consent. No indemnifying party
shall, without the consent of the indemnified party, consent to entry of any
judgment or enter into any settlement which 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 to such claim or litigation.
(e) Indemnification Payments. The indemnification required by this
Section 2.7 shall be made by periodic payments of the amount thereof during the
course of the investigation or defense, as and when bills are received or
expense, loss, damage or liability is incurred.
(f) Contribution. If the indemnification provided for in the preceding
subdivisions of this Section 2.7 is unavailable to or insufficient to hold
harmless a party otherwise entitled to be indemnified thereunder in respect to
any losses, claims, damages and expenses (or actions or proceedings, whether
commenced or threatened, in respect thereof) referred to therein, then the
Company and the Holders selling Registrable Securities in such registration
statement shall contribute to the amount paid or payable by such party as a
result of such losses, claims, damages, liabilities, expenses or actions in such
proportion as is appropriate to reflect the relative fault of each of (i) the
Company and (ii) such sellers in connection with the statements or omissions
that resulted in such losses, claims, damages, liabilities, expenses or actions.
The relative fault of the Company and such sellers shall be determined by
reference to whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Company or such sellers and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission. The Company and such sellers agree that it would not
be just and equitable if contributions pursuant to this subdivision (f) were
determined by pro rata allocation or by any other method of allocation which
does not take account of the equitable considerations referred to above in this
subdivision (f). Notwithstanding the provisions of this subdivision (f), no such
seller shall be required to contribute any amount in excess of the amount by
which the proceeds received by such seller from Registrable Securities sold by
it pursuant to such registration statement exceeds that amount of any damages
<PAGE>
20
which such seller has otherwise paid or become liable to pay by reason of any
untrue statement or alleged untrue statement or omission or alleged omission. 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 is not guilty of such fraudulent misrepresentation. For purposes of this
subdivision (f), each director of the Company, each officer of the Company who
signed such registration statement, and each person, if any, who controls the
Company within the meaning of Section 15 of the Securities Act shall (in
addition to any other rights of contribution) have the same rights to
contribution as the Company; and each person, if any, who controls any such
seller within the meaning of Section 15 of the Securities Act shall (in addition
to any other rights of contribution) have the same rights to contribution as
such seller.
(g) Other Rights, Liabilities. The indemnity agreements contained
herein shall be in addition to (i) any cause of action or similar right of the
indemnified party against the indemnifying party or others, and (ii) any
liabilities the indemnifying party may be subject to pursuant to the law.
2.8 Adjustments Affecting Registrable Securities. During any period
commencing on either (i) the date a request for a demand registration has been
made pursuant to Section 2.1(a) hereof or (ii) the date on which any Holder of
Registrable Securities makes written request in accordance with the terms of
Section 2.2(a) hereof to have its Registrable Shares registered, and in either
event, terminating on the date which is the earlier of (i) 365 days after the
date on which the registration statement registering such Registrable Securities
becomes effective and (ii) the date on which all Registrable Securities
registered under such registration statement are sold, transferred or disposed
of, the Company will not effect, permit to occur or announce any future intent
to effect or permit to occur, any combination or subdivision of shares which
would materially adversely affect the ability of the Holders of Registrable
Securities to include Registrable Securities in any registration of securities
contemplated by this Section 2 or the marketability of Registrable Securities
under any such registration.
2.9 Registration Expenses. All expenses incident to the Company's
performance of or compliance with Section 2.1 of this Agreement, including
without limitation all registration and filing fees, including fees with respect
to filings required to be made with the National Association of Securities
<PAGE>
21
Dealers, Inc., fees and expenses of compliance with securities or blue sky laws
(including reasonable fees and disbursements of counsel for the underwriters),
printing expenses, messenger, telephone and delivery expenses, and fees and
disbursements of counsel of the Company and of all independent public
accountants of the Company (including the expenses of any special audit and
"comfort" letters required by or incident to such performance), and fees and
expenses of other Persons retained by the Company (all such expenses being
herein called "Registration Expenses") will be borne by the Holders whether or
not any of the registration statements becomes effective. All Registration
Expenses incident to the Company's performance or compliance with Section 2.2 of
this Agreement (other than registration filing fees for shares to be offered by
Holders) will be borne by the Company. The Company will in each case pay its
internal expenses (including all salaries and expenses of its officers and
employees performing legal or accounting duties), the expense of any annual
audit, the fees and expenses incurred in connection with the listing of the
securities to be registered on any securities exchange, rating agency fees and
the fees and expenses of any Person, including special experts, retained by the
Company.
ARTICLE III
RULE 144
The Company shall take all actions reasonably necessary to enable Holders
of Registrable Securities to sell such securities without registration under the
Securities Act within the limitation of the exemptions provided by (i) Rule 144
under the Securities Act, as such Rule may be amended from time to time, or (ii)
any similar rule or regulation hereafter adopted by the Commission including
filing on a timely basis all reports required to be filed by the Exchange Act.
Upon the request of any Holder of Registrable Securities, the Company will
deliver to such Holder a written statement as to whether it has complied with
such requirements.
ARTICLE IV
AMENDMENTS AND WAIVERS
This Agreement may be amended with the consent of the Company and the
Company may take any action herein prohibited, or omit to perform any act herein
required to be performed by it, only if the Company shall have obtained the
written consent to such amendment, action or omission to act, of the Holder or
Holders of a majority of the Registrable Securities then outstanding. Each
<PAGE>
22
Holder of any Registrable Securities at the time or thereafter outstanding shall
be bound by any consent authorized by this Article IV, whether or not such
securities all have been marked to indicate such consent.
ARTICLE V
REGISTRATION RIGHTS
The Company covenants that it will not grant any right of registration
under the Securities Act relating to any of its shares of capital stock or other
securities to any Person other than pursuant to this Agreement, unless (i) the
rights so granted to another Person do not limit or restrict the right of the
Holders to request three (3) demand registrations as provided for in Section 2.1
hereof at such times and covering such amount of Registrable Securities as the
Holders determine in their sole judgment (except as such timing or amount of
Registrable Securities may otherwise be limited by the express terms of this
Agreement) and (ii) the rights so granted to another Person do not limit or
restrict the rights granted pursuant to Section 2.2 hereof to any Holders of
Registrable Securities to have such Registrable Securities included in any
registration by the Company under the Securities Act of any of its securities
for its own account (except as such rights of Holders of Registrable Securities
are otherwise expressly limited by the terms of this Agreement).
ARTICLE VI
NOTICES
All notices or other communications required or permitted to be given under
this Agreement shall be in writing. Notices may be served by certified or
registered mail, postage paid with return receipt requested; by private courier,
prepaid; by telex, facsimile, or other telecommunication device capable of
transmitting or creating a written record; or personally. Mailed notices shall
be deemed delivered five (5) days after mailing, properly addressed. Couriered
notices shall be deemed delivered when delivered as addressed, or if the
addressee refuses delivery, when presented for delivery notwithstanding such
refusal. Telex or telecommunicated notices shall be deemed delivered when
receipt is either confirmed by confirming transmission equipment or acknowledged
by the addressee or its office. Personal delivery shall be effective when
accomplished. Unless a party change its address by giving notice to the other
party as provided herein, notices shall be delivered to the parties as follows:
(i) if addressed to PFS, at the address set forth in the Loan Agreement, or at
<PAGE>
23
such other address as PFS shall have furnished to the Company in writing, or
(ii) if addressed to any other Holder of Registrable Securities, at the address
that such Holder shall have furnished to the Company in writing, or, until any
such other Holder so furnishes to the Company an address, then to and at the
address of the last Holder of such securities who has furnished an address to
the Company, or (iii) if addressed to the Company, at the address set forth in
the Loan Agreement, or at such other address, or to the attention of such other
officer, as the Company shall have furnished to PFS in accordance with the Loan
Agreement.
ARTICLE VII
ASSIGNMENT
This Agreement shall be binding upon and inure to the benefit of and be
enforceable by the parties hereto and, with respect to the Company, its
respective successors and assigns and, with respect to the Holders, any Holder
of any Registrable Securities. Furthermore, the rights of a Holder under this
Agreement may be assigned by such Holder at its sole discretion (and thereupon
by such assignee) without the consent of the Company to any Person who purchases
or otherwise duly receives title to ten percent (10%) or more of the Registrable
Securities then outstanding, provided that such assignee agrees in writing to be
bound by the terms of this Agreement.
ARTICLE VIII
DESCRIPTIVE HEADINGS
The descriptive headings of the several sections and paragraphs of this
Agreement are inserted for reference only and shall not limit or otherwise
affect the meaning hereof.
ARTICLE IX
GOVERNING LAW
THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, AND THE
RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE LAWS OF THE STATE OF UTAH.
<PAGE>
24
ARTICLE X
COUNTERPARTS
This Agreement may be executed simultaneously in any number of
counterparts, each of which shall be deemed an original, but all such
counterparts shall together constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
and delivered by their respective officers thereunto duly authorized as of the
date first above written.
COVOL TECHNOLOGIES, INC.
By:
-------------------------------------
Name:
-------------------------------
Title:
------------------------------
PACIFICORP FINANCIAL SERVICES, INC.
By:
-------------------------------------
Name:
-------------------------------
Title:
------------------------------
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