UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-K
For Annual and Transition Reports
Pursuant to Sections 13 or 15(d)
of the Securities Exchange Act of 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[NO FEE REQUIRED]
For the fiscal year ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[NO FEE REQUIRED]
For the transition period from .............. to ..............
Commission file number 0-27803
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COVOL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 87-0547337
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3280 North Frontage Road
Lehi, Utah 84043
(Address of principal executive offices) (Zip Code)
(801) 768-4481
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Covol Technologies, Inc. Common Stock, $.001 par value
(Securities are traded on the OTC Bulletin Board under the symbol "CVOL")
Indicate by check mark whether the registrant: (1) has filed
all reports required to be filed by Section 13 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 ___
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K [ ].
The aggregate market value of the voting stock held by non-
affiliates of the registrant on December 1, 1996 was $101,167,500.
The number of shares outstanding of each of the registrant's
classes of common stock as of December 1, 1996 was 8,895,542.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated herein by reference:
None.
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TABLE OF CONTENTS
Page
PART I
ITEM 1. BUSINESS................................................. 1
ITEM 2. PROPERTIES............................................... 14
ITEM 3. LEGAL PROCEEDINGS........................................ 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...... 17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS..................................... 17
ITEM 6. SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA......... 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................... 23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............. 28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE................. 28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...... 28
ITEM 11. EXECUTIVE COMPENSATION.................................. 31
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.......................................... 38
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......... 41
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON
FORM 8-K................................................ 43
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PART I
ITEM 1. BUSINESS
The Company
The primary business of Covol Technologies, Inc. (the
"Company") is to commercialize patented and proprietary technologies used to
recycle waste by-products from the coal and steel industries into a marketable
source of fuel and revert materials in the form of briquettes (the "Briquetting
Technology"). The Company has three plants, consisting of one prototype
briquetting plant and two commercial plants. The prototype briquetting plant,
located in Price, Utah, was built in 1992 and has produced commercial quantities
of coal, coke and revert material briquettes. The Company has two commercial
briquetting plants, one coke and revert material plant which produces coal, coke
and revert material products, located in Vineyard, Utah (referred to herein as
the "Geneva Plant"), and one synthetic coal plant, located in Price, Utah
(referred to herein as the "Utah Plant"). The Geneva Plant is operational,
however the primary contract for the sale of briquettes expired on December 31,
1996. See "BUSINESS--Business of Company--Geneva Plant. The Utah Plant is also
operational, and commenced commercial operations in December of 1996. The
Company is in the process of attempting to secure financing for additional
plants which will utilize the Briquetting Technology. See "BUSINESS--PacifiCorp"
and "BUSINESS--Gallagher."
The Company was originally incorporated in Nevada in 1987
under the name Cynsulo, Inc. In 1988 the Company consummated an initial public
offering of its common stock in Nevada in which the Company sold 200,000 shares
for $20,000. At the time of such public offering, the Company was engaged in no
material business activities. In December 1988, the Company acquired all of the
issued and outstanding shares of McParkland Corporation ("McParkland") and
changed its name to McParkland Properties, Inc. McParkland invested in
discounted notes and contracts through the Federal Deposit Insurance
Corporation. In 1989, management became aware of certain irregularities relating
to the original purchase of two loan packages. As a result of an investigation
conducted by management, the purchase of McParkland was rescinded in February
1990, and the Company's name was changed to Riverbed Enterprises, Inc. In
August, 1990, the Company's focus was changed to the growing and marketing of
certain agricultural products, primarily alfalfa. In 1991, the Company acquired
technology regarding binding agents used to make briquettes. The Company shifted
its focus to the research and development of better and stronger binding agents
which resulted in patenting the Briquetting Technology. The Company then changed
its focus from its agricultural business and devoted its primary efforts to the
development and commercialization of the Briquetting Technology. The Company's
name was changed to Enviro-Fuels Technology, Inc. in July 1991, to Environmental
Technologies Group International in 1994, and to Covol Technologies, Inc. in
August 1995, at which time the Company was reincorporated in Delaware.
In order to generate cash flow to support research and
development for the Briquetting Technology, in 1993, the Company acquired three
construction companies engaged in providing contracting and construction
services to the steel, copper and other heavy industries. The companies were
Industrial Management and Engineering, Inc. ("IME"), State Incorporated
("State") and Central Industrial Construction, Inc. ("CIC"). Additionally, in
1994, the Company acquired Larson Limestone Company, Inc. ("Larson"), which
mines, produces and markets limestone products for industrial applications. IME,
State, CIC and Larson are collectively referred to as the "Subsidiaries."
In September 1995, the Company made a strategic decision to
focus its efforts exclusively on commercializing the Briquetting Technology and
to divest itself of its Subsidiaries. Accordingly, on February 1, 1996, the
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Company entered into a Share Purchase Agreement ( the "Agreement") with Michael
McEwan and Gerald Larson, former principals of the Subsidiaries (the "Buyers"),
to sell all of the common shares of the Subsidiaries to Buyers for a $5,000,000
promissory note (the "Note"). Mr. McEwan is the son of Lloyd C. McEwan, a former
director of the Company. The Note is collateralized by 100,000 shares of stock
of the Company owned by Buyers and is payable together with interest at 6% per
annum as follows: interest only for the first year payable on or before January
31, 1997; principal and interest are payable annually with the Note amortized
over a fifteen year period commencing February 1, 1997 with the first payment
due January 31, 1998; and all unpaid principal and interest payable January 31,
2000. The Company will have voting control over the shares securing the Note
until the Note has been paid. The Company agreed to make a capital contribution
to the Subsidiaries in the amount of approximately $3,500,000 to pay down
accounts payable, accrued liabilities and lines of credit of the Subsidiaries.
The Company paid the $3,500,000 required to close under the Agreement and closed
on September 26, 1996. There have been continuing discussions regarding accounts
payable in an amount estimated at between $300,000 and $650,000 that were not
apparent at the time the Agreement was entered into. The Company has accrued
$650,000 in the September 30, 1996 financial statements. In addition, the Buyers
have verbally committed to pledge an additional 100,000 shares of stock of the
Company owned by Buyers to secure payment of the Note. The Company expects to
reach final settlement with the Buyers by January 31, 1997. There is no
assurance that the Company will be able to finalize all matters relating to the
sale by January 31, 1997. The terms of the Agreement were arrived at by arm's
length negotiations between the parties and approved by the nonaffiliated
members of the Board of Directors and the stockholders of the Company.
Effective January 1, 1994, the Company changed its fiscal
year-end from December 31 to September 30. Effective June 14, 1995, the Company
implemented a one-for-twenty reverse stock split. Effective January 23, 1996 the
Company implemented a two-for-one forward stock split. Except as otherwise
indicated, all information set forth herein has been adjusted to give effect to
such stock splits.
The Company is dependent on raising sufficient capital to
finance its expansion plans and working capital requirements until October 1997.
The Company intends to finance its capital needs through the receipt of down
payments on the sale of future plants, license fees and royalties from the sale
of its first full scale briquetting facility and from commercial loans and
equity placements. No assurances can be made that the Company will be able to
raise sufficient capital or operate profitably.
Business of Company
The Company has developed the Briquetting Technology to
recycle waste by-products from the steel and coal industries into a marketable
source of fuel and revert material in the form of briquettes. During the
steel-making process, steel mills produce, among other waste by-products, revert
materials (small particles containing iron-rich materials). Coke breeze is a
very fine residue resulting from the production and storage of coke, a coal
derivative used in the steel making process. During the coal mining process,
coal fines (small coal particles ranging from dust size to less than 1/4" in
diameter) are produced. These waste materials have historically presented a
disposal problem for steel and coal producers, who may incur substantial costs
in complying with federal and state environmental laws and regulations relating
to their storage and disposal.
The Briquetting Technology employs pressure and chemical
agents to bind coke breeze, coal fines and other revert materials into
briquettes. The coke and coal briquettes produced through use of the Briquetting
Technology are suitable for industrial and commercial use and are comparable to
high grade newly-mined coal and formed coke. The revert material briquettes
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produced through use of the Briquetting Technology are further processed in
reducing furnaces to reclaim iron and other materials. The revert processed
through use of the Briquetting Technology is comparable to scrap iron, a common
form of raw material used by the United States steel-making industry (as opposed
to newly-mined iron ore). The Company believes that its coke and coal briquettes
and reclaimed iron can be produced and marketed at prices which are competitive
with newly-mined coal, formed coke and other sources of scrap iron. Moreover,
the Company believes that the Briquetting Technology will be attractive to steel
and coal producers in addressing the environmental issues surrounding the
disposal of waste by-products generated in the production process.
The Company's fundamental business strategy has been to
commercialize the Briquetting Technology through joint ventures, licenses and
collaborative arrangements with steel, coke and coal producers or investors to
build and equip briquetting plants on-site at the producers' facilities.
Geneva Plant. In May 1995, the Company entered into a
collaborative agreement with Geneva Steel Company ("Geneva") to build and
operate a commercial briquetting plant in Vineyard, Utah defined above as the
Geneva Plant. That agreement was amended and restated in May, 1996. Pursuant to
the Amended and Restated Briquetting Services Agreement and Lease Agreement with
Geneva (collectively, the "Geneva Agreements") Geneva has provided the Company
with a building containing approximately 9,000 square feet. The Company equipped
the building to serve as a coal, coke and revert material briquetting plant. The
Company estimated that the Geneva Plant's initial capacity was 15 tons of
briquettes per hour or approximately 100,000 tons per year. Geneva provided the
Company with revert materials and the Company was obligated to produce and
deliver to Geneva briquettes conforming to agreed-upon specifications and in
agreed to quantities. Geneva bears all transportation costs with respect to
delivery of revert materials to the Geneva Plant and the shipment of briquettes.
Pursuant to the Geneva Agreements, the Company began producing briquettes in May
1996, and produced approximately 24,600 tons of revert briquettes by December
31, 1996 at the Geneva Plant. The Company has made various adjustments and
improvements to the plant to satisfy emissions and air quality standards
administered by the Utah State Division of Air Quality. Although the Geneva
Agreements expired on December 31, 1996, the Company continues to produce
briquettes for purchase by Geneva. Upon the expiration of the Geneva Agreements,
the lease of the building housing the plant also expired resulting in a
tenancy-at-will between the parties.
Limited Partnerships. In June 1996, the Company formed Utah
Synfuel #1, Ltd. ("Utah Synfuel #1") and Alabama Synfuel #1, Ltd. ("Alabama
Synfuel #1"), each a Delaware limited partnership (collectively the
"Partnerships"). The respective Partnerships are intended to (i) purchase a
nonexclusive license from the Company for the Briquetting Technology, (ii)
purchase a coal briquetting facility from the Company and (iii) sell such
facility to a third party purchaser. Utah Synfuel #1 intends to purchase the
coal briquetting Utah Plant and Alabama Synfuel #1 intends to purchase the coal
briquetting Birmingham, Alabama plant (the "Alabama Plant"). The Company will
grant to each of the Partnerships a non-exclusive license to use the Briquetting
Technology with respect to coal for a fee of $500,000 (totalling to $1,000,000).
The Company intends to retain at least a 60% interest in Utah Synfuel #1 and up
to an 83% interest in Alabama Synfuel #1. The Company has privately placed the
remaining partnership interests in the Partnerships. Specifically, the Company
received $3,277,500 ($3,080,000 at September 30, 1996) for the remaining
partnership interests in Utah Synfuel #1 and $1,762,500 ($1,305,000 at September
30, 1996) for the remaining partnership interests in Alabama Synfuel #1.
Notably, the Company is currently analyzing whether the original disclosure
provided to investors should be supplemented. The Company may decide to revise
the information in the original private placement memorandums for those
offerings, and may offer to such investors the opportunity to rescind their
purchases. If all such investors rescind, the Company would be required to pay
up to $5,040,000 ($4,385,000 at September 30, 1996) plus applicable interest
less the amount of income received thereon.
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The Company has used a portion of the funds raised in the
Partnerships to purchase equipment for each of the plants. The Utah Plant has
been completed and commenced commercial operations in December of 1996. The
Alabama Plant is expected to be completed by June 1997. However, no assurances
can be made that the completion date for the Alabama Plant will be met.
The Company, as general partner for the Partnerships, is
currently negotiating transactions with potential buyers of the Utah Plant and
Alabama Plant, which is yet to be constructed or acquired. The Company believes
that the sale of the Utah Plant and Alabama Plant would include (i) a $500,000
sublicensing fee (which would be paid by the buyer to the Partnership in
exchange for the license of the Briquetting Technology), (ii) a royalty payment
to the Partnership based on per ton amount to be agreed on with the buyer, and
(iii) a promissory note delivered by the buyer in payment of the purchase price,
which would be payable to the Partnership from the cash flow of such plant. The
Company and Alabama Synfuel #1 have entered into a letter of intent with an
unregulated subsidiary of PacifiCorp, a large low-cost electric and telephone
utility, to sell the Alabama Plant to be constructed or acquired by Alabama
Synfuel #1, on substantially the terms listed above. See "BUSINESS--PacifiCorp"
for more information regarding the terms of the PacifiCorp letter of intent. The
PacifiCorp purchase transaction is subject to various conditions and no binding
agreement has been entered into. The Company and Utah Synfuel #1 have also
entered into a letter of intent with Arthur J. Gallagher & Co., an international
insurance brokerage and risk management services firm, to sell the Utah Plant,
to be acquired by Utah Synfuel #1 on substantially the terms listed above. See
"BUSINESS--Gallagher" for more information regarding the terms of the Gallagher
letter of intent. The Gallagher purchase transaction is also subject to various
conditions and no binding agreement has been entered into. No assurances can be
made that any of the plants being constructed or acquired by the Partnerships
will be sold.
Under the organizational documents of the Partnerships, the
Company is entitled to distributions from the Partnerships according to the
Company's percentage interest in the net distributable cash flow of the
Partnerships. The Company may also enter into loading agreements and operating
and maintenance agreements that would provide for payments directly from the
buyer of a plant. The binder materials used to produce the briquettes will
likely be sold to the buyer of a plant by the Company based on the Company's
cost plus an agreed upon percentage profit.
Greystone Joint Venture. In June 1995, the Company entered
into a license agreement (the "Greystone Joint Venture Agreement") with
Greystone Environmental Technologies, Inc. ("Greystone") to form a 50/50 joint
venture (the "Greystone Joint Venture") to commercialize and exploit the
Briquetting Technology for the production of coke and revert material
briquettes. The Greystone Joint Venture Agreement was amended on January 3,
1996. The Greystone Joint Venture has an exclusive world-wide license to
commercialize and exploit the Briquetting Technology for the production of coke
briquettes and a license to commercialize and exploit the Briquetting Technology
for the production of revert material briquettes in the Alabama and Gary,
Indiana regions. The Geneva Plant is not a part of the Greystone Joint Venture
or the Greystone Joint Venture Agreement.
The Greystone Joint Venture will be on a 50/50 basis, except
in the Gary, Indiana region where Greystone has a 12% interest in the entity
with an opportunity to increase its interest to a maximum of 20%. Greystone will
manage the Greystone Joint Venture on a day-to-day basis and the parties have
agreed to contribute the necessary capital to the Greystone Joint Venture in
proportion to their respective interests therein. The Greystone Joint Venture
will purchase all of its requirements for binding agents used in the Briquetting
Technology from the Company. Greystone is a newly-formed company, although its
principals have significant experience in the steel and coke production
industries.
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In accordance with the Greystone Joint Venture Agreement,
Greystone made an initial payment of $100,000 to the Company, and was required
to make additional payments out of profits or capital of the Greystone Joint
Venture until a total aggregate of $500,000 had been paid to the Company for the
license. Greystone has failed to make the additional payments required under the
Greystone Joint Venture Agreement and, accordingly, has received notice that an
event of default has occurred thereunder. The Company believes that an uncured
event of default under the Greystone Joint Venture Agreement results in a
termination of the license.
As of December 1996, the Greystone Joint Venture has not
secured funding to proceed with the development and operation of any plants. The
Company believes that Greystone is continuing to seek funding.
Coal Venture. On January 30 1996, the Company entered into a
letter of understanding with CoBon Energy, L.L.C. ("CE"), a Utah professional
services company based in Salt Lake City, Utah, to form five entities to
commercialize and exploit the Briquetting Technology for the production of coal
briquettes (the "Coal Venture"). In August 1996, CE and the Company modified the
letter of understanding. Under the modified letter of understanding, the Company
has agreed to give CE a 1.6% interest in Alabama Synfuel #1, plus a license to
use the Briquetting Technology for specified plant locations up to an aggregate
capacity of 1.5 million tons of coal per year for each plant location. In
consideration for the interest in Alabama Synfuel #1 and the license, CE is
required to make a one-time payment of (i) $2.00 per ton for the production of
coal in the range of 500,001 to 1,000,000 tons and (ii) $2.50 per ton for the
production in the range of 1,000,001 to 1,500,000 tons. CE has not yet built any
plants which utilize the Briquetting Technology.
Business Strategy
Coke and Revert Material Briquettes. Subject to possible
termination of the license under the Greystone Joint Venture Agreement (as
explained above), the Company has agreed to exclusively market through the
Greystone Joint Venture the Briquetting Technology as it applies to coke. The
Greystone Joint Venture intends to market such technology to steel and coke
producers for the production of coke briquettes. The Company has also agreed to
exclusively market through the Greystone Joint Venture the Briquetting
Technology as it applies to revert material in the Gary, Indiana and Alabama
regions of the United States. With respect to the revert briquettes, the Company
may market the Briquetting Technology in other regions directly or through other
joint ventures or other arrangements. The Company, directly or through the
Greystone Joint Venture, will seek to enter into collaborative arrangements with
steel and coke producers to build, equip and operate briquetting plants on-site
at the producers' facilities. The Company believes that such arrangements will
benefit both the Company and steel and coke producers because they will (i)
provide the Company with an ongoing supply of inexpensive coke breeze and revert
materials while ensuring a ready customer for the briquettes produced, (ii)
provide the steel or coke producer with an economical means to dispose of waste
materials while providing a ready source of briquettes and/or iron feedstock,
and (iii) minimize transportation costs for waste by-products, raw materials and
briquettes, thereby increasing the economic competitiveness of the Company's
products.
The operations of the Geneva Plant will allow the Company to
show an operating on-site plant to assist in the establishment of other similar
sites throughout the United States. There is no assurance that such plant will
be profitable or that the Company, either directly or through the Greystone
Joint Venture, will be able to enter into comparable arrangements with other
steel and coke producers or to obtain the funding necessary to construct such
plants.
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Coal Briquettes. The Company intends to build and place in
service plants which utilize the Briquetting Technology at or near coal fine
deposits. The Company intends to sell such plants to third parties. The Company
will license to each plant the use of the Briquetting Technology for a royalty
payment and will provide to each plant the binding agents. The contract will
provide that the payment for the binding agents will be at cost plus a mark up
to be negotiated between the plant owner and the Company. There is no assurance
the Company will be successful in funding the construction of the plants or in
operating any plants.
In June 1996, the Company formed Utah Synfuel #1 and Alabama
Synfuel #1, the Partnerships, which are intended to purchase, manage and sell
the coal briquetting Utah Plant and Alabama Plant. As described above, the
Company is conducting negotiations for the sale of these facilities by the
Partnerships. See "BUSINESS--Business of Company--Limited Partnerships." The
Company has retained brokers to locate potential buyers for plants that may be
constructed by the Company or its subsidiaries. See "BUSINESS--AGTC Brokerage
Disagreement." The Company has not entered into any binding agreements to sell
either the Utah Plant or the Alabama Plant.
The Company will not sell the Briquetting Technology but will
license it for use at each plant and contract with each plant to supply the
binding agents. The Company intends to contract with third party chemical
companies for the mixing and production of the binding agent. At the point at
which the Company has sufficient volume demand it intends to manufacture the
binding agent at a facility or facilities to be established.
Construction Agreements
In December 1995, the Company entered into a design and
construction agreement with Lockwood Greene Engineers, Inc. ("Lockwood") to
design and build the Utah Plant. The Company paid Lockwood an advance payment of
$500,000 on the facility on February 9, 1996. The total cost of the Utah Plant
to the Company is expected to be $3,600,000. Lockwood and the Company have
agreed to cooperate with each other in future projects by either party in the
field of coal agglomeration or metallic recovery. Also in December 1995, the
Company entered into additional contracts to design and build additional
facilities with Lockwood, each of which were subsequently terminated by the
Company in 1996 with all applicable cancellation charges either satisfied or
settled.
In December 1996, the Company entered into a total of thirteen
design and construction agreements (the "1996 Construction Agreements") for the
design and construction of eleven new coal fines agglomeration facilities and
the retrofiting of two existing facilities (the Utah Plant and Geneva Plant).
Depending upon the specific agreement, the contractor is either TIC The
Industrial Company, CEntry Constructors, L.C. or Centerline Engineering
Corporation, a Lockwood Greene Company. Under two of the 1996 Construction
Agreements, the Company is a joint owner with Ferro Resources, L.L.C. The 1996
Construction Agreements are subject to numerous conditions and no assurances can
be given that the Company will be successful in financing or constructing any of
the thirteen facilities. The 1996 Construction Agreements generally require that
a notice to proceed be issued by the Company (and its co-owner, if any) on or
before September 30, 1997 and that the plant be placed in service by June 30,
1998. An advance payment of $250,000 is due at the time a notice to proceed is
issued by the Company (and its co-owner, if any). The 1996 Construction
Agreements may be terminated at the Company's (and co-owner's, if any) option
with a penalty of 6% of the total contract price, if established, or the
guaranteed maximum price if the total contract price is not established. If the
Company is unsuccessful in obtaining financing or otherwise fails to construct a
facility, a penalty would be owed to the contractor. If this were to occur on
all thirteen facilities, the Company would be required to pay an aggregate
penalty of $3,012,000.
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Indemnification to Lockwood
In December 1996, the Company entered into six indemnification
agreements with Lockwood whereby the Company agreed to indemnify Lockwood should
it be required to pay liquidated damages to certain third party owners under
various design and construction agreements for six coal agglomeration
facilities. Under the various design and construction agreements, if the
facilities are not completed by June 1, 1998 then $750,000 in liquidated damages
would be due and payable. The indemnification agreement will only apply if the
third party owners actually decide to build the facilities with Lockwood as the
design/builder. The maximum amount of contingent liability to the Company under
the indemnification agreements is $4,500,000 ($750,000 per design and
construction agreement). If triggered, the payments under the indemnification
agreements would not be due and owing until June 2, 1998.
PacifiCorp
In September 1996, the Company and Alabama Synfuel #1 entered
into a letter of intent with an unregulated subsidiary of PacifiCorp, a large,
low-cost electric and telephone utility, to purchase the coal briquetting
Alabama Plant that will be built and/or acquired by Alabama Synfuels #1. The
letter of intent generally provides for an entity designated by PacifiCorp to
purchase the Alabama Plant from Alabama Synfuel #1 (or to purchase Alabama
Synfuel #1's right to acquire the Alabama Plant) for a one-time $500,000
licensing fee, a promissory note in the amount of $3,400,000, that will be
payable out of the cash flow of the plant, and a per ton royalty fee. The
Company may retain up to an 83% interest in Alabama Synfuel #1 and would be
entitled to its percentage share of all cash distributed by Alabama Synfuel #1.
The letter of intent also provides for a convertible loan from
PacifiCorp to the Company in an amount up to $5,000,000. PacifiCorp would retain
a security interest in all of the assets related to the Alabama Plant. The loan
if made, may be convertible into Company common stock. The Company common stock
received upon conversion would be subject to piggy-back and demand registration
rights.
The obligations of PacifiCorp and its affiliates are subject
to PacifiCorp, the Company and Alabama Synfuel #1 entering into definitive
agreements. PacifiCorp will also require favorable tax rulings from the IRS and
completion of the Alabama Plant prior to consummating the purchase of the Plant.
The funding of the loan is subject to entering into the definitive agreements
and the filing of a request for tax rulings from the IRS, which the Company
believes will be complete by approximately January 31, 1997.
In December 1996, PacifiCorp and the Company entered into an
additional agreement for the construction of six additional facilities beyond
the Alabama Plant. Pursuant to this agreement, PacifiCorp has entered into
binding agreements with a third-party for the construction of the additional
facilities. Additionally, PacifiCorp has committed $250,000 per plant for a
total of $1.5 million to the entities through which PacifiCorp will build the
facilities. The commitment was made to facilitate the construction of the
facilities with the third-party. All of the facilities will utilize the
Briquetting Technology under license agreements with the Company. See
"BUSINESS--Recent Licensing Agreements."
Gallagher
In November 1996, the Company and Utah Synfuel #1 entered into
a letter of intent with Arthur J. Gallagher & Co., an international insurance
brokerage and risk management services firm, to purchase the Utah Plant that
will be acquired by Utah Synfuels #1. The letter of intent generally provides
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for an entity designated by Gallagher to purchase the Utah Plant from Utah
Synfuel #1 (or to purchase Utah Synfuel #1's right to acquire the Utah Plant)
for $2,500,000 (payable upon the satisfaction of certain performance
conditions), a one-time $500,000 licensing fee and a per ton royalty fee that
will be payable out of the cash flow of the Utah Plant. The Company may retain
approximately a 60% interest in Utah Synfuel #1 and would be entitled to its
percentage share of all cash distributed by Utah Synfuel #1.
The obligations of Gallagher and its affiliates are subject to
Gallagher, the Company and Utah Synfuel #1 entering into a definitive agreement.
In December 1996, Gallagher and the Company entered into an additional
agreement to construct four additional facilities beyond the two plants
contemplated by the letter of intent. Pursuant to this additional agreement,
Gallagher entered into binding agreements with a third-party to construct the
additional facilities. All of the facilities will utilize the Briquetting
Technology under license agreements with the Company. See "BUSINESS--Recent
Licensing Agreements."
In December 1996, the Company entered into a Debenture
Agreement and Security Agreement with AJG Financial Services, Inc., an affiliate
of 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 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. The Subordinated Debenture is
subordinated and junior in right to all other existing indebtedness of the
Company which is not expressly pari passu with or subordinated to the
Subordinated Debenture. Finally, the Company has granted piggy-back and demand
registration rights to AJG Financial Services, Inc. for the Company common stock
issued upon conversion of the Subordinated Debenture.
On January 2, 1997, the Company borrowed $588,683 of the
$2,900,000 draw down amount described above. In consideration for the amount
drawn down, the Company issued a Senior Debenture in such amount accruing
interest at prime plus two percent (2%) and maturing three years from the date
of issuance (the "Senior Debenture"). The Senior Debenture is collateralized by
all real and personal property purchased by the Company with the proceeds of the
Senior Debenture. The proceeds of the Subordinated Debenture and the Senior
Debenture 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.
Alabama Power Company
In April 1996, the Company entered into a sale and purchase
agreement for coal with Alabama Power Company. Under the agreement, the Company
has agreed to process coal into coal briquettes and to sell such briquettes to
Alabama Power Company at a base price per ton, plus or minus certain
adjustments, for a period of five years commencing on January 1, 1997. According
to the agreement, Alabama Power Company is required to purchase a base tonnage
of 250,000 tons per year until December 31, 1999. There are numerous conditions
and obligations to be performed by both parties prior to January 1, 1997 and on
an ongoing basis before coal briquettes are required to be purchased by Alabama
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Power Company. Given the delays associated with the financing and construction
of the Alabama Plant, the Company is now in technical default under the
agreement. It is uncertain what actions Alabama Power Company will take, if any,
in response to the default.
Port Hodder
In September 1996, the Company entered into a purchase
agreement with E. J. Hodder and Associates, Inc. for the purchase of a certain
land leasehold interest and equipment consisting of a barge loading facility
servicing the Warrior River located at the Alabama Plant. The total purchase
price for the facility is $927,000 consisting of $342,000 in cash and $585,000
of Company common stock. The land lease commenced on September 1, 1996 and
expires on May 23, 1998 with rights to extend to May 23, 2006. The Company
intends to use the facility in connection with the operations of the Alabama
Plant.
K-Lee Supply Agreement
In September 1996, the Company entered into a supply agreement
with K-Lee Processing, Inc. and Concord Coal Recovery Limited Partnership for a
continuous supply of coal fines to the Alabama Plant. Under this agreement, the
Company is obligated to purchase a minimum of 20,000 tons of coal fines per
month, commencing upon the completion of the Alabama Plant and expiring on
December 1, 2001, at a fixed price per ton during the first year (subject to
adjustment for moisture and ash content) with an escalating price thereafter.
AGTC Brokerage Disagreement
In accordance with an April 1996 letter agreement between the
Company and AGTC, a partnership formed by AGTC, Inc., Alpine Coal Company, Inc.
and E. J. Hodder & Associates, Inc., AGTC was engaged by the Company on a best
efforts basis, to investigate, identify and participate in the selection of (i)
project sites for the construction of suitable coal extrusion manufacturing
facilities for the Company, (ii) suitable coal fines reserves and (iii) suitable
users or consumers of the coal product produced. The compensation for such
services consisted of a monthly retainer of $35,000 and a commission of 8% on
the gross sales or monetized price of a project. In the fourth month following
the execution of the letter agreement a dispute arose among the parties
regarding AGTC's performance and compensation due under the agreement.
Accordingly, the Company terminated the agreement pursuant to its terms. AGTC
subsequently claimed that it was entitled to a commission on the proposed sale
of the Alabama Plant. The Company, on the advice of counsel, believes that
AGTC's claim has no merit.
Savage Mojave
In November 1996, the Company signed a primary contract with
Savage Industries, Inc. ("Savage") to form up to two limited liability companies
("LLCs") to be owned 50% by Savage and 50% by the Company, with each LLC
entering into a contract with Savage, the Company and a qualified third party
contractor for the design, construction, start-up and certification of a coal
fines agglomeration facility. All profits and losses of the respective LLCs
shall be borne by Savage and the Company according to their respective ownership
interest. Savage has the right but not the duty to operate the facilities and to
provide transportation of the raw materials and the briquettes. The Company in
turn will (i) provide its license to the binding process (at no cost) and (ii)
provide the binder required to produce the briquettes on a cost plus basis.
Performance under the agreement is subject to numerous conditions, including,
but not limited to establishing a criteria for the design of such facilities and
satisfaction of the Section 29 Tax Credit provisions of the Internal Revenue
Code of 1986, as amended.
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In November 1996, the Company also entered into an agreement
with Savage whereby the Company agreed (i) to license the Briquetting Technology
to a limited liability company, to be formed by Savage and Flyash Haulers, Inc.,
for a monthly licensing fee based upon each ton of qualified fuel produced, all
relating to a briquetting facility to be located in Laughlin, Nevada, (ii) to
provide, upon request, coal fines to the limited liability company, (iii) to
provide technical assistance to the limited liability company, and (iv) to
reimburse to Savage, from the monthly license fees, an amount equal to 16% of
the cash capital required to upgrade the Laughlin, Nevada facility. The Company
does not expect to receive monthly license fees until mid 1997. No assurances
can be made that Savage will be successful in the production and sale of
synthetic coal. The agreement expires by its terms on December 31, 2009.
Recent Licensing Agreements
In December 1996, the Company entered into agreements with
various third parties for the licensing of the Briquetting Technology. Such
third parties are not expected to construct the facilities utilizing the
Briquetting Technology until late calendar year 1997. While the Company may
receive some advance license fees,the Company does not expect to receive the
majority of the licensing fees from such agreements until the facilities have
been placed into operation. In addition, the Company will receive royalty
payments based on production and sales at the facilities.
The Briquetting Technology
The Company has developed a special binding formula, which
allows for the production of high-grade briquettes which withstand degradation
both during shipment and the burn cycle. In simplified terms, in the briquetting
process, the material to be briquetted may be washed to remove impurities. The
material is then mixed with the binding agent and fed into a briquetter, which
utilizes indirect pressure to combine the feed material into a briquette having
the desired shape, size and density. Briquettes are then air-cured to achieve
maximum strength. Waste coke breeze, coal fines and other revert material
discharged from the briquetter are also recaptured and recycled. Cured
briquettes are expelled onto a continuous belt for handling. The briquetting
process takes approximately two hours to complete.
Substantially all the equipment and machinery used in the
briquetting process are commercially available. The Company has arrangements
with certain manufacturers for the supply of a portion of the equipment and
machinery but there can be no assurance that the Company will be able to acquire
all necessary equipment and machinery on terms acceptable to the Company.
Proprietary Protection
The Company has received three United States patents and has
two United States patent applications pending (one of which received a notice of
allowance in October 1996) and two international patent applications under the
Patent Cooperation Treaty covering certain aspects of the Briquetting
Technology. There can be no assurance as to the scope of protection afforded by
the patents. Moreover, there are other industrial waste recycling technologies
in use and others may subsequently be developed, which do (or will) not utilize
processes covered by the pending patents. There can be no assurance that any
patent issued will not be infringed or challenged by other parties, infringe
against patents held by other parties or that the Company will have the
resources to enforce any proprietary protection afforded by the patent or defend
against an infringement claim.
In addition to patent protection, the Company also relies on
trade secrets and know-how and employs various methods to protect the
Briquetting Technology. However, such methods may not afford complete protection
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and there can be no assurance that others will not independently develop such
know-how or obtain access to the Company's know-how, concepts, ideas and
documentation. Since the Company's proprietary information is important to its
business, failure to protect its trade secrets may have a material adverse
effect on the Company.
Research and Development
The Company has devoted significant research and development
efforts to the refinement and commercialization of the Briquetting Technology.
The Company's research and development expenses were approximately $387,000,
$1,265,000 and $1,044,000, respectively, in the nine months ended September 30,
1994, and the years ended September 30, 1995 and September 30, 1996. The Company
at the present time is developing other related technologies to implement in
steel mills and other mineral industries. In addition, the Briquetting
Technology is being refined to apply to the commercial operations in the Geneva
Plant.
Construction and Limestone Businesses
In order to generate cash flow to support research and
development for the Briquetting Technology, in 1993 the Company acquired IME,
State and CIC, three construction companies engaged in providing contracting and
construction services to heavy industry. In addition to the foregoing, in 1994
the Company acquired Larson, which provides limestone products for industrial
applications. The Company believes that the relationships between its
Subsidiaries and their customers assisted the Company in exploring and
developing relationships with steel producers in connection with the
commercialization of the Briquetting Technology.
The Company's construction and limestone businesses accounted
for substantially all of its revenues and cash flow during the nine months ended
September 30, 1994 and the year ended September 30, 1995.
In September 1995, the Company made a strategic decision to
focus its efforts exclusively on commercializing the Briquetting Technology and
to divest itself of its Subsidiaries. On September 26, 1996, the Company
substantially completed the divestiture of its Subsidiaries. See
"BUSINESS--Business of Company--General".
Government Regulation
General. The Company's present and proposed briquetting
operations are subject to federal, state and local environmental regulations
that impose limitations on the discharge of pollutants into the air and water
and establish standards for the treatment, storage and disposal of waste
products. In order to establish and operate its briquetting plants, the Company
will be required to obtain various state and local permits. The Company has
obtained all permits required to date, believes that it will be able to obtain
future permits without inordinate difficulty or expense and that it is in
substantial compliance with all material laws and regulations governing the
briquetting operations. The Company believes that environmental compliance for
its new briquetting plant at the Geneva facility will not entail significant
costs. However, the Company's briquetting operations may entail risk of
environmental damage and the Company may incur liabilities in the future arising
from the discharge of pollutants into the environment or its waste disposal
practices. See "ITEM 3--LEGAL PROCEEDINGS--Utah Division of Air Quality."
Failure to obtain necessary permits to construct and operate
future briquetting plants could have a material adverse effect on the Company,
and other developments, such as the enactment of more stringent environmental
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laws and regulations, could require the Company to incur significant capital
expenditures. If the Company does not have the financial resources or is
otherwise unable to comply with such laws and regulations, such failure could
also have a material adverse effect on the Company.
The Company's construction and limestone products businesses
were also governed by extensive environmental and occupational safety laws and
regulations. The Company believes that it was in substantial compliance with all
such material laws and regulations while it owned the Subsidiaries. There can be
no assurance that failure to comply with applicable laws and regulations,
whether in existence or subsequently enacted would not have a material adverse
effect on the Company.
Tax Credit
Section 29 of the Internal Revenue Code of 1986, as amended
(the "Code") provides a credit (the "Section 29 Credit") against the regular
federal income tax, measured by unrelated party sales by a taxpayer of qualified
fuels, including solid synthetic fuel produced in the United States from coal,
the production of which is attributable to the taxpayer. Where more than one
person has an interest in a production facility, the Code provides generally
that the attributable production is determined by allocation among the
interested persons in proportion to their interests in gross sales.
In order to be a solid synthetic fuel produced from coal for
purposes of the Section 29 Credit, the produced fuel must differ significantly
in chemical composition, as opposed to physical composition, from the
alternative substance used to produce it. The Company has received a private
letter ruling from the Internal Revenue Service (the "Service") in which the
Service, based on representations made to it, agrees that the Briquetting
Technology, as explained to the Service, results in a significant chemical
change to waste coal fines and transforms them into a solid synthetic fuel, and
accordingly the Service concludes, based on the facts presented to it, that (i)
the Company, with the use of its patented process, produces a "qualified fuel"
within the meaning of Section 29(c)(1)(C) of the Code, and (ii) assuming the
other requirements of Section 29 are met, the sale of the "qualified fuel" will
entitle the Company to claim the Section 29 Credit in the taxable year of sale.
In its ruling, the Service noted that no temporary or final regulations
pertaining to one or more of the issues addressed in the ruling have been
adopted and that the ruling will be modified or revoked by the adoption of
temporary or final regulations to the extent the regulations are inconsistent
with any conclusions in the ruling. The Service notes, however, that a private
letter ruling from the Service is not revoked or modified retroactively, except
in rare and unusual circumstances, provided certain criteria are satisfied,
including that (i) there has been no misstatement or omission of material facts,
(ii) the facts at the time of the transaction are not materially different from
the facts on which the letter ruling was based, (iii) there has been no change
in the applicable law, (iv) the letter ruling was originally issued for a
proposed transaction and (v) the taxpayer directly involved in the letter ruling
acted in good faith in relying on the letter ruling, and revoking the letter
ruling retroactively would be to the taxpayer's detriment.
The Section 29 Credit is also subject to the passive activity
rules of Section 469, and therefore will generally not be available to
individuals and closely held corporations.
The Section 29 Credit is equal to $3.00 in 1979 dollars (or
$5.83 in 1995 dollars) for each oil barrel equivalent ("OBE") of the qualifying
fuel produced and sold. This equates to approximately $25.00 per ton of coal
briquettes. The OBE is defined generally as an amount of fuel having a 5.8
million Btu content. The Section 29 Credit allowed may not exceed the taxpayer's
regular tax liability reduced by certain other credits. The credit cannot be
utilized to offset the Alternative Minimum Tax.
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The Section 29 Credit was designed to provide protection for
qualifying fuels against market price declines, and it is therefore subject to a
phaseout (under an annually adjusted formula) after the unregulated oil price
reaches specified levels. In 1994 dollars, the credit would have phased out had
the reference price for oil exceeded $45.14 per barrel, but the reference price
determined for 1994 was $13.19, and no phaseout occurred. In 1995 dollars, the
credit would have phased out had the reference price for oil exceeded $46.00,
but the reference price determined for 1995 was $14.62 and no phaseout occurred.
There presently is no reference price for 1996. The credit is also subject to by
reduction insofar as an otherwise qualifying facility benefits from grants or
subsidized financing provided by federal, state or local governments, or from
tax-exempt bond financing.
During 1996, the time periods applicable to Section 29 tax
credits were extended. The Section 29 Credit will, under present law, be
available for sales completed by December 31, 2007 to the extent attributable to
production from facilities placed in service by June 30, 1998, provided that
such facilities are constructed pursuant to a binding written contract in effect
by December 31, 1996. Unless the Section 29 credit is extended, the Company will
be limited to the 1996 Construction Agreements which were entered into by
December 31, 1996. See "BUSINESS--Construction Agreements."
Section 29 of the Code contains no provision for carryback or
carryforward of Section 29 Credits. Once earned, however, the nonconventional
fuel credits are not subject to subsequent recapture. By virtue of the various
limitations and other factors described above, there can be no assurances that
any particular amount of Section 29 Credit will be allowable and usable.
Competition
The Company may experience substantial competition from other
alternative fuel technology companies, as well as companies that specialize in
the disposal and recycling of waste products generated by steel, coal and coke
production. Many of these companies have greater financial, technical,
management and other resources than does the Company. The Company believes that
key factors in its ability to compete will be the quality of its briquettes and
their pricing compared to other sources of coal, coke and scrap iron. The
Company anticipates that it will be able to compete favorably in these regards
although there can be no assurance that it will do so successfully.
Employees
The Company currently employs approximately 28 persons
full-time. Approximately 9 of such persons are in corporate administration, and
19 are in briquetting operations, including research, development and marketing.
None of such employees are covered by a collective bargaining agreement. In
connection with the establishment and operation of each briquetting plant, the
Company will seek to hire between eight to ten persons, principally in
operations.
The discontinuation of the limestone and construction business
has resulted in a material decrease in the number of persons employed since
November, 1995. Since that time, there has been a reduction of approximately 200
employees in the discontinued limestone and construction business due to layoffs
and seasonal reductions.
Confidentiality Provisions
As part of its business, the Company typically enters into
agreements concerning its projects which contain confidentiality provisions. The
Company is, on occasion, required to disclose such agreements to the Securities
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Exchange Commission as part of its ongoing reporting requirements under the
Securities Exchange Act of 1934. Moreover, disclosure of such agreements may be
required in connection with the Company's private placement of securities.
Notably, some of the agreements do not contain the standard exceptions for the
disclosure of information which is required to be disclosed under law.
Accordingly, no assurances can be given that the Company has not inadvertently
disclosed information regarding its various projects in violation of
confidentiality covenants entered into by the Company.
Forward Looking Statements
Statements regarding the Company's expectations as to the
financing, development and construction of facilities utilizing its Briquetting
Technology, the receipt of licensing fees and certain other information
presented in this report 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 the following:
(i) The commercial success of the 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.
(vi) Changes in governmental regulation or failure to comply with
existing regulation could result in operational shutdowns of
its facilities.
(vii) The continuance of the Section 29 Tax Credit.
(viii) Ability to meet financial commitments under existing
contractual arrangements.
ITEM 2. PROPERTIES
The Company owns a 5,000 square-foot building in Lehi, Utah,
which houses its executive offices. The building is mortgaged with a
non-affiliated party pursuant to an adjustable rate mortgage with an original
principal balance of $275,000 due in 2002. The mortgage is adjustable quarterly
and the total monthly payment was $3,711 on the remaining $175,383 balance as of
December 31, 1996. The mortgage, which was originally an obligation of IME, has
been assumed by the Company as a result of the sale of IME. This assumption has
not been approved by the lender and therefore may cause the lender to accelerate
the note. The Company has taken no formal steps to obtain the consent of the
lender, other than verbal discussions. In the event the lender accelerates the
note, the Company believes that it will be able to refinance the building on
comparable terms prior to any foreclosure action. However, there is no assurance
that the Company will be able to obtain such financing in a timely manner, which
would force the Company to relocate its executive offices.
In June 1996, the Company purchased an 8,000 square-foot site
located in Price, Utah, on which the Company's prototype briquetting plant is
located, for $150,000. Included in the purchase was a 1,400 square-foot office
building which houses equipment.
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In May 1995, the Company entered into a lease with Geneva
Steel Company for a 9,000 square foot building in Vineyard, Utah as part of the
Geneva Agreements described in "ITEM 1--BUSINESS--Business of Company--Geneva.
The Company pays no cash rent on these facilities. The purpose of the lease is
to allow the Company to apply the Briquetting Technology to Geneva's coke breeze
and steel revert materials. Upon the execution of the Geneva Agreements, the
lease with Geneva expired resulting in a tenancy-at-will between the parties.
As part of the acquisition of the Port Hodder facility, the
Company entered into a land lease of approximately 15.45 acres with a
non-affiliated party for the Alabama Plant for an annual rental of $1. See "ITEM
1--BUSINESS--Port Hodder." In June 1996, the Company entered into a land lease
of approximately 12 acres in Price, Utah with a non-affiliated party at a
monthly rental of $600.00. The lease term commenced on June 20, 1996 and expires
on December 31, 2007.
ITEM 3. LEGAL PROCEEDINGS
CoalPlex Litigation
On October 31, 1995, the Company as plaintiff filed a
complaint in the United States District Court for the District of Utah, Central
Division against CoalPlex International, Inc., a Nevada corporation ("CoalPlex")
and Daniel J. Longworth (collectively, the "Defendants"). The suit alleged that
the Defendants breached a nondisclosure agreement dated October 3, 1995 pursuant
to which the Company had given the Defendants confidential information; that the
Defendants intentionally interfered with the Company in its acquisition of the
option on the Wellington, Utah property; that the Defendants had commercially
disparaged the Company and that common law fraud was committed on the Company.
The Company sought an injunction against the Defendants and damages of
$1,000,000. The Company recently withdrew the suit without prejudice based upon
assurances from CoalPlex that it would refrain from any further breaches of the
non-disclosure agreement and from contacting the Company's customers, employees
or contacts.
Farrell Larson Litigation
In May 1995 the Company's wholly owned subsidiary, Larson,
filed a complaint in the Fourth Judicial District Court in and for the County of
Utah, State of Utah against Farrell Larson, Larson's former president and
director. In January, 1996 the complaint was amended to add the Company as a
plaintiff. In addition Irene Larson, Gary Burningham d/b/a Burningham and
Company, and Burningham Enterprises, Inc. were added as defendants. The
plaintiffs alleged that the defendants misrepresented facts and made material
omissions in connection with the sale of 50% of Larson to the Company in 1994.
Furthermore, the plaintiffs alleged that the share purchase agreement was
breached by defendant Farrell Larson and that state securities laws were
violated. The complaint sought to enjoin Farrell Larson from harassing the
Company and sought an order releasing all collateral held to secure plaintiff's
performance including the 50% of Larson held in escrow as security for the note
given by the Company in the purchase of Larson, and damages of not less than
$325,000, treble damages in accordance with Utah securities laws, punitive
damages of $1,000,000 and costs. In February 1996, Farrell Larson and Irene
Larson filed counterclaims against the Company asserting breach of contract by
the Company and Larson in respect to the agreements through which the Company
purchased Farrell Larson's 50% interest in Larson; breach of the covenant of
good faith and fair dealing with respect to the same contracts; interference
with contractual and economic relations; defamation, which relates to alleged
statements by the Company concerning the litigation, either just prior to or
during the litigation; breach of fiduciary duty, alleging that the Company owed
Farrell Larson a fiduciary duty with respect to the conduct of business of
Larson; and violation of Larson's bylaws. In their counterclaim, Farrell Larson
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and Irene Larson ask for the forfeiture of the shares of Larson acquired by the
Company, for management of Larson to be reinstated as directed by Farrell
Larson, for reimbursement of all attorney fees and costs incurred by Farrell
Larson, for an order allowing Farrell Larson to foreclose on collateral held
under the Share Purchase Agreement with the Company, for final payment of
$325,000 under other contracts between the Company and Farrell Larson, and other
unspecified amounts of actual and punitive damages.
In connection with the facts at issue in the Company's action
against Farrell Larson; in January 1996 Farrell Larson and his wife, Irene
Larson, filed a new lawsuit in the Fourth Judicial District Court in and for
Utah County, State of Utah against, among other defendants, Michael Midgley (the
then Chief Financial Officer of the Company and then President and director of
Larson), Mark Hardman (a Vice-President and director of Larson), and Kenneth M.
Young (the Company's then Chairman of the Board and former President). This
complaint included three causes of action: (i) interference with Larson's
business relations, (ii) defamation, and (iii) breach of fiduciary duty. The
factual basis for these claims for relief are substantially the same as the
facts at issue in the Company's action against Farrell Larson. Accordingly, the
Court consolidated these two cases at the Company's request so that all of the
related issues will be resolved together. The Company believes that all acts
alleged as basis for liability against Messrs. Midgley, Hardman and Young were
performed by them in the course and scope of their employment for the Company
and Larson.
As part of the sale of the Subsidiaries, the Company has
agreed to fund all legal proceedings with Farrell Larson and indemnify the
Buyers from any liability.
In September of 1996, the plaintiffs and defendants entered
into a settlement agreement whereby: (i) Farrell Larson and Irene Larson
(collectively, the "Larsons") released any claims on the amounts held in escrow
securing the note given by the Company in purchase of Larson, (ii) the Larsons
released all liens caused to be filed or recorded against the real property and
personal property of the plaintiffs, (iii) Burningham was required to pay off or
refinance its loans relating to two Beall trailers and remove Larson as a
guarantor on such lease, (iv) the Larsons agreed to the Company's sale of Larson
to any third party, (v) Burningham and Larson agreed not to purchase any stock
of the Company and (vi) the parties agree to a dismissal of the suits with
prejudice.
Notices of Violation--Utah Division of Air Quality
In April 1996, the Company and Nevada Electric Investment
Company ("NEICO") received a Notice of Violation under Utah Administrative Code
R 307-10-1 and R307-1-8 regarding asbestos in Carbon County, Utah occurring on
January 11, 1996. In August 1996, the Company agreed to pay a negotiated
settlement amount of $11,000 over the next two years to the Utah Division of Air
Quality. The Company believes the asbestos problem has been corrected.
In August 1996, the Company received a Notice of Violation
regarding numerous dust complaints received by the Utah Division of Air Quality
regarding the Geneva Plant. The Company notified the Utah Division of Air
Quality in September of 1996 regarding the corrective actions taken by the
Company.
AGTC Brokerage Disagreement
See "ITEM 1--BUSINESS--AGTC Brokerage Disagreement."
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Pursuant to a written consent of stockholders, the following
matters were approved by stockholder consent on approximately January 22, 1996:
1. The sale of the Subsidiaries was approved by
Stockholders owning 1,909,558 shares of common stock,
or approximately 54.72% of the outstanding common
stock on that date.
2. The amendment of the Company's 1995 Stock Option Plan
(the "Option Plan") to increase the number of shares
of common stock available under the plan from 450,000
shares to 1,200,000 shares was approved by
Stockholders owning 1,909,558 shares of common stock,
or approximately 54.72% of the outstanding common
stock on that date.
3. The amendment of the Company's Certificate of
Incorporation to provide for a 2 for 1 common stock
split and to maintain the authorized common stock of
the Company at 25,000,000 shares, $.001 par value,
was approved by Stockholders owning 2,051,014 shares
of common stock, or approximately 58.77% of the
outstanding common stock on that date.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The shares of common stock of the Company are listed for
trading on the OTC Bulletin Board under the symbol "CVOL." The following table
sets forth, for the periods presented, the high and low bid quotations for the
common stock as reported by National Quotation Bureau, Inc. during the three
most recent calendar years. The quotations do not reflect adjustments for retail
markups, markdowns or commissions and may not necessarily represent actual
transactions. Since the Company has several market makers, the bid prices among
the different market makers will generally vary. Accordingly, the low bid price
may represent a bid price substantially below the inside bid and be less
representative of actual trades than the high bid price. The following prices
may not be considered valid indications of market value due to the limited and
sporadic trading in the shares of common stock.
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Low Bid High Bid
------- --------
Calendar 1994
- - --------------
First Quarter $ 2.50 $ 4.375
Second Quarter $ 1.875 $ 4.375
Third Quarter $ 1.875 $ 3.43
Fourth Quarter $ 1.875 $ 3.20
Calendar 1995
- - -------------
First Quarter $ 1.25 $ 3.75
Second Quarter $ 1.25 $ 3.875
Third Quarter $ 3.00 $ 7.50
Fourth Quarter $ 5.00 $21.25
Calendar 1996
- - -------------
First Quarter $18.00 $31.50
Second Quarter $ 9.50 $22.25
Third Quarter $ 6.50 $10.75
Fourth Quarter $ 7.50 $14.375
The Company implemented a two-for-one stock split effective
January 23, 1996. The bid prices set forth above have been adjusted to reflect
the effect of that stock split.
As of December 1, 1996, there are approximately 2,103 record
holders of the Company's outstanding shares of common stock.
The Company has not paid dividends to date and does not intend
to pay dividends in the foreseeable future. The Company intends to retain
earnings, if any, to finance the development and expansion of its business.
Payment of dividends in the future will depend, among other things, upon the
Company's ability to generate earnings, its need for capital and its overall
financial condition.
Recent Sales of Unregistered Securities
The following sets forth all securities issued by the Company
within the past fiscal year without registering the securities under the
Securities Act. No underwriters were involved in any stock issuances nor were
any commissions or similar fees paid in connection therewith.
The issuance of qualified options is required to be based on
market value. Accordingly, the exercise price is set based on the market price
of the Company's common stock, even though the options convert into restricted
stock.
The Company believes that the following issuances of shares of
common stock and debentures were exempt from the registration requirements of
the Securities Act of 1993 pursuant to the exemption set forth in Section 4(2)
thereof and the certificate for each of such security bears a restrict legend:
20
<PAGE>
Commencing September of 1995 and ending January 1996 the
Company issued 629,021 shares of common stock in exchange for $2,280,172 cash
and 20,979 shares of common stock in exchange for $157,342.50 in services to
fifty four purchasers. Each of the purchasers was an individual or institution
whom the Company believed was an "accredited investor" within the meaning of
Rule 501(a) of Regulation D under the Securities Act of 1933.
In November 1995 the Company issued 69,334 shares of common
stock to Mr. George Browne in exchange for $260,000, received in fiscal year
1995. The Company also issued 50,000 shares of common stock to Mr. Alan
Summerhaays in exchange for consulting services valued at $322,000, received in
fiscal year 1995.
In December 1995, the Company issued 900,000 shares of common
stock to 17 employees in connection with the exercise of options granted under
the Option Plan. The aggregate exercise price, in excess of the par value of the
stock issued, 450,000 of which were issued in October 1995 to officers,
directors and employees, was paid by the 17 employees in the form of notes
receivable of approximately $6,159,000. The Notes are due and payable by the
employees on December 1, 2005, bear interest at 5.7% and are collateralized by
the stock issued upon exercise of the options. The interest rate on the Notes
reflects the cost to the Company to borrow money at the time the notes were
issued.
In December 1995, the Company issued 2,000 shares of common
stock to Mr. Anthony Pilotte in exchange for $4,000 and 3,000 shares to Mr. Mark
Hardman in exchange for services rendered valued at $11,250.
In December 1995, the Company issued 25,000 shares of common
stock to Mr. Clayton Timothy for $37,500 in cash and 10,000 shares of common
stock to Mr. Ted Strong for $15,000, both pursuant to exercises of stock
options.
In January 1996, the Company issued 10,000 shares of common
stock to Mr. Maury Shefftel for consulting services valued at $72,500 and 250
shares of common stock to Mr. Michael Buhman in exchange for $500.
On January 1, 1996, the Company granted options to purchase
120,000 shares of Common Stock at a price of $1.50 per share to certain
officers, employees and consultants. Of these options, 20,000 were exercised and
35,000 were canceled. At September 30, 1996, 65,000 of the options remain
unexercised. On this same date, the Company granted options to purchase 124,000
shares of Common Stock at prices between $2.50 and $3.50 per share to certain
consultants. These options remain unexercised at September 30, 1996.
In February 1996, the Company issued 227,115 shares of the
Company's common stock to accredited investors in connection with the sale of
units in a private placement transaction. A unit consists of five shares of
restricted common stock and one Class A warrant with an exercise price of
$25.00, one Class B warrant with an exercise price of $30.00 and one Class C
warrant with an exercise price of $35.00. The Company approximately raised
$3,244,000 through this private placement.
In March 1996, the Company issued 8,417 shares of common stock
to Mr. Jay Rice for professional services valued at $120,363.
In April 1996, Mr. Ken Young purchased 7,000 shares of Common
Stock for $100,100.
21
<PAGE>
In April 1996, Mr. Sidney Borenstein, Mr. Eric Bashford and
Mr. Robert Schneider purchased 8,126, 14,900 and 15,074 shares of common stock
in exercise of warrants respectively for $12,189, $22,350 and $22,611,
respectively. In connection with the purchase, the Company granted certain
registration rights to the purchasers. In the event the purchased stock is not
timely registered, the Company will be required to issue additional stock to the
Purchasers. In addition, in the event that the market value of the stock is less
than $21.00 per share at the time the stock is registered, the Company will be
required to issue additional shares to the purchasers so that the purchaser may
realize the equivalent of $21.00 per share.
In June 1996, the Company issued 750 and 1,000 shares, to Mr.
Milton Young and Mr. Golden Murry, respectively, for professional service valued
at $1,500 and $3,000, respectively.
On June 3, 1996, the Company granted options to purchase
100,000 shares and 40,000 shares of Common Stock for $1.50 per share to an
Officer of the Company as part of compensation related to an employment
agreement. At September 30, 1996, these options remain unexercised.
In July, August and September of 1996, Mr. Ray Weller, Mr.
Joe Johnson, Ms. Lois Shapiro and Ribalta, Inc. purchased 32,115, 150,000,
14,900 and 43,750 shares of common stock for $459,250, $1,000,000, $22,350 and
$350,000, respectively. The Ribalta, Inc. shares were unissued at September
30,1996. Also the Shapiro share were the exercise of options.
On August 13, 1996, the Company granted 777,500 options to
purchase shares of Common Stock to certain employees, officers and directors for
$1.50 per share. Prior to September 30, 1996, 312,500 of these options were
canceled. At September 30, 1996, 465,000 shares remain unexercised.
In September 1996, the Company issued 100,000 shares for a
note receivable to George Ford for $1.00 per share pursuant to the exercise
of an option. In addition, the Company issued 1,350 shares to Ted Harker at a
price of $1.00 per share, 20,000 shares to Roger Huber at $2.50 per share and
30,000 shares to Maynard Moe at $2.50 per share. The stock issuances to Mr.
Harker, Mr. Huber and Mr. Moe were pursuant to exercises of option, which
exercise price was paid by a combination of cash and services.
In November 1996, the Company issued convertible subordinated
debentures in the aggregate principal amount of $1,000,000. See "ITEM
7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Liquidity and Capital Resources."
In December 1996, the Company issued the Subordinated
Debenture in the principal amount of $1,100,000. See "ITEM
1--BUSINESS--Gallagher."
In January 1997, the Company issued the Senior Debenture in
the principal amount of $588,683. See "ITEM 1--BUSINESS--Gallagher."
ITEM 6. SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table sets forth the Company's selected
historical consolidated financial data as of and for the years ended December
31, 1992 and 1993; the nine months ended September 30, 1994 and the years ended
September 30, 1995 and 1996. The selected consolidated financial data as of and
for the years ended December 31, 1992 and 1993 are derived from the financial
statements of the Company which have been audited by Jones, Jensen, Orton &
Company. The selected consolidated financial data as of and for the nine months
ended September 30, 1994 and as of and for the years ended September 30, 1995
and 1996 were derived from the financial statements of the Company which have
been audited by Coopers & Lybrand, L.L.P. The information below should be read
in conjunction with the Consolidated Financial Statements and notes thereto and
appearing elsewhere in this document.
22
<PAGE>
COVOL TECHNOLOGIES, INC.
(FORMERLY ENVIRONMENTAL TECHNOLOGIES GROUP INTERNATIONAL)
AND SUBSIDIARIES
<TABLE>
<CAPTION>
Year Ended Nine
December 31, Months Ended Year Ended Year Ended
September 30, September 30, September 30,
--------------------------------
1992 1993 1994 1995 1996
-------------------------------------------------------------------------
Statement of Operations Data:
Revenues:
<S> <C> <C> <C> <C> <C>
License fees $ -- $ -- $ -- $ 100,000 $ 100,000
Briquette sales 12,447 12,688 19,867 29,310 195,165
-------------------------------------------------------------------------
Total revenues 12,447 12,688 19,867 129,310 295,165
Operating costs and expenses:
Cost of coal briquettes 8,314 22,977 32,386 37,165 859,574
Research and development 319,907 393,300 387,128 1,265,072 1,044,192
Selling, general and 266,914 426,512 393,109 1,494,270 3,796,569
administrative
Compensation expense on -- -- -- 703,527 4,772,959
stock options
Compensation expense on -- -- -- 104,000 --
stock warrants
Compensation expense on -- -- -- 148,446 100,360
issuance of common stock
Write off of purchased -- -- -- 344,900 --
technology and trade
secrets
Write-down of note receivable -- -- -- -- 2,699,575
Minority interest in net -- -- -- -- (4,456)
losses of consolidated
subsidiaries
-------------------------------------------------------------------------
Total operating costs and 595,135 842,789 812,623 4,097,380 12,268,773
expenses
-------------------------------------------------------------------------
Operating loss (582,688) (830,101) (792,756) (3,968,070) (12,973,608)
Other income (expense): -- -- -- 9,663 302,565
Interest income
Interest expense (2,091) (30,870) (21,158) (113,137) (94,706)
Other income -- -- 3,200 35,169 (166,066)
-------------------------------------------------------------------------
Total other income (expense) (2,091) (30,870) (17,958) (68,305) 41,793
-------------------------------------------------------------------------
Loss from continuing operations (584,779) (860,971) (810,714) (4,036,375) (12,931,815)
before income tax benefit
(provision)
Income tax benefit (provision) -- -- 313,100 (488,000) (23,000)
-------------------------------------------------------------------------
Loss from continuing operations (584,779) (860,971) (497,614) (4,524,375) (12,954,815)
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Year Ended Nine
December 31, Months Ended Year Ended Year Ended
------------------- September 30, September 30, September 30,
1992 1993 1994 1995 1996
-----------------------------------------------------------------------
Discontinued operations
(Note 14):
<S> <C> <C> <C> <C> <C>
Income (loss) from 10,050 145,965 609,354 (351,782) (590,480)
discontinued
operations (less
applicable income tax
(provision) benefit of $0.
$0. $0. $(297,800),
$253,000, and $0,
respectively)
Loss on disposal of -- -- -- (777,394) (291,025)
discontinued
operations (less
applicable income tax
benefit of $562,000 in
1995 and $0 in 1996)
-------------------------------------------------------------------------
Income (loss) from 10,050 145,965 609,354 (1,129,176) (881,505)
discontinued
operations
-------------------------------------------------------------------------
Income (loss) before cumulative (574,729) (715,006) 111,740 (5,653,551) (13,836,320)
effect of change in
accounting principle
Cumulative effect of change in -- -- 31,302 -- --
accounting principle (less
applicable income tax
provision of $15,300 in 1994)
-------------------------------------------------------------------------
Net income (loss) ($574,729) ($715,006) $143,042 ($5,653,551) ($13,836,320)
-------------------------------------------------------------------------
Net income (loss) per common share
Loss per share from continuing ($0.38) ($0.36) ($0.13) ($1.00) ($1.86)
operations
Income (loss) per share from 0.01 0.06 0.16 (0.25) (0.13)
discontinued operations
-------------------------------------------------------------------------
Income (loss) per share before (0.37) (0.30) 0.03 (1.25) (1.99)
cumulative effect of change
in accounting principle
-------------------------------------------------------------------------
Income per share of cumulative 0.00 0.00 0.01 0.00 0.00
effect of change in
accounting principle
-------------------------------------------------------------------------
Net income (loss) per share ($0.37) ($0.30) $0.04 ($1.25) ($1.99)
-------------------------------------------------------------------------
Weighted average shares outstanding 1,525,258 2,417,568 3,789,996 4,524,056 6,941,424
-------------------------------------------------------------------------
<CAPTION>
December 31, September 30,
-------------------------------------------------------------------------
1992 1993 1994 1995 1996
-------------------------------------------------------------------------
Balance Sheet Data:
Working capital ($198,944) ($423,570) ($619,907) ($480,420) ($3,482,227)
Net property and equipment 272,942 341,455 747,952 1,330,300 7,125,245
Total assets 725,596 2,129,885 4,852,637 2,659,977 8,772,072
Long-term debt 46,700 511,193 852,081 176,601 150,980
Total Stockholders' equity 451,182 1,107,915 2,989,529 1,182,768 (233,364)
</TABLE>
24
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in
conjunction with the information set forth under the caption entitled "ITEM
6.--SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA" and the financial
statements and notes thereto for the Company included elsewhere herein.
Year Ended September 30, 1996 Compared to Year Ended September 30, 1995
The information set forth below compares the Company's
operating results for fiscal year 1996 with its operating results
for fiscal year 1995.
Continuing Operations
Revenues. Revenues from the sales of briquettes increased to
$195,165 for the year ended September 30, 1996 from $29,310 recognized for the
year ended September 30, 1995. A substantial portion of the sale of briquettes
is attributable to production from the Geneva Plant. Fees from the licensing of
the Briquetting Technology were $100,000 for the year ended September 30, 1996,
and for the year ended September 30, 1995.
Operating Costs and Expenses. The operating costs of producing
briquettes increased to $859,574 for the year ended September 30, 1996 from
$37,165 for the year ended September 30, 1995. The increase is reflective of the
phase of development and operation the Company was in for fiscal year 1996 as
compared to fiscal 1995. In 1996, the Company incurred substantial material and
labor costs in implementing and improving the briquetting product and process,
the costs for which were currently expensed rather than capitalized.
Research and development expenditures decreased $220,880 or
17.5% during the year ended September 30, 1996 from $1,265,072 for the year
ended September 30, 1995. During the year ended September 30, 1996, the Company
received a notice of allowance on one of the patent applications which it filed
in 1993. The Company also continued the prosecution of two previously filed
patent applications relating to the Briquetting Technology during fiscal year
1996.
Selling, general and administrative expenses increased
$2,302,299 or 154% for the year ended September 30, 1996 from $1,494,270 for the
year ended September 30, 1995. During this period the Company was increasing
staff and other operating costs, in order to accommodate the licensing and
implementation of the Briquetting Technology, including extensive activity in
the development of the Utah Plant and Alabama Plant.
25
<PAGE>
In fiscal year 1996, the Company recognized compensation
expense on the issuance of stock options at below market price, compensation
expense on the issuance of warrants at below market price, and compensation
expense on the issuance of common stock for services in the total amount of
$4,873,319, which represents an increase of $3,917,346 over the prior year
expense of $955,973. The Company issued stock options at below market price to
consultants who provided and will continue to provide services relating to the
exploitation of Company technology, identification of users of such technology,
finance of the Company and its projects, marketing, and general business
strategy. The options vest over ten years. The Company has expensed the total
value of such options (current stock value less strike price) in fiscal 1996 in
the amount of $2,305,000. During fiscal 1996 and for the period through the date
of filing of this document, the Company has undergone significant management
changes. The increase in this expense reflects the acceleration of the expense
for options held by prior management and other former employees as settlement in
their termination in the amount of $832,500. As an enticement to a key
executive, the Company granted 100,000 options valued at $1,163,000. This
executive signed an employment contract with the Company through May 31, 1999.
The balance of the expense related principally to the amortization of the value
of stock options, based on the vesting of such options.
Also in fiscal year 1996, the Company recognized an expense in
the form of a write-down of the Note received from the Buyers of the
Subsidiaries in the amount of $2,699,575. Under generally accepted accounting
principles, the Company is required to write down the carrying cost of the note
to the ascertainable value of the collateral securing the note. There has been
no events of default or past due payments occur on the note. See "ITEM
1--BUSINESS--The Company." See iscussion below for discontinued
operations.
Loss From Continuing Operations. For the year ended September
30, 1996, the Company had a loss from continuing operations of $(12,954,815) as
compared to $(4,524,375) for the year ended September 30, 1995. The increased
loss is primarily due to the compensation expense from the stock options, write
down of Buyers' note from the sale of the Subsidiaries, and the expenses related
to the initial production of briquettes discussed above.
Discontinued Operations
For the year ended September 30, 1996 the discontinued
operations had a net loss of $590,480 as compared to a net loss of $351,782 for
the year ended September 30, 1995. The Company also recognized an additional net
loss on the disposal of the discontinued operations in the amount of $291,025.
The Company agreed to pay certain liabilities associated with the Subsidiaries
as a condition of the sale. The actual amount of the liabilities was greater
26
<PAGE>
than originally estimated, resulting in an additional loss from discontinued
operations in 1996. The Company is currently negotiating an increase in the
notes receivable proportional to the additional liabilities actually paid.
Year Ended September 30, 1995 Compared to the Nine Months Ended September 30,
1994
As a result of the change in the Company's fiscal year, the
comparisons of results of operations for the year ended September 30, 1995
reflect twelve months of activity as compared to nine months of activity for the
period ended September 30, 1994.
Continuing Operations
Revenues. Revenues from "Clean Coal" sales increased $9,443
or 48% for the year ended September 30, 1995 from the $19,867 recognized in the
nine months ended September 30, 1994 primarily due to closing out of the "Clean
Coal" inventory. Licensing revenues of $100,000 for the year ended September 30,
1995 represent cash received from Greystone Environmental Technology, Inc. for
the initial payment on the purchase of their coke license. See Note 15 of the
Financial Statements.
Operating Cost and Expenses. During the year ended September
30, 1995, the Company received a notice of allowance on the patent application
which it filed in 1993. The Company also filed two additional patent
applications relating to the Briquetting Technology during this time period and
built and tested a reduction furnace and installed an electric arc furnace in
Price, Utah, which was put into production to demonstrate the feasibility of the
Briquetting Technology to produce iron from waste materials. During 1995, the
Company also developed two new binders, which are more cost effective with
better thermal stability than the binders acquired in 1991 and 1992. As a result
of this activity, research and development expenditures increased $877,944 or
227% during the year ended September 30, 1995. As a result of these
developments, the Company wrote off the purchased technology and trade secrets
in the amount of $344,900.
Selling, general and administrative expenses increased
$1,101,161 in 1995 from $393,109 for the nine months ended September 30, 1994.
During this period the Company was increasing staff and other operating costs,
in order to accommodate the licensing and exploitation of the Briquetting
Technology, including starting up the Geneva plant.
In 1995, the Company recognized compensation expense on the
issuance of stock options at below market price in the amount of $703,527,
$104,000 as compensation expense on the issuance of warrants at below market
price, and compensation expense on the issuance of common stock for services in
the amount of $148,446.
27
<PAGE>
Loss From Continuing Operations. For the year ended September
30, 1995, the Company had a loss from continuing operations of $(4,524,375) as
compared to $(497,614) for the nine months ended September 30, 1994. The
increased loss is primarily due to increased operating costs and expenses
discussed above and the recognition of tax expense of $(488,000) in 1995
compared to a benefit of $313,100 in 1994. The expense in 1995 is due to the
Company's inability to offset its net loss against discontinued operations
taxable income, while the benefit in 1994 is due to the Company's ability to
offset its net operating loss against discontinued operations income.
Discontinued Operations
For the year ended September 30, 1995 the discontinued
operations had a net loss of $351,782 as compared to net income of $609,354 in
1994. The Company also recognized a net loss on the disposal of the discontinued
operations in the amount of $777,394 in 1995, which includes a reserve of
$330,000 for operating losses during the disposal period, offset by a tax
benefit of $562,000. The loss in 1995 is due to the increased focus on the
Briquetting Technology and the Company's efforts to scale down the Subsidiaries
activities until a buyer could be found.
Nine Months Ended September 30, 1994 Compared to the Year Ended December 31,
1993
As a result of the change in the Company's fiscal year the
comparisons of results of operations for the nine months ended September 30,
1994 reflect nine months of activity as compared to twelve months of activity
for the period ended December 31, 1993.
Continuing Operations
Revenues. Total revenues of $19,867 for the nine months ended
September 30, 1994 were generated by the sale of the Company's "Clean Coal"
product as compared to $12,688 for the year ended December 31, 1993 primarily as
a result of the Company's efforts to reduce its inventory.
Operating Costs and Expenses. During the nine months ended
September 30, 1994 the Company was phasing out its "Clean Coal" product line,
which resulted in a negative gross margin of $12,519 for the period as compared
to a negative gross margin of $10,289 for the year ended December 31, 1993. The
Company had determined during 1994 that the home heating market for "Clean Coal"
was not going to produce the gross margins that had been anticipated and the
Company made the decision to pursue the industrial application of the
Briquetting Technology.
Research and development expenditures decreased to $387,128
for the nine months ended September 30, 1994 from $393,300 for the year ended
December 31, 1993, a decrease of $6,172 or 2%. Expenditures in 1994 were related
to improvements made to the binding process and the Company's efforts to expand
28
<PAGE>
the application of the Briquetting Technology to steel making waste by-products.
The Company also produced test run materials for several steel plants and filed
one patent application during this period.
Selling, general and administrative expenses were $393,109 for
the nine months ended September 30, 1994 compared to $426,512 for the year ended
December 31, 1993, a decrease of $33,403 or 8%.
Loss From Continuing Operations. For the nine months ended
September 30, 1994, the Company had a loss from continuing operations of
$(497,614) before the cumulative effect of a change in accounting principle
related to the Company's method of depreciating its property, plant and
equipment, compared to a loss from continuing operations of $(860,971) for the
year ended December 31, 1993. In 1994 the Company had a tax benefit from
continuing operations of $313,100 (due to the use of net operating losses to
offset income of the discontinued operations), while in 1993 no tax benefit was
recognized.
Discontinued Operations
Net income for the discontinued operations increased to
$609,354 for the nine months ended September 30, 1994 from $145,965 for the
previous period. It was during this period that CIC started two large
construction contracts with a large mining company in Utah, which accounted for
the increase.
Liquidity and Capital Resources
While the Company continued its commitment to research and
development during fiscal 1996, the Company made significant progress toward the
commercialization of its technology and movement from a development company to
an operating company. The increase in cash used by the Company in operating
activities from $237,023 in fiscal 1995 to $2,574,713 during 1996 was largely
due to the increase in staff and the start up and operation of the Geneva Plant.
The increase in staff was necessitated by the increased planning, marketing and
development activities of the Company. The Company was able to fund this growth
principally through the issuance of common stock.
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 businesses. Accordingly in February, 1996, the
Company entered into a share purchase agreement with Mike McEwan and Gerald
Larson, former principals of the Subsidiaries, to sell all of the common stock
of the Subsidiaries. The divestiture was substantially complete on September 28,
1996 resulting in an additional loss to the Company of $881,505 during fiscal
year 1996. See "ITEM 1--BUSINESS--The Company."
29
<PAGE>
During fiscal year 1996, the Company produced revert briquettes
at the Geneva Plant for Geneva according to specifications supplied by Geneva.
Revenues from the production of revert briquettes at the Geneva Plant amounted
to $191,427. Although the Geneva Agreements expired in December 31, 1996, the
Geneva facility has continued to produce briquettes for purchase by Geneva
Steel.
The Company anticipates that cash flow from (i) operations,
including fees for the operation of facilities owned by third parties,
(ii licensing and royalty fees from new plants utilizing the Briquetting
Technology, (iii) the sale of chemical binder to new plants utilizing the
Briquetting Technology, (iv) sale of synthetic coal products, (v) fees from port
operations and loading (vi) cash distributions from Utah Synfuel #1 and Alabama
Synfuel #1 and (vii) payments on notes receivable will be used to fund working
capital and other operating needs. See "ITEM 1--BUSINESS--Business Strategy." In
September 1996, the Company entered into a letter of intent with an unregulated
subsidiary of PacifiCorp to purchase the Alabama Plant from Alabama Synfuel #1
for a one time $500,000 licensing fee, a promissory note in the amount of
$3,400,000 that will be payable out of the cash flow of the plant, and a per ton
royalty fee. See "ITEM 1--BUSINESS--PacifiCorp." In November 1996, the Company
entered into a letter of intent with Arthur J. Gallagher & Co., to purchase the
Utah plant from Utah Synfuel #1 for $2,500,000 cash and a promissory note, a one
time $500,000 licensing fee and a per ton royalty fee payable out of the cash
flow of the Utah plant. See "ITEM 1--BUSINESS--Gallagher." The Company completed
construction of the Utah plant in connection with Utah Synfuel #1, and commenced
commercial operations in December, 1996, producing and selling more than 5,000
tons of coal briquettes prior to the end of calendar year 1996. However, the
Company has not yet closed on the sale of such plants, and there can be no
assurance that the Company will receive the anticipated cash payments from the
sale of such plants. Moreover, most of the cash flow from the above sources will
not occur until late 1997 and in subsequent years.
In May 1995, the Company secured financing in the form of an
$825,000 master equipment lease funded by a commercial bank to equip its initial
briquetting plant at Geneva's facilities. The Company has the option to purchase
the equipment from the bank at the end of the lease term.
In December 1996, the Company entered into the 1996
Construction Agreements. 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. See "Item
1--BUSINESS--Construction Agreements."
In December 1996, the Company entered into indemnity
agreements with Lockwood which may result in a contingent liability of
$4,500,000 on or after June 2, 1998. See "ITEM 1--BUSINESS-- Indemnification to
Lockwood."
30
<PAGE>
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 debentures was issued
and funded with an additional $2,900,000 in credit available for future draw
downs pursuant to Senior Debentures to be issued by the Company. On January 2,
1997, the Company drew down $588,683 of the available $2,900,000. See "ITEM 1 --
BUSINESS -- Gallagher." The balance of the $2.9 million loan will be used for
working capital and for the construction and development of the coal
agglomeration facilities.
In October 1996, as part of the PacifiCorp letter of intent,
PacifiCorp agreed to a convertible loan from PacifiCorp to the Company in an
amount up to $5,000,000. See "ITEM 1--BUSINESS-- PacifiCorp."
In November of 1996, the Company issued convertible
subordinated debentures in the principal amounts of $300,000, $200,000 and
$500,000 to Mr. Douglas M. Kinney, Mr. Gordon, L. Deane and the Douglas M.
Kinney 1999 Retained Annuity Trust, respectively. The convertible subordinated
debentures accrue interest at prime plus two percent (2%) with interest and
principal payable in full on June 30, 1998. All or a portion of the unpaid
principal due on the convertible subordinated debenture is convertible into
Company common stock. Through a separate subscription agreement, the Company has
granted piggy-back registration rights to the investors for Company common stock
issued upon conversion of the convertible subordinated debentures. The Company
has the right to prepay the principal of the convertible subordinated
debentures. Finally, the investors have represented to the Company that they are
"Accredited Investors" as defined under Rule 501 of the Securities Act of 1933,
as amended.
The Company has had significant discussions with RAS Securities
Corp. to act as placement agent on a "best efforts" 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. Such debentures
would have an established floor and ceiling conversion price, and the shares
issued upon conversion would be entitled to piggy-back and demand registration
rights. No assurances can be given that RAS Securities Corp. will act as
placement agent or that the minimum offering will be successfully placed. Such
offering will be made only by means of a private offering memorandum and
statements relating to such offering herein are neither offers to sell nor
solicitations of offers to buy.
The Company believes that the resources desribed above will be
adequate to meet its obligations in fiscal year 1997, notwithstanding its
working capital deficit at September 30, 1996.
31
<PAGE>
Impact of Recently Issued Accounting Standards
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
The Statement requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The Statement is effective for financial statements for
fiscal years beginning after December 15, 1995. The impact of the Statement on
the Company is not expected to be material.
In October 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting
for Stock-Based Compensation". This Statement defines a fair value method of
32
<PAGE>
accounting for an employee stock option or similar equity instrument and
encourages adoption of that method. The Statement also requires that an
employer's financial statements include certain disclosures about stock-based
compensation arrangements regardless of the method used to account for them. The
Statement is effective for financial statements for fiscal years that begin
after December 15, 1995. The Company has determined that it will adopt the
disclosure requirement of SFAS No. 123 and will continue to account for
stock-based compensation as permitted under the provision of Accounting
Principles Board Statement No. 25.
Impact of Inflation
During fiscal year 1996, cost increases to the Company were
not materially impacted by inflation.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary financial data
required by this Item 8 are set forth in Item 14 of this Form 10-K. All
information which has been omitted is either inapplicable or not required.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On April 17, 1994, the Company's Board of Directors voted that
the accounting firm then employed by the Company was to be dismissed.
There were no adverse opinions or disclaimers of opinion, nor
were there any modifications as to uncertainty, audit scope, or accounting
principles with the former accountant. There were no disagreements with the
former accountant on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure.
On October 17, 1994, the accounting firm of Coopers & Lybrand,
L.L.P. was engaged to perform the annual audit as of September 30, 1994. Coopers
& Lybrand, L.L.P. was also engaged to perform the annual audit for fiscal year
ended September 30, 1995, and 1996.
There are no other changes in and disagreements on accounting
and financial statement disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company as of
January 1, 1997 are as follows:
33
<PAGE>
Name Age Position
- - --------------------- ------------- -----------------------------------
Brent M. Cook 36 President and Chief Executive Officer
Russ Madsen 50 Interim Chairman of the Board, Vice
President-Operations and Director
Stanley M. Kimball 42 Chief Financial Officer, Treasurer
and Director
Alan D. Ayers 39 Chief Operating Officer and Director
George W. Ford 51 Vice President-Research and
Development and Director
Steven Brown 38 Vice President of Engineering and
Construction and Director
Asael T. Sorensen, Jr. 42 Secretary and General Counsel
Richard Lambert 51 Vice President of Sales and Marketing
Raymond J. Weller 50 Director
DeLance Squire 77 Director
- - -----------------------
Brent M. Cook has served as President and Chief Executive Officer since October
1996, and Chief Financial Officer from June 1996 until December 1996. Mr. Cook
is a Certified Public Accountant. Prior to joining the Company, Mr. Cook was
Director of Strategic Accounts-Utah Operations, for PacifiCorp, Inc.
("PacifiCorp"). His responsibilities included the management of revenues of
approximately $128 million per year, and seeking out and evaluating strategic
growth opportunities for PacifiCorp, including joint ventures and other
transactions. Mr. Cook spent more than 12 years with PacifiCorp. PacifiCorp is
not affiliated with the Company.
Russ Madsen has served as Interim Chairman since November 1996 and Vice
President of Operations and a Director of the Company since August 1992. Mr.
Madsen is responsible for the Company's prototype briquetting plant in Price,
Utah. Between 1981 and 1992, Mr. Madsen was employed as an accounting manager by
Coastal States Energy, a subsidiary of Coastal Corporation. From 1984 to 1991,
Mr. Madsen also was a Vice President and Director of Specialized Mining
Services, Inc., a mine support service company from whom the Briquetting
Technology was acquired. Mr. Madsen graduated from Utah State University with a
B.S. degree in Agricultural Economics and a minor in Business Management.
Stanley M. Kimball has served as Chief Financial Officer, Treasurer and Director
since January 1, 1997. Prior to joining the Company, Mr. Kimball was employed by
Huntsman Corporation ("HC"). From 1989 to early 1995, Mr. Kimball served as the
Director of Tax for Huntsman Chemical Corporation ("HCC"). In May 1995, Mr.
Kimball was appointed as an officer of HCC, serving as Vice President, Tax. In
July 1995, Mr. Kimball was appointed as Vice President, Administration for HC.
In this position, he had numerous responsibilities, both for HC and for Mr. Jon
M. Huntsman personally, which included financial accounting, tax and estate
planning, and cash and investment management. In this position, Mr. Kimball also
served as Mr. Huntsman's Chief of Staff. In 1980, Mr. Kimball received a Masters
of Accountancy, with emphasis in taxation, from Brigham Young University and is
a Certified Public Accountant. Between 1980 and 1989, he was employed by Arthur
Andersen & Co., and was serving as a Senior Tax Manager prior to his employment
with HCC.
34
<PAGE>
Alan D. Ayers has served as Chief Operating Officer and Director since June
1996. Mr. Ayers joined the Company in August of 1995 as manager of the Company's
investor relations department. From 1993 to 1995, Mr. Ayers was the General
Manager for Taylor Maid Beauty Supply, responsible for the operations of the
regional supply company. From 1987 to 1993, he was Director of Operations for
Knighton Optical, Inc. Mr. Ayers received his M.B.A. from the University of
Utah.
George W. Ford has served as Vice President of Research and Development and a
Director of the Company since August 1993. From 1982 to 1993, Mr. Ford was
employed at Ballard Medical Products, Inc. in research and development,
principally in the biomedical field. He holds 17 national and international
patents covering a wide variety of technologies. Mr. Ford has functioned as an
independent consultant working on projects in computer programming, medical
product device design and process polymer chemistry design for the energy
industry. Mr. Ford is a member of the American Association for the Advancement
of Science, and the Iron and Steel Society.
Steven Brown has served as Vice President of Engineering and Construction of the
Company since February 1995. He was elected to the Board of Directors in
September of 1995. Mr. Brown was responsible for the management of the
construction companies and the limestone quarry. He is currently responsible for
the design and construction of the Company's production facilities. From 1993 to
1995, Mr. Brown was President of Construction Management Service, Inc. Mr. Brown
is a licensed professional engineer and a licensed general contractor. Mr. Brown
obtained a B.S. degree in Civil Engineering and a Master of Business
Administration from Brigham Young University.
Asael T. Sorensen, Jr. joined the Company as its General Counsel in September
1995. From 1982 to 1995, Mr. Sorensen practiced law primarily in the area of
contract negotiations and administration. Since 1987, Mr. Sorensen has been a
consultant with the American Management Association, a business seminar and
consulting non-profit organization headquartered in New York. Mr. Sorensen
graduated from Brigham Young University with a joint Juris Doctor and Masters of
Business Administration. He is admitted to practice law in the State of Utah.
Raymond J. Weller has served as a director of the Company since July 1991. Since
1991, Mr. Weller has been Vice President of HMO Benefits of Utah, a Utah based
insurance brokerage firm. From 1985 to 1991, Mr. Weller was an agent with the
insurance brokerage of Galbraith, Benson, and McKay.
DeLance Squire has served as a director of the Company since December 13, 1996.
Mr. Squire was the founder of Squire & Co., Orem, Utah and retired in 1986.
Since 1986, Mr. Squire has been the Executive Director for the Commission for
Economic Development, Orem, UT. In addition, Mr. Squire is a member of the
Impact Fees Committee and the Strategic Plan Committee to the City of Orem. He
also serves as a member of the board of trustees for Mountain View Hospital,
Payson, UT. Mr. Squire received his B.S. degree in Accounting from Brigham Young
University in 1947 and became a Certified Public Accountant in 1950.
The Company's executive officers are elected annually by the
Board of Directors and serve at the discretion of the Board. The Company's
directors hold office until the next annual meeting of stockholders and until
their successors have been duly elected and qualified. Officers serve at the
will of the Board of Directors.
Pursuant to an amendment to the Bylaws of the Company adopted
on January 31, 1996, the Board of Directors will be divided into three classes
after the first annual meeting of stockholders (scheduled to be held in 1997).
35
<PAGE>
The three classes will be as nearly equal in number as possible with the term of
the office of directors of the first class, second class and third class to
expire at the first, second and third annual meeting of stockholders after their
election, respectively. At each annual meeting following such classification and
division of the members of the Board of Directors, a number of directors equal
to the number of directorships in the class whose term expires at the time of
such meeting shall be elected to hold office until the third succeeding annual
meeting of stockholders of the Company. The salaried employees of the Company
serving as directors are not compensated as directors. The Board of Directors
has granted stock options to directors of the Company not otherwise employed by
the Company. Such directors also receive reimbursement of out-of-pocket
expenses.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires
the Company's officers and directors, and persons who own more than ten percent
of a registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and the National Association of Securities Dealers. Officers, directors and
greater than ten-percent shareholders are required by Securities and Exchange
Commission regulations to furnish the Company with copies of all Section 16(a)
forms they file. Based solely on review of the copies of such forms furnished to
the Company since it became subject to the Securities Exchange Act of 1934 to
December 31, 1996, year-end reports furnished to the Company after December 31,
1996 and representations by current officers and directors that no other reports
were required, the Company has determined that during the 1996 fiscal year all
applicable 16(a) filing requirements for the current officers and directors were
met; provided, however, that the Company has been unable to reconcile year-end
balances for certain officers and directors.
ITEM 11. EXECUTIVE COMPENSATION
The following sets forth the compensation paid by the Company
for services rendered by Kenneth M. Young, the Company's Chairman of the Board
and Chief Executive Officer during the nine-month fiscal period ended September
30, 1994, the fiscal years ended September 30, 1995 and September 30, 1996 and
to each of the other executive officer whose compensation exceeded $100,000
during the most recently completed fiscal year.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation Long-Term Compensation
- - ----------------------- ----------------------
Other Restricted All Other
Name and Salary Bonus ($) Annual Stock Stock Compensation
Principal Position Year ($) Compensation Awards ($) Options (#) ($)
($)
======================= -------- ---------- -------------- ------------- ------------- -------------- ==============
<S> <C> <C> <C> <C> <C> <C> <C>
Kenneth M. Young(1) 1996 $88,700 - - (1) - - 84,500(2) -
======================= -------- ---------- -------------- ------------- ------------- -------------- ==============
CEO and Chairman of 1995 $70,000 $36,812 - (2) - - 306,250(3) -
the Board
======================= -------- ---------- -------------- ------------- ------------- -------------- ==============
1994(4) $60,000 - - - - -
======================= ======== ========== ============== ============= ============= ============== ==============
Brent M. Cook (5) 1996 $23,335 $ 60,000 $1,163,000(6) 40,000(6)
Executive Vice
President and CFO
</TABLE>
36
<PAGE>
(1) Mr. Young resigned as Chairman of the Board effective November 12, 1996.
This action has resulted in further compensation being owed to Mr. Young
and payable over fiscal year 1997 pursuant to the terms of a settlement
agreement. See "ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
(2) Includes (A) an option to acquire 34,500 shares of common stock at $8.38
($16.76 presplit) per share, granted on October 17, 1995, of which all were
exercised on October 17, 1995 at a market price equal to exercise price and
(B) an option to acquire 62,500 shares of common stock at $1.50 per share,
granted on August 13, 1996, of which 12,500 were canceled pursuant to a
settlement agreement between Mr. Young and the Company. See "ITEM 13 --
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
(3) Includes an option to acquire 250,000 shares of common stock at $1.50 per
share and an option to acquire 56,250 shares of common stock at $5.315 per
share under the Company's 1995 Stock Option Plan.
(4) Represents nine-month period ended September 30, 1994.
(5) Mr. Cook entered into an employment agreement dated June 1, 1996 to act as
Executive Vice President and Chief Financial Officer. Mr. Cook was
appointed as President and Chief Executive Officer in October of 1996.
(6) Upon the execution of his Employment Agreement with the Company, Mr. Cook
received immediately exercisable options to acquire 100,000 shares of the
Company's common stock at a price of $1.50 per share. This amount
represents $1,163,000 of the compensation recorded by the Company as a
result of the option grant to Mr. Cook. Mr. Cook also received an option to
acquire 40,000 shares of the Company's common stock at a price of $1.50 per
share, which vests over 10 years.
Other than the Company's 1995 Stock Option Plan, there are no
retirement, pension, or profit sharing plans for the benefit of the Company's
officers, directors and employees. The Company does provide health insurance
coverage for its employees. The Board of Directors may recommend and adopt
additional programs in the future for the benefit of officers, directors and
employees.
Information concerning grants of options to the named
executive officer is reflected in the table below. The amounts shown for the
named executive officer as potential realizable values are based on arbitrarily
assumed annualized rates of stock price appreciation of zero percent, five
percent and ten percent over the full term of the options. These potential
realizable values are based solely on arbitrarily assumed rates of price
appreciation required by applicable SEC regulations. Actual gains, if any, on
option exercises and common stockholdings are dependent on the future
performance of the Company and overall stock market conditions. There can be no
assurance that the potential realizable values shown in this table will be
achieved.
37
<PAGE>
<TABLE>
<CAPTION>
Option Grants in Fiscal Year 1996
====================================================================================================================
Potential Realizable Value at
Assumed Annual Rates of Stock
Price Appreciation
Individual Grants for Option Term
======================== ----------------------------
% of Total
Options
Options Granted
Name Granted to Employees Exercise Market Price Expiration Date (0%) ($) (5%) ($) ( 10%) ($)
(#) in Fiscal Year Price on Date
1996 of Grant
======================== ---------- ---------------- --------- -------------- ----------------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Kenneth M. Young(1) 34,500 2.1% $8.38 $16.75 October 16, 2005 $ 288,765 $ 470,585 $ 749,532
---------- ---------------- --------- -------------- ----------------- ----------- ---------- -----------
50,000 3.1% $1.50 $10.25 August 12, 2006 $ 43,750 $ 48,467 $ 55,703
======================== ========== ================ ========= =============== ================= =========== ========== ===========
Brent M. Cook 100,000 6.2% $1.50 $13.125 June 1, 2006 $1,162,500 $1,256,834 $1,401,561
40,000 2.5% $1.50 $13.125 June 1, 2007 $ 465,000 507,020 576,187
====================================================================================================================================
</TABLE>
(1) Includes (A) an option to acquire 34,500 shares of common stock at
$8.38 ($16.76 presplit) per share, granted on October 17, 1995, of
which all were exercised on October 17, 1995 at a market price equal to
exercise price and (B) an option to acquire 62,500 shares of common
stock at $1.50 per share, granted on August 13, 1996, of which 12,500
were canceled pursuant to a settlement agreement between Mr. Young and
the Company. See "ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS."
Aggregated Option Exercises and Year-End Option Values in 1996
The following table summarizes for the named executive officer
of the Company the number of stock options, if any, exercised during Fiscal Year
1996, the aggregate dollar value realized upon exercise, the total number of
unexercised options held at September 30, 1996 and the aggregate dollar value of
in-the-money unexercised options held at September 30, 1996. Value realized upon
exercise is the difference between the fair market value of the underlying stock
on the exercise date and the exercise price of the option. The value of
unexercised, in-the-money options at September 30, 1996 is the difference
between its exercise price and the fair market value of the underlying stock on
September 30, 1996 which was $8.00 per share based on the closing bid price of
the common stock on September 30, 1996. The underlying options have not been
and, may never be exercised; and actual gains, if any, on exercise will depend
on the value of the common stock on the actual date of exercise. There can be no
assurance that these values will be realized.
38
<PAGE>
<TABLE>
<CAPTION>
Aggregated Option Exercises in Fiscal Year 1996
and Year-End Option Values
====================================================================================================================
Number of Value of Unexercised
Unexercised Options In-the-Money Options
at 9/30/96(#) at 9/30/96($)
- - --------------------------------------------------------------------------------------------------------------------
Shares Acquired Value
Name on Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
===================== ----------------- --------------- ------------ -------------- ------------- ==================
<S> <C> <C> <C> <C> <C> <C>
Kenneth M. Young 34,500 $-0-(1) -0- 100,000(2) $ -0- $ 650,000
===================== ================= =============== ============ ============== ============= ==================
Brent M. Cook -0- $-0- 100,000 40,000 $ 650,000 $ 260,000
====================================================================================================================
</TABLE>
(1) The option to acquire 34,500 shares of common stock at $8.38 ($16.76
presplit) per share was granted and exercised on October 17, 1995 at a
market price equal to the exercise price.
(2) In accordance with Mr. Young's settlement agreement, options to acquire
100,000 shares of common stock became fully vested on January 1, 1997. See
"ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
Long-Term Incentive Plan Awards in Fiscal Year 1996
The Company has no "long-term incentive plan".
Future Benefits of Pension Plan Disclosure in Fiscal Year 1996
The Company has no such benefit plans.
Employment Agreements
Kenneth Young. The Company entered into an employment
agreement dated as of January 1, 1992, with Kenneth M. Young. The employment
agreement provides for an annual base salary of $72,000. An annual bonus may be
paid as determined by the Company's Board of Directors. Mr. Young is entitled to
all other fringe benefits provided to other similar employees of the Company.
The agreement is terminable at will at anytime by either party. Upon termination
of the employment agreement, Mr. Young is subject to a 48-month covenant not to
compete, during which time Mr. Young has agreed not to compete with the Company.
The Company has agreed to pay Mr. Young a payment equal to 80% of his annual
compensation (exclusive of bonus and benefits) within 30 days after the
termination of his employment in exchange for his covenant not to compete.
Effective November 12, 1996, Kenneth Young resigned as Chairman of the Board and
Chief Executive Officer of the Company. The Company and Kenneth Young have
entered into a settlement agreement. See "ITEM 13 -- CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS."
Brent M. Cook. The Company entered into an employment
agreement dated June 1, 1996, with Brent M. Cook to act as Executive Vice
President and Chief Financial Officer. Mr. Cook was appointed as President and
Chief Executive Officer in October of 1996. The employment agreement provides
for an annual base salary of $80,000. An annual bonus may be paid as determined
by the Company's Board of Directors. Mr. Cook is entitled to all other fringe
benefits provided to other similar employees of the Company. The term of the
employment agreement commenced on June 1, 1996 and will terminate on May 31,
1999. If Mr. Cook does not continue in the employ of the Company after
39
<PAGE>
termination of the agreement (whether or not Mr. Cook is offered employment by
the Company) the Company shall pay Mr. Cook the sum of one year's annual wages
no later than July 1, 1999. Effective June 1, 1997, Mr. Cook's annual salary
shall increase to $100,000 in accordance with the employment agreement.
Director Compensation
The salaried employees of the Company serving as directors are
not compensated as directors. The Board of Directors has granted stock options
to directors of the Company not otherwise employed by the Company. Such
directors also receive reimbursement of out-of-pocket expenses.
Officer Compensation
In September 1995, the Company's Board of Directors approved a
new compensation structure for management. The structure was to become effective
on October 1, 1995 but has been deferred until such time as the board determines
the Company's cash flow is sufficient to support the new compensation structure.
The Company no longer intends to implement that structure. The Company's Board
of Directors is currently considering other compensation structures.
Stock Option Plans
1995 Stock Option Plan. Under the Company's 1995 Stock Option
Plan, as amended (the "Option Plan"), 2,400,000 shares of common stock are
reserved for issuance upon the exercise of stock options. The Option Plan is
designed to serve as an incentive for retaining qualified and competent
employees, directors and consultants. As of September 30, 1996, options to
purchase an aggregate of approximately 900,000 shares of Common Stock were
issued under the Option Plan, all of which have been exercised.
A committee of the Company's Board of Directors, or in its
absence, the Board (the "Committee") administers and interprets the Option Plan
and is authorized to grant options and other awards thereunder to all eligible
employees of the Company, including officers and directors (whether or not
employees) of the Company. The Option Plan provides for the granting of both
"incentive stock options" (as defined in Section 422 of the Code) and
non-statutory stock options. Options can be granted under the Option Plan on
such terms and at such prices as determined by the Committee, except for the per
share exercise price of incentive stock options which will not be less than the
fair market value of the common stock on the date of grant and, in the case of
an incentive stock option granted to a 10% stockholder, the per share exercise
price will not be less than 110% of such fair market value. The aggregate fair
market value of the shares of common stock covered by incentive stock options
granted under the Option Plan that become exercisable by a grantee for the first
time in any calendar year is subject to a $100,000 limit.
Options granted under the Option Plan will be exercisable
after the period or periods specified in the option agreement. Options granted
under the Option Plan are not exercisable after the expiration of ten years from
the date of grant and are not transferable other than by will or by the laws of
descent and distribution.
Other Options. In general the Company issues restricted stock
at 65% of market in transactions with third parties that involve no
consideration other than the cash received. The non-qualified options described
below were issued within this general guideline with exercise prices based on
market value at the time the options were issued.
40
<PAGE>
The following table sets forth information with respect to
options granted to the Company's executive officers and directors during the
last fiscal year.
Name Number of Exercise
Options Price
- - --------------------- ------------------ --------------------
Kenneth M. Young (1) 34,500 $ 8.38
25,000 $ 1.50
Brent M. Cook 140,000 $ 1.50
Kirby Cochran(1) 34,500 $ 8.38
Russ Madsen 30,000 $ 8.38
25,000 $ 1.50
Michael Midgley (1) 30,000 $ 8.38
25,000 $ 1.50
Alan Ayers 30,000 $ 8.38
10,000 $ 1.50
100,000 $ 1.50
Steve Brown 28,200 $ 8.38
100,000 $ 1.50
George W. Ford 28,200 $ 8.38
25,000 $ 1.50
Michael Bodon(1) 28,200 $ 8.38
Asael T. Sorensen, Jr. 28,200 $ 8.38
100,000 $ 1.50
Richard Lambert 28,200 $ 8.38
20,000 $ 1.50
Lloyd C. McEwan(1) 30,000 $ 8.38
Raymond Weller 30,000 $ 8.38
25,000 $ 1.50
- - --------------
(1) No longer with the Company.
(2) Mr. Bodon is a cousin of the spouse of Mr. Young.
Recipients of these options may exercise them at any time.
Shares related to exercised options are held in escrow and are made available as
the options vest. The options vest at different times based upon the terms
offered with some options vesting immediately and others over terms of up to 10
years. (In the event that an executive officer or employee terminates employment
with the Company, or a director ceases to be a director, prior to the specified
vesting period, the Company will cancel any of the shares in which the recipient
41
<PAGE>
has not vested) When options are issued with terms considered compensatory, the
compensation expense related to these options is being amortized to expense over
the specified vesting period.
Board Meetings
The Board held a total of nine (9) regular meetings during
fiscal year 1996 and no special meetings during fiscal year 1996. All directors
attended over 75% of the aggregate number of the regular meetings of the Board.
Committees Of The Board
The Board of Directors has not established an Audit Committee
or a Compensation Committee.
Report of the Board of Directors on Executive Compensation
The Company does not have a Compensation Committee of the Board of Directors.
The Board of Directors is responsible for establishing and administering the
compensation policies applicable to the Company's officers and key personnel,
including the named executives. Due to past cash flow concerns of the Company,
the Board of Directors has not implemented changes in the Company's compensation
structure which were previously approved by the Board of Directors. Future
compensation polices will be dependent on the Company's cash flow.
There is no specific relationship of corporate performance to executive
compensation regarding the Chief Executive Officer's compensation. However, due
to prior cash flow concerns, the Chief Executive Officer has received stock
based compensation as a significant component of his compensation. The Company
will likely continue to use stock based compensation to more closely align the
interests of the Chief Executive Officer with the interests of the stockholders.
Comparisons of base salaries to the market should take into account the
development the Company has experienced in the past year, including the
contractual arrangements entered into by the Company for the building of
facilities and the licensing of the Briquetting Technology. Measurements of
corporate responsibility may, therefore, be less accessible to obvious
conclusions for comparison to executive compensation.
The Board of Directors continues to strive to ensure that the Company's
compensation plan attracts, retains and rewards both staff and management
personnel while continuing to operate in the best interests of the shareholders.
The Board of Directors
42
<PAGE>
Stockholder Return Performance Graph
Federal regulation requires the inclusion of a line graph comparing cumulative
total shareholder return on Common Stock with the cumulative total return of (1)
NASDAQ Combined Index and (2) a published industry or line-of-business index.
The performance comparison appears below.
The Board of Directors recognize that the market price of stock is influenced by
many factors, only one of which is Company performance. The stock price
performance shown on the graph is not necessarily indicative of future price
performance.
Comparison of Cumulative Total Return
Total Returns Assume Reinvestment of Dividends
{Graphic]
Total Return Analysis 9/30/94 9/30/95 9/30/96
Covol Technologies, Inc. $100 $230 $265
S&P Energy Composite $100 $120 $150
Nasdaq Composite (US) $100 $137 $161
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of
December 1, 1996, regarding the beneficial ownership of all of the Company's
outstanding common stock, par value $.001 per share (the "common stock"),
including such ownership by (i) each of the stockholders of the Company who owns
more than 5% of the outstanding shares of common stock, (ii) each director of
the Company, and (iii) all directors and executive officers of the Company as a
group. As of December 1, 1996, there were 8,895,542 shares of common stock
outstanding. As of that date, there were outstanding options to acquire an
additional 1,366,500 shares of common stock from the Company, of which 612,750
were vested.
43
<PAGE>
Name and Address of Amount and Nature of Beneficial
Beneficial Owner (1) Ownership (2) Percent of Class
-------------------- ------------- ----------------
Kenneth M. Young* 332,328(3) 3.50%
Brent M. Cook 100,000(12) 1.05
Kirby Cochran* 23,045(4) 0.24
Russ Madsen 518,151(5) 5.50
Michael Midgley* 158,500(7) 1.67
Alan Ayers 43,500(13) 0.46
Steven Brown 144,400(8) 1.52
George W. Ford 181,696(6) 1.91
Michael Bodon* 181,650(15) 1.91
Asael T. Sorensen, Jr. 74,608(11) 0.78
Richard Lambert 55,134(14) 0.57
Lloyd C. McEwan* 239,284(9) 2.51
Raymond J. Weller 231,900(10) 2.44
All directors and executive
officers as a group 2,324,196 24.50%
(thirteen persons)
- - ------------------
* no longer affliated with the Company
(1) The address of each person named in the table is c/o the Company, 3280
North Frontage Road, Lehi, Utah 84043.
(2) The persons named in this table have sole voting and investment power with
respect to all shares of common stock reflected as beneficially owned by
them. A person is deemed to be the beneficial owner of securities that can
be acquired by such person within sixty (60) days from the Record Date upon
the exercise of options. The record ownership of each beneficial owner is
determined by assuming that options that are held by such person and that
are exercisable within sixty (60) days from the Record Date have been
exercised. The total outstanding shares used to calculate each beneficial
owner's percentage includes such options.
(3) Consists of 1,150 shares owned by Mr. Young's spouse, 120,050 shares owned
jointly by Mr. Young and his spouse, 111,123 shares owned by Mr. Young and
options to purchase 100,000 shares held by Mr. Young, which are currently
exercisable pursuant to a settlement agreement entered into by Mr. Young
and the Company in November 1996.
(4) Consists of 23,045 shares owned by Mr. Cochran. Mr. Cochran held options to
purchase 100,000 shares and 500,000 shares, both of which were forfeited in
1996.
(5) Consists of 321 shares owned by Mr. Madsen's spouse, 14,789 shares owned by
Mr. Madsen and his spouse, 363,334 shares owned by Mr. Madsen, 139,698
shares owned by Mr. Madsen in a personal securities account, and options to
purchase 17,500 shares held by Mr. Madsen which are currently exercisable.
44
<PAGE>
(6) Consists of 176,696 shares owned by Mr. Ford and options to purchase 5,000
shares held by Mr. Ford which are currently exercisable.
(7) Consists of 83,500 shares owned by Mr. Midgley and options to purchase
75,000 shares held by Mr. Midgley which are exercisable on January 1, 1997
pursuant to a settlement agreement entered into by Mr. Midgley and the
Company in November 1996.
(8) Consists of 131,900 shares owned by Mr. Brown and options to purchase
12,500 shares held by Mr. Brown which are currently exercisable.
(9) Consists of 235,784 shares owned by Mr. McEwan and options to purchase
3,500 shares held by Mr. McEwan which are currently exercisable.
(10) Consists of 229,400 shares owned by Mr. Weller and options to purchase
2,500 shares held by Mr. Weller which are currently exercisable.
(11) Consists of 44,500 shares owned by Mr. Sorensen, 8,721 shares owned by Mr.
Sorensen and his child in trust, 1,000 shares owned by Mr. Sorensen and his
spouse, 7,887 shares owned by the Sorensen family trust and options to
purchase 12,500 shares held by Mr. Sorensen which are currently
exercisable.
(12) Consists of options to purchase 100,000 shares.
(13) Consists of 30,000 shares owned by Mr. Ayers, 1,700 shares owned by Mr.
Ayers' individual retirement account, 800 shares owned by Mr. Ayers' spouse
and options to purchase 11,000 shares held by Mr. Ayers which are currently
exercisable.
(14) Consists of 49,584 shares owned by Mr. Lambert, 50 shares owned by Mr.
Lambert's spouse and options to purchase 4,500 shares held by Mr. Lambert
which are currently exercisable.
(15) Consists of 179,150 shares owned by Mr. Bodon and options to purchase 2,500
held by Mr. Bodon which are currently exercisable.
Changes in Control.
The Company knows of no arrangement, including the pledge by
any person of securities of the Company, which may at a subsequent date result
in change of control of the Company.
45
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company entered into an employment agreement dated June
1, 1996, with Brent M. Cook to act as Executive Vice President and Chief
Financial Officer. Mr. Cook was appointed as President and Chief Executive
Officer in October of 1996. The employment agreement provides for an annual
base salary of $80,000. An annual bonus may be paid as determined by the
Company's Board of Directors. Mr. Cook is entitled to all other fringe benefits
provided to other similar employees of the Company. The term of the employment
agreement commenced on June 1, 1996 and will terminate on May 31, 1999. If Mr.
Cook does not continue in the employ of the Company after termination of the
agreement (whether or not Mr. Cook is offered employment by the Company) the
Company shall pay Mr. Cook the sum of one year's annual wages no later than July
1, 1999. Effective June 1, 1997, Mr.Cook's annual salary shall increase to
$100,000 in accordance with the employment agreement.
In June of 1996, the Company formed Utah Synfuel #1, Ltd. and
Alabama Synfuel #1, Ltd., each a Delaware limited partnership, for the purpose
of facilitating the financing and construction of the Utah Plant and the Alabama
Plant, respectively. See "ITEM 1--BUSINESS--Business of the Company--Limited
Partnerships" and "--Business Strategy--Coal Briquettes." The Company is
expected to enter into various agreements and contracts with Utah Synfuel #1,
Ltd. and Alabama Synfuel #1, Ltd. which may not be structured on an arm's-length
basis.
In an effort to obtain capital for the construction of the
Utah Plant and the Alabama Plant, the Company borrowed $700,000 from Key Bank of
Utah ("Key Bank"). The loan accrues interest at Key Bank's prime rate plus 2%
per annum and was to be paid in full in October 1996. In November 1996 the
Company paid accrued interest plus principal of $100,000. The Company and Key
Bank have agreed to rollover the remaining $600,000 principal balance of the
loan for another 90 days, until January 29, 1997. As a condition to making the
loan, Key Bank required that certain officers, directors and employees of the
Company also sign as guarantors of the note evidencing the loan (the "Key Bank
Note"). To induce such officers, directors and employees to sign the Key Bank
Note, the Company further loaned $100,000 each to Mr. Russ Madsen, Mr. Dean
Young, Mr. Kenneth Young, Mr. Alan Ayers, Mr. Asael T. Sorensen, Jr., Mr. Steve
Brown and Mr. Michael Midgley (the "Individuals"). The loan to the Individuals
is on the same terms as the loan from Key Bank. The proceeds of the loan from
the Company to the Individuals, along with other money of the Individuals
aggregating $1,850,000, were invested in partnership interests in Utah Synfuel
#1 and Alabama Synfuel #1. Mr. Russ Madsen invested $50,000 of the loan in
Alabama Synfuel #1 and $50,000 of the loan in Utah Synfuel #1. The remaining
Individuals invested the full amount of their respective loans in Utah Synfuel
#1. The Company has not received any payments from the Individuals.
In November of 1996, the Company entered into a settlement
agreement with Kenneth M. Young. Pursuant to the settlement agreement, the
Company agreed: (i) to pay Mr. Young $4,000 twice a month through December 31,
1996, (ii) to pay $25,030 in deferred compensation over 24 semi-monthly
installments of $1,042 beginning January 1, 1997, (iii) to pay for Mr. Young's
medical insurance until December 31, 1997, (iv) to pay $2,500 semi-monthly for
24 payments beginning January 1, 1997 in consideration for consulting services
reasonably requested by the Company and Mr. Young's agreement to refrain from
any activities in competition with the Company, (v) to allow options
representing 50,000 shares of Company common stock at $1.50/share to become
fully vested on January 1, 1997 (these options were originally issued under a
stock option agreement dated January 1, 1995 relating to 250,000 shares) and
(vi) to allow options representing 50,000 shares of Company Common Stock at
$1.50/share to become fully vested on January 1, 1997 (these options were
originally issued under a stock option agreement dated January 1, 1995 relating
to 62,500 shares, of which the remaining 12,500 shares expired).
46
<PAGE>
In November of 1996, the Company entered into a settlement
agreement with Michael Q. Midgley. Pursuant to the settlement agreement, the
Company agreed: (i) to pay $20,000 in November 1996 and $38,479 in salary,
deferred compensation and unused vacation pay over 24 semi-monthly installments
of $1,605 beginning November 15, 1996, (ii) to pay $2,500 semi-monthly for 24
payments beginning January 1, 1997 in consideration for consulting services
reasonably requested by the Company and Mr. Midgley's agreement to refrain from
any activities in competition with the Company, (iii) to allow options
representing 50,000 shares of Company Common Stock to become fully vested on
January 1, 1997 (these options were originally issued under a stock option
agreement dated January 1, 1995) and (iv) to allow options representing 25,000
shares of Company Common Stock at $1.50/share to become fully vested on January
1, 1997 (these options were originally issued under a stock option agreement
dated January 1, 1996 relating to 50,000 shares, of which the remaining 25,000
shares expired).
47
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K
Financial Statements
Consolidated Financial Statements of Covol Technologies, Inc.
Report of Independent Public Accountants............................... F-1
Consolidated Balance Sheets as of September 30, 1995 and
September 30, 1996.................................................. F-2
Consolidated Statements of Operations
for the nine months ended September 30, 1994
and the years ended September 30, 1995 and 1996.............. F-3
Consolidated Statements of Changes in Stockholders' Equity
for the nine months ended September 30, 1994, and
the years ended September 30, 1995 and 1996.................. F-5
Consolidated Statements of Cash Flow
for the nine months ended September 30, 1994 and
the years ended September 30, 1995 and 1996.................. F-7
Notes to Consolidated Financial Statements............................ F-10
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
Exhibits
All exhibits listed hereunder, unless otherwise indicated,
have previously been filed as exhibits to the Company's Form 10 and Form 10/A.
Such exhibits have been filed with the Securities and Exchange Commission
("Commission") pursuant to the requirements of the Acts administered by the
Commission. Such exhibits are incorporated herein by reference under Rule 24 of
the Commission's Rules of Practice and Investigations. Certain other instruments
which would otherwise be required to be listed below have not been so listed
because such instruments do not authorize securities in an amount which exceeds
10% of the total assets of the Company and its subsidiaries on a consolidated
basis and the Company agrees to furnish a copy of any such instrument to the
Commission upon request.
48
<PAGE>
Report of Independent Accountants
To the Board of Directors
Covol Technologies, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Covol
Technologies, Inc. and Subsidiaries as of September 30, 1995 and 1996, and the
consolidated statements of operations, changes in stockholders' equity
(deficit), and cash flows for the nine months ended September 30, 1994 and the
years ended September 30, 1995 and 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Covol
Technologies, Inc. and Subsidiaries as of September 30, 1995 and 1996, and the
consolidated results of their operations and their cash flows for the nine
months ended September 30, 1994 and the years ended September 30, 1995 and 1996,
in conformity with generally accepted accounting principles.
As discussed in Note 11 to the financial statements, the Company changed its
method of computing depreciation in 1994.
Salt Lake City, Utah
January 10, 1997
F-1
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
as of September 30, 1995 and 1996
<TABLE>
<CAPTION>
ASSETS 1995 1996
---- ----
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 583,757 $ 490,106
Receivables 22,005 77,744
Inventories - 162,757
Notes receivable - related parties, current - 3,733
Prepaid expenses and other current assets 12,525 44,733
------------ --------------
Total current assets 618,287 779,073
----------- -------------
Property, plant and equipment, net of accumulated depreciation 1,330,300 7,125,245
---------- ------------
Other assets:
Restricted cash 500,000 -
Cash surrender value of life insurance 139,612 152,112
Notes receivable - related parties, non-current - 700,000
Deferred tax asset 23,000 -
Deposits and other assets 39,463 15,642
------------ --------------
Total other assets 702,075 867,754
----------- -------------
Net assets - discontinued operations 9,315 -
------------- --------------
Total assets $ 2,659,977 $ 8,772,072
========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 747,137 $ 2,183,278
Accrued liabilities 286,451 333,936
Notes payable - current 26,084 958,086
Notes payable - related parties, current 39,035 786,000
------------ -------------
Total current liabilities 1,098,707 4,261,300
---------- ------------
Long-term liabilities:
Notes payable, non-current 176,601 150,980
Deferred compensation 201,901 212,612
----------- -------------
Total long-term liabilities 378,502 363,592
----------- -------------
Total liabilities 1,477,209 4,624,892
---------- ------------
Minority interest in consolidated subsidiaries - 4,380,544
---------------- ------------
Commitments (Notes 8, 14, 15, and 17)
Stockholders' equity (deficit):
Common stock, $0.001 par value; authorized: 25,000,000 shares
issued and outstanding: 5,260,042 at September 30, 1995 and
7,610,373 at September 30, 1996 5,260 7,610
Common stock to be issued, 119,334 shares at September 30, 1995
and 103,750 shares at September 30, 1996 119 104
Capital in excess of par value 9,617,512 32,780,515
Capital in excess of par value - common stock to be issued 581,881 934,896
Accumulated deficit (7,360,156) (21,196,476)
Notes and interest receivable - related parties from issuance of
or collateralized by common stock (net of allowance) (240,000) (7,580,071)
Deferred compensation from stock options (1,421,848) (5,179,942)
---------- ------------
Total stockholders' equity (deficit) 1,182,768 (233,364)
---------- -------------
Total liabilities and stockholders' equity (deficit) $ 2,659,977 $ 8,772,072
========== ============
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements
F-2
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine months
ended Year ended Year ended
September 30, September 30, September 30,
1994 1995 1996
---------------- ---------------- ----------------
Revenues:
<S> <C> <C> <C>
License fees - $ 100,000 $ 100,000
Coal briquette sales $ 19,867 29,310 195,165
------------- ------------ -------------
Total revenues 19,867 129,310 295,165
------------- ----------- -------------
Operating costs and expenses:
Cost of coal briquetting operation 32,386 37,165 859,574
Research and development 387,128 1,265,072 1,044,192
Selling, general and administrative 393,109 1,494,270 3,796,569
Compensation expense on stock options - 703,527 4,772,959
Compensation expenses on stock warrants - 104,000 -
Compensation expense on issuance of common stock - 148,446 100,360
Write-off of purchased technology and trade secrets - 344,900 -
Write-down of note receivable - - 2,699,575
Minority interest in net losses of consolidated
subsidiaries - - (4,456)
------------- ---------- ------------
Total operating costs and expenses 812,623 4,097,380 13,268,773
------------ ---------- -----------
Operating loss (792,756) (3,968,070) (12,973,608)
------------ ---------- -----------
Other income (expense):
Interest income - 9,663 302,565
Interest expense (21,158) (113,137) (94,706)
Other income (expense) 3,200 35,169 (166,066)
-------------- ------------ -------------
Total other income (expense) (17,958) (68,305) 41,793
------------- ------------ --------------
Loss from continuing operations before income tax
benefit (provision) (810,714) (4,036,375) (12,931,815)
Income tax benefit (provision) 313,100 (488,000) (23,000)
------------ ----------- --------------
Loss from continuing operations (497,614) (4,524,375) (12,954,815)
Discontinued operations (Note 14):
Income (loss) from discontinued operations including
provision of $330,000 in 1995 for estimated
operating losses during phase-out period (less
applicable income tax (provision) benefit of
$(297,800), $253,000 and $0 respectively) 609,354 (351,782) (590,480)
Loss on disposal of discontinued operations (less
applicable income tax benefit of $562,000 in
1995 and $0 in 1996) - (777,394) (291,025)
----------------- ----------- -------------
Income (loss) from discontinued operations 609,354 (1,129,176) (881,505)
------------ ---------- -------------
Income (loss) before cumulative effect of change in
accounting principle 111,740 (5,653,551) (13,836,320)
Cumulative effect of change in accounting principle
(less applicable income tax provision of $15,300 in 1994) 31,302 - -
------------- ----------- --------------
Net income (loss) $ 143,042 $(5,653,551) $(13,836,320)
============ ========== ===========
</TABLE>
- Continued -
The accompanying notes are an integral
part of the consolidated financial statements
F-3
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS, Continued
<TABLE>
<CAPTION>
Nine months
ended Year ended Year ended
September 30, September 30, September 30,
1994 1995 1996
---------------- ---------------- ----------
Net income (loss) per common share:
<S> <C> <C> <C>
Loss per share from continuing operations $ (0.13) $ (1.00) $ (1.86)
Income (loss) per share from discontinued operations 0.16 (0.25) (0.13)
--------------- -------------- ---------------
Income (loss) per share before cumulative effect
of change in accounting principle 0.03 (1.25) (1.99)
Income per share of cumulative effect of change
in accounting principle 0.01 0.00 0.00
--------------- -------------- ---------------
Net income (loss) per share $ 0.04 $ (1.25) $ (1.99)
=============== ============== ===============
Weighted average shares outstanding 3,789,996 4,524,056 6,941,424
=========== ========== ===========
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements
F-4
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Notes and interest
receivable - Deferred
Common stock to be issued related parties compensa-
Capital in Capital in from issuance of, tion on
Common Stock excess of excess of Accumulated or collateralized stock
Shares Amount par value Shares Amount par value deficit by, common stock options
--------- ------- --------- ------ ------ ---------- ----------- ------------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 3,239,502 $3,240 $2,954,322 $(1,849,647)
Common stock issued to repay
advances from officers and
directors, including shares
issued upon exercise of
stock options 478,848 479 796,125
Common stock issued to repay
note payable 40,000 40 99,960
Common stock issued for note
receivable upon exercise
of stock options 100,000 100 99,900 $(100,000)
Common stock issued for
services rendered by
officers and directors,
including shares issued
upon exercise of stock options 51,974 52 78,448
Common stock issued for services 7,554 8 16,700
Common stock issued to officers
for cash 2,306 2 5,758
Common stock issued for equipment 15,400 15 40,985
Common stock to be issued for
acquisition of subsidiary 175,000 $175 $699,825
Net income for the nine months
ended September 30, 1994 143,042
--------- ----- ---------- -------- ---- --------- -------- ----------- -------
Balance at September 30, 1994 3,935,584 3,936 4,092,198 175,000 175 699,825 (1,706,605) $(100,000) $0
</TABLE>
- Continued -
The accompanying notes are an integral
part of the consolidated financial statements
F-5
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT), Continued
<TABLE>
<CAPTION>
Notes and interest
receivable - Deferred
Common stock to be issued related parties compensa-
Capital in Capital in from issuance of, tion on
Common Stock excess of excess of Accumulated or collateralized stock
Shares Amount par value Shares Amount par value deficit by, common stock options
------- ------ ---------- ------ ------- ---------- ----------- ------------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Common stock issued for
acquisition of subsidiary 175,000 $175 $699,825 (175,000) $(175) $(699,825)
Common stock issued to
repay notes payable 47,618 47 99,953
Common stock issued for
equipment 3,870 4 10,300
Common stock issued to
repay advances from
officers and directors,
including shares issued
upon exercise of stock
options 95,602 96 95,517
Common stock issued for
notes receivable 56,000 56 139,944 $(140,000)
Common stock issued for
services 60,690 61 114,638
Common stock issued for
services rendered by
officers and directors,
including shares issued
upon exercise of stock
options 24,000 24 23,976
Common stock to be issued
for services already
received 50,000 50 321,950
Common stock issued and
to be issued to officers,
directors and others, for
cash, including shares
issued upon exercise of
stock options 861,678 861 1,963,339 69,334 69 259,931
Deferred compensation
related to the issuance
of stock options at below
market value to officers
and directors 1,888,750 $(1,888,750)
</TABLE>
- Continued -
The accompanying notes are an integral
part of the consolidated financial statements
F-6
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT), Continued
<TABLE>
<CAPTION>
Notes and interest
receivable - Deferred
Common stock to be issued related parties compensa-
Capital in Capital in from issuance of, tion on
Common Stock excess of excess of Accumulated or collateralized stock
Shares Amount par value Shares Amount par value deficit by, common stock options
------ ------ --------- ------ ------- --------- ----------- ----------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Compensation expense related
to the issuance of stock for
services at below market value $148,447
Compensation expense related to
the issuance of stock options
at below market value 236,625
Compensation expense related to
the issuance of stock warrants
at below market value 104,000
Amortization of deferred
compensation on stock options $466,902
Net loss for the year ended
September 30, 1995 $(5,653,551)
-------- ------- -------- -------- ----- ---------- ----------- ------------ -----------
Balance at September 30, 1995 5,260,042 $5,260 9,617,512 119,334 $119 $581,881 (7,360,156) $(240,000) (1,421,848)
Common stock issued for services 114,517 114 769,191 (50,000) (50) (321,950)
Common stock issued for notes
receivable from related parties,
including exercise of stock
options 1,010,000 1,010 6,283,365 (6,284,375)
Common stock issued for cash,
including exercise of stock
options and warrants 1,225,814 1,226 7,479,034 (69,334) (69) (259,931)
Common stock to be issued for
cash already received 43,750 44 349,956
Common stock to be issued for
property acquired 60,000 60 584,940
</TABLE>
- Continued -
The accompanying notes are an integral
part of the consolidated financial statements
F-7
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT), Continued
<TABLE>
<CAPTION>
Notes and interest
receivable -
Common stock to be issued related parties Deferred
Capital in Capital in from issuance of, compensation
Common Stock excess of excess of Accumulated or collateralized on stock
Shares Amount par value Shares Amount par value deficit by, common stock options
------ ------ --------- ------ ------- --------- ------------ ------------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cash received in payment
on notes receivable -
related parties from
issuance of common stock $171,393
Note receivable - related
parties, collateralized
by common stock (net of
$2,699,575 allowance and
$650,425 imputed interest) (1,650,000)
Services received in lieu
of payments on notes
receivable - related
parties from issuance
of common stock 687,766
Compensation expense related
to the issuance of stock
options at below market value $3,863,000
Deferred compensation related
to the issuance of stock
options at below market value to
officers, directors, employees and
consultants (net of cancellations) 4,668,053 $(4,668,053)
Amortization of deferred compensation
on stock options 909,959
Interest earned on notes receivable -
related parties from issuance of or
collateralized by common stock (264,855)
Compensation expense related to the
issuance of stock for services at
below market value 100,360
Net loss for the year ended
September 30, 1996 $(13,836,320)
-------- ------ ---------- -------- ----- --------- ----------- ----------- -----------
Balance at September 30, 1996 7,610,373 $7,610 $32,780,515 103,750 $104 $934,896 $(21,196,476) $(7,580,071) $(5,179,942)
========= ====== ========== ======= ==== ======== ============= ============ ===========
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements
F-8
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months Year Year
ended ended ended
September 30, September 30, September 30,
1994 1995 1996
Cash flows from operating activities:
<S> <C> <C> <C>
Net income (loss) $ 143,042 $(5,653,551) $(13,836,320)
Adjustments to reconcile net income
(loss) to net cash used in operating
activities:
Cumulative effect of change in
accounting principle (31,302) - -
Depreciation and amortization 107,118 125,861 187,581
Loss on disposal of discontinued
subsidiaries - 777,394 291,025
Write off of purchased technology
and trade secrets - 344,900 -
Deferred income taxes (313,100) 488,000 23,000
Common stock issued for services 95,208 287,146 547,665
Common stock to be issued for services - 322,000 -
Compensation expense on stock options - 236,625 3,863,000
Compensation expense on stock warrants - 104,000 -
Interest earned on notes receivable -
related parties, issued for or
collateralized by common stock - - (264,855)
Write-down of note receivable - - 2,699,575
Services received in lieu of payments
on notes receivable issued for common stock - - 687,766
Amortization of deferred compensation on
stock options - 466,902 909,959
Loss on disposal of equipment - 3,359 -
Losses applicable to minority interests
in subsidiaries - - (4,456)
Notes payable issued for services - - 160,000
Increase (decrease) from changes in assets and
liabilities of continuing operations:
Receivables 35,686 (15,934) (55,739)
Inventories (13,277) 37,165 (162,757)
Prepaid expenses - (12,525) (32,208)
Deposits and other assets (2,702) (36,298) 23,821
Accounts payable 3,156 619,413 1,436,141
Accrued liabilities 69,036 171,541 47,485
Deferred compensation 7,178 9,943 10,711
Discontinued operations non-cash charges
and working capital changes (275,295) 1,487,036 893,893
---------- ---------- -------------
Net cash used in operating activities (175,252) (237,023) (2,574,713)
---------- ----------- ------------
</TABLE>
- Continued -
The accompanying notes are an integral
part of the consolidated financial statements
F-9
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
<TABLE>
<CAPTION>
Nine months Year Year
ended ended ended
September 30, September 30, September 30,
1994 1995 1996
Cash flows from investing activities:
<S> <C> <C> <C>
Cash paid for property, plant and equipment $ (100,199) $ (693,609) $ (5,055,732)
Purchase of subsidiaries (10,000) - -
Increase in cash surrender value of life insurance (20,026) (29,240) (12,500)
Notes receivable from related parties - - (703,733)
Investing activities of discontinued operations (25,426) (485,361) -
----------- ----------- --------------
Net cash used in investing activities (155,651) (1,208,210) (5,771,965)
---------- ---------- ------------
Cash flows from financing activities:
Payment of capital lease obligations (22,806) (27,345) -
Borrowings on notes payable - - 700,000
Payment of notes payable (17,235) (19,530) (159,413)
Borrowings on notes payable - related parties 860,927 52,485 -
Payments on notes payable and other obligations -
related parties (190,677) (965,160) (3,539,035)
Proceeds from note receivable from issuance of
common stock - - 171,393
Proceeds from common stock to be issued - 260,000 -
Proceeds from issuance of common stock 5,760 1,964,200 7,570,260
Proceeds from issuance of limited partnership
interests in subsidiaries - - 4,385,000
Financing activities of discontinued operations (88,727) 1,199,816 (1,582,587)
----------- ---------- ------------
Net cash provided by financing activities 547,242 2,464,466 7,545,618
---------- ---------- ------------
Net increase (decrease) in cash 216,339 1,019,233 (801,060)
</TABLE>
- Continued -
The accompanying notes are an integral
part of the consolidated financial statements
F-10
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
<TABLE>
<CAPTION>
Nine months Year Year
ended ended ended
September 30, September 30, September 30,
1994 1995 1996
<S> <C> <C> <C>
Total cash and cash equivalents,
beginning of period $ 55,544 $ 271,933 $ 1,291,166
----------- ----------- ------------
Total cash and cash equivalents,
end of period $ 271,883 $ 1,291,166 $ 490,106
========== ========== =============
Cash and cash equivalents, components
continuing operations:
Cash and cash equivalents $ 155,926 $ 583,757 $ 490,106
Restricted cash - 500,000 -
Discontinued operations 115,957 207,409 -
Supplemental schedule of noncash investing
and financing activities:
Common stock issued for notes receivable $ 100,000 $ 140,000 $ 6,284,375
Common stock issued to repay advances 796,604 112,613 -
Common stock issued, or to be issued for
purchase of subsidiaries 700,000 - -
Common stock issued for equipment 41,000 10,304 -
Common stock issued to repay notes payable 100,000 100,000 -
Discontinued operations - capital lease of equipment - 500,000 -
Notes payable issued to acquire subsidiaries 790,000 - -
Notes payable issued to acquire a building 325,000 - -
Note payable issued and common stock to be issued
to acquire land - - 926,794
Note payable issued for equipment 6,000 - -
Obligations assumed in connection with sale of
subsidiaries - - 4,636,435
Note payable issued for services - - 160,000
Note receivable received for subsidiaries (net
of imputed interest) - - 4,349,575
Supplemental disclosure of cash flow information:
Cash paid for interest:
Continuing operations $ 25,823 $ 112,171 $ 110,671
Discontinued operations 33,177 217,001 98,358
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements
F-11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Business Organization
Covol Technologies, Inc. (the Company) was incorporated in Delaware in
August, 1995. Effective August 14, 1995, the Company changed its name
to Covol Technologies, Inc. from Environmental Technologies Group
International. In 1991, the Company discontinued its agricultural
operations and acquired a coal briquetting technology (the Briquetting
Technology). In 1992, the Company constructed a pilot briquetting
plant in Price, Utah. During 1993, the Company refined the technology
to briquette waste by-products of the steel manufacturing industry.
The Company is developing and marketing the Briquetting Technology.
On June 30, 1993, the Company acquired three heavy construction
companies. Industrial Management and Engineering, Inc. (IME) is a
management company for two construction companies, R1001, Inc., DBA
State, Inc. (State) and Central Industries Construction, Inc. (CIC).
State is a union construction company and CIC is a non-union
construction company. The majority of the Company's construction
contracts are with industrial corporations located in Utah.
On September 30, 1994, the Company acquired Larson Limestone Company,
Inc. (Larson). Larson owns and operates a limestone quarry and sells
the processed quarry products primarily to construction projects
located in Utah.
On September 30, 1995, the Company's Board of Directors approved a
plan to discontinue the Company's construction and limestone
businesses. The construction and limestone businesses were sold,
effective February 1, 1996. (See Note 14, "Discontinued Operations").
In June 1996, the Company formed Utah Synfuel #1, Ltd. ("Utah Synfuel
#1") and Alabama Synfuel #1 ("Alabama Synfuel #1"), each a Delaware
limited partnership (collectively the "Partnerships"). The Company is
both the general partner and a limited partner in the Partnerships.
Continued
F-12
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
1. Summary of Significant Accounting Policies, Continued:
Principles of Consolidation
The 1995 consolidated financial statements include the accounts of the
Company and its 100% owned subsidiaries, IME, State, CIC and Larson,
until the time of their sale effective February 1, 1996. The 1996
consolidated financial statements include the accounts of the Company
and its two majority owned subsidiaries, Utah Synfuel #1 and Alabama
Synfuel #1 from their inception in 1996. All significant intercompany
transactions and accounts are eliminated in consolidation.
Change in Year End
Effective January 1, 1994, the Company changed its year end from
December 31 to a fiscal year end of September 30.
Stock Split
Effective June 14, 1995, the Company implemented a one-for-twenty
reverse stock split. In addition, the Company implemented a
two-for-one stock split, effective January 23, 1996. All information
set forth herein has been adjusted to give effect to these stock
splits.
Revenue and Cost Recognition
Revenues from the sale of coal briquettes are recognized as product is
shipped and invoiced. Revenues from the licensing of the Company's
technology is recognized as cash is received.
For the discontinued operations, revenues from fixed-price and
modified fixed-price construction contracts are recognized on the
percentage-of-completion method, measured by the percentage of labor
costs incurred to date to estimated total labor costs (the efforts
expended method) for each contract. This method is used because
management considers expended labor costs to be the best available
measure of progress on these contracts. Revenues from cost-plus-fee
contracts are recognized on the basis of costs incurred during the
period plus the fee earned.
Continued
F-13
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
1. Summary of Significant Accounting Policies, Continued:
Revenue and Cost Recognition, Continued
Construction costs include all direct material and labor costs and
those indirect costs related to contract performance, such as indirect
labor, supplies, tools, repairs and depreciation. Selling, general and
administrative costs are charged to expense as incurred. Provisions
for estimated losses on uncompleted contracts are made in the period
in which such losses are determined.
Changes in job performance, job conditions, and estimated
profitability, including those arising from contract penalty
provisions and final contract settlements, may result in revisions to
costs and income and are recognized in the period in which the
revisions are determined. Profit incentives are included in revenues
when their realization is reasonably assured. An amount equal to
contract costs attributable to claims is included in revenues when
realization is probable and the amount can be reliably estimated.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with an
original maturity of three months or less to be cash equivalents. Cash
and cash equivalents are deposited with two financial institutions
located in Utah.
Restricted cash, reported at September 30, 1995, represents amounts
which are restricted in accordance with collateral requirements
related to a note payable included in discontinued operations.
Inventories
Inventories are stated at the lower of average cost or market, and
consist of coal fines available for sale and binder materials.
Continued
F-14
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
1. Summary of Significant Accounting Policies, Continued:
Property, Plant and Equipment
Property, plant and equipment are recorded at cost and are depreciated
using the straight-line method over their estimated useful lives of
five to ten years. Maintenance, repairs and minor replacements are
charged to expense as incurred. Upon the sale or retirement of
property, plant and equipment, any gain or loss on disposition is
reflected in the statement of operations and the related asset cost
and accumulated depreciation are removed from the respective accounts.
Technology and Trade Secrets
Prior to being written off in June, 1995, technology and trade secrets
related to the coal briquetting process were recorded at cost and were
being amortized using the straight-line method over 17 to 20 years.
The write-off in 1995 was based upon development of a new binder
system which replaced the technology and trade secrets purchased in
1991 and 1992.
Earnings (Loss) Per Share Calculation
Net income (loss) per common share is computed on the weighted average
number of common and common equivalent shares outstanding during the
period. Common stock equivalents consist of common stock options and
warrants. Common equivalent shares are excluded from the computation
when their effect is anti-dilutive.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Continued
F-15
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
2. Notes Receivable - Related Parties
Notes receivable - related parties consist of the following:
<TABLE>
<CAPTION>
September 30, September 30,
1995 1996
------------- -------------
<S> <C> <C>
Notes receivable from seven officers
of the Company, bearing interest
at prime (8.25% at September 30, 1996)
plus 2%, principal and interest due
on August 1, 2000, collateralized by a
7.9% interest, in Utah Synfuels #1. - $700,000
Other notes receivable - 3,733
------------- ---------
Total - 703,733
Less: current portion - (3,733)
------------- ---------
Total notes receivable, non-current $ - $700,000
============= =======
3. Property, Plant and Equipment:
Property, plant and equipment of continuing operations consists of the
following:
September 30, September 30,
1995 1996
Building and real estate $ 333,708 $ 1,265,028
Construction in progress - 4,457,939
Machinery and equipment 1,211,824 1,805,091
Accumulated depreciation (215,232) (402,813)
----------- -----------
Net property, plant and equipment $ 1,330,300 $ 7,125,245
========== ==========
</TABLE>
Continued
F-16
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
3. Property, Plant and Equipment, Continued:
Property, plant and equipment of discontinued operations consists of
the following:
<TABLE>
<CAPTION>
September 30, September 30,
1995 1996
<S> <C> <C>
Property, plant and equipment $2,947,505
Accumulated depreciation and depletion (402,038) -
---------- ------------
Net property, plant and equipment $2,545,467 $ -
========= ============
</TABLE>
4. Notes Payable:
Notes payable of continuing operations consist of the following:
September 30, September 30,
1995 1996
Note payable to a bank, bearing
interest at prime (8.25% at
September 30, 1996) plus 2%,
principal and interest of $3,711
due monthly through October 2001,
collateralized by an office building,
property and equipment, and three
former officers of IME. $202,685 $179,249
Note payable to a bank, bearing
interest at prime (8.25% at
September 30, 1996) plus 2%, principal
and interest due January 29,
1997, personally guaranteed by seven
officers of Covol. - 700,000
Continued
F-17
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
4. Notes Payable, Continued:
<TABLE>
<CAPTION>
September 30, September 30,
1995 1996
<S> <C> <C>
Note payable to a corporation, non-
interest bearing (interest imputed at
10.25%), due on demand. - $ 229,817
---------------- -----------
Total notes payable $ 202,685 1,109,066
Less: current portion (26,084) (958,086)
------------ ----------
Total notes payable, non-current $ 176,601 $ 150,980
=========== ==========
</TABLE>
Year ending September 30, 1996
1997 $ 958,086
1998 32,220
1999 34,807
2000 37,603
2001 46,350
-----------
Total $1,109,066
Discontinued Operations
Notes payable relating to discontinued operations consist of the
following:
<TABLE>
<CAPTION>
September 30, September 30,
1995 1996
<S> <C> <C>
Note payable, bearing interest at
10.6%, principal and interest of
$2,380 due monthly through June
1998, collateralized by equipment and
personal guarantees of three
former officers. $ 68,247 -
</TABLE>
Continued
F-18
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
4. Notes Payable, Continued:
Discontinued Operations, Continued
September 30, September 30,
1995 1996
Note payable, bearing interest
at 9.25%, principal and interest of
$3,751 due monthly through June
1999, collateralized by
discontinued operations assets and
personal guarantees of three former
officers. $144,791 -
Note payable, bearing interest at 8%,
principal and interest payments
of $1,820 due monthly through September
2004, collateralized by discontinued
operations assets and personal guarantee
of a former officer of Larson. 140,674 -
Revolving lines of credit payable to
a bank, bearing interest at prime
(7.75% at September 30, 1995) plus 2%,
interest due monthly, principal due April
1996, collateralized by discontinued
operations accounts receivable. 950,000 -
Note payable to a bank, bearing
interest at 7%, principal and interest
due February 1996, collateralized by
certain cash deposits of the Company. 500,000 -
Continued
F-19
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
4. Notes Payable, Continued:
Discontinued Operations, Continued
September 30, September 30,
1995 1996
Revolving line of credit payable
to a bank, bearing interest at prime
(7.75% at September 30, 1995) plus
2%, interest payable monthly,
principal due February 29, 1996,
collateralized by discontinued
operations accounts receivable and
inventory, the guarantee of the
Company, and personal guarantees
of two officers of the Company. $ 200,000 -
Other notes payable 9,117 -
------------- -----------
Total notes payable 2,012,829 -
Less: current portion (1,967,262) -
---------- -----------
Total notes payable - non current $ 45,567 $ -
============ ==========
5. Notes Payable - Related Parties:
Continuing Operations
Note payable - related parties from continuing operations consist of
the following:
September 30, September 30,
1995 1996
Note payable, bearing interest at 6%,
collateralized by stock in a subsidiary. $34,840 -
Continued
F-20
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
5. Notes Payable - Related Parties, Continued:
Continuing Operations, Continued
<TABLE>
<CAPTION>
September 30, September 30,
1995 1996
<S> <C> <C>
Notes payable, non-interest bearing,
due upon demand. $ 4,195 -
Note payable to a shareholder, non-
interest bearing, $4,000 due monthly
with all remaining principal and
interest due in January, 1997. - $ 136,000
Obligations to two former officers
and shareholders, non-interest bearing,
payable upon demand. - 650,000
---------- --------
Total notes payable and other
obligations - related parties,
current $39,035 $ 786,000
====== ========
</TABLE>
Discontinued Operations
Notes payable - related parties, including officers, employees and
shareholders relating to discontinued operations consist of the
following:
September 30, September 30,
1995 1996
Note payable, interest imputed
at 8.5%, monthly principal and
interest payments of $2,000,
balance due October 1995,
collateralized by a building, paid
in full October 1995. $325,000 -
------- ---------
Total notes payable - related parties,
current $325,000 $ -
======= =========
Continued
F-21
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
6. Deferred Compensation Agreement
Upon the acquisition of two subsidiaries in 1993, the Company assumed
a liability to pay $40,000 per year for seven years beginning
February, 1999 to a current stockholder of the Company. The present
value of this liability, discounted at 5.18%, is reflected as deferred
compensation on the consolidated balance sheet.
7. Income Taxes
The Company accounts for income taxes using the asset and liability
approach in accordance with Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes". The Company
filed a consolidated tax return with its 100% owned subsidiaries (IME,
State, CIC and Larson) through the time of their sale on February 1,
1996. Both majority owned limited partnerships file separate tax
returns, as required.
Continuing Operations
As of September 30, 1996, the Company has net operating loss
carryforwards from continuing operations of approximately $15,600,000
which can be used to offset future taxable income. The net operating
loss carryforwards expire from 2005 to 2011. The Company also has
approximately $141,000 in research and development tax credit
carryforwards which can be used to offset future tax liabilities. The
tax credits expire from 2007 to 2010.
The provision from income taxes for the years ended September 30, 1995
and 1996 differs from the statutory federal income tax rate due to the
following:
Year Ended Year Ended
September 30, September 30,
1995 1996
Tax benefit at statutory rates $ 1,372,000 $ 3,810,000
Change in valuation allowance (1,971,000) (4,007,000)
State income taxes, net of federal
tax effect 133,000 363,000
Other (22,000) (189,000)
------------ -----------
Tax provision $ (488,000) $ (23,000)
=========== ============
Continued
F-22
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
7. Income Taxes, Continued:
Continuing Operations, Continued
The types of temporary differences between the tax bases of assets and
liabilities and their financial reporting amounts that give rise to
the net deferred tax assets and liabilities relate primarily to the
use of accelerated depreciation for tax purposes and straight-line
depreciation for book purposes, and the recording of certain reserves
for book purposes.
The components of the net deferred tax asset related to continuing
operations as of September 30, 1995 and 1996 are as follows:
1995 1996
----------- -----------
Deferred tax assets (liabilities):
Net operating loss carryforwards $ 1,984,000 $ 5,830,000
Research and development tax credit
carryforwards 96,000 141,000
Amortization of trade and technology - 72,000
Reserve for bad debts 13,000 -
Depreciation (99,000) (65,000)
------------ ------------
Total deferred tax assets 1,994,000 5,978,000
Valuation allowance (1,971,000) (5,978,000)
---------- ----------
Net deferred tax asset $ 23,000 $ -
============ ==========
The valuation allowance changed by $4,007,000 during the year ended
September 30, 1996, representing the amount of deferred tax assets at
September 30, 1996 not considered recoverable through the reversal of
taxable temporary differences, or the generation of future taxable
income. SFAS No. 109 requires that a valuation allowance be provided
if it is more likely than not that some portion or all of a deferred
tax asset will not be realized. The Company's ability to realize the
benefit of its deferred tax assets will depend on the generation of
future taxable income through its continuing operations or through the
sale of assets. Because the Company has not generated significant
revenues to date relating to the Briquetting Technology, the Company
believes that a valuation allowance of $5,978,000 should be provided
as of September 30, 1996.
Continued
F-23
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
7. Income Taxes, Continued:
Discontinued Operations
As of September 30, 1995, the Company had net operating loss
carryforwards from discontinued operations of approximately $580,000
which can be used to offset future taxable income. The net operating
loss carryforwards expire from 2005 to 2008. The utilization of these
carryforwards against future taxable income may become subject to an
annual limitation due to a change in ownership of the discontinued
operations (see Note 14).
The types of temporary differences between the tax bases of assets and
liabilities and their financial reporting amounts that give rise to
the net deferred tax assets and liabilities relate primarily to the
use of accelerated depreciation for tax purposes and straight-line
depreciation for book purposes, and the recording of certain reserves
and writedowns for book purposes.
The components of the net deferred tax liability related to
discontinued operations as of September 30, are as follows:
1995 1996
------------ ----------
Deferred tax assets (liabilities):
Reserve for operating losses during
phase-out period $ 123,000 -
Book write-down of assets held for
disposal 382,000 -
Net operating loss carryforwards 220,000 -
Reserve for bad debts 27,000 -
Depreciation (775,000) -
-------- ---------
Total deferred tax liability $ (23,000) $ -
========= ========
Continued
F-24
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
8. Leases:
Continuing Operations
Rental expense charged to continuing operations was $5,913 for the
nine months ended September 30, 1994, $92,850 for the year ended
September 30, 1995 and $330,006 for the year ended September 30, 1996.
The Company has two noncancellable operating leases for equipment and
a building that are in effect through 2000. At September 30, 1995,
minimum rental payments due under these leases, are as follows:
Year Ending September 30,
1997 $217,740
1998 217,740
1999 217,740
2000 94,925
2001 7,200
---------
Total minimum payments due $755,345
Discontinued Operations
Rental expense charged to discontinued operations was $42,775 for the
nine months ended September 30, 1994 and $429,472 for the year ended
September 30, 1995.
Continued
F-25
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
9. Notes and Interest Receivable - Related Parties, Collateralized by
Common Stock:
<TABLE>
<CAPTION>
September 30, September 30,
1995 1996
<S> <C> <C>
Note receivable from two shareholders,
$5,000,000 face amount bearing interest
at 6%, interest of $300,000 due in January
1997, principal and interest of $514,814
due in annual payments beginning January
1998, remaining principal and interest
due January 2000, collateralized by 100,000
shares of the Company's common stock held
by the Company and an additional 100,000
shares of the Company's common stock
committed by the shareholders to be
provided to the Company, and personal
guarantees of two shareholders (net of
unamortized discount of $650,425 based
upon imputed rate of 10.25%, and allowance
for impairment of $2,699,575 due to changes
in the Company's stock price) - $1,650,000
Notes and interest receivable from 11
current and former employees, issued in
exercise of 450,000 common stock
options at $5.31 per share, bearing
interest at 5.7%, principal and
interest due in December 2000,
collateralized by 450,000 shares of
common stock of the Company. - 2,191,157
Notes and interest receivable from 16
current and former employees, issued in
exercise of 450,000 common stock
options at $8.375 per share, bearing
interest at 5.7%, principal and
interest due in December 2000,
collateralized by 450,000 shares of
common stock of the Company. - 3,613,914
</TABLE>
Continued
F-26
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
9. Notes and Interest Receivable - Related Parties, Collateralized by
Common Stock, Continued:
September 30, September 30,
1995 1996
Other notes receivable, collateralized
by common stock of the Company. $ 240,000 125,000
---------- ----------
Total notes and interest receivable -
related parties, collateralized by
common stock. $ 240,000 $7,580,071
========== =========
10. Stock Options and Warrants:
Non-Qualified Options
Options and warrants are granted at the discretion of the Board of
Directors.
In 1993 the Company issued non-qualified options to purchase 470,000
shares of common stock at $0.80 to $2.50 per share to seven
individuals, including certain officers and directors. Effective
September 30, 1994, 223,700 of these options had been exercised or
expired. During 1995, 176,300 were exercised and 25,000 expired
unexercised. Also, in May 1995, the Company reissued stock options to
purchase 75,000 at $1.00 to an officer for options that had previously
expired. The remaining 120,000 options were exercised during the year
ended September 30, 1996.
During 1993, non-qualified options to purchase 100,000 shares of
common stock were issued to a marketing firm at $1.00 per share. In
1994, these options were exercised in exchange for a note receivable.
The note receivable, which is non-interest bearing and had no fixed
repayment term, is reflected as a reduction to stockholders' equity in
1995. During 1996, the note was repaid in services to the Company.
Continued
F-27
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
10. Stock Options and Warrants, Continued:
Non-Qualified Options, Continued
On December 1, 1994, the Company granted options to purchase a
combined total of 50,000 shares of common stock to two persons, each a
consultant to the Company. Such options are exercisable through
December 1, 1996 at a price of $1.80 per share. At September 30, 1996,
all 50,000 options remain unexercised.
In 1994, the Company granted options to purchase 30,000 shares of
common stock to an officer of the Company. Options for 20,000 shares
of common stock were exercised in February 1995, at a price of $1.80
per share and the remaining 10,000 options expired unexercised during
1996.
On January 1, 1995, the Company granted options to purchase 1,280,000
shares of common stock to certain executive officers, employees and
directors of the Company. During the year ended September 30, 1996,
35,000 of these options were exercised and 722,500 were forfeited or
canceled. The remaining 522,500 shares remain exercisable through
December 31, 2004 at a price of $1.50 per share.
On January 25, 1995, the Company granted options to purchase 100,000
shares of common stock to an officer of the Company, exercisable
through January 25, 1997 at a price of $1.80 per share. These options
were canceled in 1996.
On May 1, 1995, the Company granted options to purchase 20,000 shares
of common stock to an individual who was a consultant to the Company.
Such options were exercisable through December 31, 1996 at a price of
$2.50 per share. Of these options, 10,000 were exercised during 1996
and 10,000 were canceled.
On January 1, 1996, the Company granted options to purchase 160,000
shares of common stock at a price of $1.50 per share to certain
officers, employees and consultants. Of these options, 20,000 were
exercised and 35,000 were canceled during 1996. At September 30, 1996,
105,000 of the options remain unexercised. On this same date, the
Company granted options to purchase 124,000 shares of common stock at
prices between $2.50 and
Continued
F-28
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
10. Stock Options and Warrants, Continued:
Non-Qualified Options, Continued
$3.50 per share to certain consultants. These options remain
unexercised at September 30, 1996.
On June 3, 1996 the Company granted options to purchase 100,000 shares
of common stock for $1.50 per share to an officer of the Company as
part of compensation related to an employment agreement. At September
30, 1996, all 100,000 options remain unexercised.
On August 13, 1996, the Company granted 777,500 options to purchase
shares of common stock to certain employees, officers and directors
for $1.50 per share. Prior to September 30, 1996, 312,500 of these
options were canceled. At September 30, 1996, 465,000 shares remain
unexercised.
Recipients of these options may exercise them at any time. Shares
related to exercised options are held in escrow and are made available
as the options vest. The options vest at different times based upon
the terms offered with some options vesting immediately and others
over terms of up to 10 years. In the event that an executive officer
or employee terminates employment with the Company, or a director
ceases to be a director, prior to the specified vesting period, the
Company will cancel any of the shares in which the recipient has not
vested. When options are issued with terms considered compensatory,
the compensation expense related to these options is being amortized
to expense over the specified vesting period. Compensation expense
related to options that vest immediately was $236,625 and $3,863,000
for 1995 and 1996, respectively. Deferred compensation related to
options that vest over time was $1,888,750 and $4,668,053 for 1995 and
1996, respectively. The amortized compensation expense related to
these options is $466,902 and $909,959 for 1995 and 1996,
respectively.
1995 Stock Option Plan
Under the Company's 1995 Stock Option Plan (the "Option Plan"), which
was adopted in June of 1995, 900,000 shares of common stock are
reserved for issuance upon the exercise of stock options. The Option
Plan is designed to serve as an incentive for retaining qualified and
competent employees, directors and consultants.
Continued
F-29
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
10. Stock Options and Warrants, Continued:
1995 Stock Option Plan, Continued
A committee of the Company's Board of Directors, or in its absence,
the Board (the "Committee") administers and interprets the Option Plan
and is authorized to grant options and other awards thereunder to all
eligible employees of the Company, including officers and directors
(whether or not employees) of the Company. The Option Plan provides
for the granting of both "incentive stock options" (as defined in
Section 422 of the Internal Revenue Code) and non-statutory stock
options. Options can be granted under the Option Plan on such terms
and at such prices as determined by the Committee, except for the per
share exercise price of incentive stock options which will not be less
than the fair market value of the common stock on the date of grant
and, in the case of an incentive stock option granted to a 10%
stockholder, the per share exercise price will not be less than 110%
of such fair market value. The aggregate fair market value of the
shares of common stock covered by incentive stock options granted
under the Option Plan that become exercisable by a grantee for the
first time in any calendar year is subject to a $100,000 limit.
Options granted under the Option Plan will be exercisable after the
period or periods specified in the option agreement. Options granted
under the Option Plan are not exercisable after the expiration of ten
years from the date of grant and are not transferable other than by
will or by the laws of descent and distribution.
The Option Plan provides each director who is not an employee of the
Company effective as of January 1 of each year commencing January 1,
1996, an option to purchase 10,000 shares of common stock, all of
which outside director options will be exercisable with respect to 20%
of the covered shares of common stock commencing on the first
anniversary of grant and be exercisable with respect to an additional
20% of the covered shares of common stock after each additional year
until fully exercisable on the fifth anniversary of grant. The per
share exercise price of all such outside director options will be
equal to the fair market value of the common stock on the date of
grant.
Continued
F-30
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
10. Stock Options and Warrants, Continued:
1995 Stock Option Plan, Continued
As of September 30, 1995, 450,000 options were outstanding under the
Option Plan. Such options are exercisable through September, 2005 at a
price of $5.31. These options were exercised for notes receivable in
November 1995.
In October, 1995 the Company issued the remaining 450,000 options
under the Option Plan. Such options are exercisable through November,
2005 at a price of $8.38. These options were exercised for notes
receivable in November 1995.
Warrants
In January 1995, the Company issued warrants to purchase 65,000 shares
of common stock to RAS Securities Corp. Such warrants are exercisable
through January 1999 at an exercise price of $1.50 per share.
Consulting fees of $84,500, related to these warrants, was recognized
in the year ended September 30, 1995. During 1996, 53,000 of these
warrants were exercised and 12,000 remain unexercised at September 30,
1996.
In February 1996, the Company issued warrants to purchase 164,967
shares of common stock at prices ranging from $25 to $35. In addition,
warrants to purchase 43,750 shares of common stock at $15 per share
were issued in July 1996. In both cases, the issuance of warrants was
made in connection with private placement of common stock. At
September 30, 1996 all of these warrants remain unexercised.
Continued
F-31
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
11. Change in Accounting Principle:
Depreciation of property, plant and equipment has been computed using
the straight line method for periods beginning after December 31,
1993. Depreciation in prior years was computed using a method which
approximated the double declining balance method. The new method of
depreciation was adopted to more accurately reflect the usage patterns
of the assets involved. The effect of this change, excluding the
cumulative effect on years prior to January 1, 1994 of $46,602
($31,302 after tax or $0.01 per share), was to increase net income for
the nine months ended September 30, 1994 by $54,840 ($33,640 after tax
or $0.01 per share).
12. Union Employee Benefit Plans:
Discontinued Operations
Union employees of State are covered by health, accident and pension
plans sponsored by the various unions. These plans cover substantially
all union employees of State. The Company's allocated expense
associated with the plans, which is determined by the union contracts,
was approximately $153,000 for the nine months ended September 30,
1994 and $165,000 for the year ended September 30, 1995.
13. Patents:
On September 29, 1995, the Company received patent number 5,453,103
from the United States Department of Commerce - Patent and Trademark
Office relating to the Company's technology in reclaiming and
utilizing discarded and newly formed coke breeze, coal fines, and
blast furnace revert materials.
On January 30, 1996, the Company received patent number 5,487,764 from
the United States Department of Commerce - Patent and Trademark Office
relating to the Company's technology for the recovery of iron from
iron-rich material. This patent is a continuation-in-part of the
previous patent issued.
Continued
F-32
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
14. Discontinued Operations:
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. In
September 1995, the Board of Directors approved a plan to dispose of
the Company's construction and limestone businesses. Accordingly, 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 promissory note (the Note). One of
the Buyers is the son of a director of the Company at the time of the
transaction. The Note is collateralized by 100,000 shares of the
Company's common stock owned by the Buyers 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,
and is payable together with interest at 6% per annum (interest
imputed at 10.25%) as follows: interest only is payable through
January 31, 1997; principal and interest is payable annually with the
Note amortized over a 15 year period with the first payment due
January 31, 1998; and all unpaid principal and interest is payable
January 31, 2000. Because the Note includes a favorable interest rate
for the Buyers, the Company has calculated the present value of the
Note using a market rate of 10.25% over the term of the Note. The
effect of discounting the Note at 10.25% is to reduce the Note to
$4,349,575 as of the date of the Agreement. The discount on the Note
was included in the estimated loss on disposal of discontinued
operations.
Because the Note is collateralized by the Company's common stock, the
Note is reflected in the consolidated financial statements as a
reduction to stockholders' equity (deficit). Additionally, the Note is
adjusted to reflect subsequent increases or decreases in the fair
value of the Company's stock held as collateral. Because of a decrease
in the trading price of the Company's common stock subsequent to the
date of the Agreement, an allowance of approximately $2,700,000 is
reflected in the Company's consolidated financial statements as of
September 30, 1996. As of January 10, 1997, the trading price of the
Company's common stock had increased resulting in a recovery of
approximately $1,300,000 of the allowance existing at September 30,
1996. Subsequent changes in the value of the collateral will be
reflected in the consolidated statement of operations and as an
increase to the Note.
Continued
F-33
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
14. Discontinued Operations, Continued:
Under the terms of the Agreement, the Company agreed to pay off
$3,500,000 of accounts payable and lines of credit outstanding in the
subsidiaries. Subsequently, the Buyers have requested reimbursement
from the Company for approximately $650,000 of additional expenses
related to the discontinued operations during the wind-down period
which were paid by the Buyers. The Company has reflected those
obligations in the additional loss on the discontinued operations for
the year ended September 30, 1996.
The results for 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.
Net assets of the Company's discontinued operations (excluding
intercompany balances which have been eliminated against the equity of
the discontinued operations) are as follows:
As of As of
September 30, September 30,
1995 1996
Assets:
Current assets:
Cash and cash equivalents $ 207,409 -
Accounts receivable 2,310,386 -
Inventories 220,396 -
Other 123,918 -
---------- -----------
Total current assets 2,862,109 -
Net property, plant and equipment 2,545,467 -
Other noncurrent assets 510,763 -
---------- ----------
Total assets $5,918,339 $ -
========= ==========
Continued
F-34
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
14. Discontinued Operations, Continued:
As of As of
September 30, September 30,
1995 1996
Liabilities:
Current liabilities $5,103,756 -
Notes payable - long term 45,567 -
Deferred income taxes 23,000 -
Other liabilities, including capital
lease obligations 736,301 -
---------- ----------
Total liabilities 5,909,024 -
--------- ----------
Net assets - discontinued operations $ 9,315 $ -
============ ==========
The net property, plant and equipment of discontinued operations is
presented in the table above, net of the expected loss on the sale of
the discontinued operations, which includes the discount on the note
receivable from the Buyers.
Revenues of the discontinued operations were $7,836,781, $14,681,032
and $1,396,641 for the nine months ended September 30, 1994, the year
ended September 30, 1995 and the four months ending January 31, 1996
(the date of sale), respectively.
15. Agreements:
Greystone Joint Venture
In June 1995, the Company entered into a license agreement (the
"Greystone Joint Venture Agreement") with Greystone Environmental
Technologies, Inc. ("Greystone") to form a 50/50 joint venture (the
"Greystone Joint Venture") to commercialize and exploit the
Briquetting Technology for the production of coke and revert material
briquettes. The Greystone Joint Venture Agreement was amended on
January 3, 1996. The Greystone Joint Venture has an exclusive
world-wide license to commercialize and exploit the Briquetting
Technology for the production of coke briquettes and a license to
commercialize and exploit the Briquetting Technology for the
Continued
F-35
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
15. Agreements, Continued:
Greystone Joint Venture, Continued
production of revert material briquettes in the Alabama and Gary,
Indiana regions. The Geneva Plant is not a part of the Greystone Joint
Venture or the Greystone Joint Venture Agreement.
The Greystone Joint Venture will be on a 50/50 basis, except in the
Gary, Indiana region where Greystone has a 12% interest in the entity
with an opportunity to increase its interest to a maximum of 20%.
Greystone will manage the Greystone Joint Venture on a day-to-day
basis and the parties have agreed to contribute the necessary capital
to the Greystone Joint Venture in proportion to their respective
interests therein. The Greystone Joint Venture will purchase all of
its requirements for binding agents used in the Briquetting Technology
from the Company. Greystone is a newly-formed company, although its
principals have significant experience in the steel and coke
production industries.
In accordance with the Greystone Joint Venture Agreement, Greystone
made an initial payment of $100,000 to the Company, and was required
to make additional payments out of profits or capital of the Greystone
Joint Venture until a total aggregate of $500,000 had been paid to the
Company for the license. Greystone has failed to make the additional
payments required under the Greystone Joint Venture Agreement and,
accordingly, has received notice that an event of default has occurred
thereunder. The Company believes that an uncured event of default
under the Greystone Joint Venture Agreement results in a termination
of the license.
As of December 1996, the Greystone Joint Venture has not secured
funding to proceed with the development and operation of any plants.
The Company believes that Greystone is continuing to seek funding.
Continued
F-36
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
15. Agreements, Continued:
Geneva Plant
In May 1995, the Company entered into a collaborative agreement with
Geneva Steel Company ("Geneva") to build and operate a commercial
briquetting plant in Vineyard, Utah defined above as the Geneva Plant.
That agreement was amended and restated in May, 1996. Pursuant to the
Amended and Restated Briquetting Services Agreement and Lease
Agreement with Geneva (collectively, the "Geneva Agreements") Geneva
has provided the Company with a building containing approximately
9,000 square feet. The Company equipped the building to serve as a
coal, coke and revert material briquetting plant. The Company
estimated that the Geneva Plant's initial capacity was 15 tons of
briquettes per hour or approximately 100,000 tons per year. Geneva
provided the Company with revert materials and the Company was
obligated to produce and deliver to Geneva briquettes conforming to
agreed-upon specifications and in agreed to quantities. Geneva bears
all transportation costs with respect to delivery of revert materials
to the Geneva Plant and the shipment of briquettes. Pursuant to the
Geneva Agreements, the Company began producing briquettes in May 1996,
and produced approximately 24,600 tons of revert briquettes by
December 31, 1996 at the Geneva Plant. The Company has made various
adjustments and improvements to the plant to satisfy emissions and air
quality standards administered by the Utah State Division of Air
Quality. Although the Geneva Agreements expired on December 31, 1996,
the Company continues to produce briquettes for purchase by Geneva.
Upon the expiration of the Geneva Agreements, the lease of the
building housing the plant also expired resulting in a tenancy-at-will
between the parties.
Limited Partnerships
In June 1996, the Company formed Utah Synfuel #1, Ltd. ("Utah Synfuel
#1") and Alabama Synfuel #1, Ltd. ("Alabama Synfuel #1"), each a
Delaware limited partnership (collectively the "Partnerships"). The
respective Partnerships are intended to (i) purchase a nonexclusive
license from the Company for the Briquetting Technology, (ii) purchase
a coal briquetting facility from the Company and (iii) sell such
facility to a third party purchaser. Utah Synfuel #1 intends to
purchase the coal briquetting Utah Plant and Alabama Synfuel #1
intends to purchase the coal briquetting Birmingham, Alabama plant
(the "Alabama Plant"). The Company will grant to each of the
Partnerships a
Continued
F-37
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
15. Agreements, Continued:
Limited Partnerships, Continued
non-exclusive license to use the Briquetting Technology with respect
to coal for a fee of $500,000 (totalling $1,000,000). The Company
intends to retain at least a 60% interest in Utah Synfuel #1 and up to
an 83% interest in Alabama Synfuel #1. The Company has privately
placed the remaining partnership interests in the Partnerships.
Specifically, the Company received $3,277,500 ($3,080,000 as of
September 30, 1996) for the remaining partnership interests in Utah
Synfuel #1 and $1,762,500 ($1,305,000 as of September 30, 1996) for
the remaining partnership interests in Alabama Synfuel #1. Notably,
the Company is currently analyzing whether the original disclosure
provided to investors should be supplemented. The Company may decide
to revise the information in the original private placement
memorandums for those offerings, and may offer to such investors the
opportunity to rescind their purchases. If all such investors rescind,
the Company would be required to pay up to $5,040,000 ($4,385,000 at
September 30, 1996) plus applicable interest less the amount of income
received thereon. Management believes the amount rescinded by
investors will be immaterial.
The Company has used a portion of the funds raised in the Partnerships
to purchase equipment for each of the plants. The Utah Plant has been
completed and commenced commercial operations in December of 1996. The
Alabama Plant is expected to be completed by June 1997. However, no
assurances can be made that the completion date for the Alabama Plant
will be met.
The Company, as general partner for the Partnerships, is currently
negotiating transactions with potential buyers of the Utah Plant and
Alabama Plant, which is yet to be constructed or acquired. The Company
believes that the sale of the Utah Plant and Alabama Plant would
include (i) a $500,000 sublicensing fee (which would be paid by the
buyer to the Partnership in exchange for the license of the
Briquetting Technology), (ii) a royalty payment to the Partnership
based on per ton amount to be agreed on with the buyer, and (iii) a
promissory note delivered by the buyer in payment of the purchase
price, which would be payable to the Partnership from the cash flow of
such plant. The Company and Alabama Synfuel #1 have entered into a
letter of intent with an unregulated subsidiary of PacifiCorp, a large
low-cost electric and telephone utility, to sell the Alabama Plant to
be constructed or acquired by Alabama
Continued
F-38
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
15. Agreements, Continued:
Limited Partnerships, Continued
Synfuel #1, on substantially the terms listed above. The PacifiCorp
transaction is subject to various conditions and no definitive
agreement has been entered into. The Company and Utah Synfuel #1 have
also entered into a letter of intent with Arthur J. Gallagher & Co.,
an international insurance brokerage and risk management services
firm, to sell the Utah Plant, to be acquired by Utah Synfuel #1 on
substantially the terms listed above. The Gallagher purchase of Utah
Synfuel #1 is also subject to various conditions and no definitive
agreement has been entered into. No assurances can be made that any of
the plants being constructed or acquired by the Partnerships will be
sold.
Under the organizational documents of the Partnerships, the Company is
entitled to distributions from the Partnerships according to the
Company's percentage interest in the net distributable cash flow of
the Partnerships. The Company may also enter into loading agreements
and operating and maintenance agreements that would provide for
payments directly from the buyer of a plant. The binder materials used
to produce the briquettes will likely be sold to the buyer of a plant
by the Company based on the Company's cost plus an agreed upon
percentage profit.
Coal Venture
On January 30 1996, the Company entered into a letter of understanding
with CoBon Energy, L.L.C. ("CE"), a Utah professional services company
based in Salt Lake City, Utah, to form five entities to commercialize
and exploit the Briquetting Technology for the production of coal
briquettes (the "Coal Venture"). In August 1996, CE and the Company
modified the letter of understanding. Under the modified letter of
understanding, the Company has agreed to give CE a 1.6% interest in
Alabama Synfuel #1, plus a license to use the Briquetting Technology
for specified plant locations up to an aggregate capacity of 1.5
million tons of coal per year for each plant location. In
consideration for the interest in Alabama Synfuel #1 and the license,
CE is required, to make a one-time payment of (i) $2.00 per ton for
the production of coal in the range of 500,001 to 1,000,000 tons and
(ii) $2.50 per ton for the production in the range of 1,000,001 to
1,500,000 tons. CE has not yet built any plants which utilize the
Briquetting Technology.
Continued
F-39
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
15. Agreements, Continued:
Construction Agreements
In December 1995, the Company entered into a design and construction
agreement with Lockwood Greene Engineers, Inc. ("Lockwood") to design
and build the Utah Plant. The Company paid Lockwood an advance payment
of $500,000 on the facility on February 9, 1996. The total cost of the
Utah Plant to the Company is expected to be $3,600,000. Lockwood and
the Company have agreed to cooperate with each other in future
projects by either party in the field of coal agglomeration or
metallic recovery. Also in December 1995, the Company entered into
additional contracts to design and build additional facilities with
Lockwood, each of which were subsequently terminated by the Company in
1996 with all applicable cancellation charges either satisfied or
settled.
Port Hodder
In September 1996, the Company entered into a purchase agreement with
E. J. Hodder and Associates, Inc. for the purchase of a certain land
leasehold interest and equipment consisting of a barge loading
facility servicing the Warrior River located at the Alabama Plant. The
total purchase price for the facility is $927,000 consisting of
$342,000 in cash and $585,000 of the Company's common stock. The land
lease commenced on September 1, 1996 and expires on May 23, 1998 with
rights to extend to May 23, 2006. The Company intends to use the
facility in connection with the operations of the Alabama Plant.
K-Lee Supply Agreement
In September 1996, the Company entered into a supply agreement with
K-Lee Processing, Inc. and Concord Coal Recovery Limited Partnership
for a continuous supply of coal fines to the Alabama Plant. Under this
agreement, the Company is obligated to purchase a minimum of 20,000
tons of coal fines per month, commencing upon the completion of the
Alabama Plant and expiring on December 1, 2001, at a fixed price per
ton during the first year (subject to adjustment for moisture and ash
content) with an escalating price thereafter.
Continued
F-40
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
15. Agreements, Continued:
AGTC Brokerage Disagreement
In accordance with an April 1996 letter agreement between the Company
and AGTC, a partnership formed by AGTC, Inc., Alpine Coal Company,
Inc. and E. J. Hodder & Associates, Inc., AGTC was engaged by the
Company on a best efforts basis, to investigate, identify and
participate in the selection of (i) project sites for the construction
of suitable coal extrusion manufacturing facilities for the Company,
(ii) suitable coal fines reserves and (iii) suitable users or
consumers of the coal product produced. The compensation for such
services consisted of a monthly retainer of $35,000 and a commission
of 8% on the gross sales or monetized price of a project. In the
fourth month following the execution of the letter agreement a dispute
arose among the parties regarding AGTC's performance and compensation
due under the agreement. Accordingly, the Company terminated the
agreement pursuant to its terms. AGTC subsequently claimed that it was
entitled to a commission on the proposed sale of the Alabama Plant.
The Company, on the advice of counsel, believes that AGTC's claim has
no merit.
Alabama Power Company
In April 1996, the Company entered into a sale and purchase agreement
for coal with Alabama Power Company. Under the agreement, the Company
has agreed to process coal into coal briquettes and to sell such
briquettes to Alabama Power Company at a base price per ton, plus or
minus certain adjustments, for a period of five years commencing on
January 1, 1997. According to the agreement, Alabama Power Company is
required to purchase a base tonnage of 250,000 tons per year until
December 31, 1999. There are numerous conditions and obligations to be
performed by both parties prior to January 1, 1997 and on an ongoing
basis before coal briquettes are required to be purchased by Alabama
Power Company. Given the delays associated with the financing and
construction of the Alabama Plant, the Company is now in technical
default under the agreement. It is uncertain what actions Alabama
Power Company will take, if any, in response to the default. The
Company's management believes this technical default can be resolved
satisfactorily, with no material liability to the Company.
Continued
F-41
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
16. Fair Value of Financial Instruments
Statement of Financial Accounting Standards (SFAS) No. 107 requires
that the fair market value of certain financial instruments be
disclosed in the financial statements. The Company has the following
financial instruments that are subject to the provisions of SFAS No.
107:
Cash and cash equivalents Notes receivable - related parties Notes
payable Notes payable - related parties
Notes receivable - related parties from issuance of common stock
For each of the financial instruments listed above, the carrying value
approximates fair value or the instruments is reflected in the
financial statements at fair market value.
17. Subsequent Events:
Stock Options and Warrants
In October 1996, the Company issued warrants to purchase 620,000
shares of common stock at prices ranging from $7 to $30 per share to a
stockholder of the Company in association with a private placement of
common stock.
Agreements
PacifiCorp
In October 1996, the Company and Alabama Synfuel #1 entered into
a letter of intent with an unregulated subsidiary of PacifiCorp,
a large, low-cost electric and telephone utility, to purchase the
coal briquetting Alabama Plant that will be built and/or acquired
by Alabama Synfuels #1. The letter of intent generally provides
for an entity designated by PacifiCorp to purchase the Alabama
Plant from Alabama Synfuel #1 (or to purchase Alabama Synfuel
#1's right to acquire the Alabama Plant) for a one-time $500,000
licensing fee, and a promissory note in the amount of $3,400,000
that will be payable out of the cash flow of the plant, and a per
ton royalty fee. The Company will retain up to an 83% interest in
Continued
F-42
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
17. Subsequent Events, Continued:
Agreements, Continued
PacifiCorp, continued
Alabama Synfuel #1 and will be entitled to its percentage share
of all cash distributed by Alabama Synfuel #1.
The letter of intent also provides for a convertible loan from
PacifiCorp to the Company in an amount up to $5,000,000.
PacifiCorp would retain a security interest in all of the assets
related to the Alabama Plant. The loan if made, may be
convertible into Company common stock at a conversion price of
$7.00 per share. The Company common stock received upon
conversion would be subject to piggyback and demand registration
rights.
The obligations of PacifiCorp and its affiliates are subject to
PacifiCorp, the Company and Alabama Synfuel #1 entering into
definitive agreements. PacifiCorp will also require favorable tax
rulings from the IRS and completion of the Alabama Plant prior to
consummating the purchase of the Plant. The funding of the loan
is subject to entering into the definitive agreements and the
filing of a request for tax rulings from the IRS, which the
Company believes will be complete by approximately January 31,
1997.
In December 1996, PacifiCorp and the Company entered into an
additional agreement for the construction of six additional
facilities beyond the Alabama Plant. Pursuant to this agreement,
PacifiCorp has entered into binding agreements with a third-party
for the construction of the additional facilities. Additionally,
PacifiCorp has committed $300,000 per plant for a total of $1.8
million to the entities through which PacifiCorp will build the
facilities. The commitment was made to facilitate the
construction of the facilities with the third- party. All of the
facilities will utilize the Briquetting Technology under license
agreements with the Company.
Continued
F-43
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
16. Subsequent Events, Continued:
Agreements, Continued
Gallagher
In November 1996, the Company and Utah Synfuel #1 entered into a
letter of intent with Arthur J. Gallagher & Co., an international
insurance brokerage and risk management services firm, to
purchase the Utah Plant that will be acquired by Utah Synfuels
#1. The letter of intent generally provides for an entity
designated by Gallagher to purchase the Utah Plant from Utah
Synfuel #1 (or to purchase Utah Synfuel #1's right to acquire the
Utah Plant) for $2,500,000 (payable upon the satisfaction of
certain performance conditions), a one-time $500,000 licensing
fee and a per ton royalty fee that will be payable out of the
cash flow of the Utah Plant. The Company will retain
approximately a 60% interest in Utah Synfuel #1 and will be
entitled to its percentage share of all cash distributed by Utah
Synfuel #1.
The obligations of Gallagher and its affiliates are subject to
Gallagher, the Company and Utah Synfuel #1 entering into a
definitive agreement.
In December 1996, Gallagher and the Company entered into an
additional agreement to construct four additional facilities
beyond the two plants contemplated by the letter of intent.
Pursuant to this expanded agreement, Gallagher entered into
binding agreements with a third-party to construct the additional
facilities. All of the facilities will utilize the Briquetting
Technology under license agreements with the Company.
In December 1996, the Company entered into a Debenture Agreement
and Security Agreement with AJG Financial Services, Inc., an
affiliate of 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 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
Continued
F-44
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
17. Subsequent Events, Continued:
Agreements, Continued
Gallagher, continued
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 at a conversion price of $11.00 per share
subject to certain adjustments. The Subordinated Debenture is
subordinated and junior in right to all other existing
indebtedness of the Company which is not expressly pari passu
with or subordinated to the Subordinated Debenture. Finally, the
Company has granted piggy-back and demand registration rights to
AJG Financial Services, Inc. for the Company common stock issued
upon conversion of the Subordinated Debenture.
On January 2, 1997, the Company borrowed $588,683 of the
$2,900,000 draw down amount described above. In consideration for
the amount drawn down, the Company issued a Senior Debenture in
such amount accruing interest at prime plus two percent (2%) and
maturing three years from the date of issuance (the "Senior
Debenture"). The Senior Debenture is collateralized by all real
and personal property purchased by the Company with the proceeds
of the Senior Debenture. The proceeds of the Subordinated
Debenture and the Senior Debenture 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.
Savage Mojave
In November 1996, the Company signed a primary contract with
Savage Industries, Inc. ("Savage") to form up to two limited
liability companies ("LLCs") to be owned 50% by Savage and 50% by
the Company, with each LLC entering into a contract with Savage,
the Company and a qualified third party contractor for the
design, construction, start-up and certification of a coal fines
agglomeration facility. All profits and losses of the respective
LLCs shall be borne by Savage and the Company according to their
respective ownership interest. Savage has the right but not the
Continued
F-45
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
17. Subsequent Events, Continued:
Agreements, Continued
Savage Mojave, continued
duty to operate the facilities and to provide transportation of
the raw materials and the briquettes. The Company in turn will
(i) provide its license to the binding process (at no cost) and
(ii) provide the binder required to produce the briquettes on a
cost plus basis. Performance under the agreement is subject to
numerous condition, including, but not limited to establishing a
criteria for the design of such facilities and satisfaction of
the Section 29 Tax Credit provisions of the Internal Revenue Code
of 1986, as amended.
In November 1996, the Company also entered into an agreement with
Savage whereby the Company agreed (i) to license the Briquetting
Technology to a limited liability company, to be formed by Savage
and Flyash Haulers, Inc., for a monthly licensing fee based upon
each ton of qualified fuel produced, all relating to a
briquetting facility to be located in Laughlin, Nevada, (ii) to
provide, upon request, coal fines to the limited liability
company, (iii) to provide technical assistance to the limited
liability company, and (iv) to reimburse to Savage, from the
monthly license fees, an amount equal to 16% of the cash capital
required to upgrade the Laughlin, Nevada facility. The Company
does not expect to receive monthly license fees until mid 1997.
No assurances can be made that Savage will be successful in the
production and sale of synthetic coal. The agreement expires by
its terms on December 31, 2009.
Construction Agreements
In December 1996, the Company entered into a total of thirteen design
and construction agreements (the "1996 Construction Agreements") for
the design and construction of eleven new coal fines agglomeration
facilities and the retrofiting of two existing facilities (the Utah
Plant and Geneva Plant). Depending upon the specific agreement, the
contractor is either TIC The Industrial Company, CEntry Constructors,
L.C. or Centerline Engineering Corporation, a Lockwood Greene Company.
Under two of the 1996 Construction Agreements, the Company is a joint
owner with Ferro Resources, L.L.C. The 1996 Construction Agreements
are subject to numerous con-
Continued
F-46
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
17. Subsequent Events, Continued:
Construction Agreements, Continued
ditions and no assurances can be given that the Company will be
successful in financing or constructing any of the thirteen
facilities. The 1996 Construction Agreements generally require that a
notice to proceed be issued by the Company (and its co-owner, if any)
on or before September 30, 1997 and that the plant be placed in
service by June 30, 1998. An advance payment of $250,000 is due at the
time a notice to proceed is issued by the Company (and its co-owner,
if any). The 1996 Construction Agreements may be terminated at the
Company's (and co-owner's, if any) option with a penalty of 6% of the
total contract price, if established, or the guaranteed maximum price
if the total contract price is not established. If the Company is
unsuccessful in obtaining financing or otherwise fails to construct a
facility, a penalty would be owed to the contractor. If this were to
occur on all thirteen facilities, the Company would be required to pay
an aggregate penalty of $3,012,000.
Indemnification to Lockwood
In December 1996, the Company entered into six agreements with
Lockwood whereby the Company agreed to indemnify Lockwood should it be
required to pay liquidated damages to certain third party owners under
various design and construction agreements for six coal agglomeration
facilities. Under the various design and construction agreements, if
the facilities are not completed by June 1, 1998 then $750,000 in
liquidated damages would be due and payable. The indemnification
agreement will only apply if the third party owners actually decide to
build the facilities with Lockwood as the design/builder. The maximum
amount of contingent liability to the Company under the
indemnification agreements is $4,500,000 ($750,000 per design and
construction agreement). If triggered, the payments under the
indemnification agreements would not be due and owing until June 2,
1998.
Continued
F-47
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
17. Subsequent Events, Continued:
Settlement Agreements
Kenneth Young
Effective November 12, 1996, Kenneth Young resigned as Chairman
of the Board and Chief Executive Officer of the Company. The
Company and Kenneth Young have entered into a settlement
agreement. Pursuant to the settlement agreement, the Company
agreed: (i) to pay Mr. Young $4,000 twice a month through
December 31, 1996, (ii) to pay $25,030 in deferred compensation
over 24 semi-monthly installments of $1,042 beginning January 1,
1997, (iii) to pay for Mr. Young's medical insurance until
December 31, 1997, (iv) to pay $2,500 semi-monthly for 24
payments beginning January 1, 1997 in consideration for
consulting services reasonably requested by the Company and Mr.
Young's agreement to refrain from any activities in competition
with the Company, (v) to allow options representing 50,000 shares
of Company common stock at $1.50/share to become fully vested on
January 1, 1997 (these options were originally issued under a
stock option agreement dated January 1, 1995 relating to 250,000
shares) and (vi) to allow options representing 50,000 shares of
Company common stock at $1.50/share to become fully vested on
January 1, 1997 (these options were originally issued under a
stock option agreement dated January 1, 1995 relating to 62,500
shares, of which the remaining 12,500 shares expired).
Michael Midgley
In November of 1996, the Company entered into a settlement
agreement with Michael Q. Midgley. Pursuant to the settlement
agreement, the Company agreed: (i) to pay $20,000 in November
1996 and $38,479 in salary, deferred compensation and unused
vacation pay over 24 semi-monthly installments of $1,605
beginning November 15, 1996, (ii) to pay $2,500 semi-monthly for
24 payments beginning January 1, 1997 in consideration for
consulting services reasonably requested by the Company and Mr.
Midgley's agreement to refrain from any activities in competition
with the Company, (iii) to allow options representing 50,000
shares of Company common stock to become fully vested on January
1, 1997 (these options were originally issued under a stock
option agreement dated January 1, 1995) and (iv) to allow options
representing 25,000 shares of
Continued
F-48
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
17. Subsequent Events, Continued:
Settlement Agreements, Continued
Michael Midgley, continued
Company common stock at $1.50/share to become fully vested on
January 1, 1997 (these options were originally issued under a
stock option agreement dated January 1, 1996 relating to 50,000
shares, of which the remaining 25,000 shares expired).
F-49
<PAGE>
Section No. Exhibit No. Description Location
- - ----------- ----------- ------------ --------
2 2.1 Agreement and Plan of Reorganization, *
dated July 1, 1993 between the Company
and the Shareholders of R1001
2 2.2 Agreement and Plan of Merger dated *
August 14, 1995 between the Company
and Covol Technologies, Inc., a Delaware
corporation
2 2.3 Stock Purchase Agreement, dated July 1, *
1993, among the Company, Lloyd C. McEwan,
Michael McEwan, Dale F. Minnig and Ted C.
Strong regarding the purchase of Industrial
Management & Engineering, Inc. and Central
Industrial Construction, Inc.
2 2.4 Stock Sale Transaction Documentation, *
effective as of September 30, 1994,
between the Company and Farrell F. Larson
regarding Limestone Company, Inc.
2 2.5 Stock Purchase Agreement dated February *
1, 1996 by and among the Company, Michael
McEwan and Gerald Larson regarding the
sale of State, Inc., Industrial Engineering
& Management, Inc., Central Industrial
Construction, Inc., and Limestone
Company, Inc.
2 2.5.1 Amendment to Share Purchase Agreement *
regarding the sale of the Subsidiaries
2 2.5.2 Amendment No. 2 to Share Purchase **
Agreement regarding the sale of the
Subsidiaries
3 3.1 Certificate of Incorporation of the Company *
3 3.1.1 Certificate of Amendment of the Certificate *
of Incorporation of the Company dated
January 22, 1996
3 3.2 By-Laws of the Company *
3 3.2.1 Certificate of Amendment to Bylaws of the *
Company dated January 31, 1996
- - ---------------------------------
* Previously filed.
** Filed herewith.
49
<PAGE>
Section No. Exhibt No. Description Location
- - ----------- ---------- ------------- --------
9 9.1 Special Powers of Attorney Coupled With *
an Interest dated February 1, 1996 between
the Company, Gerald Larson and Michael
McEwan
10 10.1 License Agreement, dated June 30, 1995, *
between the Company and Greystone
Environmental Technologies, relating to
the Greystone Joint Venture
10 10.1.1 First Amendment dated January 3, 1996 to *
the License Agreement dated June 30,
1995 between the Company and Greystone
Environment Technologies
10 10.2 Briquetting Services Agreement, dated *
May 5, 1995, between Geneva Steel Company
and the Company
10 10.2.1 Amended and Restated Briquetting Service *
Agreement, dated May 14, 1996, between
the Company and Geneva Steel Company
10 10.3 Lease Agreement, dated May 5, 1995 *
between Geneva Steel Company, as landlord,
and the Company, as tenant
10 10.3.1 First Amendment to Lease Agreement, dated **
May 14, 1996 between Geneva Steel Company,
as landlord, and the Company, as tenant
10 10.4 Master Equipment Lease Agreement, dated *
May 4, 1995, between Keycorp Leasing Ltd.
and the Company
10 10.5 1995 Stock Option Plan *
10 10.5.1 First Amendment to the 1995 Stock *
Option Plan
10 10.6 Employment Agreement, dated January 1, *
1992, with Kenneth M. Young
10 10.7 Employment Agreement, dated July 1, 1992, *
with Russ Madsen
- - ---------------------------------
* Previously filed.
** Filed herewith.
50
<PAGE>
Section No. Exhibit No. Description Location
- - ----------- ----------- ------------- --------
10 10.8 Lease Agreement, dated May 31, 1994, *
between the Company and Byrleen Hanson
re Carbon County, Utah
10 10.9 Standard Form of Agreement between Owner *
and Design Builder dated December 28,
1995 between the Company and Lockwood
Greene Engineers, Inc.
10 10.9.1 Notice to Proceed from the Company to *
Lockwood Greene Engineers, Inc. dated
January 14, 1996
10 10.9.2 Letter Agreement with Lockwood Greene *
Engineers, Inc. to extend notice dates.
10 10.9.3 Letter dated July 26, 1996 from Lockwood **
Greene Engineers, Inc. and the Memorandum
of Understanding between Covol Technology,
Inc. and Lockwood Greene Engineers, Inc.
dated August 28, 1996
10 10.9.4 Amendment to Standard Form of Agreement **
between Owner and Design/Builder dated
December 28, 1995, dated September 16,
1996, between the Company and Lockwood
Greene Engineers, Inc.
10 10.10 Engagement Letter dated December 18, 1995 *
by and between the Company and Smith Barney
10 10.10.1 Termination Letter, dated July 8, 1996, **
from Smith Barney
10 10.11 Letter of Understanding dated January 30, *
1996 between the Company and CoBon
Energy, LLC
10 10.11.1 Modification of Letter of Understanding **
dated August 20, 1996 between the Company
and CoBon Energy, LLC
10 10.11.2 License Agreement, dated September 10, **
1996, between the Company and CoBon
Energy, LLC
- - ----------------------------------
* Previously Filed.
** Filed herewith.
51
<PAGE>
Section No. Exhibit No. Description Location
- - ----------- ------------ -------------- --------
10 10.12 Mortgage Note with First Security Bank *
of Utah, N.A. as lender on the Company's
executive offices in Lehi, Utah dated
January 21, 1992.
10 10.12.1 Loan Authorization and Agreement (Guaranty *
Loan) from the U.S. Small Business
Administration.
10 10.13 Promissory Note dated February 15, 1996 *
in favor of the Company from Michael
McEwan and Gerald Larson
10.14 [Intentionally Omitted]
10 10.15 Agreement between Alabama Power Company **
and the Company for the Sale and Purchase
of Coal, dated April 16, 1996, between
the Company and the Alabama Power Company
10 10.16 Employment Agreement, dated June 1, 1996 **
with Brent M. Cook
10 10.16.1 Stock Option Agreement dated June 1, 1996 **
with Brent M. Cook
10 10.17 Letter Agreement, dated March 6, 1996, **
among the Company, AGTC, Inc., Alpine
Coal Company, Inc, and E.J. Hodder &
Associates, Inc. regarding services to
investigate, identify and participate in
site selection
10 10.18 Letter dated July 19, 1996 from the **
Company canceling the Site Identification
Agreement
10 10.19 Term Sheet, dated August 22, 1996, from **
Company to Byrleen Hanson regarding
purchase of Price, Utah office building
10 10.20 Primary Agreement, dated November 6, 1996, **
between the Company and Savage Industries,
Inc.
10 10.20.1 Mojave Agreement, dated November 6, 1996, **
between the Company and Savage Industries,
Inc.
- - ------------------------------------
* Previously filed.
** Filed herewith.
52
<PAGE>
Section No. Exhibit No. Description Location
- - ----------- ----------- ------------ --------
10 10.21 Release to all claims, dated September 13, **
1996, executed by Maynard Moe
10 10.22 Letter of Understanding, dated September **
13, 1996, between the Company and E.J.
Hodder & Associates, Inc. regarding the
sale of the Port Hodder facility to the
Company
10 10.23 Sublease, dated September 9, 1996, between **
the Company and Parker Towing Company, Inc.
regarding the lease of approximately 16
acres located in Tuscaloosa County,
Alabama
10 10.24 Supply Agreement, dated September 11, 1996, **
among the Company, K-Lee Processing, Inc.
and Concord Coal Recovery Limited
Partnership
10 10.25 PacifiCorp Financial Services, Inc. Letter **
of Intent (Covol Technologies) dated
September 12, 1996
10 10.26 Exclusive Financial Advisor Agreement, **
dated September 16, 1996, between the
Company and Coalco Corporation
10 10.27 Settlement Agreement, dated September 17, **
1996, among the Company, Environmental
Technologies Group International, Inc.,
Larson Limestone Company, Inc., Michael
M. Midgley, Mark Hardman, Kenneth M.
Young, Irene Larson, Farrell Larson, Gary
Burningham and Burningham Enterprises,
Inc.
10 10.28 Debenture Agreement and Security Agreement, **
dated December 20, 1996, between AJG
Financial Services, Inc. and the Company
10 10.29 Arthur J. Gallagher & Co. Letter of Intent, **
dated November 13, 1996
10 10.30 Lease Agreement, dated December 12, 1996, **
between the Company and UPC, Inc.
regarding Price City, Utah property
10 10.31 1996 Standard Form of Agreement between **
Owner and Design/Contractor.
- - ---------------------------------
* Previously filed.
** Filed herewith.
53
<PAGE>
Section No. Exhibit No. Description Location
- - ----------- ----------- -------------- --------
10 10.32 Form of Limited Partnership Agreements **
for Alabama Synfuel #1, Ltd. and Utah
Synfuel #1, Ltd.
16 16.1 Letter to Securities and Exchange *
Commission, dated March 24, 1995, from
Jones, Jensen & Orton & Company,
certified public accountants
21 21.1 List of Subsidiaries of the Company *
27 27.1 Financial Data Schedule **
- - --------------------
* Previously filed.
** Filed herewith.
Reports on Form 8-K
The Company filed a Form 8-K on June 3, 1996. The information
provided in Form 8-K was as follows:
New Officers Appointed
At the June 3, 1996 meeting of the Board of Directors of the Company, the
directors received and accepted the resignations of Kirby D. Cochran as
President, and Michael Bodon as Secretary of the Company. Both Mr. Cochran and
Mr. Bodon also resigned as directors of the Company, all effective as of June 3,
1996. Mr. Cochran's resignation was prompted by health reasons, and Mr. Bodon
resigned in order to pursue other career objectives. To fill the vacancies
created by the resignations of Mr. Cochran and Mr. Bodon, certain executive
officers were appointed to new positions effective June 3, 1996. The following
sets forth the new positions of executive officers of the Company with changed
positions:
Michael M. Midgley President
Alan D. Ayers Chief Operating Officer
Brent M. Cook Chief Financial Officer
Asael T. Sorensen, Jr. Secretary and General Counsel
In connection with the changes described above, Brent M. Cook was hired as
Chief Financial Officer of the Company. The following is summary biographical
information on Mr. Ayers and Mr. Cook:
Alan D. Ayers. Mr. Ayers joined the Company in August of 1995 as manager of
the Company's investor relations department. From 1993 to 1995, Mr. Ayers was
the General Manager for Taylor Maid Beauty Supply ("Taylor Maid"), responsible
54
<PAGE>
for the operations of the regional supply company. From 1987 to 1993, he was
Director of Operations for Knighton Optical, Inc. ("Knighton"). Taylor Maid and
Knighton are not affiliated with the Company. Mr. Ayers received his M.B.A. from
the University of Utah.
Brent M. Cook. Mr. Cook is a Certified Public Accountant. Prior to joining
the Company, Mr. Cook was Director of Strategic Accounts-Utah Operations, for
PacifiCorp, Inc. ("PacifiCorp"). His responsibilities included the management of
revenues of approximately $128 million per year, and seeking out and evaluating
strategic growth opportunities for PacifiCorp, including acquisitions and other
transactions. Mr. Cook spent more than 12 years with PacifiCorp. PacifiCorp is
not affiliated with the Company.
New Directors Appointed
At the June 3, 1996 meeting of the Board of Directors of the Company Alan
D. Ayers and Brent M. Cook were appointed to fill the two vacant positions on
the Board of Directors created by the resignations of Mr. Cochran and Mr. Bodon.
Biographical information on Messrs. Ayers and Cook is set forth above.
55
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
COVOL TECHNOLOGIES, INC.
By: /s/ BRENT M. COOK
Brent M. Cook,
Chief Executive Officer and
Principal Executive Officer
By: /s/ STANLEY M. KIMBALL
Stanley M. Kimball,
Principal Financial Officer
Date: January 10, 1997
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
Signature Title Date
/s/ BRENT M. COOK Chief Executive Officer (Principal January 10, 1997
- - --------------------- Executive Officer)
Brent M. Cook
/s/ RUSS MADSEN Interim Chairman of the Board and January 10, 1997
- - --------------------- Director
Russ Madsen
/s/ STANLEY M. KIMBALL Chief Financial Officer, Treasurer January 10, 1997
- - ----------------------- and Director (Principal Financial
Stanley M. Kimball and Accounting Officer)
/s/ ALAN D. AYERS Chief Operating Officer and January 10, 1997
- - ----------------------- Director
Alan D. Ayers
56
<PAGE>
/s/ RUSS MADSEN Vice President Operation and January 10, 1997
- - ----------------------- Director
Russ Madsen
/s/ GEORGE W. FORD Vice President - Research and January 10, 1997
- - ----------------------- Development and Director
George W. Ford
/s/ RICHARD C. LAMBERT Vice President - Sales and January 10, 1997
- - ----------------------- Marketing
Richard C. Lambert
/s/ STEVEN BROWN Vice President of Engineering and January 10, 1997
- - ----------------------- Construction and Director
Steven Brown
/s/ DELANCE SQUIRE Director January 10, 1997
- - -----------------------
DeLance Squire
/s/ RAYMOND J. WELLER Director January 10, 1997
- - -----------------------
Raymond J. Weller
AMENDMENT #2
TO SHARE PURCHASE AGREEMENT
This agreement effective the 15th day of March 1996, amends that certain SHARE
PURCHASE AGREEMENT, as amended, (hereafter "Purchase Agreement") dated 1
February 1996, between Covol Technologies, Inc., a Delaware corporation,
("Covol"), and Michael McEwan and Gerald Larson, residents of the State of Utah,
("Buyer"). Covol and Buyer sometimes jointly referred to herein as the
"Parties." The Parties, intending to be legally bound, mutually agree to amend
the Purchase Agreement as follows:
1. In Section 2.03 ("The Closing"), the date for Closing is changed from
"March 15" (as amended in Amendment #1) to "June 15, 1996."
All other provisions of the Purchase Agreement will remain the same and are
incorporated herein by this reference.
In Witness whereof, the Parties have signed this Agreement on the date first
above written.
COVOL TECHNOLOGIES, INC. BUYER
By: /s/ Kirby Cochran, President /s/ Gerald M. Larson
/s/ Michael McEwan
AMENDED AND RESTATED
BRIQUETTING SERVICES AGREEMENT
THIS AMENDED AND RESTATED BRIQUETTING SERVICES AGREEMENT (the
"Agreement) is entered into this 14th day of May, 1996, (the "Effective Date"),
by and between GENEVA STEEL COMPANY, a Utah corporation ("Geneva") and COVOL
TECHNOLOGIES, INC., a Delaware corporation (formerly known as Environmental
Technologies Group International, Inc.)("Covol").
Recitals:
A. By a certain Briquetting Services Agreement dated May 12, 1995 (the
"Original Agreement"), the parties to this Agreement documented the terms and
conditions whereby Covol would produce certain briquettes for sale to Geneva. In
furtherance of the Original Agreement, the parties entered into a Lease
Agreement (the "Lease Agreement") dated May 1995 whereby Covol leased from
Geneva certain Premises, as described in the Lease Agreement.
B. Geneva and Covol desire to amend and restate the Original Agreement,
as set forth herein, to set forth the terms and conditions whereby Covol will
briquette certain of Geneva's iron and steel revert materials (the "Briquetting
Services") for a fee.
Agreement:
NOW THEREFORE. in consideration of the mutual covenants and conditions
contained herein and for other good and valuable consideration. the receipt and
sufficiency of which are hereby acknowledged, the parties, intending to be
legally bound, agree to amend and restate the Original Agreement in its entirety
as follows:
1. Revert Briquettes. Provided that the conditions set forth in this
Section 1 are satisfied, Covol shall produce and deliver to Geneva iron and/or
steel briquettes made from Geneva's in-plant reverts (the "Revert Briquettes").
The Revert Briquettes shall be produced in accordance with the guidelines
attached as Exhibit A hereto (the "Guidelines"), as such Guidelines may be
modified or changed by Geneva at any time and from time to time to meet Geneva's
quality and cost specifications. The Revert Briquettes shall be produced in two
(2) phases: the trial phase (the "Trial Phase") and the operating phase (the
"Operating Phase").
1.1. Trial Phase. The Trial Phase shall commence upon the
Effective Date. During the Trial Phase, Covol shall produce and deliver
to Geneva a minimum of 2,500 net tons of Revert Briquettes in
accordance with the Guidelines. Geneva shall not be required to charge
any portion of the Revert Briquettes produced during the Trial Phase
into the blast furnace or any other Geneva facility. If Geneva
determines, in its sole discretion, that the Revert Briquettes perform
successfully without an economic penalty or adverse effects in either
the blast furnace, cupola or hot metal, Geneva may elect to have Covol
continue Briquetting Services for Revert Briquettes.
1.2. Operating Phase. The Operating Phase shall commence
upon Geneva's determination that the Trial Phase has been successfully
<PAGE>
concluded and, unless earlier terminated in accordance with the terms
hereof, shall expire on December 31, 1996; provided that the Operating
Phase may be extended by the mutual written agreement of the parties
hereto. During the Operating Phase, Covol shall produce Revert
Briquettes in such quantities as Geneva may request from time to time,
operating Covol's plant on a 24 hour basis at maximum production
throughput as required to meet Geneva's requested deliveries. Geneva
may analyze the Revert Briquettes on a daily basis and inform Covol if
the Revert Briquettes fail to meet the Guidelines or if the blast
furnace performance is adversely impacted. In the event Covol is so
notified, it shall immediately cease production of Revert Briquettes
until the problem is resolved to Geneva's satisfaction.
2. Raw Materials and Utilities for Revert Briquettes. In connection
with the Briquetting Services for Revert Briquettes, Geneva shall, at its own
cost, supply to Covol iron and steel fines, power, natural gas, molasses,
hydrated lime and cement. Such raw materials and utilities will be supplied in
accordance with the percentages stated in the Guidelines and in such reasonable
weights or volumes which Covol indicates to Geneva are required to meet the
quantities of Revert Briquettes requested by Geneva from time to time. In
producing Revert Briquettes, Covol shall not use any binder not specifically
approved in writing by Geneva, including, but not limited to, Covol's patented
binder. GENEVA MAKES NO REPRESENTATION OR WARRANTY AS TO THE SUITABILITY OF SUCH
RAW MATERIALS OR UTILITIES FOR THE PURPOSE OF PRODUCING REVERT BRIQUETTES OR FOR
ANY OTHER PURPOSE, ALL OF WHICH REPRESENTATION'S AND WARRANTIES, INCLUDING. BUT
NOT LIMITED TO, THE WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR
PURPOSE, ARE HEREBY DISCLAIMED. Nothing contained herein shall obligate Geneva
to supply Covol with any minimum amount of raw materials or utilities or to
order any minimum amount of Revert Briquettes from Covol. Covol agrees that
notwithstanding anything in this Agreement to the contrary, Covol shall not
bring onto the Premises or process at its facilities at the Premises any coke
breeze, coke fines, coals, coal fines, in-plant reverts or other similar or
dissimilar fine materials from non-Geneva sources without the prior written
consent of a senior executive officer of Geneva in each instance, which consent
Geneva may withhold in its sole discretion.
3. Commencement of Production. Covol shall take whatever action is
necessary to enable it to begin performing the Briquetting Services at the
earliest possible date but in no event later than three (3) working days
following the date hereof. Such action shall include, but not be limited to,
obtaining all necessary governmental or environmental approvals, permits, and
licenses as necessary for performing the Briquetting Services. All improvements
or modifications to the Premises shall receive the prior approval of Geneva,
which approval shall not be unreasonably withheld, and otherwise be subject to
the provisions of Section 5.01 of the Lease Agreement. Covol shall install and
maintain in good condition and repair at the Premises all of the equipment set
forth on Exhibit "B" hereto (the "ETG Equipment").
4. Briquette Delivery. Covol shall deliver uncured Revert Briquettes to
Geneva at the end of Covol's conveyor belt coming out of the dryer. Geneva shall
be responsible for transporting the Revert Briquettes from such location to its
blast furnaces or other location, such that storage of the Revert Briquettes by
Covol does not exceed Covol's storage capacity.
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5. Briquetting Services Fee.
5.1. Fee. For each net ton of Revert Briquettes properly
processed by Covol and delivered to Geneva in accordance with the terms
and conditions of this Agreement, Geneva shall pay Covol a Briquetting
Services fee (the "Fee") of NINE DOLLARS ($9.00). The Fee shall be
Covol's sole compensation for Briquetting Services hereunder and
includes all processing work necessary to meet the strength
specifications hereof, all costs of compliance by Seller with any
federal, state and local laws and regulations applicable to the
Briquetting Services or the Premises, and all other items as set forth
in the Agreement which are the responsibility of Covol.
5.2. Payment. The Fee for each month's production shall be
payable to Covol by Geneva on or before the fifteenth day of each
calendar month following the month in which the Revert Briquettes were
delivered to Geneva and accepted as to Guidelines, or in the case of
Revert Briquettes not meeting Guidelines that are sold by Geneva to a
third party, on or before the fifteenth day of the month following
receipt by Geneva of payment therefor. Payments to Covol shall be made
only after presentation of documentation satisfactory as to the
quantity, quality and compliance with Guidelines of the Revert
Briquettes produced and made available to Geneva by Covol. The failure
of Geneva to make any payment required by this Section 5.2 within
fifteen (15) days after the date such payment is due shall be a
material default of this Agreement.
5.3. Quantity. The quantity of Revert Briquettes to which the
Fee is applicable shall be determined by weighing the Revert Briquettes
at the time of delivery to Geneva. Geneva's certified scale weights
shall be used to determine the weight of Revert Briquettes hereunder.
Geneva shall promptly inform Covol of the weight of Revert Briquettes
after the weight has been determined.
6. Termination of Production. In addition to its rights set forth
elsewhere in this Agreement, Geneva shall have the right, but not the
obligation, to terminate its obligation to supply raw materials and utilities
for the production of Revert Briquettes at any time, or from time to time, for
any of the following reasons:
6.1. The Revert Briquettes fails to meet the Guidelines or
are otherwise unsatisfactory to Geneva:
6.2. Production of Revert Briquettes is in excess of that
which Geneva estimates it can reasonably utilize:
6.3. The Trial Phase expires and Geneva does not desire
additional Revert Briquettes; or
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<PAGE>
6.4. Geneva determines that (a) its supply of iron and/or
steel fines is no longer available for Revert Briquettes, or (b) it no
longer desires to supply iron and/or steel fines to Covol for use in
the making of Revert Briquettes.
Notwithstanding anything in this Agreement to the contrary, in the
event Geneva fails to order from Covol a minimum of 4500 tons of Revert
Briquettes during any calendar month, Covol may, at the option of Geneva, either
(i) terminate the Agreement or (ii) utilize any excess briquetting capacity at
the Premises to produce briquettes using Covol's own raw materials and binder
for sale to third parties.
7. Sampling and Testing. Once delivered to Geneva as provided herein,
Geneva may, at its option, test the Revert Briquettes to determine if they
comply with the requirements of this Agreement. The procedure for sampling and
testing shall conform to applicable industry standards or such other standards
as are mutually agreed upon by Geneva and Covol in writing. Geneva shall have no
obligation to pay the Fee for Briquetting Services as to any Revert Briquettes
that do not comply with the Guidelines provided that the cause of such failure
is not attributable to the failure of raw materials supplied by Geneva. In the
event Covol produces Revert Briquettes that do not comply with the Guidelines
Covol may at its option, and its sole expense, promptly reprocess any such
nonconforming Revert Briquettes one additional time. Geneva shall retain
ownership of all such Revert Briquettes, and upon the completion of all
processing by Covol pursuant to the immediately preceding sentence Geneva may
thereafter use or dispose of such Revert Briquettes at Geneva's cost and
discretion. Covol shall not be permitted to conduct research and development
operations at the Premises without the prior written consent of Geneva in each
instance.
8. Compliance with Laws. Covol represents and warrants that all of its
operations conducted at the Premises will strictly comply at all times with all
municipal and county ordinances and codes and state and federal statutes and all
other government regulations now in force or which may hereafter be in force.
Without limiting the generality of foregoing, Covol hereby agrees that the
Briquetting Services and all other operations conducted on the Premises shall
strictly comply with all federal, state and/or local laws, rules, regulations
and ordinance's relating to protection of the environment or other health and
safety concerns whether now in existence or enacted hereinafter (the
"Environmental Laws"), and shall not produce, generate, discharge or release any
hazardous substances as defined under such Environmental Laws, except for those
substances which are specifically approved in writing in advance by Geneva. In
no event shall Geneva be responsible for Covol's compliance with the
Environmental Laws or any other laws, which compliance shall remain the sole
responsibility of Covol. If Covol fails to comply with any Environmental Law, or
receives notice from any governmental agency of any claimed noncompliance, Covol
shall immediately notify Geneva in writing and include with such notice a copy
of any written notice of noncompliance. Geneva, provided it is not materially at
fault in connection with Covol's non-compliance, in addition to any other remedy
available at law or in equity, and at Covol's sole expense, may, but shall not
be obligated to, take such action as is commercially reasonable to correct such
noncompliance or claimed noncompliance including, but not limited to, action to
restore the Premises to an environmentally sound condition. As an alternative to
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<PAGE>
Geneva restoring the Premises to an environmentally sound condition at Covol's
sole expense, Covol may, at the time it notifies Geneva of any fact or notice of
noncompliance, request a meeting with the Geneva Steel Environmental Engineering
Department.
Such notice must propose a time and place for the meeting which must
take place within two weeks of providing such notice, unless a later date is
mutually agreed upon. At the meeting, Covol must offer an explanation for the
noncompliance and propose a strategy for curing such noncompliance. Geneva shall
have two weeks from the date of the meeting to approve, recommend modifications,
or reject the proposed Covol strategy. If Geneva chooses to reject the Covol
strategy, it will provide Covol with written notice of its decision to reject.
In that event, Geneva may exercise the other remedies provided herein. These
alternative procedures allowing Covol to cure any noncompliance shall not apply
in cases reasonably deemed by Geneva to constitute an emergency.
9. Compliance with Geneva Rules. Covol shall be subject to
reasonable rules and regulations (including safety rules) promulgated from time
to time by Geneva in writing, and as brought to Covol's attention by Geneva.
Promulgation of, or compliance with, said rules and regulations shall. however.
not relieve Covol from any of its obligations under this Agreement or liability
arising therefrom.
10. Utilities. To the extent not already available at the Premises,
Geneva shall permit Covol to connect to Geneva's presently existing electrical,
gas, water, sewage or such other utilities necessary for Covol's performance of
the Briquetting Services hereunder. Covol shall be responsible for and shall pay
the costs for taking utilities to the Premises, where necessary, for connecting
to such utilities and otherwise making use of the same within the Premises.
Prior to undertaking any such utility work, Covol shall submit detailed plans
and specification for the same to Geneva's engineering department and obtain
their written approval. Geneva shall not be liable to Covol for any damages,
liability or claims or other matters whatsoever, including consequential
damages, if any, arising out of or related in any way to interruptions, surges,
outages or other irregularities that might occur with respect to such utilities.
Covol shall install, at its expense, billing meters to measure its usage of
natural gas, water and electricity provided by Geneva. Covol shall only
discharge process waste water into Geneva's waste discharge system, and not into
any public sewer or other discharge facility. Prior, however, to discharging any
process waste water into Geneva's waste discharge system, Covol will obtain in
each instance the written permission of Geneva's environmental engineering
department.
11. Insurance. Covol agrees to maintain in full force and effect at all
times during the existence of this Agreement and at least six (6) months
thereafter, comprehensive general liability and property damage insurance with
an insurance carrier licensed to do business in the State of Utah, with at least
a $1,000,000.00 limit per occurrence and a deductible of no more than 5%, and
such other insurance as is generally carried by other types of manufacturing
enterprises for similar types of hazards. The insurance policies required
hereunder shall be primary without right of contribution from Geneva. Such
insurance policies shall also name Geneva as an additional assured and shall
provide for a full and complete waiver of subrogation in favor of Geneva and its
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<PAGE>
affiliates. Covol shall also maintain workers compensation coverage as required
by Utah law. Covol shall provide Geneva with certificates evidencing such
insurance within five (5) days of the execution of this Agreement, and shall
provide reasonable evidence, at Geneva's request, that the coverages continue to
remain in effect thereafter.
12. Termination. In addition to the other rights and remedies
provided for herein, this Agreement and the Lease Agreement shall be
automatically terminated upon the occurrence of any of the following events:
12.1. The parties hereto mutually consent in writing.
12.2. The giving of written notice by Geneva to Covol that the
Agreement or the Lease Agreement is being terminated for "good cause."
For purposes of this Agreement, "good cause" for termination of this
Agreement and the Lease Agreement shall exist if: (i) in the good faith
determination of Geneva (a) Covol has violated any Environmental Law,
(b) the continuation of operations by Covol at the Premises, or the use
by Geneva of the Revert Briquettes, has or is likely to have an adverse
impact on Geneva's operation, business, or on Geneva; (ii) Covol is in
default in any way in the performance of any of its obligations
pursuant to this Agreement, the Lease Agreement, or any other written
agreement between the parties; or (iii) the Lease Agreement is
terminated by the parties; and such default under (i), (ii) or (iii) is
not cured within thirty (30) days after receipt by Covol of written
notice specifying in reasonable detail the nature of the alleged
default.
12.3. Covol shall become insolvent or involved as a debtor in
any bankruptcy proceeding for a period of more than sixty (60) days,
shall make a general assignment for the benefit of creditors, or shall
have a receiver appointed for its business.
12.4. The expiration of thirty (30) days after Geneva shall
give written notice to Covol that the Agreement and Lease are being
terminated.
12.5. Geneva has failed to pay Covol as required under Section
5.2 and such breach has not been cured within thirty (30) days after
receipt of written notice specifying such failure to pay.
Termination of this Agreement shall not prejudice any rights of, and shall not
relieve Covol from any obligations to, Geneva arising out of events that
occurred prior to such termination, provided that nothing herein shall require
Covol to perform Briquetting Services following termination. The provisions of
Sections 8, 9, 10, 11, 13, 15, 16, 17 and 18 shall survive the termination or
expiration of this Agreement.
13. Technology. Prior to the development of any new or additional
patent, copyright, ideas, designs, processes applications, or any other
intellectual property right of whatever nature regarding the production of
briquettes in which Geneva may participate, including but not limited to the
production of briquettes using petroleum coke, the parties will enter into a
Technology Development Agreement (the"Technology Development Agreement") which
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<PAGE>
shall govern the rights of the parties in and to any such new technology. Any
such new technology that may be developed at the Premises prior to execution of
such Technology Development Agreement shall be the sole property of Covol. Covol
acknowledges that Geneva shall retain all rights in any technology pertaining,
to petroleum coke. and Covol shall not make any claim of ownership of such
petroleum coke technology.
14. Representations and Warranties. Covol makes the following
representations, warranties and covenants to Geneva:
(a) Neither the execution and delivery of this Agreement, nor
the consummation of the transactions provided for herein, will violate
any agreement, lien, instrument, decree, order or judgment to which
Covol or any of its officers, directors or shareholders is a party or
by which it or they are bound. The president of Covol is duly
authorized to execute this Agreement on Covol's behalf and to
consummate the transactions contemplated hereby.
(b) Covol has all rights to enter into this Agreement and
to consummate the transactions provided for herein.
(c) The Revert Briquettes shall be produced in strict
compliance with, and shall conform to, the Guidelines.
NOTWITHSTANDING THE FOREGOING, COVOL MAKES NO OTHER REPRESENTATION OR
WARRANTY WITH RESPECT TO THE REVERT BRIQUETTES, INCLUDING, BUT NOT LIMITED TO
SUITABILITY OF USE IN GENEVA'S BLAST FURNACES OR CUPOLA OR WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, ALL OF SUCH REPRESENTATIONS
AND WARRANTIES BEING HEREBY DISCLAIMED.
15. Miscellaneous.
15.1. Inurement; Assignment; Delegation. This Agreement
shall be binding upon, and shall inure to the benefit of, the parties
hereto and their respective successors and assigns. Covol shall not
assign, delegate, substitute, pledge, transfer, hypothecate or in any
way encumber its rights and duties under this Agreement.
15.2. Entire Agreement; Modifications. This Agreement,
together with the exhibits attached hereto (which exhibits are hereby
incorporated by this reference), together with the Lease Agreement,
constitute the entire agreement between the parties with respect to the
subject matter hereof. No statement or representation shall be
considered a part of this Agreement or binding upon the parties unless
the same shall be specifically contained herein. This Agreement may not
be modified in any manner except by an instrument in writing signed by
Covol and Geneva.
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15.3. Counterparts. This Agreement may be executed in any
number of counterparts, each of which when so executed shall constitute
in the aggregate but one and the same document.
15.4. Governing Law; Personal Jurisdiction. The provisions
of this Agreement shall be governed by and construed in accordance with
the substantive laws (and not the conflicts laws) of the State of Utah.
In consideration of this Agreement, the parties hereby consent to the
personal jurisdiction of the courts of the State of Utah and agree that
any dispute between the parties hereto shall be brought only in the
district court located in Salt Lake County, Utah.
15.5. Trial by Jury. Covol and Geneva waive trial by jury
in any action, proceeding, or counterclaim brought by either of the
parties against the other on any matters arising out of or in any way
connected with this Agreement or the Lease Agreement.
15.6. Cross-default. A breach or default under the Lease
Agreement or any other written agreement between the parties shall be
deemed to constitute a breach or default under this Agreement. A
default or breach of this Agreement shall be a default or breach of the
Lease Agreement. Should any conflict arise between the terms or
conditions of this Agreement and the Lease Agreement, the terms and
conditions of this Agreement shall govern.
15.7. Captions. The captions contained herein are for
purposes of identification and convenience only and do not define,
limit or prescribe the scope of this Agreement and shall not be
considered part of this Agreement.
15.8. Additional Documents. Geneva and Covol agree to
execute such additional documents and take such further action as may
be reasonably required to carry out each of the provisions and the
intent of this Agreement.
15.9. Applicable Law. Wherever possible, each provision of
this Agreement and every related document shall be interpreted in such
a manner as to be consistent and valid under applicable law; but if any
provision of any of the foregoing shall be invalid or prohibited under
applicable law, such provision shall be ineffective to the extent of
such invalidity or prohibition, without invalidating the remainder of
such provision or the remaining provisions of this Agreement or said
documents.
15.10.Publicity. Neither party shall publicize or discuss the
terms and conditions of this Agreement with any person or entity,
without first obtaining the written consent of the other party in each
instance. Nothing herein shall be construed, however, to prevent the
parties from making such reports and disclosures as either party may
reasonably believe to be required by any applicable law or regulation.
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15.11. Remedies. The parties agree that, in the event of any
breach of any covenant under this Agreement, the non-breaching party's
remedies at law would be inadequate. The non-breaching party and its
affiliates shall, therefore, be entitled to injunctive relief in
addition to any other available remedy at law or in equity, in the
event of any breach or threatened breach of any or all of the foregoing
covenants.
15.12. No Waiver. The failure of either party to insist upon
strict performance of any of the terms or conditions of this Agreement,
or to exercise any right or remedy, shall not be construed as waiving
subsequent strict performance of any such terms, covenants, conditions,
or any such rights or remedies.
15.13. Cumulative and Severable Nature of Rights and
Agreements. The parties acknowledge and agree that the various rights
and remedies in this Agreement are cumulative and nonexclusive of one
another and that the parties' several undertakings and agreements
contained herein are severable covenants independent of one another and
of any other provisions or covenants of this Agreement. The parties
agree that the existence of any claim between the parties, whether
predicated on this Agreement or otherwise, shall not constitute a
defense to enforcement of any or all of such provisions or covenants.
15.14. Hold Harmless. Covol covenants and agrees that it will
indemnify, defend, protect and hold Geneva, and its directors,
officers, employees, representatives, successors and assigns, harmless
from any and all losses, damages, liabilities, costs, expenses, claims,
demands, actions, fines, penalties, attorneys' fees or obligations of
any nature resulting from, out of, or as a result of (i) any
non-fulfillment of any undertaking, promise or covenant on the part of
Covol set forth in this Agreement and the Original Agreement, (ii) the
presence of hazardous substances on the premises resulting in any way
from the use of the Premises or surrounding area by Covol, Covol's
agents, or Covol's assigns, (iii) any breach of duty, negligence or
willful misconduct by Covol, its directors, officers, agents,
employees, contractors, subcontractors, invitees, or persons under
Covol's control or supervision, and (iv) the Briquetting Services
under this Agreement and/or the Original Agreement (excluding only
causes due to the failure of raw materials supplied by Geneva and the
failure of the Revert Briquettes to perform in any specified manner),
or the presence of Covol, its employees, agents, representatives,
contractors, subcontractors or invitees at the Premises or at the
Geneva facilities in Utah County, Utah. Covol further agrees to
diligently defend (at its own cost) any action or proceeding involving
claims, demands and actions of all types including, but not limited to,
third party demands and claims, response and remediation costs for
violation of any Environmental Law by Covol, and any claims, demands or
actions described in this Section 15.14. Covol agrees to reimburse
Geneva upon demand for any sums reasonably expended including, but not
limited to, legal, engineering and consulting fees and expenses in
defending itself against any such claim, demand, action or proceeding.
Geneva shall have the right to select defense counsel for all demands,
claims, actions or proceedings previously described that name Geneva as
a defendant or potential defendant.
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15.15. Attorneys' Fees. In the event of any litigation
involving a dispute under this Agreement, each party shall be
responsible for its own costs and expenses in such litigation,
including attorneys' fees.
15.16. No Limitation on Other Rights. The covenants and
agreements in this Agreement are not dependent upon, connected with or
affected by the applicability or nonapplicability of any unfair
competition, trade secret, or other body of law arising from the
relationship of Geneva and Covol, and the parties' rights and remedies,
if any, under such other laws are not limited by this Agreement in any
way.
15.17. Authority of Covol. Covol's authority pursuant to this
Agreement is limited to performing Briquetting Services in accordance
with the terms in this Agreement. Covol shall have no actual or
apparent authority, and shall not represent to others that it has such
authority, to bind Geneva in any way or to execute any agreements for,
or on behalf of, Geneva, nor shall Covol use Geneva's name in any of
Covol's business dealings with others without obtaining the written
consent in each instance of an officer of Geneva. Covol is acting as an
independent contractor in its capacity pursuant to this Agreement.
Nothing contained in this Agreement or in the relationship of Geneva
and Covol shall be deemed to constitute a partnership, joint venture,
agency, franchise, factoring, or any other relationship between Geneva
and Covol.
15.18. Notices. All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given (i)
when delivered personally, (ii) when sent by telecopier (with receipt
confirmed), provided that a copy is mailed within three business days
thereafter by registered or certified mail, return receipt requested,
(iii) when received by the addressee, if sent by Express Mail, Federal
Express or other express delivery service (receipt requested), or (iv)
three business days after being sent by registered or certified mail,
return receipt requested, in each case to the other party at the
following addresses and telecopier numbers (or to such other address or
telecopier number for a party as shall be specified by like notice;
provided that notices of a change of address or telecopier number shall
be effective only upon receipt thereof):
if to Geneva to:
Max E. Sorenson
Geneva Steel Company
P.O. Box 2500
Provo, Utah 84603
Telecopier No. (801) 927-9198
and
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if to Covol to:
Steven Brown
COVOL Technologies, Inc.
3280 North Frontage Road
Lehi, Utah 84043
Telecopier No.: (801) 768-4483
15.19. Force Majeure. Performance by either party to this
Agreement shall be excused to the extent such party's performance is
rendered impossible or impracticable by one or more events of Force
Majeure. As used herein, the term "Force Majeure" means any of the
following causes to the extent such cause was beyond the reasonable
control of the party affected thereby: acts of God, strikes or other
collective action of labor, fires, floods, storms, tornadoes,
earthquakes, explosions, public disturbance, war, or any other cause,
whether similar or dissimilar to those specifically enumerated herein,
which is unforeseen or unforeseeable and is beyond the reasonable
control of the party affected thereby; provided, however, that nothing
herein, shall (a) require the settlement of any labor dispute against
the desire of the party affected thereby or (b) excuse Covol or Geneva
from the timely payment of any money when due hereunder.
15.20. No Consequential Damages. Notwithstanding anything in
this Agreement to the contrary, neither party hereto shall be
responsible or liable to the other for any special, incidental or
consequential damages arising in connection with this Agreement.
Nothing set forth in this Section 15.20 shall alter, negate or affect
in any way the specific remedies of Geneva set forth in this Agreement
for the default or failure of Covol hereunder.
16. Release and Waiver. Covol hereby knowingly and intentionally
waives, discharges and forever releases Geneva and its directors, officers,
employees, agents, attorneys, representatives, successors and assigns from and
against any and all claims, demands, defenses, obligations arising out of or
related in any way to events and circumstances occurring prior to the date
hereof. Geneva hereby knowingly and intentionally waives, discharges and forever
releases Covol and its directors, officers, employees, agents, attorneys,
representatives, successors and assigns from and against any and all claims,
demands, defenses and obligations related in any way to events and circumstances
occurring prior to the date hereof, except for any such claims, demands,
defenses or obligations which may be asserted by third parties or which are in
any way related to (i) personal injury or death, (ii) property damage, (iii) any
condition giving rise to liability as defined under current or future
Environmental Law, or (iv) failure to comply with any current or future
Environmental Law. As of the date hereof, Geneva is not aware of any such
claims, demands, defenses or obligations.
17. Right of First Refusal. In the event that Covol receives,
with respect to all or a portion, of the ETG Equipment, an offer (the "Offer")
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from a bona fide third-party purchaser for the sale, transfer or conveyance of
all or a portion of the ETG Equipment which Covol desires to accept, Covol shall
deliver a copy of such Offer to Geneva. Geneva shall have a period of forty-five
(45) days after the date of delivery of such Offer to review the Offer and to
elect to purchase the ETG Equipment, or any portion thereof, in accordance with
the terms of such Offer. In the event that Geneva delivers written notice to
Covol within such forty-five (45) day period electing to purchase the ETG
Equipment, or portion thereof, in accordance with the terms of such Offer, Covol
and Geneva shall proceed to consummate such transaction in accordance with the
terms of such Offer. In the event that Geneva delivers written notice to Covol
that Geneva has elected not to purchase the ETG Equipments or any portion
thereof, or Geneva fails to deliver to Covol its written election to purchase
the ETG Equipment, or any portion thereof, as the case may be, within such
forty-five (45) day period, Covol shall have the right to consummate the
transaction contemplated in the Offer with the party extending the same, but
only on the terms and conditions and for the consideration set forth in the
Offer. If, however, such sale, conveyance or transfer to the proposed purchaser
or transferee is not so consummated, the right of first refusal set forth in
this Section shall once again be effective. If such sale, conveyance or transfer
involves less than all of the ETG Equipment, this Section shall continue to
apply to the rest of the ETG Equipment not previously sold, conveyed or
transferred, and Covol must comply with the terms, conditions and procedures set
forth herein on any subsequent proposed sale, conveyance or transfer. Covol
shall not remove the ETG Equipment from the Premises prior to the expiration of
such forty-five (45) day period without the prior written consent of Geneva. If
Covol does not receive such an offer, the provisions of this Section 17 shall
not prevent Covol from removing the ETG Equipment from the Premises at the
termination or expiration of this Agreement. The provisions of this Section 17
shall survive the expiration or termination of the Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
GENEVA STEEL COMPANY, a Utah
corporation
By: /s/ Max E. Sorensen
Its: Sr. Vice President Engineering &
Technology
COVOL TECHNOLOGIES, INC., a
Delaware corporation
By: /s/ Kirby Cochran
Its: President
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Exhibit "A"
Guidelines for
BRIQUETTING OF IRON AND STEEL REVERT MATERIALS
The iron and steel reverts must be less than 2.5% moisture before blending with
the other dry materials. The moisture in the reverts is expected to be
approximately 5% to 12.5% as received.
Revert Briquettes will be produced by Covol using the following mixture of raw
materials for each 100 tons of Revert Briquettes produced:
<TABLE>
<CAPTION>
Dry Materials Wet Materials
(in tons) (in tons)
Portland Cement, Hydrated
Iron Reverts Steel Reverts Type 1 of 1-A Lime Molasses Water
<S> <C> <C> <C> <C> <C>
target: 57.3 target: 28.2 range: 8.1 - 8.9 range: range: *
range: 54-60 range: 27-30 0.81 - 0.86 4.9 - 5.3
</TABLE>
* The tons of water to be added per 100 tons of briquettes will equal (2.75 -
revert moisture %) x 0.855.
All dry materials shall be blended together before the wet materials are added.
The molasses should be at 160(degrees)F before blending with dry materials. If
possible, the water should be mixed with the molasses before blending with dry
materials.
If molasses/water mixing is not possible, the final mixing of all materials
should be very thorough.
During the Trial Phase, the static force on the briquetter shall be at least
1500 p.s.i.g. and the alignment of the roller shall be within (plus or minus)1/8
inch. Thereafter, if it is determined that such levels need to be adjusted to
make a suitable Revert Briquette the parties shall mutually agree to such an
adjustment in these Guidelines.
The green Revert Briquettes must not be dropped, while under the control of
Covol, from a distance of over 6' in a single drop.
13
FIRST AMENDMENT
TO
LEASE AGREEMENT
This First Amendment to Lease Agreement (this "Agreement") is entered into
the 14th day of May, 1996 (the "Effective Date"), between GENEVA STEEL COMPANY,
a Utah corporation ("Landlord") and COVOL TECHNOLOGIES, INC., a Delaware
corporation formerly doing business as Environmental Technologies Group
International, Inc. ("Tenant").
Recitals:
A. Landlord and Tenant entered into a certain Lease Agreement dated May
12, 1995, (the "Lease Agreement'), wherein Tenant agreed to lease from Landlord
certain Premises located in Utah County, as such Premises are more fully
described in the Lease Agreement
B. The parties desire to amend the Lease Agreement as provided herein.
Amendment:
NOW, THEREFORE, in consideration of the promises and covenants set
forth herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Tenant and Landlord agree to amend
the Lease Agreement as follows:
1. Definitions. The capitalized terms used in this Amendment
shall have the same meanings ascribed in such terms in the Lease Agreement.
2. Services Agreement. From and after the Effective Date, the
"Services Agreement" referred to in Article I of the Lease Agreement shall refer
to that certain Amended and Restated Briquetting Services Agreement dated as of
May 14, 1996.
3. Maintenance of Premises. The last sentence of Section 6.02 of
the Lease Agreement is hereby deleted in its entirety and the following
substituted in lieu thereof:
Landlord shall have no obligation to repair or maintain the
Premises, Landlord's obligation being limited solely to the
payment of any Fee due pursuant to Section 5 of the Services
Agreement.
4. Utilities. The reference to "Section 6" in the first line of
Article VIII of the Lease Agreement is hereby changes to refer to "Section 10."
<PAGE>
5. Entire Agreement. The phrase "and the Technology Rights
Agreement referred to therein," in the first sentence of Section 17.02 of the
Lease Agreement is hereby deleted.
6. Notices. Section 22 of the Lease Agreement is hereby amended
to provide that notices to Tenant shall be sent in the manner provided in the
Lease Agreement addressed as follows:
Steven Brown
COVOL Technologies, Inc.
3280 North Frontage Road
Lehi, Utah 84043
Telecopier No.: 768-4483
7. Benefit. This Amendment is for the sole benefit of the parties
hereto and shall not be for the benefit or enforceable by any other person or
entity.
8. Ratification. Except as specifically modified herein, the parties
hereby ratify and reaffirm the terms, conditions, warranties and guarantees set
forth in the Lease Agreement.
IN WITNESS WHEREOF, the parties have caused this Amendment to be
executed as of the day and year first above written.
"Tenant"
COVOL TECHNOLOGIES, INC., a Delaware
corporation formerly known as
Environmental Technologies International,
Inc.
By /s/ Ken Young
Its President
"Landlord"
GENEVA STEEL COMPANY, a Utah
corporation
By /s/ Max Sorenson
Its Sr. Vice President Engineering &
Technology
[Letterhead] Lockwood Greene
Planners/Engineers/Architects/Managers
- - ------------------------------------------------------------------------------
4201 Spring Valley Road, Suite 1500
Dallas, Texas 75244
July 26, 1996
Mr. Ken Young
CEO
Covol Technologies, Inc.
3280 North Frontage Road
Lehi, Utah 84043
Dear Ken:
Andy Kapusta and I enjoyed meeting with you and the Covol Team last Tuesday and
we believe this is now a sound approach to proceed with the Utah Synfuel Plant
No. 1 and install both extruders initially in Carbon County. We are all
optimistic that Tax Code 29 will be extended - hopefully this will allow many
additional opportunities in 1997 and 1998 for the coal synthetic agglomeration
facilities.
The following documents our discussion with regard to Lockwood Greene's
investment of its $600,000 fee associated with Contract LG01. The contract as
currently executed provides for Covol to pay Lockwood Greene's $600,000 fee,
plus cost of all engineering and construction personnel and all associated
expenses.
Lockwood Greene (LG) is willing to use its $600,000 fee in accordance with the
following distribution:
1. LG's fixed fee for Utah Synfuel No. 1 and LG Contract
LG01-due and payable in cash up front $100,000
2. LG's equity investment in Alabama Synfuel No. 1 400,000
3. LG's exclusive rights to provide EPCM services for both
steel mill wastes agglomeration and metallics recovery
projects and coal fines agglomeration projects 100,000
Total LG01 Fee $600,000
In addition, Lockwood Greene/CEC would be reimbursed for all man hours expended
and expenses during the engineering, procurement, and construction phases of the
project in accordance with Contract LG01. We would estimate these costs at
approximately $300,000.
<PAGE>
Mr. Ken Young
Covol Technologies, Inc.
July 27, 1996
Page 2
We would like to see additional details with regard to the equity investment in
Utah's Synfuel No. 1. We want to insure that our equity investment will not
expose Lockwood Greene to any other liabilities with regard to the
operational/financial aspects of Utah Synfuel No. 1. We would want
indemnification from Covol that we would be protected from any financial claims
on the project from Covol and third parties.
If you are in agreement with the framework of this understanding and the
attached Memorandum of Understanding between Covol Technologies and Lockwood
Greene Engineers, we would request that you sign two copies of this letter and
the attached Memorandum of Understanding and return one signed copy for our
files. Once this document is signed, we will bill the $100,000 fixed fee
associated with Contract LG01 and we would expect receipt of this payment within
thirty days after invoicing.
Again, we appreciate the opportunity of working with Covol in the development of
these coal agglomeration projects and we further look forward to developing the
steel mill waste stream agglomeration and metallics recovery projects.
Very truly yours,
LOCKWOOD GREENE ENGINEERS, INC.
H. David Rosamond
Senior Vice President
HRD:bp
Attachment
ACCEPTED BY:
COVOL TECHNOLOGIES, INC. LOCKWOOD GREENE ENGINEERS, INC.
By: /s/ Mike Midgley By: /s/ H. David Rosamond
Title: President Title: Sr. Vice President
<PAGE>
MEMORANDUM OF UNDERSTANDING
BETWEEN
COVOL TECHNOLOGIES, INC.
AND
LOCKWOOD GREENE ENGINEERS, INC.
Covol Technologies, Inc. (Covol) is a leader in developing technologies for
agglomeration of coal fines and various steel mill waste streams and recovery of
marketable metallic and other marketable minerals/oxides. Covol has their
principal office at:
Covol Technologies, Inc.
3280 North Frontage Road
Lehi, Utah 84043
Lockwood Greene Engineers, Inc. (LG) has extensive planning, environmental
permitting, engineering, procurement, and construction management experience in
providing professional EPCM services for a wide range of mining and metals
industry clients both domestically and internationally. LG has their principal
offices at:
Lockwood Greene Engineers, Inc.
4201 Spring Valley Road, Suite 1500
Dallas, Texas 75244
In view of a common interest developing coal agglomeration and metallic
recovery and recycling facilities to recover metallic from various steel mill
waste streams, Covol and LG have this day concluded this agreement for the
propose of jointly pursuing, obtaining and executing coal agglomeration, metals
recovery, and recycling facilities.
1. Cooperation. Both firms agree that they will cooperate together in
the development and exchange of information as well as in the promotion of their
respective and mutual interests. Both firms agree that the pursuit of the
aforementioned projects are on an exclusive basis. Both parties will promote
projects in the interest of both firms and will communicate to each other on
business opportunities that come to their knowledge.
2. Job Prospects. Whenever one of the parties obtains or is offered a
job assignment in the field of coal agglomeration or metallic recovery, it will
disclose such a possible collaboration to the other party. In such case, it will
be determined by discussion between the parties if such collaboration could be
mutually advantageous. If, after the discussion, one of the parties has a strong
compelling or contractual reason to work with a third party or desires not to
further pursue such assignment, it will so advise the other party in writing,
and after acceptance by the other party, will leave both parties free from any
further obligations pursuant to this Memorandum of Understanding as it concerns
such specific job assignment.
3. Future Agreements. When a prospect is deemed mutually
advantageous for joint participation, the form of participation, the particular
1
<PAGE>
organization, financing, work share, project share, etc. will be the object of
individual agreements to be entered into by the parties to this Memorandum of
Understanding.
4. Prohibitions. It is expressly understood that neither party to this
Memorandum of Understanding shall have the right to represent the other party or
to use in any way the name, characterization, or trademark of the other party.
Neither party to this Memorandum of Understanding shall utilize or commit any of
the money, property, or credit of the other party.
5. Evaluation. The parties will meet together whenever required
but in no event less than every six (6) months to evaluate the objectives and
achievements of the parties' collaboration pursuant to this Memorandum of
Understanding.
6. Notice. Any notice required to be given herein shall be
deemed to have been sufficiently given to either party for all purposes hereof
if mailed by registered airmail, postage prepaid, addressed as follows:
Lockwood Greene Engineers, Inc. Covol Technologies, Inc.
Attn: H. David Rosamond Attn: Steven R. Brown
4201 Spring Valley Road, #1500 3280 North Frontage
Dallas, Texas 75244 Lehi, Utah 84043
7. Force Majeure. Neither party shall be in default of the terms
of this Memorandum of Understanding if such default is directly or indirectly
caused by an act of force majeure.
8. Exclusivity. LG will have a right of first refusal for engineering,
procurement, and construction management services exclusively on all coal
agglomeration, steel mill waste stream metallics agglomeration, and metal
recovery projects provided that LG is acceptable to ultimate customer.
9. Remuneration. In return for the exclusivity committed to LG
in Paragraph 8, LG will reduce the $600,000 fixed fee by $100,000 for Contract
LG01 for the first coal fines agglomeration facility.
10. Recision and Mutual Release. In further consideration of this
Memorandum of Understanding, the parties hereby cancel those certain twenty-one
contracts (LG02-LG22) entered into between the parties on December 28, 1995 and
December 29, 1995. The parties also release each other from any and all claims
and liabilities against each other and arising from said contracts. (Contract
LG01 remains in force.)
11. Terms of Memorandum of Understanding. This Memorandum of
Understanding will remain in force for one (1) year from the date of this
Memorandum of Understanding or until one of the parties gives written notice of
its desire to discontinue it with at least thirty (30) days' notice. If this
notice is given while jobs already taken in collaboration between the parties
are still outstanding, each of the parties will continue its performance until
2
<PAGE>
such work is properly accomplished. If none of the parties gives notice within
the aforesaid one (1) year, this Memorandum of Understanding will automatically
be renewed for another one (1) year and so on.
12. Assignment. This Memorandum of Understanding shall not be
assigned by either of the parties without the written consent of the other
party.
IN WITNESS WHEREOF, the parties hereto have entered into the Memorandum
of Understanding effective as of the 28th day of August 1996.
LOCKWOOD GREENE ENGINEERS, INC. COVOL TECHNOLOGIES, INC.
By: /s/ H. David Rosamond By: /s/ Mike Midgley
H. David Rosamond Mike Midgley
Title:______________________ Title: President
3
AMENDMENT TO
STANDARD FORM OF AGREEMENT BETWEEN
OWNER AND DESIGN/BUILDER
DESIGN AND CONSTRUCTION AGREEMENT
This agreement amends (the "Amendment") the DESIGN AND CONSTRUCTION AGREEMENT
entitled "LG01" entered into between Covol Technologies, Inc. (the "Owner') and
Lockwood Greene Engineers, Inc., (the "Design/Builder") on December 28, 1995.
1. All references within the Agreement to the Work, Scope of Work, Project
or services to be provided by the Design/Builder (including but not
limited to all references to "construction") are amended so as to be
consistent with the amended Scope of Work described in Paragraph 19 of
this Amendment. The Design/Builder shall not be responsible for and
shall not provide, warrant, or indemnify the Owner for any materials,
equipment or services which are part of the Owner's responsibilities
defined in Paragraph 19 of this Amendment, except to the extent that
Design/Builder has specific responsibilities for such items in
Paragraph 19 of this Amendment.
2. Article 1.1.2 is amended to read as follows: "The Project is the total
design and construction for which the Design/Builder is responsible
under the Agreement, including all professional design services and
site management. All labor, materials and equipment used or
incorporated in such design and construction shall be the
responsibility of the Owner."
3. The following is inserted as Article 1.1.5: "The Design/Builder shall
act as Agent for the Owner in all dealings with the Vendor(s),
Supplier(s) and Contract(s) under this agreement with respect to the
Work. All contracts with the Vendor(s), Supplier(s) and Contractor(s)
shall be with the Owner and not the Design/Builder. Prior to making any
financial commitments, the Design/Builder shall obtain the Owner's
written approval except within the scope of the Project where time
constraints make advance approval impractical or in cases of extreme
emergencies which might involve life or property damage. The Design/
Builder will immediately notify the Owner of such orders or commitments
(within five days). Owner and Design/Builder shall execute a separate
Limited Agency Agreement to define the terms and conditions of this
agency relationship. This Limited Agency Agreement is attached as
Exhibit D."
4. Article 2.1.1 is amended to read as follows: "Design services shall he
performed by qualified architects, engineers and other professionals
selected and paid by the Design/Builder. The professional obligations
of such persons shall be undertaken and performed in the interest of
the Design/Builder. The Design/Builder shall negotiate and prepare the
contract documents between the Owner and such contractors and
suppliers. The Design/Builder shall retain control and management of
the contractors and suppliers. Payments to construction contractors and
suppliers shall be made by the Owner upon Design/Builder's approval.
5. Article 2.2.4 is amended to read as follows: "Unless otherwise provided
in the Contract Documents, the Design/Builder shall provide or cause to
be provided and shall pay for design services and construction
management. All labor, materials, equipment, tools, construction
equipment and machinery, water, heat, utilities, transportation and
other facilities and services necessary for proper execution and
completion of the Work, whether temporary or permanent and whether or
not incorporated or to be incorporated in the Work will be paid for by
the Owner."
<PAGE>
6. Article 2.2.8 is amended to state that the Design/Builder shall advise
the Owner as to work which does not conform to the Construction
Documents.
7. Articles 2.2.9, 2.2.10, 2.2.12, 2.2.14, 2.2.16, 4.5, 5.1.7, 5.1.8 and
5.1.9 are deleted.
8. Article 3.3 is amended to state that Owner will pay all the listed
fees.
9. Article 4.1 is amended to replace "construction" with "construction
management."
10. Article 4.3 is replaced in its entirety with the following:
"Design/Builder will perform its services in a timely and efficient
manner."
11. Article 5.1.4 is amended to provide that Owner shall pay each
contractor and supplier directly.
12. Article 5.2.1 is amended to specify that Design/Builder's final payment
shall not be delayed due to causes within Owner's responsibilities.
13. Article 6 is amended to make Owner responsible for all safety issues
relating to the aspects of the Project which are under the control of
Owner. All subcontractors will be required to name Owner and
Design/Builder as additional insureds. Substitute "Owner" for
Design/Builder in all Article 6.4.
14. Article 7.5.1 is amended to read as follows: "The Design/Builder shall
require a surety bond from each of the subcontractors for the full
amount of the respective subcontract covering the faithful performance
of such subcontractor and the payment of all obligations arising
thereunder."
15. Article 7.6.1 is amended to read as follows: "The Design Builder shall
provide a Professional Liability Insurance Policy for a maximum amount
of $10,000,000 aggregate.
16. Article 13.2.5 is amended to specify a fixed fee of $500,000,
consisting of a cash payment of $100,000 and an equity position of
$400,000 in one of Owners other projects.
17. Articles 13.3.1 and 13.3.2 are deleted.
18. Article 9.1 is amended to replace "correct Work rejected by the Owner
or" with "immediately advise Owner (within five days) of Work."
19. The Basic Services and Scope of Work as described in Articles 14.1 and
14.2 of the Agreement are amended to change some responsibilities from
the Design/Builder to the Owner, and Article 14 is amended to read as
follows:
14.1 Scope of Work
14.1.1 The Design/Builder shall provide all professional engineering
services, materials, labor, and equipment associated with the design
and construction at a Coal Fine Agglomeration Facility to be
constructed at a site to be designated by the Owner.
14.1.2 The Facility will be rated at an average capacity of 50 tons per
hour of finished product at a moisture content of no more than 10 per
<PAGE>
cent (10%). The Facility will have an annual rated capacity to allow it
to produce 360,000 tons annually at 7,200 hours per year of operation.
14.1.3 The Facility will utilize the approximately 5,000,000 tons
currently located in Carbon County, Utah. The coal fines are generally
at 15% moisture, 14% ash, 0.5% sulphur, 30% volatile matter, and 12,500
Btu's per pound. All percentages are based on dry ash free basis.
14.1.4 The Facility process flow diagram is attached and consists of
the following key equipment components:
1 ea Rubber Tire Wheel Loaders;
1 ea Coal Feed Bins;
1 ea Portable Power Screen;
1 ea Metal Detection and Removal System
1 ea Continuous Mixing System capable of mixing the dry coal
fines with 4 to 6 per cent binder;
1 ea Binder/Water/Acid Distribution System including moisture
detections, piping, values, pumps, and automated controls;
1 ea Binder Production & Storage Facility with freeze
protection system (off-site);
1 ea Coal Extruding System with vacuum system and support
equipment;
1 ea Material Handling System with belt conveyors and bulk
recovery equipment to Radial Stacker capable of storing
15,000 tons of finished product;
1 ea Finish Drying Ovens capable of removing 10% moisture;
1 ea Dust Collection System;
1 ea Facility Electrical Controls including motor control
center, Facility automation controls, instrumentation, and
control room;
1 ea Truck Weigh Station;
1 ea Fire Protection System;
1 ea Metal building to cover the extrusion equipment and
dryers;
1 ea Portable Trailer for plant office and laboratory;
1 ea. Office and laboratory equipment.
The other major equipment package would be provided from companies that
specialize in the manufacture of clay extruding equipment and large material
drying systems. J.C. Steel and Sons, Statesville, North Carolina has assisted
Owner in the development of the technology.
The Owner will be responsible for the site survey, soils investigation,
utilities to project site and process design.
14.1.5 The site location will be at RailCo Coal terminal, Carbon County, Utah.
Any site demolition work, construction of utility above normal service
extensions and connections, and major earthwork required will be added through
Change Orders.
<PAGE>
14.1.6 All utilities, including fuel, electricity and water, will be the
responsibility of the Owner.
14.1.7 The Owner will obtain all environmental permitting such as air/water
quality permits and coal-related permitting. The Design/Builder will assist in
the coordination of engineering and construction-related permitting with local
governmental entities.
14.1.S The Design/Builder will assist Owner in developing Operation and
Maintenance Manuals, Spare Part Lists and other plant-related documents. The
Design/Builder shall also provide start-up assistance and operational training
for the first month of plant operation.
14.2 Performance Demonstration and Training
14.2.1 The Design/Builder shall design the Facility to allow for production of
finished product at a rate of 50 tons per hour at ten per cent (10%) moisture.
The Design/Builder will secure guarantees from the extruder manufacturer at 50
tons per hour at 10% moisture to protect the interests of the Owner. The Owner
is responsible for commissioning, operating, and maintaining the Facility. The
Design/Builder will furnish start-up assistance and operational assistance. The
Owner and Design/Builder will mutually develop an acceptable performance
demonstration and training program within ninety (90) days of mechanical
completion.
14.2.2 Owner will be responsible for guarantees to the performance of the
finished product such as durability, Btu value, ash content and grindability.
14.2.3 (Deleted)
14.3 Project Meetings
14.3.1 Owner will hold frequent Project Meetings on a regularly scheduled basis
for the purpose of ensuring orderly and expeditious completion of the Work. Such
meetings will include Design/Builder's Project Manager and responsible
representatives or Subcontractors, and when desirable, Vendors or Suppliers.
14.3.2 At these meetings, schedule and progress shall be reviewed, work
activities and administrative procedures coordinated, problem areas identified
and corrective actions initiated, pending changes discussed, and safety
activities reported. Any other pertinent or timely subjects should be included
on the meeting agenda.
14.3.3 Minutes of each meeting shall be promptly issued by Design/Builder to all
attendees and/or designated persons.
14.4 Design/Builder shall, in addition to other information required by the
Contract Documents, provide, in a format acceptable to Owner, the following
reports, compiled separately for each facility, and cumulatively: Project
Procedures Manual; Monthly Progress Report (will include procurement status
report and schedule updates).
<PAGE>
20. If there are any conflicts between the Agreement and this Amendment,
the provisions of this Amendment shall control.
This Amendment entered into this 16 day of Sept., 1996.
OWNER DESIGN/BUILDER
By: /s/ Michael Midgley By: /s/ H. David Rosamond
Its: President Its: Sr. Vice President
[Letterhead]
SMITH BARNEY, A Member of TravelersGroup.
Monday, July 08, 1996
Covol Technologies
3280 North Frontage Road
Lehi, UT 84043
Attn: Asael T. Sorensen
Corporate Counsel
The purpose of this letter is to terminate, effective immediately, the
relationship between Smith Barney Inc. ("Smith Barney") and COVOL Technologies,
Inc. ("COVOL") as per paragraph 4 of the engagement letter dated December 18,
1995 (the "Letter"). As stated in the Letter, this termination shall not affect
the indemnification, contribution, and confidentiality obligations of COVOL or
the right of Smith Barney to receive and fees and expenses accrued to date.
However, Smith Barney agrees to terminate its right of first refusal under the
Letter and its claim on any Transaction Fee (as defined in the Letter), provided
that COVOL discharges in full the accrued fees and expenses owing to Smith
Barney on or before the following scheduled dates.
$39,139.37 in accrued expenses by July 31, 1996, and
50,000.00 in accrued fees by August 31, 1996.
$89,139.37
For reference, included is a copy of Smith Barney's most recent invoice dated
May 9, 1996 which has been credited for the payment made by COVOL of $32,747.71
(which covered the first of two invoices from Andrews & Kurth for legal services
performed on COVOL's behalf).
Sincerely yours,
SMITH BARNEY, INC.
By: /s/ Peter A. Tague
Name: Peter A. Tague
Title: Vice President
Accepted and agreed to as of the date set forth above:
COVOL TECHNOLOGIES, INC.
By: /s/ Michael Midgley
Name: Michael Midgley
Title: President
Smith Barney, Inc. 388 Greenwich Street New York, NY 10013 212-816-6000
[Letterhead]
CoBon Energy, L.L.C.
1145 East South Union Avenue
Midvale, Utah 84047
Telephone: (801) 255-6666
Fax. (801) 566-0088
August 20, 1996
Mr. Ken Young
Covol Technologies, Inc.
3280 N. Frontage Road
Lehi, UT 84043
RE: Modification to Letter of Understanding
Dear Ken,
This letter is a follow up to our conversation on August 12, 1996 and our
meeting with you and Mike Midgley on August 20, 1996. Before responding to your
proposal to revise the Covol/CoBon Letter of Understanding, as set forth in your
letter of August 13, 1996, let me thank you for your expressions of appreciation
and support during our meetings. We were pleased to hear that you recognized
CoBon's good faith performance and contributions to date.
Based upon our discussion and meeting this morning, CoBon would agree to
restructure the relationship as set forth below.
Covol will grant to CoBon an equity position in Alabama Synfuels #1 or, at
CoBon's option, in the first limited partnership established by Covol and
hereafter determined to be operational, exclusive of Utah Synfuels #1 (the
"Project"). The equity position granted will be for a specified equity interest
percentage in the Project, currently calculated at 1.59%, calculated upon an
anticipated revenue distribution value of $100,000/yr. over the eleven year
expected life of the Project (i.e., $1,100,000 minimum distribution). In the
event that only one limited partnership/project is successfully developed by
Covol, CoBon's equity position shall be in such limited partnership/project.
Covol agrees to sell to CoBon (an) irrevocable license(s) for the purchase price
of one dollar ($1.00) to use Covol's proprietary coal technology and to use its
patented binder in the production of coal extrusions or briquettes for an annual
aggregate capacity of which will not exceed 1,500,000 tons. Covol agrees to
grant the license for the first 500,000 tons of production capacity for CoBon
developed facility(ies) free of any royalty payment. CoBon agrees to pay Covol a
one time license royalty fee of two dollars ($2.00) per ton for all additional
production capacity tons in the range of 500,001 to 1,000,000 tons. CoBon
further agrees to pay Covol a one time license royalty fee of two dollars and
fifty cents ($2.50) per ton for all additional production capacity tons in the
range of 1,000,001 to 1,500,000 tons. The license(s) will expire on December 31,
2007, unless extended by Congress to a later date, and will be used in the CoBon
developed plants (i.e. license may be assigned to specific projects developed).
<PAGE>
Mr. Ken Young
August 20, 1996
Page 2
The royalty fee(s) will be paid to Covol after each plant(s) is operational and
is utilizing the Covol binder. Payment will be made at the end of each quarter
based on the production during that quarter. Payments will end upon the payment
of a total fee amount equal to the annual installed production capacity of the
plant(s) as described in the previous paragraph.
The sites, from which CoBon will select the plants to be constructed and the
associated licensed production capacity, will coincide with CoBon's development
efforts to date and will be as follows:
1. Somerset, Pennsylvania Area
Svonavec, Inc.
Solar Fuels Company, Inc.
PBS Coal Co.
Nicewinder Coal Co.
New Action Coal Co.
2. Grant Town, West Virginia Area
Horizon Ventures
Edison Mission Energy
Grant Town Cogeneration
Morgan Town Generation
3. Hazelton, Pennsylvania Area
Continental Energy
Panther Creek Partners
NEPCO
Whilobrator
North Hampton Generation
4. Diversified Resources, Intl. Project
Ohio, West Virginia, Pennsylvania Area
5. Consol Inc. Projects
Ohio, West Virginia, Virginia, Pennsylvania Area
6. LG&E Project
West Virginia, Pennsylvania, Kentucky Area
7. AES Corporation Projects
AES BV Partners-Beaver Valley
AES Deepwater, Inc.
AES Riverside
<PAGE>
Mr. Ken Young
August 20, 1996
Page 3
AES Shady Point, Inc.
AES Thames
AES Warrior Run, Inc.
8. Somersville, West Virginia Area
Island Creek Coal Co. (Excluded from Consol Acquisition)
9. Alphius, West Virginia Area
US Steel Properties
10. Canton, Ohio Area
Miller Mining
11. Beth Energy Project
Clarksburg, West Virginia
Former Beth Energy Properties
Covol agrees to sell and CoBon agrees to buy Covol's binder at a price equal to
the actual cost of the binder, plus a 20% profit for all binder utilized.
Subject to obtaining appropriate permits, Covol will, at its discretion,
construct binder preparation plants on or near the Plant sites for cost
effectiveness. Covol will control the production of binder to protect its
technology, patents and trade secrets. Covol will provide CoBon with a firm
price commitment for binder within two weeks after a site is located. Based upon
our meeting today, you indicated that the current cost is approximately $4.16
per ton in the State of Utah.
Covol agrees to relinquish (i) any interest in any plants selected and developed
by CoBon and (ii) any other rights that may have existed pertaining to such
plants under the Letter of Understanding. CoBon will be permitted to use Covol's
trademarks, trade names and service marks only to the extent required to meet
the requirements of Section 29 and to satisfy potential buyers/investors of the
plants or the output that the plants are producing as a qualified fuel under
Section 29.
Covol will fully cooperate with and provide necessary information to CoBon as
reasonably required in CoBon's efforts to qualify the plants for favorable
treatment under Section 29, and to obtain any necessary assurances from the IRS,
such as a Private Letter Ruling that the plants will so qualify.
<PAGE>
Mr. Ken Young
August 20, 1996
Page 4
Finally, in consideration of the promises contained herein, Covol and CoBon
agree to and do hereby mutually release and discharge one another from any and
all duties, rights, interest, liabilities and the performance of obligations
arising from or contained in the parties' January 31, 1996 Letter of
Understanding.
CoBon Energy, L.L.C. Covol Technologies, Inc.
By: /s/Steven R. Nash By: /s/ Ken Young
Steven R. Nash Ken Young
Its: President Its: CEO
SRN/cm
<PAGE>
LICENSE AGREEMENT
This License Agreement ("Agreement") is entered into and shall be
effective this 10th day of September, 1996 between Covol Technologies, Inc.
("Covol"), residing at 3280 North Frontage Road, Lehi, Utah 84043 and CoBon
Energy, L.L.C. ("CoBon"), residing at 1145 East South Union Avenue, Midvale Utah
84047.
ARTICLE 1
BACKGROUND
1.1 Covol has developed and owns proprietary "Coal Technology" as
described herein.
1.2 Covol desires to have CoBon commercially exploit the Coal
Technology.
1.3 Covol is willing to grant to CoBon, and CoBon is willing to
acquire from Covol, an irrevocable license to use the Coal Technology as
described herein.
ARTICLE 2
DEFINITIONS
2.1 "Coal Technology" means Covol's proprietary method of
reclaiming and utilizing discarded and newly formed coal fines and other
by-products of coal mining to produce a solid proprietary product in the form
of briquettes, extrusions or pellets. "Coal Technology" also includes Covol's
proprietary Inventions (patented and unpatented), trade secrets, know-how,
working prototypes, manufacturing information, improvements and other
intellectual property relating to Covol's proprietary method of reclaiming
discarded coal fines and other by-products of coal mining to produce Covol's
proprietary briquettes. Some of Covol's Inventions relating to the "Coal
Technology" (as well as other technologies which are not the subject of this
Agreement) are disclosed, described and claimed in United States Patent No.
5,453,103, which issued 26 September 1995 ("the '103 Patent"). Some of Covol's
Inventions relating to the "Coal Technology" (as well as other technologies
which are not the subject of this Agreement) are disclosed, described and
claimed in the United States Patent Application Serial No. 08/354,693, filed on
13 December 1994, entitled "RECLAIMING AND UTILIZING DISCARDED AND NEWLY FORMED
COKE BREEZE, COAL FINES, AND BLAST FURNACE REVERT MATERIALS, AND RELATED
METHODS" ("the '693 Application"). The United States Patent and Trademark Office
has recently issued a "Notice of Allowability" of many of the claims in the '693
Application. Accordingly, Covol reasonably expects that a patent will soon
mature from the '693 Application. In Article 3, CoBon receives an exclusive
license with respect to the "Coal Technology."
"Coal Technology" includes the binding technology and patented process
for manufacturing a "solid synthetic fuel" for qualification and eligibility for
Internal Revenue Code
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Section 29 energy tax credits. When used in conjunction with Covol's patented
manufacturing process, the binding technology produces a qualifying "solid
synthetic fuel" from coal fines in the context of a full scale or less demanding
manufacturing application. Consistent with the requirements of Internal Revenue
Code Section 29, the "Coal Technology" employs a unique substrate to chemically
change and bond the coal fines, thereby creating a qualifying solid synthetic
fuel. The detectable bonding between the coal fines is the result of the
binder's ability to create an actual chemical change to the coal fines and is
more than a simple physical mixture of polymer, coal fines and other additives.
Covol's "Coal Technology" does not cover any other technology or
application of technology, including but not limited to Covol's proprietary
"Coke Breeze Technology," "Revert Technology" and "Iron Recovery Technology "
ARTICLE 3
LICENSE GRANT
3.1 License. Covol hereby grants to CoBon an irrevocable license
to use Covol's proprietary Coal Technology, including but not limited to the
Inventions disclosed and claimed in the '103 Patent and the '693 Application, in
connection with CoBon's development, use, production, manufacturing, marketing
and sale of coal briquettes, extrusions and related products (as well as
applicable tax credits generated thereby), its development and construction of
manufacturing, briquetting or extruding facilities, plants and operations, and
its formation of necessary corporations, companies, partnerships, ventures or
other legal entities preparatory or incident thereto ("License").
The License to use the Coal Technology and to use Covol's patented
binder in the production of coal briquettes or extrusions shall be for an annual
aggregate capacity not to exceed 1,500,000 tons during the term hereof. The
License shall be available for use by CoBon in connection with its development
of sites consistent with CoBon's efforts to date, including those sites outlined
in the parties' August 20, 1996 Letter of Understanding, from which specific
plants will be selected for construction and from which the associated licensed
production capacity will be derived. CoBon will use its best efforts to select
and construct projects from the list of projects. On or before October 15, 1996,
CoBon will give Covol a project status report on project development. Any
project sites which CoBon does not intend to select and develop will be
identified so that Covol or its designees may pursue the development thereof.
Covol agrees not to compete, or through any third party to compete, with CoBon
with respect to the development of the agreed upon sites selected and developed
by CoBon.
3.2 Retained Ownership. Covol shall retain all right, title,
interest and ownership in and to the Coal Technology, including all Inventions
described and claimed in the '103 Patent and the '693 Application, all present
and future United States and foreign patent applications covering all or any
part of the Coal Technology, and any improvement, all present and future United
States and foreign patents that may subsequently issue covering all or any part
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of the Coal Technology, and any improvements, and related trade secrets,
know-how, manufacturing information, and other intellectual property.
3.3 Authority to License. Covol has developed and exclusively owns
the Coal Technology and believes it will exclusively own any patent rights which
may accrue during the Term of this Agreement, and Covol has the sole and
complete right to grant this License and has no knowledge that any third person
has any proprietary interest in the Coal Technology. Covol will not take any
action or fail to take any action during the Term of this Agreement that would
negate this Agreement or cause a loss to CoBon of the License granted with
respect to the Coal Technology.
3.4 Trademark License. To the extent necessary to carry out the
intent of this agreement, Covol also hereby grants CoBon a non-exclusive license
to use the trademarks and trade names used by Covol in connection with the Coal
Technology ("Trademark License"), if any exist. The authorized use by CoBon of
any of the Trademarks License shall be in accordance with Covol's written
standards, which shall govern the manner of use and the nature and quality of
the products in connection with which they may be used. Covol will furnish to
CoBon any applicable standards, in writing.
3.5 Private Letter Ruling. Covol will furnish CoBon with a copy
of the 1995 Private Letter Ruling issued to Covol by the Internal Revenue
Service pertaining to Section 29 tax credit qualification. Covol will cooperate
with CoBon, as reasonably requested, to the extent CoBon seeks to obtain a
supplemental Private Letter Ruling respecting the Section 29 tax credit
qualified status of CoBon's development and construction of manufacturing
facilities and CoBon's production and marketing of coal products.
3.6 Compliance Certification. At CoBon's request, Covol shall
conduct periodic (at least annually) field audits for the purpose of certifying,
in writing, CoBon's proper use of the Coal Technology and proprietary binder for
Section 29 tax credit qualification. Pursuant to the audit fee schedule,
attached as Exhibit A, CoBon shall reimburse Covol for its reasonable costs in
performing the audits.
ARTICLE 4
PURCHASE PRICE, ROYALTY AND PAYMENT
4.1 License Purchase Price. In consideration for the License and
other rights granted hereunder, CoBon shall pay Covol a total purchase price of
One U.S. Dollar ($1.00).
4.2 License Royalty Fee. Covol agrees to grant the License for
the first 500,000 tons of annual production capacity for CoBon developed
facility(ies) free of any License Royalty Fee payment. CoBon shall nevertheless
pay Covol a one time License Royalty Fee of Two U.S. Dollars ($2.00) per ton for
all annual production capacity in the range of 500,001 to 1,000,000 tons and
CoBon shall pay Covol a one time License Royalty Fee of Two Dollars and Fifty
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Cents ($2.50) per ton for all annual production capacity in the range of
1,000,001 to 1,500,000 tons. The total License Royalty Fee payable by CoBon
shall not exceed Two Million Two Hundred Fifty Thousand U.S. Dollars
($2,250,000.00) during the term of this Agreement.
4.3 Payment. CoBon shall pay the applicable License Royalty Fee to
Covol based on product sales after the plant(s) are operational and utilizing
the Covol binder. Payments shall be made concurrent with the closing of each
quarter's accounting and based upon sales during the quarter. Payments shall end
upon the payment of a total License Royalty Fee amount equal to the annual
installed production capacity of the plants as set forth in Article 4.2.
4.4 Audit of Records. CoBon shall keep records for a period of two
years showing, and shall furnish Covol with a quarterly report respecting, the
quantity of product manufactured and sold by CoBon, or its assigns, using the
Coal Technology during the quarter. CoBon shall permit CoBon's records to be
examined or audited by Covol to the extent necessary to verify the information
contained in such reports is accurate and commercially reasonable. If such an
examination or audit reveals that CoBon has underpaid Covol any amount due under
this Agreement, then CoBon shall pay to Covol the amount of any underpayment,
together with interest at the legal rate.
ARTICLE 5
BINDER PURCHASE AND SUPPLY
5.1 Purchase and Supply of Binder. CoBon agrees to purchase, and
agrees to require any sublicensee or assignee of CoBon to purchase, exclusively
from Covol its requirements for the Covol binder for as long as CoBon or any
authorized sublicensee or assignee uses the Coal Technology. The price Covol
shall charge CoBon, and any sublicensee or assignee, for Covol binder will be
commercially reasonable and based on Covol's actual cost to manufacture the
Covol binder plus a twenty percent (20%) profit margin on all Covol binder
utilized. Except as otherwise provided herein, Covol agrees to sell to CoBon,
and to supply to any sublicensee or assignee of CoBon, all of its requirements
for Covol binder for as long as CoBon or any authorized sublicensee or assignee
uses the Coal Technology under this Agreement.
CoBon may, at its option, construct and operate a binder preparation
and batch plant(s) in connection with its site development. Subject to the
parties' agreement of confidentiality and nondisclosure, subject to terms and
provisions to protect the proprietary nature of Covol's binder formula, Covol
agrees to furnish CoBon with access and use of its proprietary binder
formula(s), raw material source(s), and other binder components and preparation
technique(s) to facilitate CoBon's operation of the batch plant. At CoBon's
request and expense, Covol will assist with the review and analysis of the
economic feasibility of constructing and operating a batch plant(s). This will
include locating materials, costs of materials and other related costs to
determine the feasibility of constructing and operating an on-site batch plant
versus purchase of binder from a Covol source to provide an adequate, cost
effective, and reliable source of binder. In the event Covol becomes insolvent,
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declares bankruptcy or is liquidated, Covol agrees to coordinate and arrange
for, and does hereby authorize, CoBon, its sublicensees or assignees, to
purchase the Covol binder directly from Covol's binder manufacturing source(s)
or vendor(s).
5.2 Binder Certification. In connection with Covol's sale and
delivery of binder, Covol shall certify, in writing, or cause its binder
vendor(s) to certify, that the binder quality and chemical makeup is consistent
with that binder referenced in and underlying Covol's existing Section 29
qualification, as indicated in the 1995 Private Letter Ruling. Such formulation
certification shall be based upon independent, random sample testing conducted
at the time of binder production.
5.3 Audit of Records. The parties shall permit one another to
examine or audit their respective records to the extent necessary to verify
binder costs and Covol's profit calculations are accurate and commercially
reasonable.
ARTICLE 6
TERM AND TERMINATION
6.1 Term. The License shall expire on December 31, 2007, unless a
Congressional extension of applicable Section 29 tax credit legislation is
granted, in which case the term of the License shall be automatically extended
by an equal period of time.
6.2 Termination. This Agreement shall terminate upon the
expiration date set forth in Article 6.1. Upon termination of this Agreement,
all rights granted hereunder and obligations to the parties shall immediately
cease; however termination shall not relieve either party of its obligations
accrued during the Term of this Agreement (including any pre-termination
obligation CoBon may have to pay Covol under Article 4) which has not been
fulfilled.
6.3 Exclusive Remedies. The parties expressly acknowledge and
agree that nonperformance by CoBon, or any of its sublicensees or assignees, of
the nature described below shall not be grounds to terminate this Agreement. The
exclusive remedies for nonperformance shall be as follows:
(a) In the event CoBon, or any of its sublicensees or assignees,
fails to timely pay Covol for proprietary binder purchased on
credit or other terms, Covol shall be entitled to immediately
discontinue further sale or delivery of Covol binder to such
nonperforming entity(ies), until all such payments due and
owing to Covol, together with interest thereon at the legal
rate, are made. Covol may, at its option subject the
nonperforming entity(ies), to C.O.D. or other appropriate
payment terms regarding future binder purchases. The
nonpayment for binder by an entity(ies) shall not, however, be
grounds to terminate this Agreement as to any other compliant,
purchasing entity(ies).
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(b) In the event CoBon, or any of its sublicensees or assignees,
fails to timely pay Covol the Royalty License Fee, Covol shall
be entitled to immediately discontinue the sale or delivery of
Covol binder until all such payments due and owing to Covol,
together with interest thereon at the legal rate, are made.
The nonpayment of a Royalty License Fees by an entity(ies)
shall not, however, be grounds to terminate this Agreement as
to any other compliant purchasing entity(ies).
(c) In the event CoBon, or any of its sublicensees or assignees,
fails to comply with Covol's written standards regarding use
of the Trademark License granted in Article 3.4, Covol may,
subject to a sixty (60) day right to cure, terminate the
non-compliant entity(ies) right to use Covol's trademarks.
Noncompliance with Article 3.4 by an entity(ies) shall not
be grounds to terminate any other provisions of this
Agreement as to any other compliant entity(ies).
ARTICLE 7
GENERAL PROVISIONS
7.1 Notices. Any notice, report, request or payment provided for
in this Agreement shall be deemed made when furnished in writing and sent by
U.S. mail, addressed to the party for whom it is intended at the address
indicated in the first paragraph of this Agreement, unless another address is
given in writing by either party to the other party.
7.2 Utah Law; Jurisdiction. This Agreement shall be governed by
the laws of the State of Utah.
7.3 Arbitration. The parties agree that any claim or controversy
arising hereunder, which the parties are unable to resolve in good faith, shall
be finally resolved and settled exclusively by arbitration in Salt Lake City,
Utah, by a panel of three (3) arbitrators under the American Arbitration
Association's Commercial Arbitration Rules then in effect. The arbitrators shall
have authority to enter an award which includes injunctive relief or specific
performance; however, the arbitrators shall have no authority to award punitive
or exemplary damages against any party.
7.4 Attorneys' Fees. Should any party employ an attorney for
the purpose of enforcing this Agreement in any lawful proceeding, the prevailing
party shall be entitled to receive from the other party reimbursement for all
attorneys' fees and costs. A "prevailing party" means a party prevailing on all
material issues in dispute as determined by the trier of fact.
7.5 Modification. No modification of this Agreement shall be
binding upon either party unless made in writing and signed by the party to be
charged therewith.
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7.6 Assignment. This Agreement shall be assignable and binding on,
and shall enure to the benefit of, the parties, and their assigns, transferees
and successors-in-interest.
7.7 Entire Agreement. Except with regard to the applicable
provisions of the parties' Letter of Understanding dated August 20, 1996, this
Agreement constitutes the entire and integrated agreement of the parties and
supersedes any other agreements, whether oral or in writing, between the parties
regarding the subject hereof.
7.8 Sublicenses; Assignments. CoBon is hereby granted the right to
sublicense all or any part of this Agreement, provided:
(a) Sublicense agreements must be in writing and incorporate all
of the terms of this Agreement, binding CoBon's sublicensees
as CoBon is bound by this Agreement, and
(b) At Covol's request, CoBon will supply Covol with a copy of all
such sublicense agreements.
7.9 Severability. The provisions of this Agreement shall be
construed to be severable and the invalidity of any one provision shall not
affect the enforceability of the remainder of this Agreement.
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IN WITNESS WHEREOF, each signing party represents that, having been
duly authorized they have read this Agreement in all particulars and consents to
the rights, conditions, duties and obligations imposed upon that party in this
Agreement, and that this Agreement has been executed in duplicate originals.
COBON ENERGY, L.L.C. COVOL TECHNOLOGIES, INC.
By:/s/ Steven Nash By:/s/ Asael T. Sorensen
- - ------------------- -------------------------
Steven Nash Asael T. Sorensen
PRINTED NAME PRINTED NAME
President General Counsel
TITLE TITLE
C:\WPDOC\COBON\LICEN.2.RV3
Attachment "A" - Letter of Understanding
Attachment "B" - Fee Schedule
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Exhibit - B
Field Audit Fee Schedule
Individual Position Hourly Rate
Steve Brown (Engineer) $ 120/hr
Russ Madsen (Operations) $ 75/hr
Ace Sorensen (Legal) $ 110/hr
George Ford (Technical) $ 120/hr
Secretary $ 25/hr
Reimbursable Expenses: Cost + 5%
The following expense items are reimbursable to Covol Technologies when directly
related to the project:
1. Communication - telephone and telegraph toll charges; postage and
freight costs.
2. Travel - actual cost paid by Covol Technologies for project related
travel.
3. Lodging and Food - reasonable living expenses incurred while on
assignment or travel away from office.
4. Outside Services and Special Supplies - actual cost of services
contracted by Covol Technologies; all major expenditures with Owner's
prior approval.
5. Printing and Reproduction -
$0.15 per square foot for blueprints
$0.40 per square foot for sepia
$1.40 per square foot for mylar
$0.10 per letter size copy
Standard charges for miscellaneous reproductions
6. Rental - The rental of such buildings, trade fixtures, equipment and
the cost of such materials as may be required for field office and
other facilities or services at the site of the work rented and/or
contracted for in accordance with job requirements including the cost
of maintenance and operation thereof.
Reimbursable Computer Charges
1. Computer equipment - for use of in-house computer equipment when used
in direct connection with a project for data processing or
computational applications, the following charges shall apply:
For all applications - $6.00/hr. Terminal connect time
2. Computer Aided Design (CAD)
Machine Time - $18.00/hr
$1.65 per square foot for mylar electrostatic plots $1.25 per
square foot for mylar pen plots $0.25 per square foot for
other plots
9
Schedule "A"
COVOL TECHNOLOGIES, INC.
CONVERTIBLE DEBENTURE
TERM SHEET
SEPTEMBER 5, 1996
Issuer: Covol Technologies Inc.
Issue: USD $6,153,846 par value principal amount of 6%
convertible debentures issued pursuant to regulation
D of the Securities Act. Due December 31, 1999.
Price to Issuer: 65% of par value including all fees and commissions.
Interest: 6% per annum due and payable on principal amount in
cash or stock on December 31st, March 31st, June 30th
and September 30th of each year until maturity.
Interest shall begin to accrue on December 31, 1996.
Conversion: Holder at its discretion, can convert 25% of the
principal amount, plus outstanding interest every
thirty days after the registration period (Dec. 31,
1996) at the lesser of USD $9.75 (strike price), or
the average closing bid price of the common stock for
the five (5) OCT-BULLETIN BOARD (NASDQ) trading days
immediately preceding the conversion.
Maximum Price: If conversion price is greater to or equal to the
strike price, conversion price shall be set at a
maximum price of the strike price. Holder may retain
any profit over USD $9.75.
Warrants: The Issuer will grant warrants to Kaimor Securities.
Kaimor Securities will be entitled to one warrant for
every two shares. Each warrant would entitle Kaimor
Securities or the holder thereof to buy one treasury
share for $15 a share. The warrant would have a two
year term from closing.
Closing: Upon filing with the SEC .
Net Proceeds: Issuer to receive 65% of par value = USD $4,000,000.
Legal Opinion: Upon closing, Covol Technologies Inc. will undertake
to provide a legal opinion to Kaimor Securities and
each purchaser, that the transaction has been
reviewed, is good, valid and enforceable, and was
done in good faith.
Call Feature: Upon effective registration, the issuer has the right
to require the conversion to common shares of up to
25% of the principal amount of the debenture.
The issuer is entitled to call up to 25% every thirty
days. This clause in subject to the strike price
and closing bid provisions set out in the Conversion
clause above.
Penalties: The escrow agent will withhold 4% of the proceeds
from Covol Technologies in escrow. Upon effective
registration of the shares, the escrow agent will
release the said 4% to Covol. If the effective
registration is not completed by January l, 1997, the
escrow agent will release 2% to the purchaser(s) for
each calendar month, or pro-rated portion thereof, as
the case may be until effective registration.
Escrow Agent: Kaimor Securities, acting reasonably, will
select an appropriate escrow agent, being a lawyer
licensed in Ontario, to carry out the duties required
as such in this transaction, and the issuer will sign
an appropriate escrow agreement in this regard.
AGREEMENT BETWEEN ALABAMA POWER COMPANY
AND COVOL TECHNOLOGIES, INC.
FOR THE SALE AND PURCHASE OF COAL
TABLE OF CONTENTS
PAGE
1.01 MUTUAL OBLIGATIONS......................................... 1
2.01 DEFINITIONS................................................ 1
3.01 TERM OF AGREEMENT.......................................... 2
4.01 BASE PRICE PER TON OF CCP (BASE TONNAGE)................... 2
4.02 BASE PRICE PER TON OF CCP (OPTION TONNAGE)................. 2
4.03 ADJUSTMENTS - GENERAL...................................... 2
4.04 GOVERNMENTAL IMPOSITIONS................................... 2
4.05 CALORIFIC VALUE ADJUSTMENT................................. 2
4.06 EXCESS ASH ADJUSTMENT...................................... 3
4.07 EXCESS MOISTURE ADJUSTMENT................................. 4
5.01 BILLING AND PAYMENT........................................ 4
6.01 SHIPMENT: TRUCK............................................ 5
6.02 SHIPMENT: BARGE............................................ 6
6.03 FREIGHT CHARGES. TITLE AND RISK OF LOSS - BARGE DELIVERIES. 7
6.04 FREIGHT CHARGES. TITLE AND RISK OF LOSS - TRUCK DELIVERIES. 7
7.01 QUANTITY REQUIREMENTS (BASE TONNAGE)....................... 7
7.02 QUANTITY REQUIREMENTS (OPTION TONNAGE)..................... 7
8.01 WEIGHING................................................... 8
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9.01 GUARANTEED SPECIFICATIONS.................................. 8
9.02 TERMINATION OF AGREEMENT BY BUYER FOR OPERATIONAL
PROBLEMS........................................................ 9
10.01 SAMPLING AND ANALYSIS..................................... 10
11.01 REJECTION OF CCP FOR CCP QUALITY DEFICIENCIES............. 10
11.02 SUSPENSION OF SHIPMENTS FOR DEFICIENCIES.................. 11
11.03 TERMINATION OF AGREEMENT FOR DEFICIENCIES................. 13
11.04 CANCELLATION.............................................. 13
12.01 BUYOUT OPTION............................................. 14
13.01 CANCELLATION FOR UNREMEDIED BREACH........................ 14
13.02 START UP REQUIREMENTS..................................... 14
14.01 FORCE MAJEURE............................................. 15
15.01 CHANGES IN ENVIRONMENTAL RELATED REQUIREMENTS............. 17
16.01 WARRANTIES................................................ 20
17.01 INDEPENDENT CONTRACTOR.................................... 20
18.01 BINDING EFFECT............................................ 21
19.01 ASSIGNMENTS............................................... 20
20.01 ACCOUNTING AND AUDIT...................................... 21
21.01 SITE VISITS; COAL PROPERTY................................ 21
22.01 WAIVER.................................................... 22
23.01 REMEDIES FOR BREACH....................................... 22
24.01 REMEDIES CUMULATIVE....................................... 22
25.01 NOTICES................................................... 22
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26.01 AGENT FOR PURCHASER....................................... 23
27.01 CAPTIONS.................................................. 23
28.01 APPLICABLE LAW............................................ 24
29.01 COMPLIANCE WITH LAWS AND REGULATIONS...................... 24
30.01 ENTIRE AGREEMENT.......................................... 24
31.01 CONFIDENTIAL AND PROPRIETARY INFORMATION.................. 24
32.01 CONTRACT TERMS BINDING ON PARTIES' EMPLOYEES' SUPPLIERS
AND SUB-CONTRACTORS............................................. 25
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AGREEMENT BETWEEN ALABAMA POWER COMPANY
AND COVOL TECHNOLOGIES, INC.
FOR THE SALE AND PURCHASE OF COAL
This Agreement is made and entered into this _ day of ___________
1996 by and between ALABAMA POWER COMPANY, a corporation organized and existing
under the laws of the State of Alabama, and having its principal office in the
City of Birmingham, Alabama ("PURCHASER") and COVOL TECHNOLOGIES, INC., a
corporation organized and existing under the laws of the State of Delaware,
("SELLER").
WHEREAS, PURCHASER, an electric public utility, owns and operates power
generating stations which require large quantities of coal; and
WHEREAS, SELLER owns or otherwise controls the COVOL Process (as
hereinafter defined) from which SELLER desires to process and sell coal to
PURCHASER.
NOW, THEREFORE, in consideration of the premises and covenants herein.
PURCHASER and SELLER agree as follows:
1.01 MUTUAL OBLIGATIONS. SELLER agrees to process coal into the Covol
Coal Product (CCP) and sell such Covol Coal Product to PURCHASER and PURCHASER
agrees to buy Covol Coal Product from SELLER on the terms and conditions and in
the quantities and quality set forth herein.
2.01 DEFINITIONS. The following definitions shall apply in this
Agreement:
a. "Contract Year" shall mean each calendar year during the term
of this Agreement.
b. "Ton" or "ton" shall mean two thousand pounds avoirdupois
weight.
c. "Base Price" is the price calculated as provided in Section
4.01 and 4.02 herein.
d. "Billing Price" is the Base Price as adjusted pursuant to
Section 4.03 and 4.05.
e. "COVOL Coal Product" (CCP) is a coal briquette produced from
coal fines utilizing the Covol Process.
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f. "COVOL Coal Process "is a proprietary process developed and
patented by Covol whereby coal fines are converted into a
synthetic fuel in the form of a high quality briquette.
g. A "Shipment" shall occur when SELLER delivers CCP in
sufficient quantities into a barge or truck.
3.01 TERM OF AGREEMENT. The term of this Agreement shall be for a
period of five contract years commencing on January 1, 1997 and shall continue
in full force and effect during the five years unless earlier terminated or
extended according to the provisions of this Agreement. PURCHASER shall have the
unilateral right to extend this Agreement for two additional five (5) year
consecutive periods by giving Seller l80 days notice prior to the end of the
then current term. Purchaser must exercise the first five year option in order
to have the right to the second five year term.
4.01 BASE PRICE PER TON OF CCP (BASE TONNAGE). The Base Price per
Ton of CCP, effective January l, 1997 is 1) $22.00 per ton plus the freight
charges (to be mutually agreed upon by November 30, 1996) f.o.b. Plant for CCP
delivered by truck to any of PURCHASER's Plants or Transloading Facilities, or
2) $23.00 per ton f.o.b. barge for CCP loaded in the Port Birmingham area. The
Base Price is subject to adjustment as provided for herein. It is understood
that the Base Price includes all costs for mining, processing, marketing or
quality control work necessary to meet the quantity or quality specifications
hereof.
4.02 BASE PRICE PER TON OF CCP (OPTION TONNAGE). The Base Price
per Ton of CCP for option tonnage as described in Section 7.02 shall be mutually
agreed upon.
4.03 ADJUSTMENTS - GENERAL. The Billing Price shall be adjusted January
1 of each calendar year using a fixed escalation rate of one percent (1%)
annually for the first five (5) year period, with the initial adjustment to be
effective January 1, 1998. Such adjustment shall be calculated by applying a
multiplier of 1.01 to the prior year's Billing Price. The annual escalation rate
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applicable to each five (5) year option shall be mutually agreed upon by the
parties.
4.04 GOVERNMENTAL IMPOSITIONS. The parties agree that the cost of
any and all Government Impositions will be the sole responsibility of SELLER.
4.05 CALORIFIC VALUE ADJUSTMENT. The amount to be paid by
PURCHASER for the CCP delivered under this Agreement shall be adjusted on the
basis of the actual "as received" Calorific value of the CCP as determined from
the samples taken and analyzed in accordance with Section 10.01 and Annex D
hereof. The Calorific Value Adjusted Price for CCP shipped from SELLER and
accepted by PURCHASER during any calendar month shall be determined as follows:
The monthly weighted average "as received" Calorific value of all CCP received
by PURCHASER hereunder during the calendar month shall be divided by the Minimum
Calorific Value Specification of 12,000 Btu/lb, as set forth in Section 9.01.
The resulting quotient shall be multiplied by the then-current Billing Price
determined by PURCHASER. The resulting product shall then be added to or
subtracted from the then-current Billing Price.
PURCHASER shall submit to SELLER analyses of CCP received and
computations of the Calorific value adjustments to substantiate such
adjustments. The Calorific value adjustment mechanism is further detailed and
illustrated in Annex A, and such adjustments shall be made in accordance with
Annex A.
4.06 EXCESS ASH ADJUSTMENT. In addition to other adjustments, the price
per Ton to be paid by PURCHASER for CCP delivered under this Agreement shall be
adjusted downward in proportion to the ash content in excess of 14%. This
adjustment shall be subtracted from the Calorific Value Adjusted Price of such
CCP and shall be based upon the "as received" ash content of CCP shipped each
month. The amount per Ton of this excess ash adjustment shall be calculated
according to the following formula:
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The adjustment shall be $0.25 per Ton multiplied by the portion of a
percent by which the "as received" ash content of CCP supplied hereunder exceeds
14% by an amount up to 0.99%. The adjustment shall be $0.45 per Ton multiplied
by the number of percentage points (or portions thereof) by which the "as
received" ash content of CCP supplied hereunder exceeds 14% by an amount of
1.00% or more. No adjustment shall be made if the "as received" ash content is
less than 14%. The excess ash adjustment is further detailed and illustrated in
Annex B and such adjustments shall be made in accordance with Annex B. This
adjustment in price is in addition to any other remedies provided under this
Agreement or at law.
4.07 EXCESS MOISTURE ADJUSTMENT. In addition to other adjustments, the
price per Ton to be paid by PURCHASER for CCP delivered under this Agreement
shall be adjusted downward in proportion to the moisture content as described
below. This adjustment shall be subtracted from the Calorific Value Adjusted
Price of such CCP and shall be based upon the "as received" moisture content for
the CCP each month. The amount per Ton of this excess moisture adjustment shall
be calculated according to the following formula:
The adjustment shall be $0.25 per Ton multiplied by the number of
percentage points (or portions thereof by which the "as received" moisture
content of CCP supplied hereunder exceeds 8%. No adjustment shall be made if the
"as received" moisture content is less than 8%. The excess moisture adjustment
is further detailed and illustrated in Annex C and such adjustments shall be
made in accordance with Annex C. This adjustment in price is in addition to any
other remedies provided under this Agreement or at law.
5.01 BILLING AND PAYMENT. For all CCP delivered by barge, SELLER shall
provide PURCHASER with a multiple copy shipping notice form that accurately
describes each Shipment. Such form shall be prepared by SELLER to incorporate
SELLER's name, shipment date, destination point, origin, PURCHASER's
transportation contract identification, barges by number, purchase
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order number, weight and any other applicable data which may be reasonably
required. One copy of such form shall be retained by SELLER, and the remaining
copies shall be transmitted to the carrier at the time the barges are moved.
Upon delivery, the carrier shall forward such form to PURCHASER's destination
plant. In addition, promptly after loading each barge Shipment, SELLER shall fax
PURCHASER a notice of shipment which shall include SELLER'S name, barge numbers,
tonnage shipped, date of shipment, and other such information as pertinent and
required by PURCHASER from time to time.
For CCP delivered by truck, SELLER will provide properly completed
shipping notices with each truck delivery on forms furnished by PURCHASER.
Payment at the then current Billing Price for CCP delivered during the
periods consisting of the first fourteen ( 14) days of each month and from the
fifteenth day through the end of the month will be made within ten (10) days
after the close of the period.
Within fifteen (15) days after the close of each calendar month, a
report shall be submitted by PURCHASER to SELLER showing the computation of
adjustments required to determine the Billing Price to be paid for CCP received
during the preceding month, and in the event of any underpayment or overpayment,
the difference shall be applied to SELLER's account.
6.01 SHIPMENT: TRUCK. Where delivery of CCP is by truck, Seller will
arrange for the proper dump trucks or dump trailers to transport the CCP to the
delivery point specified in the Purchase Order. Such dump trucks and dump
trailers shall not have cross beams installed in the cargo area that could
damage the sampling auger and all trucks will be required to have in-cab
tailgate releases. Additionally, all trailers will be required to have a RF
(Radio Frequency) tag attached. All trucks and trailers operated on properties
of Purchaser shall comply with all applicable federal and state safety
standards. If required by Purchaser, each vehicle shall be furnished an identity
number, which must be affixed to the vehicle, to gain admittance to the
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designated delivery point. Seller will employ or utilize only competent
commercially licensed truck drivers and will be responsible for compliance by
such drivers with PURCHASER's rules and requirements, including speed limits and
weight limits on roads within PURCHASER's properties. Such drivers shall comply
with the requirements for loading, transporting, weighing, sampling and
unloading of CCP delivered hereunder, in the manner and at locations on
PURCHASER's properties as given by the manager of the designated delivery point
or his representative, and such drivers will cooperate with PURCHASER's
CCP-receiving employees and other suppliers in a manner so as not to interfere
with any of PURCHASER's operations. CCP may be delivered to the designated
delivery point according to the then current operating schedule for CCP receipts
in effect at the delivery point. It shall be SELLER's responsibility to
determine the schedule in effect and comply therewith in all respects.
The operation of vehicles which are excessively heavy in weight has an
adverse effect on roads within PURCHASER's properties. CCP shall be delivered on
PURCHASER's properties in dump trucks or dump trailers having gross vehicle
weights including cargo not exceeding 44,000 pounds for two axles, 66,000 pounds
for three axles, 82,500 pounds for four axles, 88,000 pounds for five axles and
92,400 pounds for six axles. Any truck shipment exceeding the applicable gross
vehicle weight may be rejected. PURCHASER at its option may accept overweight
trucks but in such case PURCHASER will only be obligated to pay for the cargo
amount which combined with the vehicle weight equals the gross load limit as
outlined herein.
6.02 SHIPMENT: BARGE. At any time during the term of this agreement
PURCHASER may require SELLER, upon thirty (30) days notice, to deliver all or a
portion of the CCP sold hereunder by barge from the barge loading facility in
the Port Birmingham area to PURCHASER'S other facilities or other destinations
within the Southern electric system as specified by PURCHASER.
Shipment and receipt of CCP under this Agreement shall be made in
accordance with the PURCHASER barge contracts. If any applicable barge contract
is amended supplemented or replaced,
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subsequent shipments and receipts shall be made in accordance with the terms of
the applicable barge contract, as amended, supplemented or replaced.
Shipping schedules shall be coordinated by PURCHASER'S and SELLER'S
Transportation Coordinators in accordance with monthly quantities of CCP to be
delivered under this Agreement. SELLER shall load the equipment in a timely and
appropriate manner that coincides with the loading times specified in the
applicable barge contract.
6.03 FREIGHT CHARGES, TITLE AND RISK OF LOSS - BARGE DELIVERIES.
PURCHASER shall pay all freight and other charges imposed by the Barge Carrier
applicable to the destination of the shipment. Title to and risk of loss of the
CCP shall pass to PURCHASER at the time the CCP is loaded into barges in the
Port Birmingham area.
6.04 FREIGHT CHARGES, TITLE AND RISK OF LOSS - TRUCK DELIVERIES. SELLER
shall pay all freight and other charges imposed by the trucking company
delivering the CCP to PURCHASER'S designated plant. SELLER shall bear the risk
of loss of each shipment until each shipment has been properly unloaded at
PURCHASER'S designated plant and title shall remain with SELLER until each
shipment is properly unloaded at PURCHASER'S designated plant.
7.01 QUANTITY REQUIREMENTS (BASE TONNAGE). For the period January 1,
1997 through December 31, 1999, PURCHASER will purchase 250,000 tons per year
(20,833 tons per month). In addition, PURCHASER shall have the right to purchase
monthly nominations up to an additional 20,833 tons per month for each six (6)
month period beginning in January and July during this period by notifying
SELLER sixty (60) days in advance of each six (6) month period. For the period
January 1, 2000 through December 31, 2001, PURCHASER shall have the right to
purchase up to 41,667 tons per month for each six (6) month period during this
period by notifying SELLER sixty (60) days in advance of each six (6) month
period.
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In the event that PURCHASER desires to buy spot coal, at any time
during the term of this Agreement, SELLER shall have the right of first refusal
on the amount of tons between the monthly nomination and 41,667 tons per month.
7.02 QUANTITY REQUIREMENTS (OPTION TONNAGE). SELLER shall give
PURCHASER right of first refusal on option tonnage between 41,667 and 83,333
tons per month. Otherwise, option tonnage may be supplied by SELLER and
purchased by PURCHASER by mutual agreement. Option tonnage pricing will be
described in Section 4.02.
8.01 WEIGHING. For CCP loaded in the Port Birmingham area weighing will
be done in the Port Birmingham area by Combustion Testing & Engineering, Inc.
For CCP delivered to PURCHASER by truck, the weight of CCP delivered
and sold hereunder shall be determined by PURCHASER at the destination on truck
scales, certified in accordance with the procedures and requirements of the
State of Alabama Division of Weights and Measures. Said trucks shall be weighed
loaded and empty and the difference shall be the net weight of the CCP
delivered.
9.01 GUARANTEED SPECIFICATIONS. The CCP sold by SELLER hereunder shall
be three inches and under in size (3 " x 0") as defined in the then-current ASTM
Designation D-43 1 Standard for Designating Size of CCP; shall not contain
greater than twenty percent (20%) particles less than one quarter (1/4) inch in
size (if, in PURCHASER'S sole judgment, handling problems occur at the
destination because of size consistency, SELLER agrees to take reasonable
corrective action acceptable to PURCHASER); shall be substantially free of bone,
slate, shale, rock, dirt, and clay, and substantially free of extraneous
material, including, but not limited to, plastic, rubber, iron, wood and other
waste materials; and shall conform to the following on an "as received" basis:
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As Received Guaranteed
Specifications Per Shipment
Max. % Moisture (total) 8.0
Max. % Ash 14.0
Max. Sulfur lbs/MMBtu 0.60
Min. % Volatile Matter 30
Min. Ash Fusion Temp. 2400(degrees)F
Softening (H=W Reduc. Atmos.)
Min. Grindability 50
Min. Calorific Value (Btu/lb) 12,000
9.02 TERMINATION OF AGREEMENT BY BUYER FOR OPERATIONAL PROBLEMS.
PURCHASER and SELLER acknowledge that as of the date of this Agreement, CCP is a
new product which has not been commercially used as a fuel for electric
generating plants and that certain operational problems may arise in the future
with respect to the handling or use of CCP at one or more of the Plants. If, in
PURCHASER's sole judgment exercised in good faith, the handling or use of CCP
causes or creates any problem in the operation of any Plant, then PURCHASER may
terminate this Agreement by notifying SELLER, as provided in Section 23.01, at
least thirty days prior to the effective date of termination. Upon such
termination, PURCHASER shall have no further obligation to SELLER under this
Agreement, except with respect to payments for Shipments made prior to such
termination. Notwithstanding any other provision of this Agreement, PURCHASER
shall not be required to operate or maintain any Plant outside of normal
operating procedures in order to handle or use CCP at such Plant, nor shall
PURCHASER be required to make any capital modifications or additions to such
Plant in order to accommodate the handling or use of CCP at such Plant. If, in
PURCHASER's sole judgment exercised in good faith. the quality or
characteristics of
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CCP are incompatible with other coal purchased for use at any Plant, then
PURCHASER may terminate this Agreement pursuant to this Section 9.02.
10.01 SAMPLING AND ANALYSIS. PURCHASER shall collect representative
samples at the unloading site of each shipment of CCP shipped by truck; in
addition, SELLER shall collect representative samples for CCP loaded in barges
at the Port Birmingham loading facility. Samples shall be collected in
accordance with procedures and methods which are based on ASTM standards and
mutually acceptable to PURCHASER and SELLER. PURCHASER shall analyze all samples
of CCP collected by PURCHASER and SELLER in accordance with procedures set forth
in the attached Annex D. PURCHASER shall have the right at its option, however,
to contract with an independent, qualified, commercial testing laboratory to
perform the analyses of the samples referred to above. SELLER may observe any
sampling, sample preparation, and/or analysis performed by PURCHASER or its
designated commercial laboratory. PURCHASER may observe any sampling and/or
sample preparation performed by SELLER for samples taken in the Port Birmingham
area. If in PURCHASER's sole opinion operational problems occur, with the
sampling, sample preparation, and/or procedure. the parties will discuss steps
to resolve the operational problem including modifications to the COVOL Coal
Process.
All samples collected shall be divided by PURCHASER into at least two
(2) parts and put in suitable airtight containers, the first container in each
case to be used for analysis by PURCHASER, or its designated commercial
laboratory, and the second container in each case to be held available by
PURCHASER for a period of thirty (30) days from actual date of receipt of CCP by
PURCHASER, properly sealed and labeled, to be analyzed if a dispute arises
between PURCHASER and SELLER.
11.01 REJECTION OF CCP FOR CCP QUALITY DEFICIENCIES. In addition to
and not as a limitation upon other rights of PURCHASER hereunder, PURCHASER
shall have the right to refuse and reject any Shipment of CCP under any one or
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more of the following circumstances: (a) the Shipment fails by analysis
(including in-transit analysis as provided for in Section 11.01) to comply with
any one or more of the Guaranteed Specifications set forth in Section 9.01; (b)
the Shipment fails in any manner to comply with the CCP size specified in
Section 9.01; (c) the Shipment is delivered in equipment other than as specified
herein; (d) the Shipment contains extraneous material; or (e) the Shipment fails
to comply with the loading requirements set forth in Sections 6.01 and 6.02.
PURCHASER shall give prompt notice to SELLER of any such rejection of Shipments.
After receipt of such notification, SELLER shall not resume Shipments until CCP
quality or other condition causing rejection has been corrected to PURCHASER'S
satisfaction. In the event that PURCHASER rejects any Shipment, SELLER shall
immediately remove, at SELLER's expense, such Shipment from PURCHASER'S
facilities or from transportation equipment and shall reimburse PURCHASER for
all costs and expenses, including (but not limited to) transportation costs,
incurred by PURCHASER in connection with such Shipment. PURCHASER may deduct all
such costs and expenses from any sum owed by PURCHASER to SELLER.
The foregoing notwithstanding, it shall be the responsibility of SELLER
to ensure that the sulfur content of CCP delivered does not exceed the
Guaranteed Specification for sulfur provided in Section 9.01 and failure to do
so shall constitute a material breach of SELLER's obligation and guarantee.
SELLER acknowledges that the delivery of CCP exceeding the guaranteed sulfur
content may cause PURCHASER to incur substantial damages and have fines or
penalties assessed against it by regulatory agencies, and SELLER further
acknowledges that in the event of such breach, PURCHASER may pursue any and all
remedies available at law and under this Agreement.
In addition to the provisions set forth in Section 10.01 regarding
sampling, PURCHASER shall have the right to take samples of Shipments while they
are in transit and to analyze such samples, for the purpose of determining
whether to accept or to reject any such Shipments for failure to comply with the
Guaranteed Specifications set forth in Section 9.01 or other terms and
conditions
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of this Agreement. If any of such Shipments are accepted, the samples taken in
transit and results of such analyses shall not be used for other purposes and
shall not affect PURCHASER's right to collect samples of such shipment(s) at the
unloading facility.
11.02 SUSPENSION OF SHIPMENTS FOR DEFICIENCIES. In addition to and not
in limitation of the rights set forth above in Section 11.01, PURCHASER shall
have the right to suspend Shipments immediately, by giving verbal or written
notice to SELLER, under any one or more of the following circumstances: (a) any
Shipment fails to comply with any one or more of the Guaranteed Specifications
set forth in Section 9.01 (b) any Shipment contains extraneous material; (c) any
Shipment fails to comply with the CCP size requirements specified in Section
9.01, or (d) any Shipment fails to comply with the loading requirements set
forth in Sections 6.01 and 6.02. Shipments in transit at the time of
notification of suspension may be accepted, at PURCHASER's sole option. After
notice of any such suspension, PURCHASER may terminate this Agreement unless
SELLER gives reasonable assurance within fifteen (15) days after receipt of said
notice that it will and can comply with the Guaranteed Specifications stated in
Section 9.01 and the other requirements of this Agreement. Four (4) or more
suspensions in any 90-day period shall be deemed a material breach of this
Agreement, for which PURCHASER shall have the unilateral right, exercised in its
sole discretion, to immediately terminate this Agreement by giving notice of the
termination to SELLER as provided in Section 25.01. Assurance by SELLER that it
can comply may, at PURCHASER's option, be provided by means of a complying test
Shipment scheduled and sampled by such method as shall be acceptable to
PURCHASER or by other means acceptable to PURCHASER. All special handling costs,
including (but not limited to) stockpile segregation, transportation routing
etc., associated with the test Shipment shall be borne by SELLER. If analysis by
PURCHASER shows the test Shipment to be in compliance with each of the
requirements set forth herein, deliveries shall be permitted to resume.
PURCHASER shall have the sole right to determine if SELLER shall be allowed to
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make up any tonnage not delivered during the period Shipments were suspended.
The price to be paid for any such make-up tonnage is the price that would have
been in effect at the time the CCP was originally scheduled to be delivered
under the terms of this Agreement. For purposes of this Section 11.02, the
make-up of tonnage not delivered during any suspension shall be made up on a
pro-rata, monthly basis as specified by PURCHASER in writing to SELLER.
If PURCHASER does not receive, within fifteen (15) days of the date of
the notice of suspension provided in this Section 11.02, adequate assurance of
SELLER's ability to deliver CCP which complies with the requirements set forth
herein or if the test Shipment fails to comply with such requirements, PURCHASER
shall so notify SELLER of such failure and may, at PURCHASER's option, terminate
this Agreement immediately by giving notice of the termination to SELLER as
provided in Section 25.01. In the event of rejection of any Shipment followed by
termination of this Agreement, SELLER shall reimburse PURCHASER for any and all
transportation costs associated with rejected Shipments and/or termination which
may be incurred by PURCHASER and shall promptly remove all such rejected
Shipments at SELLER's expense. PURCHASER's rights of rejection, suspension and
termination set forth in this Agreement are in addition to any other remedies
provided by this Agreement or at law for SELLER's failure to deliver CCP in
compliance with this Agreement.
11.03 TERMINATION OF AGREEMENT FOR DEFICIENCIES. In addition to and not
as a limitation upon other rights of PURCHASER, if twenty percent (20%) of
Shipments delivered during a thirty (30) consecutive day period, following
notice of deficiency to SELLER given pursuant to Sections 11.01 and 11.02, fails
to comply with any one or more of the Guaranteed Specifications set forth in
Section 9.01, then such failure shall constitute a material breach of this
Agreement; and PURCHASER shall have the right to terminate this Agreement
immediately by giving notice of the termination to SELLER as provided in Section
25.01.
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In the event PURCHASER terminates this Agreement under this Section
11.03 or Section 11.02 or suspends Shipments pursuant to the provisions of
Section 11.02, and in addition to PURCHASER's other rights and remedies under
this Agreement or as provided at law, SELLER shall be liable to PURCHASER for
breach of this Agreement and shall reimburse PURCHASER for any and all costs
incurred by PURCHASER under this Agreement and other contracts with
transportation contractors which result from such termination or suspension of
Shipments.
11.04 CANCELLATION. In addition to and not in limitation of the rights
set forth above in Sections 11.01, 11.02, and 11.03 and the rights and remedies
available at law and under other provisions of this Agreement, PURCHASER shall
have the right to cancel the remaining Shipments to be delivered under this
Agreement immediately by giving written notice to SELLER, as provided in Section
25.01, under any one or more of the following circumstances: (a) thirty percent
(30%) of Shipments of CCP delivered by SELLER fail to comply with any one (1) or
more of the Guaranteed Specifications set forth in Section 9.01 averaged over
two (2) consecutive calendar months; or (b) SELLER engages in any fraudulent or
illegal conduct in connection with its performance under this Agreement.
12.01 BUYOUT OPTION. At any time during the term of this Agreement,
PURCHASER may terminate this Agreement by giving SELLER 180 days' notice thereof
as provided in Section 25.01; and within 180 days of giving such notice,
PURCHASER shall pay SELLER an amount equal to ten percent ( 10%) of the initial
Base Price per ton effective January 1, 1997 multiplied by the remaining Tons
scheduled to be delivered under this Agreement. Upon SELLER's receipt of such
payment, this Agreement shall terminate without any further liability to either
party hereunder, except with respect to CCP delivered prior to such termination.
13.01 CANCELLATION FOR UNREMEDIED BREACH. In the event of the
failure of either party to comply in good faith with any or all of its
respective obligations as set forth in this
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Agreement, the party not in default shall have the right to cancel this
Agreement at any time by giving notice of its intention to do so to the other
party as provided in Section 25.01, which notice shall specify the default. At
the expiration of thirty (30) days after the date of such notice, unless the
party in default shall have cured such default, the party not in default shall
have the right, at its sole election, to cancel this Agreement immediately with
no liability therefor.
In addition to and not as a limitation upon other rights of PURCHASER
or SELLER hereunder, either party may elect, at its sole option, to forego its
right to terminate this Agreement upon the other party's default under this
Agreement, as provided in this Section 13.01, and may require, in lieu of
cancellation, the other party to perform its obligations according to the terms
and conditions of this Agreement.
13.02 START UP REQUIREMENTS. If SELLER fails to meet Section 29 of IRS
code requirements by January 1, 1997 or to meet either the quantity or quality
requirements by April 1, 1997, PURCHASER may terminate this agreement in its
entirety from written notice to SELLER pursuant to Section 25.01.
14.01 FORCE MAJEURE. "SELLER's Force Majeure" as used herein shall mean
a cause reasonably beyond the control of SELLER which, wholly or in substantial
part, prevents the mining, processing, loading or delivery of CCP. "PURCHASER's
Force Majeure" as used herein shall mean a cause reasonably beyond the control
of PURCHASER which, wholly or in substantial part, directly or indirectly
prevents or restricts the unloading, storing or burning of CCP by PURCHASER at
PURCHASER's facilities. Examples (without limitation) of force majeure are the
following: acts of God; acts of the public enemy; insurrections; riots; strikes;
labor disputes; work stoppages; fires; explosions; floods; electric power
failures; breakdowns of or damage to generating or preparation plants;
interruptions to or contingencies of transportation, including (but not limited
to) force majeure as defined in the applicable tariff rail contract; embargoes;
and orders or acts of civil or military
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authority (including, without limitation, a city or county ordinance, an act of
a state legislature, or an act of the United States Congress); provided,
however, for the purposes of this Agreement, force majeure shall not include,
and neither party hereto shall be excused from performance because of, the
development or existence of economic conditions which may adversely affect the
anticipated profitability of such party's activities hereunder, acts or
omissions of such party which constitute mismanagement or fraud on the part of
such party, or reduced productivity of labor employed by such party in its
activity hereunder.
If, because of PURCHASER's Force Majeure, PURCHASER is unable to carry
out its obligations under this Agreement, and if PURCHASER gives SELLER notice
of such force majeure as provided in Section 25.01, the obligations and
liabilities of PURCHASER and the corresponding obligations of SELLER shall be
suspended to the extent made necessary by and during the continuance of such
force majeure; provided, however, that the disabling effects of such force
majeure shall be eliminated as soon as and to the extent possible (except that
either party may settle any of its own labor disputes, strikes, or terminate any
of its own lockouts in its sole discretion).
If, because of SELLER's Force Majeure, SELLER is unable to carry out
its obligations under this Agreement, and if SELLER gives PURCHASER notice of
such force majeure as provided in Section 25.01, the obligations and liabilities
of SELLER and the corresponding obligations of PURCHASER shall be suspended to
the extent made necessary by and during the continuance of such force majeure;
provided, however, that the disabling effects of such force majeure shall be
eliminated as soon as and to the extent possible (except that either party may
settle any of its own labor disputes, strikes, or terminate any of its own
lockouts in its own sole discretion).
Any deficiencies in the production, sale or purchase of CCP hereunder
caused by force majeure shall be made up at PURCHASER's sole option. If
PURCHASER desires, the term of this Agreement may be extended to make up any
such force majeure deficiencies.
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It is agreed that in the event that any valid act, law, ordinance, rule
or regulation of a municipality, county, state or the United States government,
or final judicial decision, judgment or order, is adopted or passed after
January 1, 1995, which either (a) directly prohibits the processing contemplated
hereunder or (b) directly or indirectly imposes significant burdens or
restrictions upon the burning or use of such CCP by PURCHASER to the extent that
PURCHASER is unable or would not be allowed to utilize such CCP feasibly and
economically in PURCHASER's sole discretion at any of its electric generating
plants or would be allowed to utilize such CCP only after the installation or
substantial renovation of plant equipment, then the existence and implementation
of such act, law, ordinance, rule, regulation, decision, judgment or order shall
constitute an event of permanent force majeure whereupon this Agreement may be
terminated by the party so affected upon notice to the other party.
Notwithstanding the provisions of this Section 14.01, a party not
claiming force majeure may terminate this Agreement upon notice to the other
party and without liability to the other party whenever all of the following
circumstances exist: (a) a condition of force majeure occurs which causes the
mutual obligations to be suspended as provided above with respect to the total
quantity of CCP to be supplied; (b) such condition (alone or extended by other
conditions of force majeure) continues so that the mutual obligations remain
suspended for a period of six (6) consecutive months; and (c) at the end of said
six (6) consecutive months or at any time thereafter, the party not claiming
force majeure, in the exercise of reasonable judgment, concludes that there is
little likelihood of ending the condition(s) in the immediate future. The party
not claiming force majeure may exercise such right of termination by giving
ninety (90) days' notice, as provided in Section 25.01, of its intention to
terminate to the other party.
15.01 CHANGES IN ENVIRONMENTAL RELATED REQUIREMENTS. The term
"environmental related requirement," as used in this Agreement, means the
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following: (a) any prohibition, restriction, or limitation related to the
quality of CCP which PURCHASER may burn, including any constituent
specification, at any or all of its electric generating plants, or to the type
or amount of emissions from any or all such plants; (b) any rule or requirement
affecting the permissible means for complying with any such prohibition,
restriction or limitation; or (c) any imposition of a cost, fee, tax or other
economic burden on PURCHASER relating to (i) the production of electricity
(generally or by means of CCP-fired steam electric generation), (ii) the
quantity of CCP purchased and/or burned by PURCHASER, (iii) any constituent
specification of CCP purchased by PURCHASER, or (iv) the type or amount of
emissions from PURCHASER's electric generating plants. The term shall also be
deemed to include PURCHASER's strategy for compliance with environmental related
requirements. A change in environmental related requirements shall be deemed to
have occurred in any one or more of the following circumstances: (a) there is
any increase or decrease in existing environmental related requirements; (b)
PURCHASER, in the exercise of its sole judgment. decides to change its strategy
for compliance with any existing environmental related requirements; or (c) a
new environmental related requirement is imposed on PURCHASER as a result of any
federal or state statute, local ordinance, administrative regulation or ruling,
court order, or any revision in any interpretation or implementation thereof. It
is recognized that a change in environmental related requirements upon PURCHASER
may occur even though stated as a restriction or limitation on, or requirement
of, PURCHASER and its affiliates or some other group of utilities. It is further
recognized that any change in environmental related requirements may affect
PURCHASER in a general way and may not be directed at specific plants, fuels,
fuel supplies or other operating conditions. In the event of a change in
environmental related requirements, PURCHASER shall, in its sole judgment,
determine how to comply with such change and whether PURCHASER's use of the CCP
to be supplied hereunder has been adversely impacted. The provisions of this
Section 15.01 are intended to provide rights in addition to the rights provided
in Section 14.01.
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The price, specifications, quantity and destination of CCP purchased
hereunder are predicated on environmental related requirements in effect as of
the effective date hereof. In the event and whenever after the effective date
hereof, there is a change in environmental related requirements, PURCHASER shall
determine whether such change has had or may have an adverse impact on its use
of the CCP purchased hereunder. It is agreed that any change in environmental
related requirements which has one or more of the following effects shall be
deemed to have an adverse impact on PURCHASER's use of the CCP purchased
hereunder, even though the statute, regulation, ruling or ordinance may allow
PURCHASER a choice of options for complying with such changed environmental
related requirements (which choice may include the payment of a fee or tax in
lieu of the installation of equipment, or utilization of CCP of different
constituent specifications, the reduction in the overall use of CCP by PURCHASER
or the acquiring of an emission allowance or credit): (a) the change imposes a
fee, tax, or other economic burden on PURCHASER relating to the constituent
specifications of CCP purchased or burned by it or on the type or amount of
emissions from PURCHASER's electric generating plants; (b) the change directly
or indirectly prevents or restricts PURCHASER from utilizing the CCP purchased
hereunder in one or more of its electric generating plants; (c) the change
requires PURCHASER to install equipment (such as flue gas desulfurization
equipment or particulate removal equipment) at one or more of its electric
generating plants in order to comply with such change; or (d) the change
requires or permits PURCHASER to utilize CCP of a quality (including, but not
limited to, sulfur) different from that specified in Section 9.01 or requires
the use of a fuel other than CCP.
If PURCHASER determines that a change in environmental related
requirements has had or may at a future date have an adverse impact on its use
of the CCP purchased hereunder, PURCHASER shall so notify SELLER as provided in
Section 25.01. Upon receipt of such notice, SELLER shall have the right, at its
option, to propose within thirty (30) days after receipt of such
19
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notice, any steps available to SELLER in its processing of the CCP, in the
supply of substitute CCP, in the change in the price of the CCP, or other
measure which would result in as low a delivered cost of fuel at PURCHASER's
electric generating plant as PURCHASER could achieve by purchasing reasonably
available substitute fuel, taking into consideration any fees, taxes, costs, or
other economic burdens imposed on the use of CCP by PURCHASER. In the event
PURCHASER, in its sole judgment, determines that SELLER cannot achieve this
result, then PURCHASER may terminate this Agreement upon ninety (90) days'
notice thereof as provided in Section 25.01. PURCHASER shall have the right to
give such notice of termination at a time chosen by PURCHASER either before or
after the effect of a change in environmental related requirements.
The parties hereto acknowledge that this Agreement is based on the
assumption that the CCP to be delivered hereunder will enable PURCHASER to
comply with the provisions of the Clean Air Act Amendments of 1990, judicial and
administrative interpretations thereof, and regulations promulgated thereunder
which exist as of January 1, 1995. If, at any time during the term of this
Agreement, PURCHASER determines, in its sole judgment, that any operational or
environmental compliance problem will result from the components or
characteristics of SELLER's CCP or the products of its combustion (including,
but not limited to, nitrogen oxide emissions) or any other constituent or
property of the CCP not otherwise specified herein, SELLER and PURCHASER shall
immediately enter into discussions in a good faith effort to resolve the
problem. If such discussions fail to resolve such problem in a manner which, in
PURCHASER's sole judgment, is reasonable and would not impose an unreasonable
additional expense to PURCHASER, then PURCHASER shall have the right to
terminate this Agreement by giving SELLER 30 days notice of PURCHASER's
intention to do so as provided in Section 25.01. No expense contemplated by this
Section 15.01 shall be deemed reasonable if it would result in a delivered price
of CCP hereunder in excess of the delivered price of competitive fuels or
sources then available to PURCHASER.
20
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16.01 WARRANTIES. SELLER warrants that it has title or control of CCP
in sufficient quantity and quality to satisfy the requirements of this
Agreement, including without limitation the Guaranteed Specifications of Section
9.01. SELLER warrants that no outside sales to others will diminish the
production of CCP to be supplied under this Agreement.
17.01 INDEPENDENT CONTRACTOR. This Agreement is a contract for the sale
and purchase of CCP. The parties recognize and agree that SELLER is not an agent
or employee of PURCHASER nor any affiliate of PURCHASER and that SELLER is
independent of any managerial or other control or direction by PURCHASER and is
free to perform, by such means and in such manner as SELLER may choose, all work
in pursuance of commitments hereunder.
18.01 BINDING EFFECT. This Agreement shall bind and inure to the
benefit of the parties and their successors and assigns, as permitted under
Section 19.01.
19.01 ASSIGNMENTS. Neither party may assign its rights under this
Agreement without the non-assigning party's prior written approval. However,
notwithstanding the above, PURCHASER may assign its rights, duties, obligations
and interests in and to this Agreement to a subsidiary, affiliate or sister
corporation; provided, however, that PURCHASER shall not be thereby relieved of
its responsibilities or obligations hereunder. Furthermore, notwithstanding the
above, SELLER may assign its rights, duties, obligations and interests in and to
this Agreement to a parent, subsidiary, affiliate or sister corporation,
provided, however, that SELLER shall not be thereby relieved of its
responsibilities or obligations hereunder. This Agreement shall likewise apply
to any successor of either PURCHASER or SELLER.
IA addition to the above rights, PURCHASER may exercise its right to
divert Shipments to other destinations under Section 6.01 or 6.02 without
SELLER's consent or approval.
20.01 ACCOUNTING AND AUDIT. SELLER shall keep full and complete
books and records of its costs and expenses relating to the sale and delivery of
CCP under this Agreement in accordance
20
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with sound and generally accepted accounting principles and shall retain such
books and records for at least three (3) years after this Agreement is
terminated or expires. SELLER shall also preserve in an orderly manner the
records supporting all charges and adjustments to the Billing Price hereunder
and shall make such records available to PURCHASER, its accountants, auditors or
other authorized representatives, who shall, after giving adequate notice, be
afforded access to and be permitted to examine such records at all reasonable
times during normal business hours. In the event, upon audit, it is determined
that claims made by SELLER for adjustments in price which were allowed to go
into effect by PURCHASER were not properly calculated, adjustments shall be made
promptly In billings hereunder for current CCP deliveries to reflect proper
amounts of such adjustments; or if no billings are then due, payments reflecting
the difference between the proper amounts determined by audit and the amounts
paid shall be made. It is expressly understood and agreed that the provisions of
this Section 20.01 shall survive the termination or expiration of this
Agreement.
21.01 SITE VISITS; CCP PROPERTY. PURCHASER or its designated agent
shall have the right at all times, at its sole risk and expense, to enter upon
the SELLER's property and/or other appropriate locations, whether such entry is
announced or unannounced, for any of the following purposes: (a) to observe and
examine the method, equipment and manner of mining, producing, storing, washing,
blending, crushing, loading, unloading, transporting, sampling, weighing,
analyzing, and other handling of CCP to be sold and delivered under this
Agreement; (b) to take samples of CCP for PURCHASER's analyses; or (c) in
connection with any accounting, audit, or examination of SELLER's records.
PURCHASER's representative shall check in with the appropriate personnel at the
entrance to SELLER's facility prior to entering onto SELLER's property. No
observation or examination by PURCHASER shall be deemed as a waiver of any of
PURCHASER's rights or relieve SELLER of any obligation of this Agreement.
22.01 WAIVER. The failure of either party to insist on strict
performance of any provision of this Agreement, or to take advantage of any
right hereunder, shall not be construed as a waiver of such provision or right.
Time is of the essence of this Agreement.
21
<PAGE>
23.01 REMEDIES FOR BREACH. In the event of a breach for which PURCHASER
terminates this Agreement or a breach resulting from SELLER's failure to deliver
the amount of CCP required under this Agreement, SELLER shall be liable to
PURCHASER for the difference between the market price of coal available at the
time of such breach and the price provided for hereunder with regard to all
conforming CCP not delivered under this Agreement. The market price of such
replacement coal shall be determined conclusively to be the highest incremental
cost to PURCHASER for coal of similar quality purchased during the three (3)
months following breach by SELLER, whether or not such incremental coal v;as for
the exact quantities, quality and delivery periods for CCP remaining to be
delivered hereunder. This remedy shall be in addition to other remedies for
breach available to PURCHASER under this Agreement or at law.
24.01 REMEDIES CUMULATIVE. Except as otherwise provided herein,
remedies provided under this Agreement shall be cumulative and in addition to
other remedies provided at law or in equity.
25.01 NOTICES. With the exception of SELLER's invoices or shipping
notices as required by Section 5.01, any notice, request, protest, consent,
demand, report or statement given by one party to the other shall be in writing
and deemed duly received seventy-two (72) hours after it is deposited in the
United States mail, by certified mail, postage prepaid, and properly addressed
as follows:
(1) If the notice is to PURCHASER, to:
Vice President, Fuel Services
Southern Company Services, Inc.
P. O. Box 2625
14N-8163
Birmingham, AL 35202
22
<PAGE>
With copy to:
Alabama Power Company
P. O.Box 2641
Birmingham, AL 35291-0480
Attention: Manager - Fuel Services
(or to such other person or addresses as PURCHASER shall have designated in
writing to SELLER).
NOTE: Escalation notices should not be copied to Alabama Power Company.
(2) If the notice is to SELLER, to:
(or to such other person or address as SELLER shall have designated in writing
to PURCHASER).
26.01 AGENT FOR PURCHASER. Southern Company Services, Inc., an Alabama
corporation, is agent for PURCHASER and is designated to act for and on behalf
of PURCHASER for the purpose of giving or receiving any notice, demand or
request required or authorized by this Agreement, for the purpose of designating
the quantity, size, destination and routing of Shipments to be made from time to
time to PURCHASER hereunder, and for such other purposes as may Tom time to time
be designated by PURCHASER. PURCHASER may change agent by giving notice thereof
to SELLER as provided in Section 25.01.
27.01 CAPTIONS. The captions to sections hereof are for convenience
only and shall not be considered in construing the intent of the parties.
28.01 APPLICABLE LAW. All questions concerning the execution,
construction, performance, breach or enforcement of this Agreement shall be
construed under the substantive laws of the State of Alabama and not just the
Alabama laws regarding conflicts of laws.
29.01 COMPLIANCE WITH LAWS AND REGULATIONS. In connection with the
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performance of this Agreement, SELLER agrees to comply in all material respects
with governmental laws and regulations, including (but not limited) to those set
forth in Annex E attached hereto. SELLER agrees and warrants that it or its
agent will acquire and maintain, in a timely manner, all licenses and permits
required by governmental authorities to engage in the mining, processing, and
selling of CCP and to otherwise perform its obligations under this Agreement.
30.01 ENTIRE AGREEMENT. This instrument contains the entire Agreement
between the parties; and there are no representations, understandings or
agreements, oral or written, which are not included herein. This Agreement
cannot be changed except by duly authorized representatives of both parties in
writing.
31.01 CONFIDENTIAL AND PROPRIETARY INFORMATION. The terms and
conditions (including, but not limited to prices) set forth in this Agreement
are considered by both PURCHASER and SELLER to be confidential and proprietary
information. Neither party shall disclose any such information to any third
party without advance written consent of the other (which consent shall not be
unreasonably withheld) except where such disclosure may be required by law,
regulation or regulatory agencies having jurisdiction over SELLER or PURCHASER
or is required in connection with the assertion of a claim or defense in
judicial or administrative proceedings involving the parties hereto, in which
event the party intending to make such disclosure shall advise the other in
advance and cooperate to the extent practicable to minimize the disclosure of
any such information. For purposes of this Section 31.01, the term "third party"
shall not include a parent, subsidiary, affiliate or sister corporation of
either party hereto.
32.01 CONTRACT TERMS BINDING ON PARTIES' EMPLOYEES' SUPPLIERS AND
SUB-CONTRACTORS. Each party shall require each of its employees, suppliers, and
sub-contractors performing obligations under the Agreement or having access to
the Agreement in the performance of duties for such party to be bound by the
terms and conditions of the Agreement, including without
24
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limitation the terms containing obligations and responsibilities respecting CCP
Property and confidentiality of information.
24
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers duly authorized "hereunto.
ATTEST: PURCHASER
/s/ Shirley A. Thomas Ben M. Gutten
Assistant Secretary Its: Executive Vice President
Date Executed April 15, 1996
ATTEST: SELLER
/s/ Michael S. Bodon /s/ Kirby Cochran
Secretary Its: President
Date Executed April 16, 1996
04/11/96 8:30:52AM
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Annex A
Reference to Section 4.05
COMPUTATION OF CALORIFIC VALUE ADJUSTMENT
TO THE BILLING PRICE
This adjustment is to adjust the amount per ton to be paid by PURCHASER for CCP
delivered in each month as a result of the extent by which the Calorific value
of such is greater than or is less than 12,000 Btu's per pound of coal.
Determination of the Calorific Value Adjustment is made as follows:
(X) (Y) (Z)
Base Factor Hypothetical Months
At the At a At a
Specification Month's Month's
Calorific Calorific Calorific
Value of Value of Value of
12 000 Btu/lb 12 200 Btu/lb 11.800 Btu/lb
ITEM
1. Per ton -
FOB Price
(Billing Price) $ 22.00 $ 22.00 $ 22.00
2. Calorific Btu Value
Per Pound 12,000 12,200 11,800
3. Calorific Adjustment 12,200 11,800
Fraction 12,000 12,000
4. Calorific Adjustment
Factor 1.017 .983
1
<PAGE>
Continued
Annex A
Reference to Section 4.05
COMPUTATION OF CALORIFIC VALUE ADJUSTMENT
TO THE BILLING PRICE
(X) (Y) (Z)
Base Factor Hypothetical Months
At the At a At a
Specification Month's Month's
Calorific Calorific Calorific
Value of Value of Value of
12.000 Btu/lb 12.200 Btu/lb 11.800 Btu/lb
ITEM
5. Adjusted Basis 22.37 21.63
Figures used in Columns (x), (y) and (z) of Items 1 through 6 are purely
hypothetical and are used for illustrative purposes only.
2
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Annex B
Reference to Section 4.06
COMPUTATION OF EXCESS ASH ADJUSTMENT
The adjustment to the Billing Price to be paid by PURCHASER on a per ton basis
for coal for which the actual "as received" ash content that exceeds 14.00% is
calculated as follows:
Assume that the following Shipments are received:
Actual Per Train
"As Received"
Month Ash Content
No. 1 13.50%
No. 2 15.50%
No. 3 14.50%
Examples of Calculations
(a) Adjustment for Shipment No. 1
No adjustment because the "as received" ash content is less than 14.00%
(b) Adjustment for Shipment No. 2
$.45 x (15.50 - 14.00) = $.68 per ton
(c) Adjustment for Shipment No. 3
$.25 x (14.50 - 14.00) = $.13 per ton
3
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Annex C
Reference to Section 4.07
COMPUTATION OF EXCESS MOISTURE ADJUSTMENT
The adjustment to the Billing Price to be paid by PURCHASER on a per ton basis
for coal for which the actual "as received" moisture content that exceeds 8.00%
is calculated as follows:
Assume that the following Shipments are received:
Actual Per Train
"As Received"
Month Moisture Content
No. 1 7.50%
No. 2 9.50%
Examples of Calculations
(a)Adjustment for Shipment No. 1
No adjustment because the "as received" moisture content is less than
8.00%
(b) Adjustment for Shipment No. 2
(9.50 - 8.00) x $.25 = $.375 per ton
4
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Annex D
Reference to Section 10.01, 4.05
COAL SAMPLE PREPARATION AND ANALYSIS LABORATORY
PROCEDURES
Procedures utilized by Alabama Power Company for coal sample preparation and
analysis will be performed manually or by utilization automated equipment which
conforms with the referenced ASTM Standards:
1. Total Moisture in Coal - (Air drying will be
continued for predetermined time necessary
to achieve a loss in weight or no more than
0.1 percent per hour). ASTM D-2013
2. Preparing Coal Samples for Analysis ASTM D-2013
3. Moisture in the Analysis Sample of Coal ASTM D-3173
4. Ash in the Analysis Sample of Coal ASTM D-3174
5. Gross Calorific Value of Coal by the ASTM D-2015
Adiabatic Bomb Calorimeter or
Gross Calorific Value of Coal by the ASTM D-3286
Isoperibol Bomb Calorimeter
6. Total Sulfur in the Analysis Sample of Coal ASTM D-4239
Using High Temperature Tube Furnace
Combustion Method
7. Volatile Matter in the Analysis Sample of Coal ASTM D-3175
8. Fusibility of Coal Ash ASTM D-1857
9. Grindability of Coal by The Hardgrove ASTM D-409
Grindability Machine Method (No. 8 coal
samples will be used for this analysis)
10. Fixed Carbon is a calculated value. Fixed ASTM D-5142
Carbon is the resultant of the summation of or ASTM D-3172
percentage moisture, ash and volatile matter
subtracted from 100. All percentages used in
the calculation must be on the same moisture basis.
5
<PAGE>
Continued
Annex D
Reference to Section 10.01, 4.05
COAL SAMPLE PREPARATION AND ANALYSIS LABORATORY
PROCEDURES
11. Nitrogen in Me Analysis Sample of Coal ASTM D-5373
or ASTM D-3179
12. Calculating Coal Analyses from As-Determined ASTM D-3180
to Different Basis
6
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Annex E
AGREEMENT AND CERTIFICATION OF COMPLIANCE
WITH FEDERAL LAWS AND REGULATIONS
Alabama Power Company is a government contractor under an Area-Wide Utilities
Service Contract with the General Services Administration of the United States
Government. The Seller agrees that the provisions referred to below shall, as if
set forth herein in full text, be incorporated into and form a part of every
contract or purchase order as may be entered into between the Seller and Alabama
Power Company after the date set out below if the amount and circumstances of
each such contract or purchase order meet the criteria set out in each of the
provisions referred to below for incorporation of the provision into contracts
or purchase orders between Alabama Power Company and others.
(1) 52.219-8 Utilization of Small Business Concerns and Small
Disadvantaged Business Concerns
(2) 52.219-8 Small Business and Small Disadvantaged Business
Subcontracting Plan
(3) 52.220 3 Utilization of Labor Surplus Area Concerns
(4) 52.220-4 Labor Surplus Area Subcontracting Program
(5) 52.222 4 Contract Work Hours and Safety Standards Act -
Overtime Compensation - General
(6) 52.222-26 Equal Opportunity
(7) 52.222-35 Affirmative Action for Special Disabled and Vietnam
Era Veterans
(8) 52.222-36 Affirmative Action for Handicapped Workers
(9) 52.223-2 Clean Air and Water
This Agreement shall remain in effect and binding upon the Seller. Upon the
Seller's request, Alabama Power Company will provide the full text of any of the
above provisions of clauses incorporated herein by reference.
Name of Contractor:____________________________________(Firm)
By:__________________________________________________(Individual's Name)
Its:__________________________________________________(Title)
Date:_________________________________________________
8
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT ("Agreement") is made effective as of June 1,
1996 between COVOL Technologies, Inc., a Delaware corporation (the "Company) and
Brent M. Cook (the "Executive").
WHEREAS, the Executive is leaving employment with PacifiCorp to become employed
by the Company as its Executive Vice President and Chief Financial Officer
effective June 1, 1996; and
WHEREAS, the Company and the Executive wish to record their agreement with
respect to the employment of Executive by Company, including the incentives
which the Company will provide to the Executive to induce him to accept such
employment.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein, and with knowledge that each party hereto intends to rely
hereon, the Company and the Executive agree as follows:
1.Base Salary. During the first twelve months of this Agreement, the
Executive's regular salary, before all customary and proper payroll deductions,
shall be $6,667.00 per month payable bi-weekly. During the second twelve months
of this Agreement, the Executive's regular salary, before all customary and
proper payroll deductions, shall be $8,334.00 per month payable bi-weekly.
During the last twelve months of this Agreement, the Executive's regular salary,
before all customary and proper payroll deductions, shall be $9,167.00 per month
payable bi-weekly.
<PAGE>
2. General Bonuses and Benefits. The Executive shall be entitled to
participate in and receive the benefits bonus plans and other benefit plans
generally available to other Company employees.
3. Expense Reimbursement. The Executive shall be entitled to prompt
reimbursement for reasonable expenses incurred by the Executive in performing
services for the Company.
4. Grant of Options. The Company shall grant to the Executive, in
accordance with the terms of the Stock Option Agreement attached hereto as
Exhibit A, the right and option to purchase all or any part of 100,000 shares of
the Company's Common Stock at a purchase price of $1.50. Alternatively, upon
mutual agreement of the Company and the Executive, the Company shall pay to the
Executive, in lieu of the grant of stock options, a sum equal to the market
price of 100,000 shares of the Company's Common Stock on June 1, 1996, less
$150,000.00.
5. Medical Insurance. The Company shall pay the premium for and
provide medical insurance benefits for the Executive and his family which are
comparable to the medical insurance benefits Executive received from PacifiCorp.
Said medical insurance shall be provided with no lapse in coverage between the
time Executive's medical insurance benefits from PacifiCorp terminate and the
time Executive's medical insurance benefits from the Company begin.
6. Personal Time Off. The Executive shall be entitled to at least six
(6) weeks paid personal time off each year. Personal time off may be carried
over from year to year. At the end of the term of this Agreement, the Executive
shall be entitled to be paid for the prorated portion of the accrued salary
attributable to unused personal time off.
<PAGE>
7. Leave of Absence. The Executive shall be provided a paid leave of
absence for the purpose of serving as an organ donor for his brother.
8. Automobile Expense. The Company will provide the Executive with a
monthly auto allowance. This allowance is to compensate the Executive for the
use of his personal automobile for travel related to the business of the
Company.
9. Death. If the Executive dies during the term of this Agreement,
his personal representative or designated survivor shall be entitled to receive
all of the salary and benefits provided hereunder for the remaining term of this
Agreement.
10. Dental Expense. The Company will provide the Executive with an
annual dental allowance in the amount of $4,500.00 or provide comparable
coverage.
11. Term. This Agreement shall commence on June 1, 1996 and shall
terminate on May 31, 1999.
12. Severance Pay. If the Executive does not continue in the
employ of the Company after the termination of this Agreement, whether or not
the Executive is offered continued employment by the Company, Company shall pay
to the Executive, no later than July 1, 1999, the sum of one years annual wages.
The Executive shall not be required to mitigate the amount of the payment
provided for in this section by seeking other employment or otherwise; nor shall
the amount of the payment be reduced by any compensation earned by the Executive
as the result of employment by another employer after termination or otherwise.
<PAGE>
13. Indemnification. The Company shall release, indemnify and hold
harmless the Executive against and from any and all loss, claims, actions or
Suits, including costs and attorney's fees, both at trial and on appeal,
resulting from, or arising out of or in any way connected with the Executive's
acts as an employee of the Company.
14. Miscellaneous.
(a) This Agreement shall be governed by and construed under the laws of
the state of Utah, exclusive of choice of law rules. If any provision or
provisions of this Agreement are found to be unenforceable, the remaining
provisions shall nevertheless be enforceable and shall be construed as if the
unenforceable provisions were deleted.
(b) This Agreement may be amended or modified only by written
consent of the Company and the Executive.
IN WITNESS WHEREOF, the parties have executed this Agreement in duplicate as of
the date written above.
Company: COVOL TECHNOLOGIES, INC.
a Delaware Corporation
By: /s/ Mike Midgley
Its: Chairman
Executive: /s/ Brent M. Cook
EXHIBIT A
STOCK OPTION AGREEMENT
This STOCK OPTION AGREEMENT is made between COVOL TECHNOLOGIES, INC., a
Delaware corporation (the "Company"), and Brent M. Cook (the "Optionee"). The
Company and the Optionee agree as follows:
1. Option Grant. The Company hereby grants to the Optionee the
right and the option (the "Option") to purchase all or any part of 100,000
shares of the Company's Common Stock at a purchase price of $1.50 per share.
2. Grant Date. This Option shall become effective on June 1, 1996 and
shall continue in effect until June 1, 2006, unless earlier terminated upon the
mutual written agreement of the Executive and the Company as provided in section
4 of the Employment Agreement between the Company and the Executive.
3. Time of Exercise of Option. Subject to the provisions of section 2
of this Agreement, the Option for the entire 100,000 shares shall become
exercisable on _____________.
IN WITNESS WHEREOF, the parties have executed this Agreement in
duplicate as of the date written above.
COVOLTECHNOLOGIES, INC. OPTIONEE
By: /s/ Mike Midley /s/ Brent M. Cook
Title: President
[LETTERHEAD] COVOL TECHNOLOGIES, INC.
March 6, 1996
Mr. Richard Visovsky
AGTC, Inc.
7 Oakwood Way
Robbinsville NJ 08691
Dear Rick,
The purpose of this letter is to memorialize our agreement concerning terms
under which Covol Technologies, Inc. ("Covol") will utilize the services of
AGTC, Inc. - Rick Visovsky, Alpine Coal Company, Inc. - Mark Rodak and E.J.
Hodder and Associates, Inc. - Edwin Hodder, Jr. (hereafter referred to as
"AGTC"). All of the work that will be performed by AGTC is subject to the
approval of Covol Technologies, Inc. ("Covol").
AGTC intends to use its best efforts to investigate, identify and participate in
the selection of project sites for the construction of suitable coal extrusion
manufacturing facilities (the "Project"). Each Project (capacity 1,000,000 tons
per year) will be identified based on an economic evaluation of centralized
locations, which minimize transportation costs, maximize the quantity of
available coal and coal fines and consider the interests of potential end users,
Covol and CoBon or other qualified purchasers. AGTC will negotiate relating to
contractual arrangements with respect to the use of the selected sites for
purposes of constructing the Project. AGTC will assist with the acquisition of
all necessary mining, air quality, water discharge and property use permits
which must be secured for each Project site.
AGTC intends to investigate, identify and participate in the selection of
suitable coal fines reserves or supply sources for purposes of furnishing the
Project with a source of raw materials. AGTC will negotiate relating to
contractual arrangements with respect to the supply of coal resources for the
Project. AGTC will assist with all necessary mining, air quality, water
discharge and property use permits which must be secured for each Project site.
AGTC intends to investigate, identify and participate in the selection of
suitable end users or consumers of the coal product produced. AGTC will assist
with negotiations relating to contractual arrangements with respect to the sale
of the coal product produced by the Project.
As compensation for services, AGTC will receive a combination of the following
four items:
1. A monthly retainer of $35,000 to be paid on the first of each month.
Payment is to be made by wire transfer to the account of AGTC, Inc.
2. Reimbursement for all direct expenses which are defined as airfare,
lodging, car rental and meals incurred in conjunction with project
development.
3. The retainer and reimbursement for expenses (Items 1 and 2) will remain
in place until the Project is placed into commercial operation. At the
time the Project is placed into commercial operation, the product
sales commission, as defined hereafter, will become effective and the
monthly retainer and reimbursement for expenses (Item 1 and 2) and will
no longer be paid. The product sales commission for all coal sold will
be on a graduated incentive scale for all coal contracted for FOB plant
as follows:
[LETTERHEAD]3280 NO. FRONTAGE ROAD, LEHI, UT 84043 801-768-4481 FAX 801-768-4483
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(a) Sales price less than $23.49 per ton: Product Sales Commission
= $1.00 per ton.
(b) Sales price greater than $23.50 and less than $26.00 per ton:
Commission = $1.50 per ton.
(c) Sales price greater than $27.00 and less than $30.99 per ton:
Commission = $2.00 per ton.
(d) Sales price greater than $31.00 and less than $49.99 per ton:
Commission = $2.50 per ton.
(e) Sales price greater than $50.00 per ton:
Commission = 10% per ton.
4. At the time and date of closing for the monetizing or sale of any
Project, a commission of each percent (8%) of the gross sales or
monetized price of the Project shall be paid to AGTC. After the time
and date of closing, AGTC will no longer be entitled to Items 1, 2 and
3 above.
RESPONSIBILITIES OF COVOL. Covol will use its best efforts in connection with
the following responsibilities:
License to Use Coal Technology. Covol agrees to license its proprietary
Coal Technology, as defined in Exhibit "A" (to be furnished by Covol),
to operating companies to be established hereafter by the parties. The
operating companies will be entitled to commercially exploit Covol's
Coal Technology and related binding agents by means of the production,
marketing and sale of coal briquette products and related goods and
services. Covol at its sole discretion shall grant the operating
companies a license to use the trademarks, trade names and service
marks used by Covol and pertaining to the Coal Technology.
Use of Proprietary Binder. Covol shall sell and supply to the operating
companies all of their needs, and the operating companies shall
exclusively buy from Covol all of their respective requirements, for
the proprietary binding agents.
Construction Services. Covol shall be responsible to coordinate all
construction services incident to the manufacturing facilities,
including the execution of such documents of assignment or otherwise as
may be necessary to insure the operating companies qualify for Section
29 Tax Credits as contemplated herein (i.e., all necessary assignments
of existing binding contracts under IRC Section 29).
<PAGE>
Section 29 Tax Credits. Covol's Coal Technology was approved under a
Private Letter Ruling by the IRS for Section 29 Tax Credits. Covol
cannot warrant or guarantee the continuation of the Private Letter
Ruling or the application of the Private Letter Ruling to the operating
entities in the future.
Financing. Covol shall utilize its best efforts to coordinate and
acquire the necessary financing for the manufacturing facilities to be
constructed by Covol.
MISCELLANEOUS PROVISIONS. Covol and AGTC agree to the following additional
provisions:
Confidentiality and Nondisclosure. Information of a confidential and
proprietary nature ("Confidential Information") will be shared between
the parties as commercially necessary for the purposes hereof AGTC
agrees to and shall strictly maintain during the term hereof and for
three years afterwards the Confidential Information of Covol, including
specifically the "Coal Technology" and all proprietary manufacturing
processes incident thereto. The parties acknowledge that the
Confidential Information has not been disclosed, published or
disseminated to third parties so as to have become public knowledge or
to be found in the public domain, and that they have required, or will
be required hereafter, all persons to whom Confidential Information has
been, or will be, disclosed to execute a written agreement containing
commercially reasonable confidentiality provisions against unauthorized
disclosure.
Governing Law. This agreement shall be governed by Utah law.
Arbitration. Any and all disputes which may arise between the parties
shall be finally resolved and settled exclusively by arbitration to be
held in Salt Lake City, Utah before a panel of three (3) arbitrators
under the American Arbitration Association's Commercial Arbitration
Rules.
Progress Reports and Standing Meeting Schedule. To insure that open and
direct communication is maintained between the parties, a standing
meeting schedule shall be established whereby written progress reports
shall be exchanged between the parties and discussed at no shorter
intervals than every week.
Critical Path. A critical path shall be established to facilitate
performance hereunder. This critical path shall be reviewed at each
weekly standing meeting.
Modification and Integration. This agreement shall constitute the
entire agreement of the parties with respect to the subject matter
hereof and no modification hereof will be legally recognized unless
executed in writing by both parties.
Term. This agreement will automatically renew annually until such time
that the Project is sold or monetized and AGTC is paid the commission
for each Project they presented. At the end of four (4) months AGTC
shall have presented to Covol at least two (2) Projects ready to be
financed for construction and then placed into commercial operation. If
less than two (2) Projects are presented and accepted then the retainer
shall be renegotiated or canceled and the agreement may be canceled.
Acceptance of the Projects presented by AGTC shall be with
<PAGE>
the sole discretion of Covol based on its own analysis of the economic
viability of any such Projects. If this agreement is terminated, the
terms of this agreement will continue to apply to any Projects that
have been presented by AGTC at the time of termination and which are
accepted and constructed by Covol, until the time of monetizing or sale
of such Projects.
If this letter of intent accurately sets forth your understanding of our
intentions and agreements, please execute both copies of this letter in the
space provided below and return one copy to us.
Sincerely,
AGTC, Inc. Alpine Coal Company, Inc. E.J. Hodder & Associates,
Inc.
/s/ Rick Visovsky /s/ Mark Rodak /s/ Edwin Hodder, Jr.
By: By: By:
Its: President Its: President Its: President
Acknowledgment
Duly authorized, agreed to and accepted this 6th day of March, 1996.
Covol Technologies, Inc.
/s/Kirby Cochran
By:
Its:
July 19, 1996
VIA FAX TRANSMISSION
TO: Rick Visovsky Mark Rodak
AGTC, Inc. Alpine Coal Company, Inc.
7 Oakwood Way Fax: (717)730-9416
Robbinsville, NJ 08691
Fax: (609)275-0779
Edwin J. Hodder
E.J. Hodder & Assoc.
2700 Powhatan Street
Mulga, AL 35118
Fax: (205)436-4099
SUBJECT: CANCELLATION OF SITE IDENTIFICATION AGREEMENT
Gentlemen:
In accord with the provisions relating to the term of the agreement entered into
by COVOL TECHNOLOGIES, INC. ("COVOL"), AGTC, Inc., ALPINE COAL COMPANY, INC.,
and E.J. HODDER & ASSOCIATES, on March 6, 1996, whereby COVOL has the right to
cancel if less than two projects are presented and accepted at the end of four
months, COVOL hereby cancels the agreement.
Sincerely,
/s/Michael Q. Midgley
Michael Q. Midgley
President
[LETTERHEAD] COVOL TECHNOLOGIES, INC.
August 22, 1996
Byrleen Hansen
45 South 1300 East
Pleasant Grove, UT 84062
RE: TERMS FOR PURCHASE OF OFFICE BUILDING
Dear Byrleen:
Following are the modified terms of purchase for the 401 North Carbonville Road,
Price, Utah, office building. The insurance and title companies are gearing up
to close around September 1, 1996. This is a follow up to our discussion on
Wednesday on the terms of the purchase of the office building in Price. As we
discussed, we will arrange with a title company for the closing. Relevant
provisions from the Lease Agreement regarding default, insurance, utilities and
notices, will continue to apply to the purchase.
The terms outlined in the Lease Agreement, and in our discussions, will be as
follows:
Purchase Price: $150,000
Credit for rental payments (48,800)
Balance: 101,200
Cash to be paid: 1,200
Loan to be carried by the owner: 100,000
Terms: 120 months at 9% per annum.
Monthly payment: 1,266.76
Timing: first payment will be due October 1 for the month of
September.
Annuity arrangement: Prepayment will not be permitted. If for any reason
we sell the building before 10 years, we will escrow
sufficient money to guarantee that you continue
receiving the same payments for the remainder of the
10 years, without adverse tax consequences.
Late payment penalty: $10 for each day after the first of the month that
you actually receive our payment.
Encumbrances: Covol will not use the building as collateral for any
loan.
[LETTERHEAD]3280 NO. FRONTAGE ROAD, LEHI, UT 84043 801-768-4481 FAX:801-768-4483
<PAGE>
Taxes: Covol pays taxes for 1996. Future taxes will be
escrowed.
Insurance: The replacement policy will be in effect by September
1, 1996. Insurance agent will be instructed to notify
you if the coverage lapses during the term of this
agreement.
Title insurance: You will pay half the cost of obtaining title
insurance, up to $320 (half of $640).
Default: If Covol defaults on she purchase or Lease Agreement,
and you take back the building, Covol must return it
in its original condition, minus ordinary wear.
Again, Byrleen, if there are any questions with the above, call me so we can
clear them up before closing.
Sincerely,
/s/Asael T. Sorensen
Asael T. Sorensen
General Counsel
PRIMARY AGREEMENT
This Primary Agreement ("Agreement") is made and entered into at Salt Lake City,
Utah this 6th day of November 1996 by and between Covol Technologies Inc., a
Delaware corporation ("Covol") and Savage Industries Inc., a Utah corporation
("Savage").
RECITALS:
A. Covol has approached Savage about the possibility of Covol and
Savage entering into a business relationship and Savage is
interested in pursuing the possibility of a business
relationship with Covol.
B. Covol has developed a process to bind coal fines (the "Covol Process")
and produce usable coal briquettes (the "Briquettes") and usable coal
extrusions (the "Extrusions") using a binder (the "Covol Binder")
developed by Covol.
C. Covol has applied for and received multiple United States
patents (the "Patents") covering the Covol Process using the
Covol Binder.
D. Covol has received a private letter ruling (the "Covol Private
Letter Ruling") from the Internal Revenue Service (the "IRS")
dated September 8, 1995 to the effect that (i) Covol, using
the Covol Process with the Covol Binder, is able to produce a
"qualified fuel" within the meaning of Section 29(c)(1)(C) of
the United States tax code (the "Code"), and (ii) the sale of
the "qualified fuel" will qualify for energy tax credits in
the year of the sale (the "Tax Credits") pursuant to Section
29(a) of the Code.
E. As a part of their business relationship, Covol and Savage, or
a third party entity formed by them, intends to enter into not
to exceed two (2) written contracts (the "Contract(s)") with
a qualified third party contractor or contractors (the
"Contractor(s)") whereby the Contractor will agree to design,
construct' start-up and certify up to two (2) separate coal
fines agglomeration facilities (collectively, the
"Facilities", with each such facility referred to herein as
the "Facility") using the Covol Process and the Covol Binder
to produce Extrusions.
<PAGE>
AGREEMENT AND UNDERSTANDING:
1. Representations and Covenants
1.1 Covol represents to and covenants with Savage as follows:
a. Environmental Technologies Group International, a
Nevada corporation, merged with Covol with Covol
being the surviving corporation. Covol is qualified
and in good standing to do business in the State of
Utah;
b. Covol is the lawful holder of the Patents and the
Patents are valid, in good standing and
enforceable pursuant to the United States patent
laws and regulations. Copies of the Patents
received to date by Covol have been provided by
Covol to Savage;
c. The Covol Private Letter Ruling has not been
modified or rescinded and Covol has no reason to
believe that such a modification or rescission will
occur. A copy of the Covol Private Letter Ruling
has been provided by COVOL to Savage;
d. To the best knowledge and understanding of Covol,
the Covol Private Letter Ruling (i) will, with
respect to Covol, apply to (a) each of the
Facilities to be constructed by the Contractor, (b)
the Extrusions produced by each of the Facilities,
and (c) the sale of the Extrusions produced by each
of the Facilities and (ii) will result in (x) the
Extrusions produced by each of the Facilities being
a "qualified fuel" pursuant to Section 29(c)(1)(C)
of the Code and (y) will result in the sale of
Extrusions produced by each of the Facilities
qualifying, in the year of such sale, for Tax
Credits pursuant to Section 29(a) of the Code;
e. Covol has the expertise, personnel and financial
ability to perform as required by the terms and
provisions of this Contract and all other documents
contemplated herein;
f. To the best knowledge and understanding of Covol, the
Tax Credits will be available to any third party who
obtains an interest in the production and sale of
Extrusions produced, using the Covol Process and
Covol Binder, by either of the Facilities constructed
by the Contractor pursuant to any of the Contracts;
and
2
<PAGE>
g. The execution and delivery of this Agreement and
the documents contemplated herein (i) have been or
will be duly executed by Covol, (ii) when executed,
will be valid, binding and enforceable against
Covol pursuant to the terms thereof, (iii) and the
performance of Covol hereunder, will not violate or
constitute an event of default under the terms and
provisions of any agreement to which Covol is a
party and (iv) do not require the consent of any
third party (except as otherwise provided in this
Agreement) or any governmental entity.
1.2 Savage represents to and covenants with Covol as follows:
a. Savage is a Utah Corporation, qualified and in good
standing in the State of Utah;
b. Savage has the expertise, personnel and financial
ability to perform as required by the terms and
provisions of this Agreement and all other
documents contemplated herein; and
c. The execution and delivery of this Agreement and
the documents contemplated herein (i) have been or
will be duly executed by Savage, (ii) when
executed, will be valid, binding and enforceable
against Savage pursuant to the terms thereof, (iii)
and the performance of Savage hereunder, will not
violate or constitute an event of default under the
terms and provisions of any agreement to which
Savage is a party and (iv) do not require the
consent of any third party (except as otherwise
provided in this Agreement) or any governmental
entity.
2. Conditions Precedent
2.1 The parties will jointly work together in clarifying the
criteria and other factors for the design, component parts,
layout and production capabilities of each of the Facilities
to be constructed by the Contractor.
2.2 The parties will jointly work together in obtaining an
informal position of the IRS as to (i) whether or not the
Tax Credits would be available to Savage and/or a limited
liability company (the "LLC") established by Savage in
conjunction with Covol with respect to the sale of
Extrusions produced, using the Covol Process and Covol
Binder, by the Facility or Facilities constructed by the
Contractor and (ii) whether or not the Contracts will
qualify for the "binding contract rule" of Section
29(g)(i)(A) of the Code.
3
<PAGE>
*** Missing information may be available upon request to the Company
2.3 Subject to receiving a positive informal position from
the IRS pursuant to Section 2.2, the parties will jointly
work together in obtaining a private letter ruling from
the IRS (the "Savage Private Letter Ruling") to the
effect that the Tax Credits (i) will be available in
accordance with the informal position obtained from the
IRS and (ii) will be equally applicable to the sale of
Extrusions produced, using the Covol Process and Covol
Binder, by the Facility and/or the Facilities.
2.4 If, at any time, either party is not satisfied, in its sole
discretion, with the results, progress or the timing of any of
the matters above set forth in Sections 2.1 through 2.3, such
party (the "Giving Party") may give written notice to the
other party (the "Receiving Party") of such dissatisfaction
and in such event, the Receiving Party shall either elect (i)
to terminate this Agreement or (ii) solely proceed with the
remaining terms and provisions of this Agreement hereinafter
commencing with Article 3.
2.5 If the Receiving Party elects to terminate this Agreement
pursuant to Section 2.4(i), then neither party shall have any
further rights, claims, duties or obligations to the other
party on account of this Agreement.
2.6 If the Receiving Party elects to proceed with this
Agreement pursuant to Section 2.4(ii), then the Receiving
Party shall (i) reimburse the Giving Party for the actual
out of pocket expenses incurred by the Giving Party in
its performance of the matters above set forth in
Sections 2.1 through 2.4, (ii) be entitled to receive all
technological information concerning the Covol Binder and
the Covol Process, all test results, studies, and
information received, gained and/or possessed by the
Giving Party, (iii) defend, indemnify and hold the Giving
Party harmless on account of this Agreement and all of
the matters set forth herein or contemplated hereby, (iv)
be entitled to proceed as provided in Section 2.4(ii)
with the cooperation, but not at the expense, of the
Giving Party, and (v) if the Giving Party is Covol, be
entitled to receive from Covol (a) *** to the
Receiving Party a license to use the Covol Process, Covol
Binder and Patents and (b) receive from Covol, the Covol
Binder required to produce Extrusions from the Facilities
at *** cost to the Receiving Party equal to *** (10%) to
produce the Covol Binder and at *** to deliver the Covol
Binder to the Facilities.
2.7 Until such time as notice is given or received pursuant to
Section 2.4, the parties shall continue to exert all
reasonable efforts to timely perform as required by Sections
2.1 through 2.3.
4
<PAGE>
*** Missing informaiton may be available upon request to the Company
2.8 The parties shall not commence performance of the
remaining terms and provisions of this Agreement,
commencing with Article 3, unless the parties (i) are
satisfied with each of the matters contemplated by
Sections 2.1 through 2.3, or (ii) have waived the right
to be satisfied with any of the matters contemplated by
Section 2.4(i) and (iii) in any event, have agreed in
writing to proceed with such remaining terms and
provisions (the "Proceed Notice").
2.9 Each of the parties shall be responsible for its own out
of pockets associated with their individual performances
pursuant to Article 2.
3. Duties, Rights and Obligations
3.1 The parties shall form up to two (2) LLC(s) to be owned ***
by Savage and *** by Covol, which LLC shall have the right
to own up to a *** percent (100%) interest in one or both of
the Contracts.
3.2 All costs and profits or losses of the LLC, to the extent
associated with Contracts and the Facilities constructed by
the Contractor shall be borne, distributed and/or allocated
*** to Savage and *** to Covol.
3.3 Savage shall have the right, but not the duty to operate
(i) either or both of the Facilities, upon terms and
conditions, reasonably and in good faith, acceptable to
each of the parties and (ii) to provide transportation of
(a) raw coal materials to either of both of the
Facilities and (b) Extrusions produced by the either of
both of the Facilities.
3.4 Covol, ***, will license the use of the Covol Process,
Covol Binder and Patents with respect to the Facilities.
3.5 Covol will provide the Covol Binder required to produce
Extrusions from the Facilities at *** to produce the Covol
Binder and *** to deliver the Covol Binder to the Facilities.
3.6 The parties contemplate that each will have the right to sell
to third parties any or all of its interest in either or both
of the L.L.C.'s.
5
<PAGE>
4. Time of the Essence
4.1 Time is of the essence for all matters set forth in this
Agreement and subject to the terms and conditions hereof, each
party agrees to proceed with dispatch and exert all reasonable
efforts to perform as herein required.
5. Applicable Law
5.1 This Agreement shall be construed and interpreted
pursuant to the laws of the State of Utah.
5.2 The parties agree to resort only to (i) the Utah state
district court or the United States district court sitting in
Salt Lake City, Utah, or (ii) such other entity or mechanism
as the parties may mutually agree, to decide any controversy
arising hereunder between the parties.
6. Initial Agreement
6.1 The Initial Agreement between the parties dated March 19, 1996
is terminated and neither party shall have any right, claim,
duty or obligation to the other on account thereof.
7. Mohave Agreement
7.1 Concurrently with the execution of this Agreement, the parties
have executed a written agreement (the "Mohave Agreement").
8. Miscellaneous Provisions
8.1 Each of the parties, and their respective counsel, have
participated in the negotiation and preparation of this
Agreement.
8.2 This Agreement contains the entire understanding and agreement
between the parties concerning the subject matter set forth
herein and supersedes all prior communications, understandings
and agreements of the parties.
8.3 No part of this Agreement shall be amended except in
writing signed by each of the parties.
6
<PAGE>
Executed in duplicate as of the date first above set forth.
Covol Technologies Inc.
/s/ Brent M. Cook
Its CEO & President
Savage Industries, Inc.
/s/ H. Benson Lewis
Its Executive Vice President
7
MOHAVE AGREEMENT
This Mohave Agreement is made and entered into this 6th day of November
1996 by and between Covol Technologies Inc., a Delaware corporation ("Covol")
and Savage Industries Inc., a Utah corporation ("Savage").
RECITALS:
A. On March 19, 1996, the parties executed a written agreement
(the "Initial Agreement").
B. On May 17, 1985, Flyash Haulers, Inc., an Arizona corporation
("Flyash") and Southern California Edison Company, a California utility ("Cal
Edison") entered into a written agreement (the "Mohave Underflow Sales
Contract") which provides Flyash with the right to purchase and remove coal
fines underflow (the "Coal Fines") from impoundment ponds 1 and 5 at Cal
Edison's Mohave Generating Station near Laughlin, Nevada (the "Station").
C. In conjunction with this Mohave Agreement, Savage and Flyash intend
to execute a written agreement (the "Business Agreement") (i) to form a Utah
limited liability company ("Mohave"), (ii) to upgrade an existing facility (the
"Facility") and place the Facility into operation at the Station, and (iii) to
produce and sell a "Qualified Fuel" pursuant to Section 29(c)(1)(C) of the
Internal Revenue Code (the "Code") which will result in "Tax Credits" for Mohave
pursuant to Section 29 of the Code.
D. Savage and Flyash intend for Mohave to execute a written agreement
with Flyash (the "Management Agreement") for Flyash to manage and operate the
Facility in the production of a Qualified Fuel.
E. Covol is willing to license to Mohave, the "Covol Process" using the
"Patents" and the "Covol Binder" as described in the Initial Agreement.
AGREEMENT:
1. Term. The term of this Mohave Agreement is effective as of
the date hereof and shall continue until December 31, 2009.
2. License Agreement. At Savage's request, Covol will execute a written
license agreement with Mohave (the "License Agreement") which will (i) allow
Mohave to use the Covol Process in conjunction with the Patents in return for a
monthly license fee (the "License Fee") to be paid by Mohave to Covol for each
ton (2,000 lbs.) of Qualified Fuel produced from the Coal Fines by Flyash at the
Facility and sold by Mohave to a third party purchaser during each calendar
quarter calculated on the basis of *** for each BTU contained within the
<PAGE>
*** Missing information may be available upon request to the Company
Qualified Fuel [for example, one (1) ton of Qualified Fuel containing *** BTU's
will generate a License Fee of ***.
3. Covol Binder ***. At Mohave's request, Covol shall provide to
Mohave for use with the Coal Fines, at ***, such quantities of the Covol Binder
as required by the Facility to produce Qualified Fuel.
4. Technical Assistance. Covol agrees to provide technical assistance
and field support to Mohave as may be reasonably necessary and as may be
requested by Mohave from time-to-time in the production of Qualified Fuel by the
Facility. Mohave agrees to reimburse Covol for its reasonable out-of-pocket
expenses incurred in providing such technical assistance and field support.
5. Reimbursement Fee. To induce Savage to participate in the formation
of and to invest capital in Mohave, Covol agrees that it will reimburse (the
"Reimbursement Fee") Savage from the License Fees received by Covol from Mohave,
an amount equal to *** of the cash capital required to (i) initially upgrade
and place the Facility into operation at *** and (ii) to thereafter upgrade the
Facility from time-to-time as determined by Mohave to efficiently and
economically produced a Qualified Fuel. The basis for the Reimbursement Fee
shall be documented. At Savage's request, Covol agrees to request and authorize
Mohave to deduct from the License Fees due to Covol and pay directly to Savage,
the amount thus deducted which will be treated as a credit against the
Reimbursement Fee owing by Covol to Savage.
6. Secure Performance. To secure Covol's performance in the event of a
failure on the part of Covol to produce and deliver the Covol Binder to Mohave
pursuant to the License Agreement, Covol agrees to place in escrow at Zions
First National Bank, Main Office in Salt Lake City, Utah (the "Escrow Holder"),
all documents, written specifications and instructions necessary and required
for Mohave or a third party designated by Mohave to formulate, mix, prepare and
produce the Covol Binder as required by the terms and provisions of this Mohave
Agreement. Covol agrees to cooperate with Mohave and the Escrow Holder, in the
preparation and execution of appropriate escrow instructions concerning the
documents to be placed in escrow and how, when and for what purposes the
documents may be released to Mohave or its designee.
7. Other Documents. Savage and Covol each agree to execute such
documents and take such action as is reasonably required and appropriate to
carry out the intent of this Mohave Agreement.
8. Entire Understanding. This Mohave Agreement has been
negotiated and prepared with the assistance and participation of each of the
parties and their respective counsel and contains the entire understanding and
agreement between the parties with respect to the subject matter set forth
herein.
2
<PAGE>
Executed in duplicate as of the date first above set forth.
Savage Industries Inc.
By: /s/ H. Benson Lewis
Executive Vice President
Covol Technologies Inc.
By: Brent M. Cook
President
3
RELEASE OF ALL CLAIMS
FOR AND IN CONSIDERATION of the issuance to MAYNARD MOE, an individual, by Covol
Technologies, Inc., ("Covol"), (formerly Environmental Technologies Group
International, formerly Enviro-Fuels, Inc.), of 30,000 shares of Covol
restricted common stock, the undersigned, MAYNARD MOE, and his successors, and
any other party in privity with the undersigned, do
HEREBY RELEASE AND FOREVER DISCHARGE Covol and their agents, employees,
employers, principals, partners, and all others in privity with said Releases
(agreeing parties) of and from any and all claims, demands, rights, liens,
damages, injuries, losses, contracts, covenants, suits, causes of action,
expenses, judgments, orders and liabilities of any kind and nature, whether now
known or unknown, suspected or unsuspected, foreseen or unforeseen, and whether
or not concealed and hidden, which may have existed or may not have existed, or
which can, may or shall hereafter exist or which have accrued or may hereafter
accrue, on account of, or in any way relating to the services, purchases, sales,
loans and all other transactions between the undersigned (including any party
related to or in privity with the undersigned) and Covol (including any of
Covol's predecessors).
The undersigned does hereby state that this is a full and final Release in
accord with its terms, applying to all unknown, unanticipated and unsuspected
injuries, damages claims and expenses as set forth above, arising out of the
above incidents, as well as to those now known or disclosed.
It is understood and agreed, and the undersigned does hereby state that reliance
is placed wholly upon his and his attorney's judgment, belief and knowledge as
to the nature, cause, extent, and duration of any injuries and damages; and that
no statement with regard thereto made by the Releases has in any way influenced
the making of this compromise settlement and the execution of this Release.
It is understood and agreed that this offer and/or compromise shall not be
deemed or construed as an admission of liability as to any of the agreeing
parties.
Having read and understood the terms of this Release of All Claims, and in
witness whereof, the undersigned has hereunto set his hand this 13th day of
September, 1996.
/s/ Maynard Moe
MAYNARD MOE
SUBSCRIBED AND SWORN TO before me this 13th day of September, 1996.
/s/ Asael T. Sorensen
NOTARY PUBLIC
Residing in: Utah County
My Commission Expires: 2/09/00
Letter of Understanding
This agreement is made and entered into this 13th day of September, 1996 by and
between Covol Technologies, Inc., a Delaware Corporation ("Covol") and E.J.
Hodder & Associates, Inc. ("Hodder"), a __________ corporation.
RECITALS
Whereas, "Hodder" owns an assignable land lease and equipment company commonly
referred to as Port Hodder (2700 Powhatan Street, Mulga, AL.) which is a barge
loading facility servicing the Warrior River.
Whereas, "Hodder" warrants that it owns title to all the equipment and
facilities currently located on Port Hodder site.
Whereas, "Hodder" desires to sell the Port Hodder facility, and "Covol" desires
to purchase said facility.
BE IT THEREFORE AGREED AS FOLLOWS:
Hodder" agrees to sell and convey unencumbered title to the Port Hodder facility
to "Covol", "Hodder" warrants and represents that there are no liens or
encumbrances and that any claims against the Port Hodder facility have been
disclosed to "Covol".
"Covol" agrees to pay to "Hodder" the following sums for the Port Hodder
facility:
(1) A Sum of $125,000 U.S. Dollars to be paid at commencement of
construction or by August 15, 1996 whichever is sooner.
(2) An additional sum of $125,000 U.S. Dollars to be paid on or
before September 15, 1996.
(3) An additional sum of $100,000 U.S. Dollars to be paid on or
before October 15, 1996.
(4) 71,800 Shares of Covol Stock (CVOL)
(Estimated value, based on 6/27/96 closing price $700,000.
Both parties agree to cooperate and work jointly at operating the Port Hodder
facility. Both parties further agree that if the efforts to acquire Concord Coal
Recovery Ltd. Partnership (K-Lee Processing) are unsuccessful the quantity of
shares identified in (3) above shall be reduced to 60,000 shares of Covol Stock
(CVOL) (estimated value based on 6/27/96 closing price $585,000).
<PAGE>
It is further agreed that if the efforts to acquire Concord Coal Recovery Ltd.
Partnership (K-Lee Processing) is successful, the payment identified in (3)
above shall be reduced to $50,000 U.S.
Dollars.
Both parties agree that Ed Hodder shall have the right to load and utilize the
Port facility for business purposes, upon condition that any such activity shall
not interfere with any present or future business activities of Covol
Technologies, Inc.
Both parties further agree that E.J. Hodder & Associates, Inc. shall provide
consulting services to Covol Technologies, Inc. and will assist with operation
of the port facility and future plant operations, and will also aid in acquiring
fines and other feedstock material and in developing finished product markets in
Coal, Coke and iron rich material an in other market development and industry
efforts which Covol is undertaking. Compensation and consideration for such
consulting services shall be as follows:
(deleted)
Agreed to this day 13th of September 1996.
Covol Technologies, Inc. E.J. Hodder Associates, Inc.
/s/ Ken Young /s/ Edwin J. Hodder
By: Ken Young By: Edwin J. Hodder
Title: CEO Title: President
STATE OF ALABAMA )
) SUBLEASE
COUNTY OF JEFFERSON )
THIS SUBLEASE is made and executed on the 9th day of September, 1996
and between PARKER TOWING COMPANY, INC., an Alabama corporation having its
principal office in the City of Tuscaloosa, Tuscaloosa County, Alabama, herein
referred to as "Parker"; and COVOL TECHNOLOGIES, INC., a Delaware corporation
having its principal office in the City of Lehi, Utah, herein referred to as
"Covol."
W I T N E S S E T H
WHEREAS, Parker is the Lessee under a certain Lease Agreement dated May
24, 1988, with AmSouth Bank N.A., Birmingham, Alabama, and Mary Harris Wood, as
Co-Trustees under the Will of Allen K. Wood, Deceased, as Lessor (the "Owner"),
pertaining to the lease of 280 acres of land in Jefferson County, Alabama (the
"Parker Property"); and Parker has, pursuant to the provisions of Section XV of
that Lease exercised an Option to renew for an additional five year term (such
that term now extends to May 23, 1998); and, Parker desires to sublease to
Covol, and Covol desires to rent from Parker, a portion (consisting of
approximately 15.45 acres, more particularly described below) of said real
property for a term also extending to May 23, 1998;
NOW, THEREFORE, in consideration of the covenants and agreements
hereinafter set forth, the parties hereto covenant and agree as follows:
SECTION I
Demise, Description, and Use of Premises.
(a) Parker hereby demises and leases to Covol and Covol leases from
Parker, to have and to hold through the term hereof for the sole purpose of
operating a facility which will heat coal fines, blend the fines with a bonding
agent and extrude the material making a high quality metallurgical coal product
and conducting activities related thereto, those certain premises and
appurtenances, situated in Jefferson County, Alabama, and more particularly
described and shown on the plat prepared by Almon Associates and attached hereto
as Exhibit "A".
As used herein, the term "premises"' refers to the real property above
described and to any improvements located thereon from time to time during the
term hereof, but specifically excludes mineral, mining, timber, or oil and gas
rights.
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SECTION II
Term.
The term of this Sublease shall commence on September 1, 1996, and
shall be for a period of approximately two years, expiring May 23, 1998. In
addition, the term hereof may be extended for two consecutive extension terms,
one for five years (through May 23, 2003) and the second for three additional
years (through May 23, 2006). In order to exercise such option, Covol shall so
notify Parker in writing not less than 210 days prior to the end of the then
existing term, whereupon the term hereof shall automatically be extended
accordingly. As used herein, the expression "term hereof" refers to such initial
term and to any extension hereof.
SECTION III
Rent and Wharfage
(a) Rental Payments. Covol shall pay to Parker, as rent for
the premises, the sum of One Dollar per year during the term of
this Sublease.
(b) Wharfage. Covol agrees to pay wharfage for all cargo, goods,
merchandise, or whatever, either bulk or package (the "Cargo"), which is moved
by Covol or its assignees or licensees through, across or onto any dock and
wharf facilities located on the premises, an amount equal to fifty cents ($.50)
per ton (2,000 pounds) of Cargo. Notwithstanding the foregoing, no such wharfage
shall be payable in the event Parker or any of its subsidiaries or affiliated
companies provides barging for such Cargo. In the event any Cargo is moved onto
or from the premises by truck or other method other than by barge, by Covol or
its assignees or licensees, Covol agrees to pay Parker a storage fee in an
amount equal to fifty ($.50) per ton (2,000 pounds) of such Cargo. Each such
payment of wharfage and storage shall be due on or before the 15th day of the
month for the immediately preceding month.
(c) Late Payments. Covol shall be obligated to pay a late fee equal to
two percent of the amount of any rental or wharfage installment which is not
paid within ten (10) days from its due date, which late fee shall be due and
paid with the late rental or wharfage and storage installment.
(d) Access to Records. Covol will furnish to Parker, by the 15th day of
each month, a report setting out the volume of all Cargo shipped to or from the
premises, including the number of barges or trucks loaded or unloaded and the
type and weight of Cargo, during the preceding month. At all reasonable times
and intervals, Parker may examine the books of account of Covol and any other
reports, records and materials of Covol pertaining to the determination of
wharfage and storage due hereunder; and upon written request by Parker, Covol
shall promptly furnish Parker copies of such records, reports and materials.
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SECTION IV
Warranties of Title and Quiet Possession.
Parker covenants that Parker is the tenant of AmSouth Bank N.A.,
Birmingham, Alabama, and Mary Harris Wood, as Co-Trustees under the Will of
Allen K Wood, Deceased, as above recited; and has full right to make this
Sublease and that Covol shall have quiet and peaceable possession of the demised
premises during the term
hereof.
SECTION V
Compliance with Laws; Waste and Nuisance Prohibited.
During the term of this Sublease, Covol shall comply with all
applicable laws, regulations or governmental rules affecting the premises
demised hereunder, including, without limitation, all state or federal laws or
regulations respecting environmental protection or hazardous wastes or
substances. Covol also agrees to furnish from time to time, upon the request of
Parker or Owner, a certificate to the effect that Covol is at the time of such
request in compliance with all such laws, regulations or governmental rules.
Covol shall not commit, or suffer to be committed, any waste on the premises, or
any nuisance. Covol hereby covenants and agrees to indemnify and hold harmless
Parker and Owner for any loss or damage to either of them or their respective
interests in the premises as a result of any violation of the foregoing
covenants.
SECTION VI
Abandonment of Premises.
Covol shall not vacate or abandon the premises at any time during the
term hereof. Neither shall Covol cease to use the premises at any time as a
facility for receiving, storing, processing and loading coal product, except
that in the event of casualty or other loss Covol may cease to use the premises
for such purpose for such time as shall be reasonably required to repair the
facility.
SECTION VII
Construction; Ownership of Improvements.
(a) Construction of Improvements. Covol, at its own cost and expense,
may make such improvements to the premises, including erection of a coal loading
facility, processing facilities, buildings, docks, roads, and other facilities
that may be required in the operation of its business, and may dredge any
waterway serving the premises. Covol shall have the right at any time and from
time to time to grade, gravel and clear the premises, and to construct on all or
any part of the premises such buildings, structures and other improvements as
Covol shall determine will further Covol's construction and operation of its
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facility. All costs and expenses incurred in connection with any construction,
site preparation, grading or similar activities shall be borne solely by Covol.
(b) Use of Existing Equipment. Covol shall have the right, without any
payments in excess of the rent due hereunder, to use in conjunction with its use
of the premises such conveyors, motors and hoppers as are presently located on
the premises [and as are more fully described on the schedule attached hereto as
Exhibit "B"]. All such equipment is provided as is, where is and Covol hereby
assumes the risk of use of all such equipment and agrees to indemnify and hold
harmless Parker for any injury, loss or damage resulting from such use.
(c) Alterations and Additions. Covol shall have the right at any time,
at its own discretion and solely at its expense, to make additions to or
alterations of any of the buildings, structures or other improvements on the
premises.
(d) Ownership of Improvements. All buildings, structures and other
improvements and all machinery, equipment and trade fixtures (other than as
described below) now or hereafter constructed, installed or placed by Covol upon
the premises or any part thereof, shall become affixed to the premises and shall
become the property of Parker upon the termination of the Sublease.
Notwithstanding the foregoing, Covol shall be entitled prior to the termination
of this Sublease to remove machinery (other than the conveyors and other
equipment furnished by Parker under Paragraph (b) hereof), rolling stock and
office furniture and equipment.
SECTION VIII
Parker's Right of Re-entry; Access Easements.
(a) Right of Re-entry. Covol shall permit Parker and the agents and
employees of Parker to enter into and upon the premises at all reasonable times
for the purpose of inspecting the, same, or for the purpose of posting notices
of nonresponsibility for alterations, additions, or repairs, without any rebate
of rent and without any liability to Covol for any loss of occupation or quiet
enjoyment of the premises thereby occasioned, and shall permit Parker or the
Owner and their respective agents and employees, at any time within the last
ninety (90) days prior to the expiration of this Sublease, or any extension
thereof, to place on the demised premises any usual or ordinary "To Lease" or
"For Sale" signs and exhibit the premises to prospective tenants or purchasers
at reasonable hours.
(b) Access Easements. Parker agrees to provide Covol an easement at
least thirty (30) feet wide, for ingress and egress to the Premises, such
easement to be located for the mutual convenience of Covol and Parker. In
addition, Parker hereby retains an easement over and across the premises for
general ingress and egress to and from the Parker Property or any part
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thereof. Such easement shall inure to the benefit of Parker and any successor,
assign or sublessee of Parker occupying any of the Parker Property.
SECTION IX
Subletting and Assignment.
The parties acknowledge the limited purposes for which the premises are
to be used, and therefore agree that, except as hereinafter set forth, Covol may
sublet the premises in whole or in part, or may assign or transfer this
Sublease, or any interest herein, only with Parker's prior written consent,
which consent may be withheld in the event Parker determines that such
subletting, assignment or transfer would or could result in any additional
liability or economic loss to it, or for other reasons in the reasonable
discretion of Parker. No consent to any subletting, assignment or transfer shall
be deemed to be a consent to any subsequent subletting, assignment or transfer.
No sublease, assignment or transfer of any interest in this Sublease shall
release Covol from, or otherwise affect in any manner, any of Covol's
obligations hereunder and Covol hereby expressly agrees that it shall continue
to be liable for its obligations hereunder notwithstanding any sublease,
assignment or transfer as contemplated by this Section IX.
SECTION X
Taxes and Assessment.
(a) Taxes. Covol shall pay all ad valorem taxes assessed to or on any
buildings, improvements, futures, machinery or personal property located on the
premises. In the event any of such property is not assessed separately from
other portions of the Parker property, the parties shall endeavor to have such
property separately assessed or, failing such, to allocate any taxes payable
according to the relative values of the properties.
(b) Fees. All license fees of every kind and nature which may be
levied, assessed, charged or imposed or which may become a lien or charge on or
against the land hereby demised, or any part thereof, arising from or due to any
improvements placed on the premises by Covol or by and through Covol's
operations shall be paid by Covol.
SECTION XI
Utilities.
(a) Payment of Costs. Covol shall fully and promptly pay for all water,
gas, heat, light, power, telephone service, and other public utilities of every
kind, including connection fees and installation expenses, furnished to the
premises throughout the term hereof, and all other costs and expenses of every
kind whatsoever of or in connection with the use, operation, and
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maintenance of the premises and all activities conducted thereon, and Parker
shall have no responsibility of any kind for any thereof.
(b) Utility Easement; Access Easements. Covol shall be entitled and is
hereby authorized to enter into such easement agreements with utility companies
as may be required or needed in order to provide service to any improvements
located on the premises; provided, however, the precise ground location of such
easements shall be approved in advance by Parker, and Parker will cooperate in
planning for utility service to the site.
SECTION XII
Liens.
(a) Covol's Duty to Keep Premises Free of Liens. Covol shall keep all
of the premises and every part thereof and all buildings and other improvements
at any time located thereon free and clear of any and all mechanics',
materialmen's, and other liens for or arising out of or in connection with work
or labor done, services performed, or materials or appliances used or furnished
for or in connection with any operations of Covol, any alteration, improvement,
or repairs or additions which Covol may make or permit or cause to be made, or
any work or construction, by, for, or permitted by Covol on or about the
premises, or any obligations of any kind incurred by Covol. Covol shall at all
times promptly and fully pay and discharge any and all claims on which any such
lien may or could be based, and agrees to indemnify Parker and all of the
premises and all buildings and improvements thereon against all such liens and
claims of liens and suits or other proceedings pertaining thereto.
(b) Contesting Liens. If Covol desires to contest any such lien, it
shall notify Parker of its intention to do so within thirty (30) days after the
filing of such lien. In such case, and provided that Covol shall on demand
protect Parker by a good and sufficient surety bond against contest, Covol shall
be permitted to pursue such contest so long as neither Parker's leasehold
interest nor Owner's fee interest shall be impaired or endangered. In the event
of any such contest, Covol shall protect and indemnify Parker and Owner against
all loss, expenses, and damage resulting therefrom.
SECTION XIII
Attorney's Fees.
If any action at law or in equity shall be brought to recover any rent
under this Sublease, or for or on account of any breach of, or to enforce or
interpret any of, the covenants, terms, or conditions of this Sublease, or for
the recovery of the possession of the premises, the prevailing party shall be
entitled to recover from the other party as part of the prevailing party's
costs, reasonable attorney's fees.
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SECTION XIV
Indemnity.
Covol assumes responsibility for the condition of the premises and
covenants for and agrees that (except as expressly provided below) neither
Parker nor Owner shall be liable for any injuries or damages to persons or
property caused by Covol or occurring on the premises during the use,
occupation, control or enjoyment of the premises by Covol, and Covol will save
and hold harmless Parker and Owner from and against any and all such liability,
loss, penalties, damages, expenses and judgments whatsoever on account of such
injuries or damages, including reasonable attorney's fees and court costs;
provided, that Parker shall be responsible for damages to persons or property
caused by Parker or by Waterway Forest Products, Inc., Cargo Handlers, Inc.,
other affiliates of Parker, or their agents, employees, contractors,
subcontractors, customers or invitees, including injuries occurring on the
premises. In addition, Covol shall be responsible for, and shall indemnify and
hold Parker harmless against any claims arising out, any and all injuries to
Covol's employees, contractors or while on or about any barge or other vessel
owned by Parker but within the custody and control of Covol or parties acting
under contract with or with permission of Covol. Without limiting the generality
of the foregoing, Covol agrees, upon the request of Parker or Owner, to defend
any claim against such party, or both of them, in any way related to any such
injuries or damages.
SECTION XV
Use of Run-Off Control Pond
The parties acknowledge that there is a run-off control pond located on
the premises. Covol shall cooperate with Parker in causing Covol to be named by
the Alabama Department of Environmental Management as the "operator" of such
pond and shall be solely responsible for control of such pond under the rules
and regulations applicable thereto. Covol shall be solely responsible for any
injury occurring in or on such pond and shall indemnify and hold harmless Parker
for any such injury, damage or failure to comply with applicable laws, rules and
regulations.
SECTION XVI
Redelivery of Premises.
Covol shall pay the rent, wharfage, storage and all other sums required
to be paid by Covol hereunder in the ~mounts, at the times, and in the manner
herein provided, and shall keep and perform all other terms and conditions
hereof on its part to be kept and performed, and, at the expiration of this
Sublease, shall peaceably and quietly quit and surrender to Parker the premises
in good order and condition subject to the other provisions of this Sublease.
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SECTION XVII
Remedies Cumulative.
All remedies hereinbefore and hereinafter conferred on Parker and Covol
shall be deemed cumulative and no one exclusive of the other, or of any other
remedy conferred by law.
SECTION XVIII
Insurance.
(a) Property Insurance. Covol shall at all times during the term of
this Lease, and at Covol's sole expense, keep all improvements which are a part
of the premises insured on an "all risk of loss" basis for their full
replacement value.
(b) Liability Insurance. Covol shall maintain in effect throughout the
term of this Sublease Commercial General Liability Insurance, including coverage
for their Maritime Operations, with a combined-single limit of $1,000,000 per
occurrence, $2,000,000 annual aggregate. Covol will also carry the appropriate
Wharfingers, Terminal Operators, and Stevedores Liability Coverage, to include
bodily injury liability, with a Combined-Single Limit of $1,000,000. Both of
these policies shall name Parker, Waterway Forest Products, Inc., and Cargo
Handlers, Inc. as additional insureds.
Automobile Liability Coverage, including Hired and Non-Owned
Coverage, shall be carried with Combined-Single Limit of
$1,000,000.
Umbrella Liability Coverage in the Mount of $2,000,000 shall
be carried with Parker, Waterways Forest products, Inc., and Cargo
Handlers, Inc. shown as additional insureds.
(c) Worker's Compensation Insurance. Covol will also carry
Worker's Compensation Coverage with a Longshoreman and Harbor
Worker's Endorsement, with waiver of subrogation in favor of
Parker, Waterways Forest Products, Inc. and Cargo Handlers, Inc.
(d) Insurance During Construction. In regard to any construction
operations to be performed on behalf of Covol on these premises, Covol shall
ensure that all contractors and subcontractors are adequately insured with
Commercial General and Automobile Liability Coverages, including coverages for
the Maritime Operations of such contractors and subcontractors for limits of
$1,000,000 per occurrence, $2,000,000 per Annual Aggregate, and an Umbrella
Policy in the Mount of $2,000,000. Such policies shall name Parker, Waterways
Forest Products, Inc., and Cargo Handlers, Inc., as additional insureds. Covol
shall also ensure that all such contractors and subcontractors shall carry
Worker's Compensation Coverages with the Longshoreman and Harbor Worker's
Endorsement and subrogation shall be waived against Parker, Waterways Forest
Products, Inc., and Cargo Handlers, Inc.
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Covol shall also execute a contract, in a form satisfactory to Parker,
with such subcontractors and contractors whereby Covol, Parker, Waterways Forest
Products, Inc., and Cargo Handlers, Inc. will be held harmless for any liability
arising out of the contractors or subcontractors operations in regard to
construction on these premises.
(e) Certificates. Upon execution of this Sublease and thereafter from
time to time upon the request of Parker, Covol shall furnish certificates of
insurance providing 30 days notice of cancellation, non-renewal or material
changes in any of the foregoing policies.
SECTION XIX
Default.
(a) Events of Default. Each of the following acts or
omissions of Covol or occurrences shall constitute an event of
default hereunder:
(i) Failure to pay rent, wharfage, storage or other
payments hereunder promptly when due, if any such
failure continues for a period of ten (10) days
following written notice to Covol of such failure;
(ii) Failure to perform or preserve any other
obligation, covenant or condition of this
Sublease by Covol and the continuation of such
failure for a period of thirty (30) days
following written notice to Covol of such
failure, unless Covol upon receipt of such
notice in good faith shall have promptly
commenced and thereafter shall continue
diligently to prosecute all action necessary to
cure each default.
(iii) Covol shall file a voluntary petition in
bankruptcy or shall be adjudicated as a bankrupt
or insolvent, or shall file any petition or
answer seeking or acquiescing in any
reorganization, arrangement, composition,
readjustment, liquidation, dissolution or
similar relief for itself under any present or
future federal or state law relating to
bankruptcy, insolvency or other relief for
debtors; or shall seek or consent to or
acquiesce in the appointment of any trustee,
receiver or liquidator of itself; or shall make
any assignment for the benefit of creditors or
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admit in writing its inability to pay its debts
generally as they become due.
(iv) The entry by court of competent jurisdiction of
an order, judgment or decree approving a
petition filed against Covol seeking any
reorganization, arrangement, composition,
readjustment, liquidation, dissolution or
similar relief under any present or future
federal or state law or regulation relating to
bankruptcy, insolvency or other relief for
debtors, which order, judgment or decree remains
unvacated and unstayed for an aggregate of sixty
(60) days (whether or not consecutive) from the
date of entry thereof; or the appointment of any
trustee, receiver or liquidator of Covol without
the consent or acquiescence of Covol, which
appointment shall remain unvacated and unstayed
for an aggregate of sixty (60) days (whether or
not consecutive).
(b) Remedies. Upon the occurrence of any event of default, Parker
shall have the option, in addition to any remedy or right given hereunder or by
law or equity, to do any one or more of the following
(i) Terminate this Sublease, in which event Covol
shall immediately surrender possession of the
premises to Parker together with all rights of
Covol with respect to the premises.
(ii) Re-enter and take possession of the premises
with or without having terminated this Sublease.
(iii) Alter locks and other security devices of Covol
at or on the premises;
(iv) File suit to collect any and all amounts
presently due and owing to Parker.
If Parker elects to repossess the premises without terminating the
Sublease, the rent required to be paid by Covol to Parker thereafter during the
remainder of the term hereof shall be due and payable each month as herein
provided, and Parker may bring action from time to time to collect such amounts
as have already accrued without waiting until expiration of the current term,
provided that any net sums received by Parker by reletting the premises during
said period shall be applied against the total indebtedness of Covol to Parker
hereunder, but in no event shall Covol be entitled to any excess of any rents
obtained by reletting over and above the rent herein reserved, although Covol
shall receive credit therefor against rents as they accrue.
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(c) Forbearance No Waiver. Any forbearance or failure of Parker to
enforce its rights under this Sublease shall not be deemed a waiver of such
rights and shall not constitute a waiver of its right to proceed against Covol
for any act of default then existing or thereafter occurring.
SECTION XX
Effect of Eminent Domain.
(a) Effect of Total Condemnation. In the event the entire premises
shall be appropriated or taken under the power of eminent domain by any public
or quasi-public authority, this Sublease shall terminate and expire as of the
date of such taking, and Parker and Covol shall thereupon be released from any
liability thereafter accruing hereunder, except for Covol's obligations to
indemnify and hold harmless Parker and Owner.
(b) Effect of Partial Condemnation. In the event a portion of the
premises shall be so appropriated or taken and the remainder of the premises
shall not be suitable for the use then being made of the premises by Covol, or
if the remainder of the premises is not one undivided parcel of property, Covol
shall have the right to terminate this Sublease as of the date of such taking or
giving to Parker written notice of such termination within ninety (90) days
after Parker has notified Covol in writing that a portion of the premises has
been so appropriated or taken. In the event of such partial taking and Covol
does not so terminate this Sublease, then this Sublease shall continue in full
force and effect as to the part not taken.
(c) Condemnation Award. In the event of the termination of this
Sublease by reason of the total or partial taking of the premises by eminent
domain, then in any such condemnation proceedings Parker and Covol shall be free
to make claim against the condemning or taking authority for the amount of any
damage done to them, respectively, as a result thereof.
SECTION XXI
Permits and Licenses.
Parker agrees to take such steps as shall be reasonably necessary to
assign to Covol the benefit of Parker's existing permits with respect to use of
navigable waterways contiguous to the premises. Covol shall be responsible for
obtaining and maintaining all other necessary permits, licenses and approvals
required in connection with its use of the premises. Parker shall not be
responsible for obtaining any such other permits, licenses or approvals, but
shall execute such applications or other documents as Covol shall reasonably
request so long as Parker shall not incur any liability thereunder.
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SECTION XXII
Waste Disposal; Covenant to
Comply with Environmental Requirements.
(a) Covol shall promptly remove from the premises all waste products
produced in connection with its use of the premises and all spoil resulting from
any dredging and waterway improvement. Such waste products may be stored on the
premises, in a safe and sanitary manner, for a period not exceeding sixty (60)
days. The coals fines used by Tenant as feedstock for its coal processing plant
will not be considered a waste product and may be reasonably stockpiled for
operational purposes.
(b) Environmental Covenant and Indemnity. Without limiting the
generality of Paragraph (a) hereof, Covol agrees to comply in all respects with
all laws, rules and regulations pertaining to storage, use or disposal of
hazardous substances or wastes. In addition, Covol agrees to indemnify, defend
and hold harmless Parker, the Owner and their respective officers, directors,
employees, agents, assignees, sublessees and licensees from any liability which
may arise from or relate in any way, directly or indirectly, to the handling,
use, generation, processing, release, discharge, storage or disposal of any
hazardous or toxic substances, including, without limitation, petroleum products
or byproducts, any flammable explosives, radioactive materials, hazardous
materials, hazardous waste, asbestos, PCB's, phosphates, lead or other heavy
metals, chlorine, radon gas, "hazardous substance," "hazardous material," or
"hazardous waste," all as contemplated and governed by applicable federal, state
or local laws, rules and regulations pertaining to such matters.
(c) Notwithstanding other provisions herein, Tenant will not be
responsible or liable for contamination of the premises which occurred prior to
the execution of this Lease. Tenant will establish a baseline for such
contamination by taking ground water and other samples within 30 days of
execution of this Lease. The samples will then be analyzed and the reports
therefrom will establish the baseline for allocation of liability under this
Lease. Tenant will furnish a copy of such fundings to the Landlord and Landlord
may independently verify Tenant's findings.
SECTION XXIII
Miscellaneous Provisions.
(a) Time of the Essence. The parties agree that time shall be of
the essence as to the performance of each and every provision hereof.
(b) Notices. Any and all notices by Parker to Covol, or by Covol
to Parker, shall be in writing and shall be deemed to have been given when
personally delivered to the other party or when deposited in the U.S. mail,
registered or certified, return receipt requested, addressed to the respective
addresses below stated:
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To Parker at: Parker Towing Company, Inc.
Post Office Box 020908
Tuscaloosa, Alabama 35402-0908
To Covol at: Covol Technologies, Inc.
3280 No. Frontage Road
Lehi, UT 84043
Either party may at any time change the address by notice to the other
party in writing by registered or certified U.S. mail, return receipt requested.
Unless Parker shall have given notice of, and there shall be continuing, any
event of default as provided in Section XVIII hereof, rent shall be payable by
check sent by ordinary mail by Covol to Parker at the address set forth above or
any change thereof made pursuant to this Section.
(c) Successors and Assigns. All covenants, agreements, provisions,
conditions and undertakings in this Sublease contained, shall extend to and be
binding upon the heirs, executors, successors and assigns or Parker and Covol,
respectively, but nothing herein shall permit sublease or assignment by Covol
without compliance with Section IX hereof.
(d) Holdover. If Covol shall continue in possession of the premises
after the expiration of the term of this Sublease, or any extension thereof,
such tenancy shall be from month-to-month only and upon all the terms, covenants
and conditions hereof.
(e) Lease Agreement. Covol hereby acknowledges receipt of the Lease
Agreement pursuant to which Parker occupies the premises. Parker has obtained
consent to this Sublease, as required under the terms of such Lease Agreement.
Covol agrees not to take any actions which would cause the occurrence of a
default or event of default under such Lease Agreement.
IN WITNESS WHEREOF, the parties have executed this Sublease in
duplicate original counterparts as of the date first above written.
This 9th day of September, 1996.
WITNESS PARKER TOWING COMPANY, INC.
Beverly Smith By: Richard A. Kienitz
COVOL TECHNOLOGIES, INC.
By: Michael Midgley
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STATE OF ALABAMA ) PARKER TOWING COMPANY, INC.
JEFFERSON COUNTY ) 19 JULY 1994
A parcel of land lying and being in the east half of the Southwest
Quarter of Section 6, Township 17 South, Range 5 West, Jefferson County,
Alabama, containing 15.45 acres, more or less, and being more particularly
described as follows:
Commence at the northwest corner of said Section 6; thence southerly
along the west boundary of said Section 6 a distance of 3,035.09 feet; thence
with a deflection angle of 90 degrees 00 minutes 00 seconds to the left, run
easterly a distance of 2,023.16 feet to the point of beginning; thence with a
deflection angle of 21 degrees 08 minutes 28 seconds to the right, run
southeasterly a distance of 574.53 feet; thence with a deflection angle to the
right of 72 degrees 46 minutes 06 seconds, run southerly a distance of 1,202.65
feet to the right margin of the Locust Fork of the Black Warrior River; thence
with a deflection angle to the right of 97 degrees 00 minutes 16 seconds, run
westerly along the right margin of said river a distance of 529.49 feet; thence
with a deflection angle to the right of 81 degrees 58 minutes 47 seconds run
northerly a distance of 1,308.48 feet to the point of beginning.
14
<PAGE>
STATE OF ALABAMA ) Parker Towing Company, Inc.
JEFFERSON COUNTY ) Field Line Easement
29 December 1994
A parcel of land lying and being in the east half of the Southwest
Quarter of Section 6, Township 17 South, Range 5 West, Jefferson County,
Alabama, containing 3.31 acres, more or less, and being more particularly
described as follows:
Commence at the northwest corner of said Section 6; thence southerly
along the west boundary of said Section 6 a distance of 3,021.21 feet; thence
with a deflection angle of 90 degrees 00 minutes 00 seconds to the left, run
easterly a distance of 1,748.51 feet to the POINT OF BEGINNING; thence with a
deflection angle of 02 degrees 53 minutes 37 seconds to the right, continue
easterly a distance of 275.00 feet; thence with a deflection angle to the right
of 90 degrees 00 minutes 00 seconds, run southerly a distance of 525.00 feet;
thence with a deflection angle to the right of 90 degrees 00 minutes 00 seconds,
run westerly a distance of 275.00 feet; thence with a deflection angle to the
right of 90 degrees 00 minutes 00 seconds run northerly a distance of 525.00
feet to the POINT OF BEGINNING.
15
SUPPLY AGREEMENT
This Supply Agreement (the "Agreement") effective the 11th day of September,
1996, is between K-Lee Processing, Inc., an Alabama corporation ("K-Lee"),
Concord Coal Recovery Limited Partnership, an Alabama limited partnership
("Concord") (K-Lee and Concord collectively referred to herein as the "Seller")
and Covol Technologies. Inc., a Delaware corporation ("Buyer"). Buyer and Seller
are sometimes jointly referred to herein as the "Parties." The Parties,
intending to be legally bound, mutually agree as follows:
ARTICLE 1
Scope and Term of Agreement
1.1 SCOPE OF AGREEMENT: Buyer desires to assure a continuous supply of
appropriate coal fines ("Fines") for its facility ("Facility ") and
Seller is willing and able to provide such Fines. The Parties agree
that all purchases of Fines by Buyer from Seller during the term of
this Agreement shall be subject to and in accordance with the
provisions of the Agreement, which shall supersede and take precedence
over any contrary or additional terms stated in Seller's
acknowledgment, invoice or other document unless the Parties expressly
agree by written modification to this Agreement, in accordance with
Section 4.5 hereof, that the provisions of this Agreement shall not
apply.
1.2 TERM OF AGREEMENT: This Agreement shall become effective on December 1,
1996 and, unless sooner terminated as provided herein, shall remain in
full force and effect until December 1, 2001, inclusive, at which time
it shall terminate without notice or other action by the Parties.
ARTICLE 2
Sale of Fines
2.1 DESCRIPTION OF FINES AND PRICE SCHEDULE: In accordance with the terms
of this Agreement Seller agrees to transfer ownership and deliver to
Buyer, and Buyer agrees to accept and pay Seller for washed Fines
produced or located at Seller's Plant located in Jefferson County,
Alabama. The coal specifications shall be approximately 12,500 Btu per
ton, not to exceed 14% moisture, not to exceed 10.5% dry ash. The price
which Buyer will pay for the Fines during the first year of this
Agreement is $29.00 per ton. If moisture content varies from the 14%
level the price per ton shall be weight adjusted to reflect a higher or
lower moisture. A per ton premium or penalty will apply for variances
in ash content at the rate of $0.75 per percentage point (or fraction
thereof) above or below 10.5%. A price escalation of 5% may be enacted
by the Seller after January 1, 1998, and an additional price escalation
of 5% may be enacted by the Seller after January 1, 1999. After January
1, 2000, annual price escalations shall be the greater of 5% per year
or the average market price of coal fines of the same specification as
outlined in this agreement, sold in the Alabama area.
<PAGE>
2.2 QUANTITY: Buyer shall be obligated as outlined in Section 3.1 to
purchase from Seller a minimum of twenty thousand tons of Fines per
month at the prices contained herein. Buyer may purchase additional
Fines from Seller at a mutually agreed upon price. Both parties
acknowledge the existence of the contract between K-Lee and Drummond
Coal Sales Inc., dated March 16, 1996, and will cooperate to see such
terms are met until March 31, 1997. If more than 2,500 tons of Fines
accumulates at Seller's Plant without Buyer notifying Seller as to
Buyer's intent to purchase, Seller shall have the right to market fines
to third parties prior to the 20,000 ton limit, the qantity of fine
specified herein. If Buyer's facility is in operation producing
briquettes and Buyer does not purchase Fines from Seller for two
consecutive months, Seller may give 30 day notice and terminate this
Agreement.
2.3 WEIGHING AND SAMPLING: Weights shall be determined via certified truck
certificates at Buyer's facility. Buyer's scales shall be certified
quarterly and subject to review by Seller. Quality of Fines for
purposes of determining premiums or penalties as outlined in Section
2.1 shall be determined using an average of Buyer's and Seller's daily
sampling utilizing generally accepted standards and sampling techniques
(using ASTM certified laboratories). Any discrepancies or disputes
shall be settled by third party sampling at Buyer's expense.
2.4 SELLER'S OBLIGATION TO PERFORM: Seller shall immediately notify Buyer
when Seller has reason to believe that it will not be able to operate
the Plant or that it will not be able to supply sufficient Fines to
meet the quantity requirements of this Agreement. Notwithstanding the
foregoing, Seller shall not take any action or fail to take any action
during the term of this Agreement with the intent of jeopardizing
Seller's ability to fulfill the requirements of this Agreement. Seller
shall in good faith use its best efforts to keep the Plant in operation
and to operate the Plant such that it can consistently and
substantially produce the purchase quantities required by this
Agreement. Notwithstanding any clause to the contrary, Seller cannot
guarantee its' ability to produce the quality of Fines designed herein
given the variance in feed stock which may occur in the USSM
impoundments.
ARTICLE 3
Orders, Shipment and Payment
3.1 ORDER PROCEDURE: Buyer shall be required to submit all Purchase Orders
at least 30 days in advance of the first day of the month in which said
deliveries are made. Buyer shall be obligated to take and pay for the
tonnage specified in the Purchase Order at the price agreed upon
herein. (For example, Buyer shall issue a Purchase Order for December
delivery by no later than November 1st). Buyer shall pick up coal fines
on a continuous daily haul basis until such time as they have removed
20,000 tons each month; thereafter orders for Fines shall be made on
signed Purchase Orders or orally by telephone by an authorized agent of
Buyer. Orders shall be sent to Seller at the address listed in Section
3.2, or such other address as Seller shall direct.
<PAGE>
3.2 NOTICES: All notices given pursuant to this Agreement shall be sent to
the following addresses or facsimile numbers:
SELLER BUYER
K-Lee Processing, Inc. Covol Technologies, Inc.
Attn: Tom Bryan Attn: Brent M. Cook
P.O. Box 19127 3280 North Frontage Road
Birmingham, AL 35219 Lehi, UT 84043
Fax: (205) 491-7598 Fax: (801) 768-4483
3.3 F.O.B. POINT AND SHIPPING INSTRUCTIONS: Prices are F.O.B. Seller's
Plant. Buyer will provide trucks and Seller will load the trucks. Buyer
will arrange for transportation of the Fines from Seller's loadout
facility to Buyer's plant. Trucks will be tarped and hauling of product
will be subject to Seller guidelines while on USS Mining property.
3.4 PAYMENT TERMS: Payment in full by Buyer is due on or before the seventh
day following receipt by Buyer of an invoice that conforms to the terms
of this Agreement. Invoices shall be submitted weekly and any
adjustments to the price as outlined in Section 2.1 shall be invoiced
monthly. A premium of two (2) percent will be paid by Buyer for payment
sent after seven (7) days following such receipt. All invoices
submitted by Seller to Buyer shall the date and tonnage weight of each
shipment covered by the invoice. Buyer will pay a late fee of 1.5% per
month for invoices delinquent 30 days or longer. If unpaid in excess of
90 days Seller shall have the right to exercise Buyer's letter of
credit or other financial arrangement and shall have the right to
terminate this Agreement.
Payment shall be sent to Seller's address listed in Section 3.2 of this
Agreement.
3.5 MUTUAL OBLIGATION TO NOTIFY: Seller shall promptly notify Buyer if
Seller plans to shut down its Plant for any reason beyond routine
maintenance. Likewise, Buyer shall promptly notify Seller if Buyer
intends to buy less than twenty thousand tons of Fines in any calendar
month due to plant shutdown for any reason beyond routine maintenance.
Buyer shall not be obligated to purchase the 20,000 ton monthly
quantity if the construction of the buyers plant is delayed or fails to
occur.
3.6 LETTER OF CREDIT: On or before December 1, 1996 Buyer shall obtain a
letter of credit from an institution acceptable to Seller in the amount
of $580,000, or other financial backing on terms satisfactory to seller
to adequately assure Seller of Seller's ability to collect all proceeds
due Seller pursuant to a binding Purchase Order issued under this
Agreement as specified in Section 3.1.
<PAGE>
ARTICLE 4
Miscellaneous
4.1 ADVERTISING AND PUBLICIZING AGREEMENT: Neither Party will advertise,
circularize or release any information regarding this Agreement to any
person, entity, organization, news agency or media without written
permission from the other Party. This Section will not prevent either
Party from disclosing such information as said Party in good faith
believes is reasonably required in order to comply with state and
federal governmental regulations or in compliance with a court order.
Either Party may also disclose such information to business partners
and potential investors as said Party in good faith believes is
reasonably required to carry out the purposes of this Agreement.
4.2 APPLICABLE LAW: This Agreement shall be governed by the laws of the
State of Alabama.
4.3 CONSENT TO JURISDICTION: The Parties hereby irrevocably submit to the
nonexclusive jurisdiction of any court of the State of Alabama or the
United States of America, in any action or proceeding arising out of or
relating to this Agreement, and the Parties hereby irrevocably agree
that all claims in respect of such action or proceeding may be heard
and determined in any such court. The Parties hereby irrevocably waive,
to the fullest extent they may effectively do so, the defense of an
inconvenient forum to the maintenance of such action or proceeding. The
Parties agree that a final judgment in any such action or proceeding
shall be conclusive and may be enforced in other jurisdictions by suit
on the judgment or in any other manner provided by law.
4.4 ASSIGNABILITY: In the event this Agreement is assigned, it shall not
relieve the assigning Party from any of the obligations of this
Agreement. Any assignee shall be considered an agent of the assigning
Party and the assigning Party shall remain liable to the same extent as
if no such agreement had been made. Subject to the foregoing, this
Agreement shall be binding upon and inure to the benefit of the
respective successors and assignees of the Parties hereto.
4.5 COMPLETE CONTRACT; NO ORAL MODIFICATION: This Agreement is
intended by the Parties as a final expression of their agreement and
supersedes all prior communications, representations and agreements,
oral or written, between the Parties with respect to the subject matter
contained herein. The Parties also intend this Agreement to be a
complete and exclusive statement of the terms of their Agreement. This
Agreement may not be modified or terminated orally, and no claimed
modification, rescission or waiver shall be binding on Buyer or the
Seller unless in writing signed by a duly authorized representative of
Buyer or Seller.
<PAGE>
In witness whereof, the Parties have signed this Agreement on the dates
shown below:
SELLER BUYER
K-LEE PROCESSING, INC. COVOL TECHNOLOGIES, INC.
By: /s/Thomas B. Bryan By: /s/Brent M. Cook
Its: President Its: Chief Financial Officer
Date: September 13, 1996 Date: September 11, 1996
CONCORD COAL RECOVERY, L.P.
By: /s/Thomas M. Ellbogen By: /s/ Ken Young
Its: Partner CCRLP Its: Chief Executive Officer
Date: September 12, 1996 Date: September 11, 1996
PACIFICORP FINANCIAL SERVICES, INC.
LETTER INTENT
(Covol Technologies)
September 12, 1996
Subject to the qualifications and conditions set forth below, PacifiCorp
Financial Services, Inc. ("PFS") proposes, directly and/or through its
subsidiaries and affiliates ("PFS Investors") to make the following investments
in Covol Technologies, Inc. ("Covol") and in the coal briquetting facility to be
located in Birmingham, Alabama, known as Alabama Syn Fuel #1 Ltd.
(the "Alabama Project").
Loan:
A PFS Investor shall make a first-priority secured convertible
loan (the "Loan") to Covol on the following terms:
a. Borrower: Covol ("Borrower").
b. Amount: $5,000,000, in the aggregate (the "Loan
Commitment").
c. Purpose: The Loans shall be available for the
following purposes: (i) $2.3 million to
complete construction by Covol of the
Alabama Project, (ii) to finance the
acquisition by Covol 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) funding of net
working capital needs of plant operations
of the Alabama Project as approved by
PFS, (iv) to finance the development and
construction of a wash plant for coal
fines at a location, price and with
specifications approved by PFS, and (v)
other uses by Borrowers as approved by
PFS in its sole discretion.
d. Advances: Subject to the terms and conditions
contained herein and in the final
documents, advances up to the
Letter of Intent Page 1
(Covol Technologies)
LLO1-48682.8 17509-028
<PAGE>
aggregate Loan Commitment shall be made
from time to time through six months
after the date of the loan agreement (the
"Commitment Period"). Such advances
shall be made upon the written
request of Borrowers against invoices
for the purposes contemplated above as
approved by PFS. The first advance shall
be available on the last of the following
to occur: (i) October 1, 1996, (ii) the
filing of the request for a Letter Ruling
contemplated below, (iii) the obtaining
of a Coal Fines Contract (see "Coal
Fines," below), or (iv) the execution
and delivery of the Transaction
Documents. The amount and timing of the
Loan advances shall be staged over the
Commitment Period, with the availability
to be reflected in the final loan
agreement, as determined by mutual
agreement of the parties based upon
reasonable projections. For purposes
hereof, the "Transaction Documents"
shall mean the Loan Agreement, the
security agreement, the Alabama Project
Sale Agreement, the O&M Agreement, the
Licensing Contract, the Sales Contract
(each as defined below), and any
other documents or agreements required in
the opinion of PFS to effect the
transactions contemplated herein.
e. Term: 12 months from the date of the loan
agreement ("Maturity").
f. Interest: Prime + 2% per annum, compounded monthly;
unless the Loan is accelerated, interest
shall not be payable but shall accrue
prior to Maturity, at which point it will
be payable in full.
g. Prepayment; Voluntary Termination of Commitment:
Borrowers may prepay the Loan in whole
(but not in part) and terminate the
commitment to make further Loans at any
time without penalty; provided, that the
PFS Investors will have sixty-
Letter of Intent Page 2
(Covol Technologies)
LLO1-48682.8 17509-028
<PAGE>
days' notice prior to any such prepayment
and termination (the "Early Termination
Period") during which Early Termination
Period the PFS Investors may convert all
or any portion of the outstanding Loan,
and may simultaneously advance and
convert all or any portion of the
remaining commitment, in each case to
Common Stock of Covol, as set forth
below.
h. Termination of Commitment
By PFS: PFS may terminate the commitment to make
further Loans at any time it determines
(in the case of clause (iii), in its sole
discretion, and in the case of each of
the other clauses, in its reasonable
discretion) that (i) a favorable Letter
Ruling will not be obtained by Newco,
(ii) the environmental report discloses
an adverse matter, or (iii) an Event of
Default has occurred and is continuing
under the Transaction Documents.
i. Security: The obligation of Borrowers under the
Loan will be secured by a first priority
lien on all of the real and personal
property constituting the Alabama Project
(including, without limitation, an
assignment of all related contracts).
j. Covenants, Representations, etc.
To be negotiated.
k. Conversion: At any time, the PFS Investors may elect
to convert all or any portion of the then
outstanding principal and interest owing
under the Loan into shares of Common
Stock of Covol. In addition, within 30
days' prior to the end of the Commitment
Period and at any time during the Early
Termination Period, the PFS Investors may
elect to simultaneously advance and
convert all or any portion of the
remaining Loan Commitment into shares of
Common Stock of Covol. The PFS
Letter of Intent Page 3
(Covol Technologies)
LLO1-48682.8 17509-028
<PAGE>
*** Missing information may be available uon request to the Company
Investor shall receive one share of
Common Stock for each *** of principal
and/or interest converted (including,
without limitation, principal upon any
Loan which is simultaneously
advanced and converted).
l. Anti-dilution
Protection: ***
m. Registration Rights: The PFS Investors will have demand and
piggyback registration rights with
respect to any Common Stock received
upon conversion of the Loan. Covol
will be responsible for all of the
expenses of registration other than (i)
the cost of counsel to the PFS Investors
and (ii) any commission or similar
fee paid by the PFS Investors to an
underwriter or placement agent for the
sale of such Common Stock.
n. Board of Directors Meetings:
The PFS Investors will have
the right to receive
notices of all regular and
special meetings of the
Board of Directors of Covol
and any committee thereof
and the right to attend
such meetings.
Letter of Intent Page 4
(Covol Technologies)
LLO1-48682.8 17509-028
<PAGE>
*** Missing information may be available upon request to the Company
Formation of Newco; Acquisition of Alabama Project:
It is anticipated that Alabama Synfuel #1 Ltd., a Delaware
limited liability partnership ("Alabama Synfuel"), will enter
into various agreements (which shall be in form and substance
satisfactory to the PFS Investors) with Covol for the
acquisition of the Alabama Project. An Alabama limited
liability company ("Newco") would be formed by the PFS
Investors. Newco would enter into an agreement with Alabama
Synfuel and Covol (the "Alabama Project Sale Agreement")
pursuant to which Alabama Synfuel would agree to assign to
Newco its right to acquire the entire interest in the Alabama
Project (including, without limitation, any of its rights
under the agreement with the design/builder for the Alabama
Project, any contracts relating to purchase of raw materials,
the lease of the land at the site, and the licenses
contemplated below, in each case relating to the Alabama
Project), and would assign the license of the technology from
Covol to Newco. In consideration of the foregoing transfers,
Newco would pay cash in the amount of *** to Alabama
Synfuels as the Base Licensing Fee contemplated below (see
"Licensing Contract," below) (which amount shall not be
payable until receipt of a favorable Letter Ruling
contemplated below,) and would provide to Alabama Synfuel a
six year installment note in the principal amount of ***,
bearing interest at *** per annum (the "Installment Note").
The transfer would occur upon the earlier of (i) receipt of
a favorable Letter Ruling contemplated below, or (ii)
immediately prior to start-up of the Alabama Project. Payments
upon the Installment Note would be made on a quarterly basis
after start-up of the Alabama Project (after an agreed-to
testing period) (such date, the "Acceptance Date") from
available net operating cash flow of Newco, at a rate of ***
per MM Btu (adjusted as set forth below) of briquettes sold
from the Alabama Project during the immediately preceding
quarter; provided that the full amount of the Installment Note
will be payable upon maturity.
Put Option:
If the Alabama Project is not completed consistent with
approved plans and specifications or placed in service (for
purposes of the Code and Section 29) by June 30, 1997, or if
there occur other defaults by Covol with respect to the
various Transaction Documents (a "Put Event"), then the PFS
Investors will have an option to require Covol to purchase
their entire interest in Newco and the Loan. The purchase
price under the put option shall be payable in cash in an
amount equal to the sum of (i) all capital contributions of
the PFS Investors to
Letter of Intent Page 5
(Covol Technologies)
LLO1-48682.8 17509-028
<PAGE>
*** Missing information may be available upon request to the Company
Newco, (ii) 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 this transaction. Such an
event may also be, but shall not be required to be, considered
by the PFS Investors as an event of acceleration of the Covol
Loan.
Completion of Alabama Plant:
Covol shall be responsible for the completion of the
development and construction of the Alabama Project.
Operation and Maintenance:
Newco shall enter into an operating and maintenance agreement
(the "O&M Agreement") with Covol (or an affiliate thereof, the
"Operator"); provided that such O&M Agreement shall only be
effective upon the acquisition of the Alabama Project. In the
event there are any operating deficits with respect to the
operation and maintenance (excluding the O&M Fee referred to
below) of the Alabama Project, the Operator shall loan (the
"Deficit Loans"), from time to time, funds to Newco, at the
times and in the amounts needed to cover any such deficits. If
the Operator is not Covol, the undertakings of the Operator
under the O&M Agreement, including the obligation to make
Deficit Loans, shall be guaranteed by Covol. The Deficit Loans
shall bear interest at the Prime rate and be payable from net
operating cash flow of Newco. The O&M Agreement shall provide
for a quarterly fee (the "O&M Fees") to the Operator equal to
*** per ton of briquettes produced at the Alabama Project
during the immediately preceding quarter. Any accrued but
unpaid O&M Fee shall bear interest at the Prime rate and be
payable from net operating cash flow of Newco. The O&M
Agreement shall also provide for an annual incentive
management fee (the "O&M Incentive Fee") to the Operator equal
to *** of available net cash flow of Newco.
Licensing and Royalties:
Alabama Synfuels shall enter into a long-term licensing
contract (through rights received from Covol) (the "Licensing
Contract") which shall grant to Newco any licenses or similar
rights required in order to develop, construct and operate the
Alabama Project and to manufacture and market the briquettes;
provided that such Licensing Contract shall only be effective
upon the acquisition of the Alabama
Letter of Intent Page 6
(Covol Technologies)
LLO1-48682.8 17509-028
<PAGE>
*** Missing information my be available upon request to the Company
Project. Alabama Synfuels shall be paid a base fee (the "Base
Licensing Fee") under the Licensing Contract of $500,000
(which amount shall not be payable until receipt of a
favorable Letter Ruling contemplated below) and, after the
Acceptance Date, shall be entitled to a quarterly royalty
payment (the "Royalty") at a rate of $0.6014 per MM Btu
(adjusted as set forth below) of briquettes sold from the
Alabama Project during the immediately preceding quarter;
provided, that, from and after the time the Installment Note
has been paid in full, the Royalty shall be increased to a
rate of *** per MM Btu (adjusted as set forth below) of
briquettes sold from the Alabama Project during the
immediately preceding quarter. Any accrued but unpaid Base
Licensing Fee and Royalty shall bear interest at the Prime
rate and be payable from net operating cash flow of Newco.
Binder Contract:
Covol (and/or an appropriate affiliate of Covol, with the
undertaking guaranteed by Covol) shall enter into a long-term
contract with Newco to provide the "binder" required to
manufacture the briquettes (the "Binder Contract") at the
levels contemplated herein; provided that such Sales Contract
shall only be effective upon the acquisition of the Alabama
Project. The cost of the "binder" shall be cost plus ***;
provided, however, that the cost of the binder in any year
shall not be increased above the rate for the immediately
preceding year (and any increased rate for such year shall be
subject to rebate) if the imposition of the increased rate
would require a Deficit Loan. The Binder Contract shall
include rights and technology which would enable Newco to
manufacture the "binder" in the event the Covol was unable to
fulfill its obligations under the Binder Contract.
Long-Term Sales Contract:
Covol (and/or the appropriate affiliate of Covol, with the
undertaking guaranteed by Covol) shall enter into a long-term
contract for the purchase of briquettes from Newco (the "Sales
Contracts); provided that such Sales Contract shall only be
effective upon the acquisition of the Alabama Project. Covol
shall purchase all of the briquettes produced by the Alabama
Project for a purchase price equal to *** per ton for
metallurgical grade coal (which price may be adjusted, based
upon actual operating experience within the initial six months
of operation, such that the Alabama Project achieves a ***
(without considering the Section 29 Credit defined below),
with the prices adjusted as agreed to by the parties for
Letter of Intent Page 7
(Covol Technologies)
LLO1-48682.8 17509-028
<PAGE>
*** Missing information may be available upon request to the Company
other grades of coal (the "Sales Price"), which amount shall
be payable on a quarterly basis for the briquettes produced by
the Alabama Project and made available to Covol during the
immediately preceding quarter. Commencing the first
anniversary of the Sales Contract and on each anniversary
thereafter, the Sales Price per ton for the contract year then
commencing shall be increased by *** over the Sale Price for
the contract year just ended.
Adjustments to Fees and Payments:
Each of the amounts per ton reflected for the payments on the
Installment Note are based upon Newco maintaining a production
level of 300,000 tons of briquettes per year. In the event the
production level is less than 300,000 tons per year, the
payments under the Installment Note shall be adjusted
accordingly. In addition, commencing on the first anniversary
of the date of the acquisition of the Alabama Project, and
each anniversary thereafter, the amounts per ton reflected for
the payments on the Installment Note and the Royalty shall be
adjusted each year by *** of the relative change between (i)
the "inflation adjustment factor" (contemplated under Section
29(d)(2) of the Code) as calculated for the immediately
preceding year and (ii) the "inflation adjustment factor" as
calculated for the second preceding year.
Priority of Payments; Determination of Available Net Operating Cash Flow:
Net operating cash flow shall include the funding of
replacement and operating reserves for the Alabama Project,
the amounts and timing of which are subject to negotiation.
The payments set forth below which are payable from net
operating cash flow shall be made in the following order of
priority:
1. O&M Fee;
2. Installment Note;
3. Royalty; and
4. O&M Incentive Fee.
Letter of Intent Page 8
(Covol Technologies)
LLO1-48682.8 17509-028
<PAGE>
*** Missing informaiton mya be available upon request to the Company
Coal Fines:
Covol shall enter into a coal fines supply agreement with
Concord Coal Recovery, Ltd. (in form and substance acceptable
to PFS) (the "Concord Supply Agreement") which shall provide
Covol with a right of first refusal to obtain up to 20,000
tons of coal fines per month from the Concord USX coal fine
source at a price no more than *** per ton (adjusted annually
by no more than ***). In addition, Covol shall obtain a
long-term (a minimum of five years) fixed price contract(s)
(in form and substance acceptable to PFS) for the purchase of
up to an aggregate of 20,000 tons of coal fines per month (the
"Coal Fines Contracts"), which may include USX, to provide the
Alabama Project with a firm source of coal fines
(substantially similar in quality to the fines located at the
Concord USX coal fine source) required to manufacture
briquettes in an amount sufficient to operate the Alabama
Project at 240,000 tons per year and a term of at least five
years. Upon the acquisition of the Alabama Project, the
Concord Supply Agreement and the Coal Fines Contracts shall be
assigned to Newco.
Section 29 Credits; Letter Ruling:
As an additional condition to the obligation of the PFS
Investors to make the investments contemplated hereunder,
Newco shall obtain 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 PFS, among other things, (i) 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 "Code"), (ii) that the construction contract for
the Alabama Project satisfies the requirements of the Section
29 Credits, and (hi) that the allocation of the Section 29
Credits to the various members of Newco is valid under the
Code.
The letter ruling request shall be prepared by counsel and
accountants for PFS, but shall be subject to the review and
continent of Covol.
Call Option:
Newco will grant to Covol the right to acquire the Alabama
Project for cash at the then fair market value after January
1, 2008.
Letter of Intent Page 9
(Covol Technologies)
LLO1-48682.8 17509-028
<PAGE>
Support and Security; Set off Rights:
The obligations of Covol under the transaction documents shall
be guaranteed by the affiliates thereof. The obligations of
the Covol under the transaction documents shall also be
secured in a manner satisfactory to PFS, including, without
limitation, cross-collateralization and set off rights of the
various contracts and agreements.
Noncompetition:
Covol and the principals and affiliates thereof shall agree
not to (i) acquire coal fines for resale or use in any other
plant other than the Alabama Project, or (ii) build or be
involved in another briquetting plant using the same or
similar technology designed to produce "qualified solid
synthetic fuel" pursuant to Section 29 of the Internal Revenue
Code, in either case where the source of coal fines or the
plant are within a 100 mile radius of the Alabama Project
without the prior written consent of PFS.
Expenses:
Each party shall be responsible for its own legal expenses.
Covol shall be responsible for all other expenses relating to
the transactions, including, without limitation, expenses
relating to the transfer of the Alabama Project.
Option of PFS to Acquire Additional Plants:
PFS would have an option, upon the substantially similar terms
and conditions (other than the convertible loan), through
separate limited liability companies to acquire up to two
additional coal briquetting plants prior to December 31, 1998.
Nondisclosure:
THIS LETTER OF INTENT IS STRICTLY CONFIDENTIAL AND SHALL NOT
BE DISCLOSED BY COVOL OR ANY OF ITS AFFILIATES OR PFS OR ANY
OF ITS AFFILIATES TO ANY OTHER PERSON OR ENTITY WITHOUT THE
CONSENT OF THE OTHER PARTY.
Letter of Intent Page 10
(Covol Technologies)
LLO1-48682.8 17509-028
<PAGE>
Due Diligence; Conditions to Closing:
The transaction is subject to satisfactory completion of the
following conditions and a due diligence inquiry into the
Alabama Project, the briquetting technology, the patents,
Covol, and the principals thereof and their respective
affiliates, including, but not limited to the following:
o Approval by the PacifiCorp Investment Committee.
o The creditworthiness of Covol and its affiliates.
o Negotiation of documentation acceptable to the
parties.
o Satisfaction of other conditions typically required
in a transaction such as that described herein, as
requested by PFS.
o Receipt by PFS Investors and Newco of a tax opinion
prepared by Covol's tax counsel acceptable to PFS
Investors addressing all material tax issues of the
transaction.
o Receipt by PFS Investors and Newco of a general
opinion prepared by Covol's counsel acceptable to PFS
Investors addressing all material authority,
enforceability and related issues of the transaction.
o Review to the satisfaction of PFS of the development
and construction budget, all construction documents
(including, but not limited to, drawings, plans,
specifications and inspection reports), environmental
studies or assessments, equipment data, permits,
orders, letters, tax and assessment bills, all public
agency documents (including directives, inspections,
and requirements) and other documents relating to the
Alabama Project.
o Review to the satisfaction of PFS of the availability
and quality of coal fines for use at the Alabama
Project, including, without limitation, the presence
of long term contracts for such fines satisfactory to
PFS and the marketability of the briquettes.
Letter of Intent Page 11
(Covol Technologies)
LLO1-48682.8 17509-028
<PAGE>
o Review to the satisfaction of PFS of all
documentation pertaining to compliance results,
rulings, appeals, the zoning and land use regulations
and related matters governing the property where the
Alabama Project is to be located.
o Review to the satisfaction of PFS of all
documentation pertaining to the briquetting
technology, including, but not limited to, patents,
patent applications, and licenses.
o Receipt of an environmental audit relating to the
Alabama Project addressed to Newco and the PFS
Investors and acceptable to PFS.
o Receipt of confirmation acceptable to PFS that
neither Newco nor any PFS Investor shall be subject
to any environmental liability relating to the source
of the coal fines or any other matter relating to the
Alabama Project.
o Review of all matters relating to the tax credits to
the satisfaction of PFS.
o Review to the satisfaction of PFS of all
documentation pertaining to Covol and the issuance of
Common Stock.
o No material adverse change in the condition
(financial or other), business, net worth, results of
operations or expectations of Covol.
o Confirmation that Covol shall receive at least ***
of the net economic benefits from royalty and debt
service payments received by Alabama Synfuels.
Dated this 12th day of September, 1996.
PACIFICORP FINANCIAL SERVICES, INC.
By: /s/ Craig N. Longfield
Craig N. Longfield
President
Letter of Intent Page 12
(Covol Technologies)
LLO1-48682.8 17509-028
<PAGE>
ACKNOWLEDGMENT AND AGREEMENT
THE TERMS OF THE FOREGOING LETTER OF INTENT ARE HEREBY ACKNOWLEDGED AND AGREED
TO BY THE UNDERSIGNED ON ITS OWN BEHALF AND ON BEHALF OF ALABAMA SYNFUEL #l LTD,
A DELAWARE LIMITED PARTNERSHIP.
COVOL TECHNOLOGIES, INC.,
in its corporate capacity and as general partner
of Alabama Synfuel #1 Ltd.
By:/s/ Michael Midgley
Name: Michael Midgley
Title: President
Letter of Intent Page 13
(Covol Technologies)
LLO1-48682.8 17509-028
EXCLUSIVE FINANCIAL ADVISOR AGREEMENT
This Exclusive Financial Advisor Agreement ("Agreement") is made as of
September 16, 1996, between Covol Technologies, Inc., a Delaware corporation
("Covol") and Coalco Corporation, a Massachusetts corporation ("COALCO").
WHEREAS, Covol is seeking financing in connection with its synthetic
coal producing, facility currently located at Vinyard, Utah (the "Facility").
WHEREAS, Covol has generally discussed its objectives and activities
with COALCO and desires COALCO to assist with such financing in accordance with
the terms and conditions of this Agreement.
NOW, THEREFORE. in consideration of the mutual covenants and agreements
set forth below, it is hereby covenanted and agreed by the parties hereto as
follows:
1. Term and Duties.
(a) Covol engages COALCO as an independent contractor to
advise and consult with it with respect to financing for the Facility, the sale
of some or all of the Facility or other similar material transactions during the
period commencing on the date hereof and terminating on the Final Date (as
hereafter defined). COALCO's responsibilities under this Agreement shall be to
provide to Covol a list of prospective investors (the "Investor Lists"), to
introduce Covol to the person or entities on the Investor List, and to initiate
discussions with those parties. If Covol and COALCO mutually agree, COALCO may
initiate discussions with other parties which are not on the Investor List but
which are specified by Covol. The persons, entities and parties on the Investor
List or specified by Covol to COALCO for discussion are collectively referred to
herein as the "Investors." COALCO may have such other duties hereunder as the
parties may mutually agree. It is understood and agreed that COALCO has no
authority to contractually obligate Covol in any way whatsoever and that any
obligations of Covol must be authorized by the duly authorized representative of
Covol.
(b) For purposes of this Agreement,
"Final Date" means the later of August 20, 1997 or the
six-month anniversary of the "Operations Date";
"Operations Date" means the first date on which the Facility
has produced and sold 5,000 tons of synthetic coal product during any
consecutive 30-day period, provided (i) such Facility has been placed in service
within the meaning of Section 29(f) and (g) of the Code, and (ii) substantially
all of the energy content (expressed in MMBtus) of the synthetic coal comprising
such production and sale qualifies for the credit under Section 29 of the Code;
and
<PAGE>
"Code" means the Internal Revenue Code of 1986, as amended and
any successor statute thereto.
(c) If, prior to the Final Date, any discussions initiated by
COALCO with an Investor on the Investor List or with an Investor specified by
Covol as described above result in (i) Covol selling a material portion (or
substantially all) of the Facility, or (ii) C financing or an investment for its
activities with respect to the Facility, (B) a binding commitment which results
in such financing, invent or sale, or (C) a guarantee which enables such
financing, investment or sale (including from a third party), (collectively the
"Financing"), Covol agrees to pay COALCO the compensation in the amount and at
the times provided in Section 5 hereof. COALCO shall be entitled to the
compensation provided for herein even if some, most or all of the actual funding
of the Financing occurs after the Final Date.
2. Related Transactions. Covol agrees to pay COALCO additional
compensation in the amount and at the times provided in Section 5 hereof, with
particular regard to the provisions of Section 5(e) if:
(a) (i) Covol receives any Financing from any Investor at any
time prior to the Final Date, and (ii) such Investor provides any other
Financing to Covol or any affiliate thereof (with respect to any facility
producing synthetic coal or substantially similar product) at any time during
the five (5) year period commencing on the date of the closing of the Financing
to Covol; or
(b) Covol or any affiliate thereof receives any Financing with respect
to any facility producing synthetic coal or substantially similar product from
any Investor on the Investor List at any time prior to December 31, 1998 and a
significant portion of the benefits intended to be received by such Investor as
a result of making such Financing is in the form of credits under Section 29 of
the Code.
3. No Requirements for Investment.
(a) Nothing combined in this Agreement requires Covol to accept any
Financing on the terns or conditions thereof. COALCO shall be entitled to the
compensation provided in Section 5 hereof only if Covol or any affiliate thereof
accepts any portion of the Financing and actually receives, directly or
indirectly, the gross proceeds of any portion thereof.
(b) This Agreement does not constitute a commitment or undertaking by
COALCO to provide any portion of the Financing, and not ensure the successful
arrangement or completion of any such Financing or any portion thereof.
2
<PAGE>
*** Missing informaiton mya be available upon request to the Company
4. Investor List. The term "Investor" as used in this Agreement shall
include any subsidiary or affiliate of such Investor. COALCO may add Investors
to the Investor List at arty time during the term hereof, with the consent of
Covol which consent shall not be unreasonably withheld. Investors may be removed
from the Investor List only by mutual agreement. Any investor directly
introduced to Covol by an Investor on the Investor List shall also be deemed to
be an Investor on the Investor List "introduced" by COALCO to Covol for all
purposes of this Agreement. However, the foregoing principle or secondary
introductions shall apply beyond the second step (i.e., COALCO introduces A,
which introduces B) only when such further introductions (i.e., B introduces C,
C introduces D, etc.) involve the material and active participation of COALCO in
the introduction which result in a Financing.
5. Compensation.
(a) Covol agrees to pay COALCO a fee in the amount set forth in this
Section 5 in the event that at any time prior to the "Final Date" Covol receives
any Financing from an Investor on the Investor List or an Investor specified by
Covol as described in Section 1 hereof.
(b) In the event the aggregate amount of the Financing is receive by
Covol in one lump sum at or soon after the closing of the Financing, the fee in
dollars payable to COALCO hereunder shall equal:
(i) ***
(ii) ***
(c) In the event the aggregate amount of the Financing is received by
Covol in quarterly installments based primarily on the Production Amount (as
defined below) during the calendar quarter immediately preceding the calendar
quarter in which Covol receives such installment, the fee in dollars payable to
COALCO hereunder shall be paid quarterly and shall equal each calendar quarter:
(i) ***
(ii) ***
(d) For purposes of this Section 5,
"Production Amount" shall mean the energy content (expressed in MMBtus
of the synthetic coal projected to be produced (by the Facility ) and sold to
any purchaser (which is unrelated to Covol within the meaning of Section
29(a)(2)(A) of the Code) during a specified period; provided, however that (A)
prior to the summation of the energy content for each calendar quarter during
3
<PAGE>
the specified period, such energy content shall be increased on an annual basis
commencing on January 1, 1996, by an amount equal to the change in the GNP
implicit price deflator ("GND") for the prior calendar year with 1995 as the
base year; (B) if the manner in which the GND is determined is substantially
revised or the GND shall become unavailable, the parties hereto shall cooperate
in good faith to determine an acceptable alternative comparable index; and (C)
in computing such energy content, there shall be excluded the energy content
resulting from such production and sale which does not or will not qualify, for
the credit under Section 29 of the Code.
"F" shall mean the aggregate gross proceeds of the Financing received,
directly or indirectly, by Covol at or soon after the closing of such Financing.
"T" shall mean the Production Amount (as defined above) during the
period commencing on the date of closing of such Financing and ending on
December 31, 2007, as accepted by the Investor in connection with its providing
the Financing.
"Q" shall mean the aggregate gross proceeds of the installments of the
Financing received, directly or indirectly, by Covol during a specific calendar
quarter.
"P" shall mean the Production Amount (as defined above) during the
calendar quarter immediately preceding the calendar quarter during which "Q" (as
defined above) is received by Covol.
(e) In the event the aggregate amount of the Financing is received by
Covol in a manner other than as specified in Section 5(b) or (c) above, the
parties shall use their best efforts to determine an acceptable alternative
comparable method to calculate the fee payable to COALCO hereunder so that the
amount of such fee and the manner of its payment shall be substantially the same
as described in Sections 5(b), (c) and (d) above and Section 5(f) below.
(f) The sums due pursuant to this Section 5 shall be paid to COALCO
contemporaneously with the receipt of the actual cash proceeds of the lump sum
payment or each installment of the Financing by Covol from the Investor. All
fees (or portions thereof) which are not paid within 30 toys of Covol's receipt
of the related cash proceeds from the Investor shall bear interest at 12% per
annum commencing on the date of such receipt by Covol.
6. Representations, Warranties Covenants and Agreements of Covol.
Covol hereby represents, warrants, covenants and agrees that:
(a) No Untrue Statement; Compliance with Securities Laws. No Document
(as defined in Section 9(a) hereof) will include 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, in light of the circumstances under
which they were made, not misleading. Furthermore, Covol represents and warrants
that any projections provided by Covol to
4
<PAGE>
COALCO or any Investor in connection with any aspect of the Financing will have
been prepared in good faith and will be based upon assumptions which, in light
of the circumstances under which they were made, are reasonable.
(b) Notification of Subsequent Material Events. If Covol incurs any
material liability or obligation, direct or contingent, or enters into any
material transaction not in the ordinary course of business, or there has been
any material adverse change in the financial position or results of operation of
Covol, then Covol shall promptly notify COALCO of any such event.
(c) Authorization of Agreement. This Agreement has been duly
authorized, executed and delivered by Covol and constitutes a valid and binding
agreement of Covol enforceable in accordance with its terms, except as may be
limited by bankruptcy, insolvency or other similar laws affecting the
enforcement of creditors' rights in general and subject to general principles of
equity (regardless of whether such enforceability is considered in a proceeding
in equity or at law); the performance of this Agreement by Covol and the
consummation by Covol of the transactions contemplated herein, will not result
in a material breach of any of the terms and provisions of, or constitute a
default under, any law, regulation, indenture, mortgage, deed of trust, note,
agreement, lease or other agreement or instrument to which Covol is a party or
by which it or any of its property is bound, or under any rule or regulation or
order of any court or other governmental agency or body applicable to Covol;
and, no consent, approval, authorization or order of any court or governmental
agency or body has been or is required for the performance of this Agreement by
Covol, or for the consummation by Covol of the transactions contemplated hereby.
7. Exclusivity; Non-solicitation. By the terms of this Agreement,
COALCO has been appointed by Covol as its sole and exclusive financial advisor
with respect to matters pertaining to any Financing. Accordingly, Covol agrees
that it will not solicit, entertain proposals from, or hold discussions with,
any other person or entity regarding a Financing to Covol with respect to the
Facility, during the period commencing the date hereof and ending on the Final
Date, except for discussions with Investors on the Investor List or Investors
specified by Covol as set forth in Section 1 hereof which are initiated by, or
immediately referred to, COALCO.
8. Indemnification.
(a) Indemnification of COALCO. Covol agrees to indemnify, defend and
hold harmless COALCO, its shareholders, directors, officers, employees and
agents (individually, the "Indemnitee" and collectively, the "Indemnitees"),
from and against any losses, claims, damages or liabilities, joint or several,
including costs and reasonable attorneys' fees incurred in the investigation and
defense of such claims, to which any Indenmitee becomes subject, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof), arise
out of or are based, directly or indirectly, upon (i) any untrue statement or
alleged untrue statement of any material fact contained in any documents or
written material
5
<PAGE>
furnished by Covol to COALCO or any Investor in connection with the transactions
contemplated herein (collectively, the "Documents"), (ii) the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, (iii) any breach by Covol of any of its
representations, warranties, covenants or agreements in this Agreement, or (iv)
any Financing. In addition, Covol agrees to reimburse each Indemnitee for any
legal or other expenses reasonably incurred by such Indemnitee in connection
with investigating or defending any such loss, claim, damage, liability or
action.
(b) Indemnification of Covol. COALCO agrees to indemnify, defend and
hold harmless Covol, its shareholders, directors, officers, employees and agents
(individually the "Covol Indemnitee" and collectively, the "Covol Indemnitees"),
for any willful violation by COALCO in connection with the transactions
contemplated herein, of (i) any applicable state or federal law or any rule or
regulation thereunder, provided that such violation is not based upon any
violation by any Covol Indemnitee of such law, rule or regulation, or (ii) any
breach by COALCO of any of its representations, warranties, covenants or
agreements in this Agreement.
(c) Notice of Claim. Within 30 allays of the receipt by a party
entitled to indemnification or legal defense under Section 8(a) or (b) hereof of
notice of the commencement of any action referred to therein, such indemnified
party shall, if any claim in respect thereof is to be made against the
indemnifying party under Section 8(a) or (b), notify the indemnifying party in
writing of the commencement thereof, but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
the indemnified party otherwise than under Section 8(a) or (b) hereof. In case
any action shall be brought against any indemnified party, and it shall notify
the indemnifying party of the commencement thereof, the indemnifying patty shall
be entitled to participate in, and, to the extent that it shall wish, jointly
with any indemnifying party similarly notified, to assume the defense thereof
with counsel satisfactory to the indemnified party. After notice to the
indemnified party of its election to so assume the defense thereof, the
indemnifying party shall not be liable to such indemnified party under Section
8(a) or (b) for any expenses subsequently incurred by such indemnified party in
connection with the defense thereof other than the reasonable costs of
investigation; provided, however, that the indemnifying party shall continue to
be liable for all other losses sustained by the indemnified party to the extent
provided in Section 8(a) or 8(b) hereof. No indemnification shall be required
hereunder for any payment made in settlement of any suit or claim unless such
payment is approved by the indemnifying party or by a court of competent
jurisdiction.
(d) Contribution. If the indemnification provided in Section 8(a) above
is for any reason held to be unavailable, then Covol shall contribute to any
damages paid by any Indemnitee. If the indemnification provided in Section 8(b)
above is for any reason held to be unavailable, then COALCO shall contribute to
any damages paid by the Covol Indemnitee. Any contribution in either case shall
be based on relative fault and on the relative benefits received.
6
<PAGE>
9. Confidentiality. Neither party hereto stall disclose any of the
terms, conditions or other aspects of the transactions contemplated herein,
except to their advisors, shareholders and Investors and the advisors of such
Investors. Any information (a) provided by COALCO to Covol or by Covol to
COALCO, and (b) which is not otherwise customarily excluded for the definition
of confidential information, shall be treated in accordance with the
confidentiality agreement dated on or about July 2, 1996, signed by Covol and
LKD Energy Corporation as if such agreement were reciprocal with respect to the
treatment of such information and as if the agreement had been signed by Covol,
on the one hand, and by COALCO, on the other hand.
10. Termination. This Agreement shall terminate on the Final Date,
unless sooner terminated by any party hereto in accordance with this Section.
The term of this Agreement may be extended by mutual agreement of all of the
parties hereto. Covol shall have the right to terminate this Agreement in the
event of a material default by COALCO under this Agreement or a material breach
of any representation or warranty by COALCO under this Agreement; and COALCO
shall have the right to terminate this Agreement in the event of the occurrence
of one of the events with respect to Covol set forth In Section 6(b) hereof, a
material default by Covol under this Agreement or a material breach of any
representation or warranty by Covol under this Agreement; provided in the case
where a non-defaulting party asserts that a material default has occurred, it
shall notify the defaulting party in writing and allow the party in default a
period of 30 days from the date of receipt of such notice to cure the default.
In the event of a default or breach under this Agreement by my party hereto, the
the other parties shalt have all rights and remedies as are provided at law or
in equity in addition to the rights expressly provided herein.
Notwithstanding anything contained herein, the provisions of Sections
2, 5, 8 and 9 hereof shall remain operative and in full force and effect, and
shall survive the termination or expiration of this Agreement.
11. Notices. All notices, demands and other communications provided for
or permitted herein shall be in writing and shall be deemed properly served (i)
by hand delivery, telecopy or other facsimile transmission, on the day sued at
the time on which delivered to the intended recipient at the address or
telecopier number set forth in this Agreement, (ii) if sent by mail, on the
third business day after the day on which deposited in the United States
certified or registered mail, postage prepaid, return receipt requested,
addressed to the intended recipient at its address set forth in this Agreement;
or (iii) if by Federal Express or other reputable express mail service for
overnight delivery, on the next business day after delivery to such express mail
service, addressed to the intended recipient at its address set forth in this
Agreement. All notices required or permitted to be served upon either party
hereunder will be directed to:
7
<PAGE>
if to CovoL, to: Covol Technologies, Inc.
3820 North Frontage Road
Lehi, Utah 84043
Attn: Michael Midgley, President
(801) 768-4483 (fax)
if to COALCO, to: COALCO
c/o Palmer Management Corp.
13 Elm Street, Suite 200
Cohasset, MA 02025
Attn: Gordon L. Deane
(617) 383-3205 (fax)
Any party may specify a different address or telecopier number by
sending the other parties a notice thereof in the manner specified in this
Section 11.
12. Construction. All questions with respect to the construction of
this Agreement and the rights and liabilities of the parties hereunder shall be
determined in accordance with the laws of the State of Massachusetts. The
parties agree that, to the extent possible, the federal and/or state courts of
the State of Massachusetts shall have jurisdiction over any litigation entered
into hereunder. If the parties hereto so agree in writing at the time any
dispute arises, any dispute between any of the parties hereto arising under this
Agreement which cannot be settled may be submitted to arbitration conducted in
accordance with the Rules of the American Arbitration Association. The award or
decision rendered by any arbitrator shall be final, and judgment may be entered
in any court having jurisdiction concept that any party may petition a court of
competent jurisdiction for review of errors of law.
13. Counterparts. This Agreement may be executed in counterparts
each of which shall be deemed an original and all of which shall constitute a
single agreement
14. Headings. The headings appearing in this Agreement are
intended for convenience and reference only, and are not to be considered in
construing this Agreement or any part hereof.
15. Severability. If any term or provision of this Agreement or the
application thereof to any party or circumstance be invalid or unenforceable to
any extent, the remainder of this Agreement or the application of such terms or
provisions to persons or circumstances other than those to which it has been
held invalid or unenforceable shall not be affected thereby and each term and
provision of this Agreement shall be valid and enforceable to the fullest extent
permitted by law.
8
<PAGE>
16. Successors and Assigns. Subject to the restrictions on assignment
herein contained, the terms and provisions of this Agreement shall be binding
upon, and shall inure to the benefit of, the successors, assigns and personal
representatives of the respective parties hereto. This Agreement shall not
(directly, indirectly. contingently or otherwise) confer or be construed as
conferring any rights or benefits on any person or entity not named as a party
hereto, except as otherwise specifically provided in Section 9 hereof. No party
hereto may assign this Agreement or any of its obligations hereunder without the
prior consent of the other parties. except that COALCO may subcontract out or
delegate any or all of its obligations hereunder without obtaining the consent
of Covol, provided in such case, COALCO is not relieved of any of its
obligations or liabilities hereunder.
17. Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof and
supersedes all prior oral or written agreements end understandings between the
parties relating to the subject matter hereof.
18. Amendments. This Agreement may only be amended or modified by a written
instrument signed by both parties hereto.
IN WITNESS WHEREOF, COVOL and COALCO have executed this Agreement as of the
date set forth above.
COVOL TECHNOLOGIES, INC.
a Delaware corporation
By: Michael Midgley
COALCO CORPORATION,
a Massachusetts corporation
By: Douglas M. Kinney
9
SETTLEMENT AGREEMENT
THIS AGREEMENT is made and entered into this 17th day of September
1996, by and between Covol Technologies, Inc., a Delaware corporation, and its
predecessor in interest, Environmental Technologies Group International, Inc., a
Nevada corporation, Larson Limestone Company, Inc., a Utah corporation
(collectively called "Plaintiffs"), Michael Q. Midgley, an individual, Mark
Hardman, an individual, and Kenneth M. Young, an individual (collectively called
"Messrs. Midgley Hardman and Young, or Consolidated Defendants"), Farrell
Larson, an individual, Irene Larson, an individual (collectively called
"Larsons"), and Gary Burningham dba Burningham and Company, a Financial
Consulting Firm, and Burningham Enterprises, Inc. a Utah corporation
(collectively called "Burningham"). All of the foregoing Parties to this
Agreement shall be referred to individually as a "Party" and collectively as
"Parties."
RECITALS
A. Plaintiffs have filed and maintain a lawsuit against the Larsons and
Burningham in the Fourth Judicial District Court of Utah County, State of Utah,
Case No. 950400278, entitled Environmental Technologies, Inc., Covol
Technologies, and Larson Limestone Company, Inc. v. Farrell Larson, Irene
Larson, Gary Burningham individually, and dba Burningham and Company, and
Burningham Enterprises, Inc. asserting a number of claims. The Larsons and
Burningham have denied the principal allegations which form the basis for
Plaintiffs' claims, and the Larsons have asserted counterclaims against
Plaintiffs in this lawsuit.
B. The Larsons filed a lawsuit against a number of Plaintiffs' agents,
their attorneys and their expert in the Fourth Judicial District Court of Utah
County, State of Utah, Case No. 960400032, entitled Farrell Larson and Irene
Larson v. Lynn G. Foster, Brett L. Foster, Foster& Foster L.C., Lynn M. Carlson,
Lynn M. Carlson & Co., Michael Q. Midgley, Mark Hardman and Kenneth M. Young,
asserting a number of claims. The Defendants in this case denied the principal
allegations which formed the basis for the Larsons' claims, but did not assert
any counterclaims in that lawsuit.
C. The two above-referenced lawsuits were consolidated into a single case
under Consolidated Case No. 950400278. These consolidated cases are hereafter
referred to as the "Litigation."
D. Lynn G. Foster, Brett L. Foster, Foster & Foster L.C., Lynn M. Carlson,
and Lynn M. Carlson & Co. moved the Court for summary judgment dismissal of all
claims the Larsons asserted against them. The Court has granted that motion,
dismissing all claims against them. Accordingly, the only claims still pending
in the Larsons' consolidated lawsuit are against the above-referenced
Consolidated Defendants.
E. Through this Agreement, the Parties desire to reach a full and final
compromise, settlement, and discharge of all claims, counterclaims, and defenses
which have been asserted or which could be asserted by Plaintiffs and
Consolidated Defendants against the Larson or Burningham, and which have been
asserted or which could be asserted by the Larsons or Burningham against
Plaintiffs and Consolidated Defendants in the Litigation. This Agreement
<PAGE>
is specifically intended by the Parties to resolve and forever release any and
all disputes or claims which have been, may have been, or could be asserted
between the Parties prior to the date of this Agreement, without reservation.
AGREEMENT
Based upon the foregoing, the Parties agree as follows:
1. CONSIDERATION FOR SETTLEMENT. In full consideration for settlement and
mutual release of the claims, counterclaims and defenses asserted by the Parties
against one another in the Litigation and for the other obligations and
covenants set forth in this Agreement, the Parties agree as follows:
a. RELEASE OF DEPOSITED FUNDS TO THE LARSONS. Plaintiffs and
Consolidated Defendants shall and hereby do release all claims they may
have to any sums deposited by Plaintiffs with the Court in the
Litigation and agree to execute a stipulation and motion for the
release of said deposited sums and for disbursement of such funds to
the Larsons. The Parties assume and condition this Agreement on the
assumption that the amount deposited with the Court is equal to
$325,000 plus any interest accrued through the date of its
distribution.
b. RELEASE OF DEPOSITED ESCROW DOCUMENTS TO PLAINTIFFS. The
Larsons shall and hereby do release any claims they may have to all
escrow documents deposited by David Glazier, Esq. with the Court in the
Litigation and agree to execute a stipulation and motion for the
release of said deposited escrow documents and for tender of such
escrow documents to Plaintiffs. The Parties assume and condition this
Agreement upon the assumption that the following escrow documents are
on deposit with the Court:
(1) Original STOCK PURCHASE AGREEMENT, dated effective 30
September 1994, with schedules.
(2) Original PROMISSORY NOTE, dated effective 30
September 1994.
(3) Original LARSON LIMESTONE MINUTES.
(4) Original ETGI MINUTES.
(5) Original TRUST DEED, dated effective 30 September
1994; recorded 26 October 1994.
(6) ETGI FINANCING STATEMENT, original with exhibits and
carbon copy without exhibits.
(7) LARSON LIMESTONE FINANCING STATEMENT original with
exhibits and carbon copy without exhibits.
<PAGE>
(8) Original AGREEMENT FOR SALE OF BUILDING AND
ASSIGNMENT OF LEASE, dated effective 30
September 1994.
(9) Original EMPLOYMENT AGREEMENT, dated effective 30
September 1994.
(10) Original OWNERS POLICY OF TITLE INSURANCE.
(11) Original STOCK CERTIFICATE NO. 4, for 750 shares
marked "Canceled."
(12) Original STOCK CERTIFICATE NO. 9, for 2,500 shares.
(13) A copy of SIX MONTH PAYMENT ON LOAN AT BANK OF
AMERICAN FORK in the form of $25,000 Certificate of
Deposit. A copy of check with letter from Midgley to
Chatfield (at Bank of American Fork) included.
(14) Original WAIVER OF CLOSING CONDITIONS.
(15) QUIT CLAIM DEED FROM FARRELL LARSON AND GERALD
LARSON TO LARSON LIMESTONE COMPANY, INC.
(16) Original LETTER FROM FAR WEST BANK, dated 19 October
1994, addressed to David Glazier.
(17) Original INDEMNITY AGREEMENT, dated 19 October 1994,
between Gerald Larson and ETGI.
c. RELEASE OF LIENS, LIS PENDENS, AND OTHER
ENCUMBRANCES RELATING TO PLAINTIFFS' REAL PROPERTY. The Larsons
shall and hereby do release any and all liens, lis pendens and other
encumbrances which they have caused to be filed or recorded against any
and all real property owned or reputed to be owned by Plaintiffs and
Consolidated Defendants, or any of them. Although there may be other
liens, lis pendens or other encumbrances which the Larsons have caused
to be filed or recorded against Plaintiffs' real property, Plaintiffs
have identified the following specific encumbrances:
(1) A $600,000 Trust Deed from Larson Limestone Company,
Inc. in favor of Farrell Larson, effective 30 September 1994, recorded
on 26 October 1994;
(2) A $10,000 Trust Deed issued by Larson Limestone
Company, Inc. in favor of Farrell Larson, Gerald Larson, Thelma Barnes
and Joanne Parker, effective October 7, 1988, recorded on March 30,
1989;
(3) A lis pendens filed by Farrell Larson against Larson
Limestone's property recorded on 8 December 1995, entry No. 85275, book
3836, page 442; and
<PAGE>
(4) A lis pendens filed by Farrell Larson against ETGI's real
property recorded in the Utah County Recorder's Office on 8 December
1995 as entry No. 85276, book 3836, page 446.
In order to fulfill the intent of this Agreement, upon the execution of
this Agreement, the Larsons shall execute and tender to Plaintiffs (a)
a reconveyance of all trust deeds identified above in a recordable
form, attached hereto as Exhibit A; and (b) a release of all lispendens
identified above, in a recordable form, attached hereto as Exhibit B.
In respect to any other liens, lis pendens, or any other encumbrances
subsequently discovered but not listed above, if any, the Larsons agree
to execute whatever recordable instrument that may be necessary to
remove said liens, lis pendens, or other encumbrances or other clouds
from Plaintiffs' title to real property due to the Larsons' actions.
d. RELEASE OF LIENS AND ENCUMBRANCES RELATING TO PLAINTIFFS'
EQUIPMENT. The Larsons shall and hereby do release any and all liens or
other encumbrances which they have caused to be filed or recorded
against equipment (personal property) owned or reputed to be owned by
Plaintiffs and Consolidated Defendants, and any of them. Although there
may be other liens or encumbrances which the Larsons have caused to be
filed or recorded against Plaintiffs' equipment, Plaintiffs are aware
of the following such encumbrances:
(1) U.C.C. 1 filing by Farrell Larson for
certain equipment of ETGI, filed 26 October 1994; and
(2) U.C.C. 1 filing by Farrell Larson against certain
equipment of Larson Limestone Company, Inc. filed 26 October
1994. In order to fulfill the intent and purpose of this
provision, the Larsons shall execute U.C.C. 3 Termination
Statements in a recordable or fileable form, attached as
Exhibit C, for all of the foregoing U.C.C. 1 statements and
shall deliver those executed U.C.C. 3 Termination Statements
to an agreed upon escrow agent which shall remain in escrow
until all loans to which Farrell Larson has guaranteed are
paid off, at which time the escrow agent shall be instructed
by Plaintiffs and the Larsons to deliver said U.C.C. 3
Termination Statements to Plaintiffs . In respect to all liens
and encumbrances including U.C.C. 1 filings concerning
Plaintiffs' equipment which are not known but are discovered
after the execution of this Agreement, if any, the Larsons
agree to execute an appropriate, recordable release of said
liens and encumbrances, tender them to an agreed upon escrow
agent to hold them until all loans that Farrell Larson has
secured are paid off, at which time the escrow agent shall be
instructed who shall be instructed by Plaintiffs and the
Larsons to deliver said release of liens, encumbrances, or
U.C.C. 3 Termination Statements to Plaintiffs.
e. REFINANCING OF BEALL TRAILERS LEASE BY BURNINGHAM.
<PAGE>
Burningham shall be required to refinance or payoff Zions Credit
Corporation Master Finance Lease No. 6528, equipment schedule No. 1,
relating to two Beall trailers, such that Larson Limestone Company,
Inc. is removed as a guarantor. Prior to the execution of this
Agreement, Burningham shall provide commercially reasonable evidence
that Larson Limestone Company, Inc. has been removed as a guarantor on
said Zions lease.
f. COVOL'S SALE OF LARSON LIMESTONE. The Larsons agree
that Covol may sell Larson Limestone Company, Inc. to any third party
without violating this Agreement, and without providing the Larsons
with any new causes of action.
g. COVENANT NOT TO PURCHASE COVOL STOCK. Burningham and
the Larsons hereby covenant and agree that they will directly or
indirectly following the execution of this Agreement purchase any stock
of Covol, any of its subsidiary companies, or any successors.
4. STIPULATED DISMISSAL OF CLAIMS OR ENTRY OF JUDGMENT.
Concurrently with the execution hereof, and as additional consideration for
settlement, counsel for each of the Parties shall execute a Stipulation and
Joint Motion to Dismiss all claims with prejudice, in the form attached hereto
as Exhibit D.
5. MUTUAL RELEASES. Each of the Parties to this Agreement hereby
forever release, completely acquit and discharge each other Party, their past
and present partners, predecessors and successors in interest, officers,
directors, shareholders, children, employees, representatives and agents from
and against any and all claims, demands, liabilities, obligations, costs,
expenses, damages, actions, and causes of actions of any kind known or unknown,
contingent or non-contingent, that they may have against any Party, arising
prior to the date of this Agreement, whether or not arising out of the
allegations set forth in the Litigation.
6. DISCLAIMER. By executing this Agreement, the Parties do not admit
any liability or wrongdoing and do not admit any allegations set forth in the
Litigation, nor do they admit any violation of state or federal law. Each of the
Parties acknowledge that the consideration received by them under this Agreement
is in full accord and satisfaction and in full compromise of disputed claims.
7. ATTORNEY'S FEES. The Parties hereto agree that they shall bear their
own costs and attorney's fees incurred in connection with the Litigation and
related proceedings. However, in the event any Party to this Agreement brings an
action to enforce the terms hereof, or to enter judgment in the breach of any
terms or conditions of this Agreement, the prevailing Party shall be entitled to
an award of its reasonable attorney's fees and costs incurred in such an
enforcement proceeding or entry and collection of judgment.
8. TERMS TO BE HELD IN CONFIDENCE. The terms of this Agreement shall be
held by the Parties in strict confidence and no Party shall be permitted to
disclose these terms unless they have been served with a valid subpoena
requiring such disclosure, or such disclosure is required to enforce the terms
of this Agreement. Each of the Parties may, when responding to inquiry regarding
the Litigation, state that a settlement has been reached by the Parties and
<PAGE>
that the terms of the settlement are satisfactory and agreeable to all Parties.
However, the terms of the settlement agreement shall remain strictly
confidential.
9. ASSURANCES. Each of the Parties acknowledge that they have executed
this Agreement voluntarily, after consultation with counsel of their choice, and
of their own free will, without coercion or duress, intending to be legally
bound hereby. The Parties further acknowledge that they have had a reasonable
opportunity to review and consider the Agreement before signing it.
10. COUNTERPART ORIGINALS. This Agreement may be executed in multiple
counterpart originals and shall have the same force and effect as if all
signatures appeared on the same original. For purposes of this Agreement and the
documents required hereby, and executed copy shall be considered an executed
original.
11. CONSTRUCTION OF AGREEMENT. This Agreement and the documents
required hereby shall be construed in accordance with the laws of the State of
Utah.
12. INTEGRATION. This Agreement constitutes the final written
expression of all of the terms of the settlement of the Litigation between the
Parties and is a complete and exclusive statement of those terms. Each of the
Parties acknowledges that no representations or promises not expressly contained
in this Agreement have been made by any Party, or by the agents or
representative of any Party.
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement in
counterpart as of the date entered in the first paragraph of this Agreement.
COVOL TECHNOLOGIES, INC., ENVIRONMENTAL
a Delaware corporation TECHNOLOGIES GROUP
INTERNATIONAL, INC.,
a Nevada corporation
By: /s/ Michael Q. Midgley By: /s/ Michael Q. Midgley
Its: President Its: President
LARSON LIMESTONE COMPANY, INC.,
a Utah corporation
By: /s/
Its: President
/s/ MICHAEL Q. MIDGLEY, /s/ MARK HARDMAN,
Individually Individually
/s/ KENNETH M. YOUNG,
Individually
/s/ IRENE LARSON, /s/ FARRELL LARSON,
Individually Individually
GARY BURNINGHAM, Individually and
dba BURNINGHAM AND COMPANY,
a Financial Consulting Firm
By: /s/ Gary Burningham
BURNINGHAM ENTERPRISES, INC.
By: /s/ Gary Burningham
Its: President
COVOL TECHNOLOGIES, INC.
DEBENTURE AGREEMENT AND SECURITY AGREEMENT
DECEMBER 20, 1996
JZM5843
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TABLE OF CONTENTS
Section Page
1. Purchase and Sale of Debenture.................................. 1
1.1 Issuance of Convertible Subordinated Debenture......... 1
1.2 Issuance of the Senior Debentures...................... 1
1.3 Closing................................................ 1
2. Representations, Warranties and Covenants of the Company........ 2
2.1 Corporate Existence; Compliance with Law............... 2
2.2 Corporate Power; Authorization; Enforceable Obligations. 2
2.3 Authorization and Valid Issuance of Debentures and Shares of
Common Stock............................................ 3
........................................................ 3
2.4 Disclosure.............................................. 3
2.5 Ownership of Property; Liens............................ 3
2.6 Patents, Trademarks, Copyrights and Licenses............ 3
2.7 No Material Adverse Effect.............................. 4
2.8 Environmental Laws...................................... 4
2.9 Use of Proceeds......................................... 4
3. Representations, Warranties and Covenants of the Investor........ 4
3.1 Purchase Entirely for Own Account....................... 4
3.2 Disclosure of Information............................... 4
3.3 Investment Experience................................... 5
3.4 Restricted Securities................................... 5
3.5 Legends................................................. 5
3.6 Accredited Investor..................................... 5
4. Security Agreement............................................... 5
4.1 Security Interest....................................... 6
4.2 Collateral.............................................. 6
4.3 Perfection and Priority................................. 6
4.4 Affirmative Covenants................................... 6
4.5 Negative Covenants...................................... 7
4.6 Insurance; Payment of Premiums.......................... 7
4.7 Remedies Upon Default................................... 8
5. Conditions Precedent............................................. 9
5.1 Execution and Delivery of Agreement..................... 9
5.2 Documents and Other Agreements.......................... 9
JZM5843
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<PAGE>
5.3 Absence of Material Adverse Change......................10
5.4 Conditions to the Initial Closing.......................10
5.5 Conditions to Each Closing..............................10
6. Miscellaneous....................................................11
6.1 Survival of Warranties..................................11
6.2 Successors and Assigns..................................11
6.3 Governing Law...........................................11
6.4 Counterparts............................................11
6.5 Titles and Subtitles....................................11
6.6 Notices.................................................11
6.7 Expenses................................................11
6.8 Amendments and Waivers..................................11
6.9 Severability............................................12
6.10 Indemnity...............................................12
6.11 Waiver of Trial by Jury.................................12
6.12 Entire Agreement........................................12
JZM5843
ii
<PAGE>
DEBENTURE AGREEMENT AND SECURITY AGREEMENT
THIS DEBENTURE AGREEMENT AND SECURITY AGREEMENT is made as of the 20th
day of December, 1996, by and among COVOL TECHNOLOGIES, INC., a Delaware
corporation (the "Company"), and AJG FINANCIAL SERVICES, INC., a Delaware
corporation ("Investor").
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Purchase and Sale of Debenture.
1.1 Issuance of Convertible Subordinated Debenture. Subject to
the terms and conditions of this Agreement, Investor agrees to lend at
the Closing, and the Company agrees to borrow and issue to Investor at
the Closing, the Company's 6% Convertible Subordinated Debenture in the
form set forth in Exhibit A (the "Convertible Debenture") in the
principal amount of $1,100,000, such amount to be paid by wire transfer
or check payable to the order of Covol Technologies, Inc. within three
(3) business days of the Initial Closing.
1.2 Issuance of the Senior Debentures. Subject to the terms
and conditions of this Agreement, Investor agrees to lend and the
Company agrees to borrow and issue at each Subsequent Closing the
Company's Senior Debenture in the form set forth in Exhibit B (the
"Senior Debenture" and together with the "Convertible Debenture, the
"Debentures"), in the principal amount set forth in the Funding
Request, up to $2,900,000, such amount to be paid by wire transfer or
check payable to the order of Covol Technologies, Inc. at each
Subsequent Closing.
1.3 Closing.
(a) The issuance of the Convertible Debenture
hereunder shall be on December 20, 1996 (the "Initial
Closing"). Within three (3) business days of the Initial
Closing Investor shall pay by wire transfer or check the
principal amount of the Convertible Debenture.
(b) The issuance of the Senior Debentures shall occur
from time to time within 10 days of the delivery of request by
the Company ("Funding Request") setting forth the amount
requested and the proposed use of the proceeds of the amount
requested (each a "Subsequent Closing"). At each Subsequent
Closing, Investor shall pay to the Company the amount set
forth in the Funding Request, up to an aggregate of
$2,900,000, and the Company shall deliver to
JZM5843
<PAGE>
Investor a Senior Debenture in a principal amount equal to the
amount set forth in the Funding Request, up to an aggregate
principal amount of $2,900,000.
2. Representations, Warranties and Covenants of the Company. The
Company hereby represents, warrants and covenants to each Investor that:
2.1 Corporate Existence; Compliance with Law. The Company (i)
is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware; (ii) is duly qualified as a
foreign corporation and in good standing under the laws of each
jurisdiction where its ownership or lease of property or the conduct of
its business requires such qualification (iii) has the requisite
corporate power and authority and the legal right to own, pledge,
mortgage or otherwise encumber and operate its properties, to lease the
property it operates under lease, and to conduct its business as now,
heretofore and proposed to be conducted; (iv) has all material
licenses, permits, consents or approvals from or by, and has or will
have made all material filings with, and has or will have given all
material notices to, all governmental authorities having jurisdiction,
to the extent required for such ownership, operation and conduct; (v)
is in compliance with its certificate of incorporation and by-laws; and
(vi) is in compliance with all applicable provisions of law, including,
without limitation, the Employee Retirement Income Security Act of
1974, as amended, those regarding the collection, payment and deposit
of employees' income, unemployment and Social Security taxes, and those
relating to environmental matters where the failure to comply could
reasonably be expected to have a material adverse effect on the
business of the Company.
2.2 Corporate Power; Authorization; Enforceable Obligations.
The execution, delivery and performance by the Company of this
Agreement and the Debentures (i) are within the Company's corporate
power; (ii) have been duly authorized by all necessary or proper
corporate action; (iii) are not in contravention of any provision of
the Company's certificate of incorporation or by-laws; (iv) will not
violate any law or regulation, or any order or decree of any court or
governmental instrumentality; (v) will not conflict with or result in
the breach or termination of, constitute a default under, or accelerate
any performance required by, any indenture, mortgage, deed of trust,
lease, agreement or other instrument to which the Company is a party or
by which the Company or any of its property is bound (except such
conflict, breach, termination, default or acceleration as could not
reasonably be expected to have a material adverse effect on the
business of the Company); (vi) will not result in the creation or
imposition of any lien upon any of the property of the Company other
than those in favor of the Investor; and (vii) do not require the
consent or approval of any governmental body, agency, authority or any
other Person. At or prior to the Initial Closing, each of the documents
to be delivered at such time shall have been duly executed and
delivered for the benefit of or on behalf of the Company, and each
shall then constitute a legal, valid
JZM5843
2
<PAGE>
and binding obligation of the Company to the extent it is a party
thereto, enforceable against it in accordance with its terms, subject
to the effects of laws governing creditors rights generally and general
principles of equity.
2.3 Authorization and Valid Issuance of Debentures and Shares
of Common Stock. All corporate action on the part of the Company and
its officers, directors and stockholders necessary for the
authorization, issuance and delivery of the Debentures being issued
hereunder and the reservation for issuance of shares of Common Stock
issuable upon conversion of the Debentures has been taken or will be
taken prior to the Closing, and this Agreement and the Debentures, when
issued and paid for, shall then constitute valid and legally binding
obligations of the Company, each enforceable in accordance with its
terms. The Debentures which are being acquired by the Investor, when
issued and delivered in accordance with the terms hereof for the
consideration expressed herein, will be duly and validly issued. The
Common Stock issuable upon conversion of the Convertible Debentures
purchased under this Agreement has been duly and validly reserved for
issuance and, upon issuance in accordance with the terms of the
Company's Certificate of Incorporation, shall be duly and validly
issued, fully paid and nonassessable, and issued in compliance with all
applicable federal and state securities laws, as currently in effect.
2.4 Disclosure. The Company's (i) Registration Statement on
Form 10/A, Amendment No. 2, filed on approximately April 25, 1996, (ii)
Form 10-Q for the quarter ended March 31, 1996, (iii) Form 8-K dated
June 3, 1996, (iv) Form 10-Q for the quarter ended June 30, 1996, and
(v) all other written information furnished to Investor did not, as of
the date of such filings or information, contain any untrue statement
of a material fact or omit to state a material fact necessary to make
the statements therein not misleading. The Company is currently
preparing its financial statements for the fiscal year ended September
30, 1996, subject to audit, and its annual report on Form 10-K for the
fiscal year ended September 30, 1996, which may show significant
changes from prior filings with the Securities and Exchange Commission.
2.5 Ownership of Property; Liens. The Company owns good and
merchantable title to, or valid leasehold interests in, all of its
properties and assets; and the Company has received all deeds,
assignments, waivers, consents, non-disturbance and recognition or
similar agreements, bills of sale and other documents, and duly
effected all recordings, filings and other actions necessary to
establish, protect and perfect the Company's right, title and interest
in and to all such property to the extent necessary to use such
property in its ordinary business operations.
2.6 Patents, Trademarks, Copyrights and Licenses. The Company
owns all material licenses, patents, patent applications, copyrights,
service marks, trademarks, trademark applications, and trade names
necessary to continue to conduct its business as
JZM5843
3
<PAGE>
heretofore conducted by it, now conducted by it and proposed to be
conducted by it, each of which is listed, together with Patent and
Trademark Office application or registration numbers, where applicable,
on Schedule 2.6 hereto. The Company conducts its businesses without
infringement or claim of infringement of any license, patent,
copyright, service mark, trademark, trade name, trade secret or other
intellectual property right of others. To the best knowledge of the
Company, there is no infringement or claim of infringement by others of
any material, license, patent, copyright, service mark, trademark,
trade name, trade secret or other intellectual property right of the
Company.
2.7 No Material Adverse Effect. Except as disclosed on
Schedule 2.7 hereto, no event has occurred since June 30, 1996, and is
continuing which has had or could reasonably be expected to have a
material adverse effect on the business, assets, properties,
operations, prospects or financial or other condition of the Company.
2.8 Environmental Laws. All premises and facilities owned,
leased, used or operated by the Company or, to the knowledge of any
executive officer of the Company after a reasonable investigation, any
predecessor in interest, have been, and continue to be, owned, leased,
used or operated in compliance in all material respects with all
applicable environmental laws.
2.9 Use of Proceeds. The proceeds of the issuance of the
Debentures shall be used to satisfy certain contractual obligations of
the Company, for working capital to fund operations, 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.
3. Representations, Warranties and Covenants of the Investor.
Investor hereby represents and warrants that:
3.1 Purchase Entirely for Own Account. Investor hereby
confirms that the Debentures to be received by Investor hereunder and
the Common Stock issuable upon conversion of the Convertible Debenture
(collectively, the "Securities") will be acquired for Investor's own
account and not with a view to the resale or distribution of any part
thereof, and that Investor has no agreement or arrangement with regard
to or present intention of selling, granting any participation in, or
otherwise distributing the same; provided, however, notwithstanding the
foregoing, Investor may effect transactions in reliance on Rule 144A
promulgated under the Securities Act of 1933, as amended (the "Act").
3.2 Disclosure of Information. Investor has received all
the information it considers necessary or appropriate for deciding
whether to purchase the Debentures being issued hereunder. Investor
further represents that it has had an opportunity to ask
JZM5843
4
<PAGE>
questions and receive answers from the Company regarding the terms and
conditions of the sale of the Debentures.
3.3 Investment Experience. Investor acknowledges that it is
able to fend for itself, can bear the economic risk of its investment
and has such knowledge and experience in financial or business matters
that it is capable of evaluating the merits and risks of the investment
in the Debentures being issued hereunder.
3.4 Restricted Securities. Investor understands that the
Debenture and the shares of Common Stock issuable upon conversion of
the Convertible Debenture it is acquiring pursuant hereto are
characterized as "restricted securities" under the federal securities
laws inasmuch as each is being acquired from the Company in a
transaction not involving a public offering and that under such laws
and applicable regulations such securities may be resold without
registration under the Act only in certain limited circumstances. In
this connection, Investor represents that it is familiar with Rule 144
under the Act, as presently in effect, and understands the resale
limitations imposed thereby and by the Act.
3.5 Legends. It is understood that the Debentures being issued
hereunder (and the Common Stock issuable upon conversion thereof) will
bear a legend substantially similar to the following:
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), OR REGISTERED OR
OTHERWISE QUALIFIED FOR SALE UNDER ANY APPLICABLE STATE
SECURITIES LAWS AND MAY NOT BE TRANSFERRED OR SOLD OR OFFERED
FOR SALE OR OTHERWISE TRANSFERRED, PLEDGED, HYPOTHECATED OR
DISPOSED OF UNLESS IT HAS BEEN REGISTERED UNDER THE ACT AND
REGISTERED OR OTHERWISE QUALIFIED FOR SALE UNDER SUCH STATE
SECURITIES LAWS OR AN EXCEPTION FROM REGISTRATION THEREUNDER
IS AVAILABLE."
3.6 Accredited Investor. Investor is an Accredited
Investor within the definition set forth in Rule 501(a) under the Act.
4. Security Agreement. Payment of the Senior Debenture shall be
secured to the extend described below:
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5
<PAGE>
4.1 Security Interest. The Company hereby grants to Investor a
security interest in the property and its proceeds described in Section
4.2 herein to secure the Company's obligations under the Senior
Debenture (the "Security Interest").
4.2 Collateral. The property in which the Security Interest is
granted (the "Collateral") consists of a continuing interest in all
real and personal property purchased by the Company from the proceeds
of the issuance of the Senior Debentures, and all accessions to,
substitutions for and all replacements, products and proceeds thereof,
including, without limitation, proceeds of insurance policies insuring
the Collateral, and all books and records (including, without
limitation, computer programs, printouts and other computer materials
and records) of the Company pertaining to any of the foregoing. The
Company shall provide in each Funding Request an accounting to Investor
of the proposed use of any proceeds of the issuance of the Senior
Debentures. At the applicable Subsequent Closing or at the time the
Collateral is acquired, the Company shall execute and deliver to
Investor any documents, notices or instruments reasonably requested by
Investor to perfect, evidence, give effect to or give notice of
Investor's security interest, and shall pay all costs in connection
therewith.
4.3 Perfection and Priority. The Security Interest grant
herein shall be a first priority lien on the Collateral, subject to no
other liens, claims or rights of others.
4.4 Affirmative Covenants. The Company covenants that it
shall:
(a) Keep and maintain all Collateral consisting of
equipment and machinery in good operating condition and
repair; make all necessary replacements thereof so that the
value and operating efficiency thereof shall at all times be
maintained and preserved; promptly inform Investor of any
additions to or deletions from such equipment and machinery;
and prevent any such equipment and machinery from becoming a
fixture to real estate or accession to other personal
property;
(b) Promptly discharge any liens, encumbrances
or other claims against the Collateral;
(c) Maintain such insurance as may be required by law
and such other insurance to such extent and against such
hazards and liabilities as is customarily maintained by
companies similarly situated, and include Investor as an
additional insured on all liability policies; and
(d) Comply strictly and in all respects with all
applicable environmental laws.
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6
<PAGE>
4.5 Negative Covenants. The Company covenants that it
shall not, without Investor's prior written consent, which Investor may
or may not in its sole discretion give:
(a) Enter into any transaction which materially
and adversely affects the Collateral or the Company's ability
to repay the indebtedness under the Senior Debentures;
(b) Remove the Collateral from the locations set
forth in the Funding Request with respect to the purchase of
such Collateral or keep the Collateral at any other
location(s) unless (i) the Company gives Investor written
notice thereof and of the new location of the Collateral at
least thirty (30) days prior thereto, and (ii) the other
location is within the continental United States of America;
or
(c) Create or permit any lien on any of the
Collateral, other than liens created hereunder.
4.6 Insurance; Payment of Premiums. The Company shall, at its
sole cost and expense, keep and maintain the Collateral insured for its
full insurable value against loss or damage by fire, theft, explosion,
sprinklers and all other hazards and risks ordinarily insured against
by other owners or users of such properties in similar businesses and
notify Investor promptly of any occurrence causing a material loss or
decline in value of the Collateral and the estimated (or actual, if
available) amount of such loss or decline. All policies of insurance on
the Collateral shall be in form and with insurers recognized as
adequate by prudent business persons and all such policies shall be in
such amounts as may be satisfactory to Investor. The Company shall
deliver to Investor a certificate of insurance and, upon request, the
original (or certified copy) of each policy of insurance, and evidence
of payment of all premiums therefor. Such policies of insurance shall
contain an endorsement, in form and substance acceptable to Investor,
showing loss payable to Investor, as its interests may appear. Such
endorsement, or an independent instrument furnished to Investor, shall
provide that the insurance companies will give Investor at least thirty
(30) days prior written notice before any such policy or policies of
insurance shall be altered or cancelled and that no act or default of
the Company or any other person shall affect the right of Investor to
recover under such policy or policies of insurance in case of loss or
damage. The Company hereby directs all insurers under such policies of
insurance to pay all proceeds payable thereunder directly to Investor,
as its interests may appear. The Company irrevocably makes, constitutes
and appoints Investor (and all officers, employees or agents designated
by Investor) as the Company's true and lawful attorney (and
agent-in-fact) for the purpose of making, settling and adjusting claims
under such policies of insurance, endorsing the name of the Company on
any check, draft, instrument or other items of payment for the proceeds
of such policies of insurance and for making all determinations and
decisions with respect to such policies of insurance. In the event the
Company, at any time hereafter, shall fail to
JZM5843
7
<PAGE>
obtain or maintain any of the policies of insurance required above or
to pay any premium in whole or in part relating thereto, then Investor,
without waiving or releasing any obligations or default by the Company
hereunder, may at any time thereafter (but shall be under no obligation
to) obtain and maintain such policies of insurance and pay such premium
and take any other action with respect thereto which Investor deems
advisable. All sums so disbursed by Investor, including reasonable
attorneys' fees, court costs, expenses and other charges relating
thereto, shall be payable on demand by the Company to Investor and
shall be additional liabilities under the Senior Debentures secured by
the Collateral.
4.7 Remedies Upon Default. In the event of any Event of
Default under the Senior Debentures, Investor may do any one or more of
the following:
(a) Declare any indebtedness under the Senior
Debenture immediately due and payable;
(b) Enforce the security interest given in this
Agreement under the provisions of the Uniform Commercial Code
of the applicable state or any other equivalent law;
(c) Enter upon the premises of the Company, without
any obligation to pay rent to the Company, through self-help
and without judicial process, without first obtaining a final
judgment or giving the Company notice and opportunity for a
hearing on the validity of Investor's claim, or any other
place or places where the Collateral is located and kept, and
remove the Collateral therefrom to the premises of Investor or
any agent of Investor, for such time as Investor may desire,
in order to effectively collect or liquidate the Collateral,
or (ii) require the Company to assemble the Collateral and
make it available to Investor at a place to be designated by
Investor, in its sole discretion;
(d) Take possession of the Collateral or any
part of it and of the records pertaining to the Collateral;
(e) Sell or otherwise dispose of all or any
Collateral at public or private sale or sales, with such
notice as may be required by law, in lots or in bulk, for cash
or on credit, all as Investor, in its sole discretion, may
deem advisable; (ii) adjourn such sales from time to time with
or without notice; (iii) conduct such sales on the Company's
premises or elsewhere and use the Company's premises without
charge for such sales for such time or times as Investor may
see fit. Investor shall have the right to sell, lease or
otherwise dispose of the Collateral, or any part thereof, for
cash, credit or any combination thereof, and Investor may
purchase all or any part of the Collateral at public or, if
permitted by law, private sale and, in lieu of actual payment
of such purchase
JZM5843
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<PAGE>
price, may setoff the amount of such price against the
indebtedness under the Senior Debentures. The proceeds
realized from the sale of any Collateral shall be applied
first to the reasonable costs, expenses and attorneys' fees
and expenses incurred by Investor for collection and for
acquisition, completion, protection, removal, storage, sale
and delivery of the Collateral; second to interest due upon
any of the indebtedness under the Senior Debentures; and third
to the principal of the indebtedness under the Senior
Debentures. If any deficiency shall arise, the Company shall
remain liable to Investor therefor; and
(f) Exercise any other rights and remedies of a
secured party under the Uniform Commercial Code of the
applicable state or other applicable law, all of which rights
and remedies shall be cumulative and non-exclusive, to the
extent permitted by law.
5. Conditions Precedent
This Agreement shall become effective upon the satisfaction of the
following conditions precedent:
5.1 Execution and Delivery of Agreement. This Agreement or counterparts
thereof shall have been duly executed by, and delivered to, the Company and the
Investor.
5.2 Documents and Other Agreements. The Investor shall have received
all of the following, each in form and substance satisfactory to the Investor:
(a) Convertible Debenture;
(b) Registration Rights Agreement between the Company and
the Investor (the "Registration Rights Agreement");
(c) A Certificate of the Secretary of the Company, together
with true and correct copies of the Certificate of Incorporation and
By-Laws of the Company, and all amendments thereto, true and correct
copies of the resolutions of the Board of Directors of the Company
authorizing or ratifying the execution, delivery and performance of
this Agreement, the Debentures and the Registration Rights Agreement,
and the names of the officer or officers of the Company authorized to
sign this Agreement, the Debentures and the Registration Rights
Agreement, together with a sample of the true signature of each such
officer;
(d) Certified copies of all documents evidencing any other
necessary corporate action, consents and governmental approvals (if
any) with respect to this Agreement, the Debentures and the
Registration Rights Agreement;
JZM5843
9
<PAGE>
(e) The favorable opinion of Ballard, Spahr, Andrews &
Ingersoll, counsel for the Company, addressed to the Investor with
respect to such matters as may be reasonably requested by the Investor;
(f) The Certificate of Incorporation of the Company
certified by the Secretary of State of Delaware;
(g) Good Standing Certificates for the Company from the
Secretaries of State of Delaware and Utah;
(h) UCC lien search reports of filings against the
Company for such jurisdictions as the Investor deems appropriate;
(i) UCC Financing Statements filed against the Company in
respect to such jurisdictions as the Investor deems appropriate; and
(j) Certificate of insurance, together with a properly
executed Lender's Loss Payable Clause.
5.3 Absence of Material Adverse Change. No material adverse change in
the business, operations or condition, financial or otherwise, of the Company
shall have occurred or be continuing.
5.4 Conditions to the Initial Closing. It shall be a condition to the
Initial Closing that the conditions contained in Sections 5.1, 5.2 and 5.3 shall
have been fulfilled.
5.5 Conditions to Each Closing. It shall be a further condition to the
Initial Closing and to each Subsequent Closing that the following statements
shall be true on the date of each such Closing:
(a) All of the representations and warranties of the Company
contained herein shall be correct in all material respects on and as of
the date of each such Closing as though made on and as of such date,
except (i) to the extent that any such representation or warranty
expressly relates to an earlier date, and (ii) for changes therein
permitted or contemplated by this Agreement.
(b) No event shall have occurred and be continuing which
constitutes or would constitute an Event of Default under the
Debentures.
The acceptance by the Company of the proceeds of the issuance
of any Debenture shall be deemed to constitute, as of the date of such
acceptance, (i) a representation and warranty by the Company that the
conditions in this Section 5.5 have been satisfied and
JZM5843
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<PAGE>
(ii) a confirmation by the Company of the granting and continuance of
the Investor's lien on the Collateral.
6. Miscellaneous.
6.1 Survival of Warranties. The warranties, representations
and covenants of the Company and the Investor contained in or made
pursuant to this Agreement shall survive the execution and delivery of
this Agreement and the Closing and shall in no way be affected by any
investigation of the subject matter thereof made by or on behalf of
Investor or the Company.
6.2 Successors and Assigns. Except as otherwise provided
herein, the terms and conditions of this Agreement shall inure to the
benefit of and be binding upon the respective successors and assigns of
the parties (including transferees of any of the Debentures issued
hereunder or any Common Stock issued upon conversion thereof).
6.3 Governing Law. This Agreement shall be governed by
and construed under the laws of the State of Utah without regard to
choice of law principles.
6.4 Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed an original, but all
of which together shall constitute one and the same instrument.
6.5 Titles and Subtitles. The titles and subtitles used in
this Agreement are used for convenience only and are not to be
considered in construing or interpreting this Agreement.
6.6 Notices. Unless otherwise provided, any notice required or
permitted under this Agreement shall be given in writing and shall be
deemed effectively given upon personal delivery to the party to be
notified or upon deposit with a reputable overnight courier or with the
United States Post Office, by registered or certified mail, postage
prepaid and addressed to the party to be notified at the address
indicated for such party on the signature page hereof, or at such other
address as such party may designate by ten (10) days advance written
notice to the other parties.
6.7 Expenses. Each party shall bear its own expenses in
connection with the transactions contemplated by this Agreement.
6.8 Amendments and Waivers. Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived
only with the written consent of the Company and the Investor. Any
amendment or waiver effected in accordance with this Section shall be
binding upon each holder of any securities
JZM5843
11
<PAGE>
purchased under this Agreement at the time outstanding (including
securities into which such securities are convertible), each future
holder of all such securities, and the Company.
6.9 Severability. If one or more provisions of this Agreement
are held to be unenforceable under applicable law, such provision shall
be excluded from this Agreement and the balance of the Agreement shall
be interpreted as if such provision were so exuded and shall be
enforceable in accordance with its terms.
6.10 Indemnity. The Company hereby indemnifies the Investor,
and its directors, officers, employees, affiliates and agents
(collectively, "Indemnified Persons") against, and agrees to hold each
such Indemnified Person harmless from, any and all losses, claims,
damages and liabilities, including claims brought by any stockholder or
former stockholder of the Company, and related expenses, including
reasonable counsel fees and expenses, incurred by such Indemnified
Person arising out of any claim, litigation, investigation or
proceeding (whether or not such Indemnified Person is a party thereto)
relating to any transactions, services or matters that are the subject
of this Agreement; provided, however, that such indemnity shall not
apply to any such losses, claims, damages, or liabilities or related
expenses determined by a court of competent jurisdiction to have arisen
from the gross negligence or willful misconduct of such Indemnified
Person.
6.11 Waiver of Trial by Jury. THE COMPANY AND THE INVESTOR
HEREBY WAIVE TRIAL BY JURY IN ANY ACTION, SUIT, PROCEEDING OR
COUNTERCLAIM OF ANY KIND DIRECTLY OR INDIRECTLY ARISING OUT OF OR
RELATED TO THIS AGREEMENT OR THE DEBENTURES OR ANY ACT OR OMISSION
WHICH EITHER PARTY ASSERTS RESULTED IN ANY LIABILITY TO THE COMPANY,
THE INVESTOR OR THEIR RESPECTIVE OFFICERS, DIRECTORS, STOCKHOLDERS,
PARTNERS, EMPLOYEES OR AGENTS, TO THE FULL EXTENT PERMITTED BY LAW.
6.12 Entire Agreement. This Agreement, the Debentures,
and other documents delivered pursuant hereto constitute the full and
entire understanding and agreement between the parties with regard to
the subjects hereof and thereof.
THE DEBENTURES (AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF THE CONVERTIBLE
DEBENTURE) ARE SUITABLE ONLY FOR SOPHISTICATED INVESTORS FOR WHOM AN INVESTMENT
IN THE DEBENTURES DOES NOT CONSTITUTE A COMPLETE INVESTMENT PROGRAM AND WHO
FULLY UNDERSTAND AND ARE WILLING TO ASSUME THE RISK INVOLVED IN PURCHASE OF THE
DEBENTURES. NO OFFER TO SELL (OR SOLICITATION OF AN OFFER TO BUY) IS BEING MADE
IN ANY JURISDICTION IN WHICH SUCH OFFER ORSOLICITATION WOULD BE UNLAWFUL. THERE
WILL BE NO PUBLIC OFFERING OF THE DEBENTURES.
JZM5843
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IN MAKING AN INVESTMENT DECISION INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF
THE COMPANY AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS
INVOLVED. THESE DEBENTURES (AND THE COMMON STOCK ISSUABLE UPON CONVERSION
THEREOF) HAVE NOT BEEN APPROVED OR DISAPPROVED BY ANY FEDERAL OR STATE
SECURITIES COMMISSION OR REGULATORY AUTHORITY NOR HAS ANY SUCH FEDERAL OR STATE
SECURITIES COMMISSION OR REGULATORY AUTHORITY PASSED UPON THE ACCURACY OR
ADEQUACY OF ANY INFORMATION PROVIDED HEREWITH. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
Address: 3280 North Frontage Road COVOL TECHNOLOGIES, INC.
Lehi, Utah 84043
By: /s/ Brent M. Cook
Name: Brent M. Cook
Title: President
Address: The Gallagher Centre AJG FINANCIAL SERVICES, INC.
Two Pierce Place
Itasca, Illinois 60143-3141
By: /s/ David Long
Name: David Long
Title: Vice President
JZM5843
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Schedule 2.6
to
Debenture Agreement and Security Agreement
LICENSES, PATENTS, PATENT APPLICATIONS,
COPYRIGHTS, SERVICE MARKS, TRADEMARKS,
TRADEMARK APPLICATIONS AND TRADE NAMES
UNITED STATES PATENTS:
o No. 5,453,103, issued 26 September 1995
o No. 5,487,764, issued 30 January 1996
UNITED STATES PATENT APPLICATIONS:
o Title: Reclaiming and Utilizing Discarded and Newly Formed Coke Breeze,
Coal Fines, and Blast Furnace Revert Materials, and Related Methods,
filed on 25 June 1995. Will issue 31 December 1996.
INTERNATIONAL PATENT COOPERATIVE TREATY
o Serial No. PCT/US94/03814, lodged on 7 April 1994
o Serial No. PCT/US94/01798, lodged on 8 February 1996
TRADEMARKS AND SERVICE MARKS
o Intent-to-use trademark application for briquettes identified by
"Covol". Serial No. 75/061,295, filed 22 February 1996, published for
opposition 5 November 1996.
o Licensing services identified by "Covol". Serial No. 75/067,086, filed
4 March 1996, published for opposition 26 November 1996.
JZM5843
<PAGE>
Schedule 2.7
to
Debenture Agreement and Security Agreement
POTENTIALLY ADVERSE EVENTS
COVOL TECHNOLOGIES, INC. AGTC. AGTC is a coal broker located in the State of
Alabama, and organized as a partnership of three individuals: Mark Rodack, Rick
Visovsky, and Ed Hodder. Ed Hodder is the owner of Port Hodder, the port in
Alabama where the Company is building its second full scale agglomeration
facility. The Company entered into an agreement with AGTC in March, 1996, to
assist the Company in developing coal agglomeration projects. The Company
terminated the agreement in July, 1996 because they were dissatisfied with
AGTC's performance. Subsequent to termination of the agreement, the Company
reached an agreement with Ed Hodder to purchase his property as a site for the
Company's Alabama project. The Company offered payment of $35,000 in the form of
a check with a restrictive indorsement as a settlement of all outstanding
obligations. AGTC cashed the check and them immediately claimed the Company owed
them additional amounts. AGTC has threatened litigation, which the Company
believes has a very low likelihood of success. The agreement specifies Utah law,
and Utah has a strong accord and satisfaction provision. Assuming AGTC files and
the case is decided against the Company, the maximum liability by the Company
would be "8% of the gross sales or monetized price" of the Alabama project.
JZM5843
<PAGE>
EXHIBIT A
THIS DEBENTURE HAS BEEN ACQUIRED FOR INVESTMENT AND HAS NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), OR REGISTERED OR OTHERWISE QUALIFIED FOR SALE
UNDER THE SECURITIES LAWS OF ANY STATE. THIS DEBENTURE MAY NOT
BE TRANSFERRED OR SOLD OR OFFERED FOR SALE OR OTHERWISE
TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF SUCH
REGISTRATION OR QUALIFICATION OR AN EXEMPTION THEREFROM UNDER
SUCH ACT AND SUCH LAWS OR AN OPINION OF COUNSEL SATISFACTORY
TO THE ISSUER HAS BEEN DELIVERED TO THE ISSUER TO THE EFFECT
THAT SUCH REGISTRATION IS NOT REQUIRED.
6% CONVERTIBLE SUBORDINATED DEBENTURE DUE DECEMBER 20, 1999
Salt Lake City, Utah
December 20, 1996
$1,100,000
COVOL TECHNOLOGIES, INC., a Delaware corporation whose headquarters are
located at 3280 North Frontage Road, Lehi, Utah 84043 (the "Company"), promises
to pay to the order of AJG FINANCIAL SERVICES, INC., or its successors and
assigns (the "Holder"), the aggregate principal sum of One Million, One Hundred
Thousand Dollars ($1,100,000) (the "Principal Amount"), in lawful money of the
United States of America, together with interest thereon from the date hereof on
the unpaid Principal Amount, on the terms and conditions as hereinafter
specified, until the Principal Amount is repaid in full.
1. Identification of Debenture. This Debenture is the "Convertible
Debenture" defined in that certain Debenture Agreement and Security Agreement of
even date herewith between the Company and the Holder (the "Purchase Agreement")
and the Holder is entitled to all of the benefits that arise under the Purchase
Agreement from being the "Investor" and the holder of the "Convertible
Debenture" thereunder.
2. Payment of Principal and Interest.
(a) The Principal Amount shall be payable, unless converted
pursuant to Section 4 below, on December 20, 1999 ("Principal Repayment
Date", also herein referred to as the "Maturity Date"). At the Maturity
Date, any required prepayment pursuant to Section 3 below, any
acceleration of the Principal Amount pursuant to Section 8 below, or
upon the effective date of any conversion of the total unpaid
JZM5841
<PAGE>
Principal Amount of this Debenture pursuant to Section 4 below, any
unpaid Principal Amount of this Debenture, all interest accrued thereon
and other sums payable hereunder shall be due and payable in full,
notwithstanding any other provision hereof.
(b) From and after the date hereof, interest on the unpaid
balance of the Principal Amount shall accrue and be due and payable at
the per annum rate of six percent (6%). Interest on the outstanding
unpaid Principal Amount shall be payable upon the Maturity Date, any
Prepayment and any acceleration of the Principal Amount pursuant to
Section 8 below. Interest shall be calculated on the basis of a 365-day
year and the actual number of days elapsed. In the event that all or
any portion of the Principal Amount is not paid on any regularly
scheduled payment date of this Debenture or upon acceleration
(regardless of the reason therefor) and whether or not such payment is
deferred because of the subordination provisions of this Debenture, the
portion of the Principal Amount not paid when due shall bear interest
until paid at the "Default Rate" (as defined in Section 8 below).
(c) All portions of the Principal Amount, all interest thereon
and all other sums due hereunder, shall be payable, without set-off or
deduction, at the offices of the Holder set forth above or at such
other place as Holder, from time to time may designate to the Company
in writing, in cash, certified check or check of the Company that the
Holder has agreed in writing in advance to accept or a wire transfer to
such account as Holder may have previously designated to the Company in
writing.
(d) The Company shall not have the right to prepay any
portion of the Principal Amount or any installment thereof.
3. Required Prepayment. If a Change in Control (as hereinafter defined)
occurs, the Holder may, by notice to the Company given not later than the date
10 days after the date the Company has notified the Holder of such Change in
Control, require the prepayment of the entire unpaid Principal Amount of this
Debenture and all accrued but unpaid interest thereon; whereupon the Company
shall, on the date 10 days after the date such notice is given by the Holder,
prepay this Debenture. The Company shall give the Holder notice of the
occurrence of any Change in Control not later than 10 days after such Change in
Control occurred.
As used herein, "Change in Control" of the Company means:
(a) any "person", as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), (other than the Company, any trustee or other fiduciary holding
securities under an employee benefit plan of the Company, or any
corporation owned, directly or indirectly, by the stockholders of the
Company in substantially the same proportions as their ownership of
stock of the Company), is or becomes the "beneficial owner" (as defined
in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company
JZM5841
17
<PAGE>
representing 30% or more of the combined voting power of the Company's
then outstanding securities;
(b) during any period of two consecutive years (not including
any period prior to the date of this Debenture), individuals who at the
beginning of such period constitute the Board, and any new director
(other than a director designated by a person who has entered into an
agreement with the Company to effect a transaction described in
paragraph (a), (c) or (d) of this Section) whose election by the Board
of Directors or nomination for election by the Company's stockholders
was approved by a vote of at least two-thirds (2/3) of the directors
then still in office who either were directors at the beginning of the
period or whose election or nomination for election was previously so
approved, cease for any reason to constitute at least a majority
thereof;
(c) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than (I)
a merger or consolidation which would result in the voting securities
of the Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into
voting securities of the surviving entity) more than 80% of the
combined voting power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger or
consolidation or (II) a merger or consolidation effected to implement a
recapitalization of the Company (or similar transaction) in which no
"person" (as hereinabove defined) acquires more than 30% of the
combined voting power of the Company's then outstanding securities; or
(d) the stockholders of the Company approve a plan of
complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all of the Company's
assets.
4. Conversion of Debentures.
(a) Conversion into Company's Common Stock.
(i) Conversion by Holder. On any day on which the
Company is open for business from and after the date hereof
and prior to 5:00 p.m. Salt Lake City time on the Maturity
Date, subject to and upon compliance with the provisions of
this Section 4, at the option of the Holder, any portion of
the then outstanding Principal Amount which is $50,000 or
greater and an integral multiple of $1,000 or the remaining
balance due, may, so long as this Debenture or any part
thereof remains outstanding, be converted into the number of
duly authorized, validly issued, fully-paid and nonassessable
shares of the Company's Common Stock equal to the then unpaid
Principal Amount being converted,
JZM5841
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<PAGE>
*** Missing informaiton mya be available upon request to the Company
divided by the Conversion Price then in effect. For purposes
of this Debenture, the "Conversion Price" shall be ***
subject to adjustment as provided herein. Holder shall
exercise its conversion right by surrendering this Debenture
to the Company, at any time after 8:00 a.m. and prior to 5:00
p.m. Salt Lake City time at the Company's offices, set forth
above, or at such other place in Salt Lake City, Utah as the
Company from time to time may designate to the Holder in
writing, accompanied by a written notice of election to
convert in the form attached hereto as Exhibit A.
(ii) Conversion by Company. Provided the Company is
not then in default of any of its obligations under this
Debenture or the Purchase Agreement, and further provided no
Event of Default or any event with the passage of time would
be an Event of Default has occurred and is continuing at any
time from and after six (6) months from the date hereof and
prior to 5:00 p.m. Salt Lake City time on the Maturity Date,
the Company may, at its option, cause the then outstanding
entire Principal Amount of this Debenture to be converted into
shares of the Company's Common Stock, so long as this
Debenture or any part thereof remains outstanding, such rights
to be exercisable with not less than 15 days and not more than
30 days written notice in the form attached hereto as Exhibit
B (the "Notice") to the Holder, which Notice shall be
irrevocable without the written consent of the Holder. The
Notice shall designate the date upon which such conversion
shall occur (the "Conversion Date"); provided, however, the
Conversion Date shall not be a date subsequent to the Maturity
Date. Within 10 days of the Holder's receipt of the Notice,
the Holder shall have the right to designate whether Holder
shall receive on the Conversion Date shares of the Company's
Common Stock or cash in an amount equal to the then
outstanding Principal Amount of this Debenture and any accrued
and unpaid interest thereon; provided, however, that in the
event the Conversion Date is the Maturity Date, the Holder
shall have no right to receive cash. The then unpaid Principal
Amount of the Debenture shall be converted into the number of
duly authorized, validly issued, fully-paid and nonassessable
shares of the Company's Common Stock equal to the then unpaid
Principal Amount divided by the Conversion Price in effect on
the Conversion Date. On or before the Conversion Date, the
Holder shall surrender the Debenture to the Company at the
address in Salt Lake City, Utah designated in the Notice from
the Company.
(b) Adjustment for Interest. In the event that all or
any portion of this Debenture shall be converted into Common
Stock pursuant to the terms of this Debenture, any accrued but
unpaid interest relating to the Principal Amount converted
shall be paid and, at the option of the Company, may be paid
in either cash or shares of Common Stock. If such interest is
paid in shares of Common Stock pursuant to a conversion under
Section 4(a)(i) hereof the Holder shall receive number of duly
authorized, validly issued, fully-paid and nonassessable
JZM5841
19
<PAGE>
shares of the Company's Common Stock equal to the then accrued
but unpaid interest divided by the Conversion Price in effect
on the date on which the Debenture shall have been surrendered
for conversion with proper notice of the amount to be
converted. If such interest is paid in shares of Common Stock
pursuant to a conversion under Section 4(a)(ii) hereof the
Holder shall receive number of duly authorized, validly
issued, fully-paid and nonassessable shares of the Company's
Common Stock equal to the then accrued but unpaid interest
divided by the Conversion Price in effect on the Conversion
Date. If such interest is paid in cash pursuant to a
conversion under Section 4(a)(i) hereof the Company shall pay
such interest in cash to the Holder within five (5) days of
the date on which the Debenture shall have been surrendered
for conversion with proper notice of the amount to be
converted. If such interest is paid in cash pursuant to a
conversion under Section 4(a)(ii) hereof the Company shall pay
such interest in cash to the Holder on the Conversion Date.
(c) Issuance of Shares of Common Stock upon Conversion.
(i) As promptly as practicable after the surrender,
as herein provided, of the Debenture or any portion thereof
for conversion, the Company shall deliver or cause to be
delivered to the Holder a certificate or certificates
representing the appropriate number of duly authorized,
validly issued, fully-paid and non-assessable shares of the
Company's Common Stock. If conversion is effected pursuant to
Section 4(a)(i) hereof, the conversion shall be deemed to have
been made at the time that the Debenture shall have been
surrendered for conversion with proper notice of the amount to
be converted. If conversion is affected under Section 4(a)(i)
hereof, upon surrender to the Company for conversion, this
Debenture or such portion as is being converted shall be
cancelled by the Company and the rights of the Holder as to
the portion converted shall cease at such time (or such
earlier time as shall be specified in Section 4(d), and the
person or persons entitled to receive the shares of Common
Stock upon conversion of such Debenture or Debentures shall be
treated for all purposes as having become the record holder or
holders of such shares of Common Stock at the time the
Debenture is surrendered for conversion as provided herein. If
conversion is effected pursuant to Section 4(a)(ii) hereof,
the conversion shall be deemed to have been made on the
Conversion Date. If conversion is effected under Section
4(a)(ii) hereof, on the Conversion Date this Debenture or such
portion as is being converted shall be cancelled by the
Company and the rights of the Holder as to the portion
converted shall cease at such time (or such earlier time as
shall be specified in Section 4(d), and the person or persons
entitled to receive the shares of Common Stock upon conversion
of such Debenture or Debentures shall be treated for all
purposes as having become the record holder or holders of such
shares of Common Stock on the Conversion Date. If the
Debenture is converted
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in part only, upon such conversion, the Company shall execute
and deliver to the Holder a new Debenture in a Principal
Amount equal to the unconverted portion.
(ii) Each Common Stock certificate issued upon
conversion of all or any portion of this Debenture, shall be
stamped or otherwise imprinted with a legend substantially in
the following form:
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), OR REGISTERED OR
OTHERWISE QUALIFIED FOR SALE UNDER ANY APPLICABLE STATE
SECURITIES LAWS AND MAY NOT BE TRANSFERRED OR SOLD OR OFFERED
FOR SALE OR OTHERWISE TRANSFERRED, PLEDGED, HYPOTHECATED OR
DISPOSED OF UNLESS IT HAS BEEN REGISTERED UNDER THE ACT AND
REGISTERED OR OTHERWISE QUALIFIED FOR SALE UNDER SUCH STATE
SECURITIES LAWS OR AN EXCEPTION FROM REGISTRATION THEREUNDER
IS AVAILABLE."
(d) Tender. From and after tender to the Holder of the unpaid
Principal Amount and all accrued but unpaid interest thereon on or
after the Maturity Date, this Debenture shall not, for the purposes of
this Debenture, or any other purpose, be deemed to be outstanding, and
the rights of the Holder under this Debenture (except to receive the
consideration tendered) shall cease, regardless of whether this
Debenture has been surrendered.
(e) Fractional Interests. No fractional shares of Common Stock
shall be delivered upon conversion of Debentures. If more than one
Debenture shall be surrendered for exchange at one time by the same
Holder, the number of full shares which shall be delivered upon such
exchange shall be computed on the basis of the aggregate Principal
Amounts of the Debentures (or specified portions thereof) so
surrendered. In lieu of any fractional shares which otherwise would be
deliverable upon exchange of any Debenture (or specified portions
thereof), the number of shares issuable upon such conversion will be
rounded down to the next lower whole share and the Holder shall be paid
an amount in cash equal to the Conversion price times the fraction of a
share of Common Stock the Holder would otherwise be entitled to.
(f) Taxes, Etc. The Company shall pay all documentary stamp or
other transactional taxes attributable to the issuance or delivery of
Common Stock upon conversion of the Debenture, provided, however, that
the Company shall not be required to pay any taxes which may be payable
in respect to any transfer involved in the issuance or
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delivery of any certificate for Common Stock in a name other than that
of the Holder of the Debenture in respect of which such Common Stock is
issued.
(g) Reservation of Stock. The Company shall at all times
reserve and keep available, out of its treasury stock or authorized and
unissued stock, or both, solely for the purpose of effecting the
conversion of the Debenture, such number of shares of Common Stock as
shall from time to time be sufficient to effect the conversion of the
Debenture.
(h) Listing. In the event that the outstanding Common Stock
shall be listed on one or more national securities exchanges or The
NASDAQ Stock Market at any time after the date hereof, the Company
shall use its best efforts to obtain the listing of the Common Stock
issuable upon conversion of the Debenture, upon official notice of such
issuance at the same time the outstanding Common Stock shall become
listed such national securities exchange or The Nasdaq Stock Market.
5. Subordination.
(a) This Debenture and any instrument issued in exchange,
renewal or substitution of any such Debenture, including any amendment
thereto or modifications of any of the foregoing, are referred to in
this Section 5 collectively as the "Debenture." The Holder hereby
agrees, by accepting this Debenture, for Holder and any transferee,
assignee or subsequent holder (each a "Subordinated Creditor"), that
the indebtedness of the Company evidenced by the Debenture is
subordinated and junior in right of payment to all unpaid "Senior
Indebtedness." For purposes of the Debenture, "Senior Indebtedness"
shall mean all of the unpaid principal and accrued interest on
(including, without limitation, any interest which accrues after the
commencement of any case, proceeding or other action relating to the
bankruptcy, insolvency or reorganization of the Company) all other
indebtedness of the Company for borrowed money which is not expressly
pari passu with, or subordinated to, this Debenture.
(b) As used in this Debenture, the term "subordinated and
junior in right of payment" shall mean that no part of this Debenture
shall have any claim to the assets of the Company on a parity with or
prior to the claims of the Senior Indebtedness. Subject to the
provisions of this Section 5, until and unless the Senior Indebtedness
shall have been fully paid and satisfied, the Subordinated Creditor
shall not be entitled to receive any payment on the whole or any part
of the Principal Amount or of any interest on this Debenture. Prior to
such time as either (i) a petition or case under any bankruptcy,
insolvency, reorganization or other similar law has been filed by or
against the Company or the Company has made an assignment for the
benefit of creditors or admitted in writing its inability to pay its
debts as they come due or there occurs any other event set forth in
Sections 8(c) or 8(d) of this Debenture, or (ii) the holder of any of
the Senior
JZM5841
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<PAGE>
Indebtedness (or any person or entity acting on behalf of such holder)
has declared an event of default under any note or other instrument
relating to any of the Senior Indebtedness and has notified the Company
and the Subordinated Creditor thereof, the Company may make, and the
Subordinated Creditor may accept payment of principal and interest due
under this Debenture. Each of the events referred to in clauses (i) and
(ii) of this Section 5(b) is hereafter referred to as a "Specified
Event".
(c) Upon the occurrence of any Specified Event:
(i) the holders of Senior Indebtedness shall be
entitled to receive payment in full in cash (or in such other
medium as such holders shall agree) of the principal of,
premium, if any, and interest and other amounts payable with
respect to, the Senior Indebtedness to the date of payment on
the Senior Indebtedness before Holder shall be entitled to
receive any payment on the Debenture; and
(ii) until the Senior Indebtedness is paid in full in
cash (or in such other medium as such holders shall agree),
any distribution to which Holder would be entitled but for
this Section 5 shall be made to the holders of the Senior
Indebtedness.
Upon any distribution of assets (in cash, securities or other
property) of the Company to Holder in violation of this Section 5,
Holder shall hold the distribution in trust for the benefit of, and
shall forthwith pay over and deliver such distribution to, the holders
of the Senior Indebtedness.
(d) If, while any Senior Indebtedness is outstanding, a
Specified Event occurs:
(i) an "Event of Default" shall have occurred under
this Debenture and the holders of the Senior Indebtedness are
hereby irrevocably authorized and empowered (in their own
names or in the name of Holder or otherwise), but shall have
no obligation, to demand, sue for, collect and receive every
payment or distribution in respect of this Debenture and give
acquittance therefor and to file claims and proofs of claim
and take such other action (including, without limitation,
voting the indebtedness evidenced by this Debenture) as such
holders may deem necessary or advisable for the exercise or
enforcement of any of the rights or interests of such holders;
and
(ii) the Subordinated Creditor shall duly and
promptly take such action as the holders of such Senior
Indebtedness may request (A) to collect this Debenture for the
account of the holders of the Senior Indebtedness and to file
appropriate claims or proofs of claim in respect of this
Debenture, (B) to execute and deliver to the holders of the
Senior Indebtedness such powers of attorney,
JZM5841
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<PAGE>
assignments, or other instruments as such holders may request
in order to enable them to enforce any and all claims with
respect to this Debenture, and (C) to collect and receive any
and all payments of distributions which may be payable or
deliverable upon or with respect to this Debenture.
Notwithstanding anything to the contrary contained in this
Debenture or any agreement or instrument relating to the indebtedness
evidenced hereby, the Subordinated Creditor shall not initiate any
action to seek or enforce collection of the Debenture, including
initiating a filing of a case or petition for relief under the Federal
Bankruptcy Code during any period with respect to which payment may not
be made on the Debenture under this Section 5 unless judicial
proceedings have been initiated by the holders of the Senior
Indebtedness to collect the Senior Indebtedness and are continuing;
provided, however, that if the Company fails to pay any interest or
principal with respect to this Debenture (for these purposes, the
"Defaulted Payment") and such Event of Default continues for a period
of thirty (30) days ("Default Period") from the date such interest or
principal was due, then the Subordinated Creditor shall have the right
to institute proceedings against the Company to recover the Defaulted
Payment; provided, further, that (A) prior to instituting proceedings
against the Company to recover the Defaulted Payment, the Subordinated
Creditor shall give the holders of the Senior Indebtedness at least
twenty (20) days notice of Company's failure to pay such interest or
principal during which time the holders of the Senior Indebtedness
shall have the right, but not the obligation, to pay or cause to be
paid the Defaulted Payment (such notice not to extend the Default
Period in any manner); (B) the Subordinated Creditor shall not have the
right to institute proceedings to recover any amounts other than the
Defaulted Payment; and (C) the Subordinated Creditor shall have no
right to file any petition in bankruptcy against the Company or take
advantage of any insolvency law in connection with the recovery of the
Defaulted Payment. Notwithstanding anything herein to the contrary, the
Subordinated Creditor may enforce the rights to collect the unpaid
balance hereof on and after the Maturity Date.
(e) Except as specifically provided herein, the rights under
these subordination provisions of the holders of the Senior
Indebtedness as against the Subordinated Creditor shall remain in full
force and effect without regard to, and shall not be impaired or
affected by:
(i) any act or failure to act on the part of the
Company under the terms of this Debenture;
(ii) any extension or indulgence in respect of any
payment or prepayment of any Senior Indebtedness or any part
thereof or in respect of any other amount payable to any
holder of the Senior Indebtedness;
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<PAGE>
(iii) any amendment, modification or waiver of, or
addition or supplement to, or deletion from, or compromise'
release, consent or other action in respect of, any of the
terms of any Senior Indebtedness, any agreement which may be
made relating to any Senior Indebtedness or any instrument
evidencing the Senior Indebtedness; or
(iv) any exercise or nonexercise by any holder of the
Senior Indebtedness of any right or remedy under or in respect
of any Senior Indebtedness or these subordination provisions
or any waiver of any such right or remedy or of any default in
respect of the Senior Indebtedness or these subordination
provisions, or any receipt by any holder of the Senior
Indebtedness of any security, or any failure by any holder of
the Senior Indebtedness to perfect a security interest in, or
any release by any holder of the Senior Indebtedness, any
security or guaranty for the payment of the Senior
Indebtedness.
(f) The obligations of the Subordinated Creditor hereunder
shall continue to be effective, or be reinstated, as the case may be,
if at any time any payment in respect of any Senior Indebtedness, or
any other payment to any holder of any Senior Indebtedness, is
rescinded or must otherwise be restored or returned by the holders of
such Senior Indebtedness upon the occurrence of any event described in
Section 5(b) hereof, all as though such payment had not been made.
(g) The provisions of this Section 5 shall continue in full
force and effect, notwithstanding the commencement of a case under
Title 11 of the United States Code, as amended, by or against the
Company or any of its property. In furtherance of the foregoing, if
Holder receives, directly or indirectly, by set-off, redemption,
purchase or in any other manner, any property of, or payments from, the
Company after the commencement of such a case on account of a claim
which is subordinated by the terms of this Section 5 (whether as
"adequate protection" payments or otherwise), Holder shall immediately
turn such property or payments over to the holders of the Senior
Indebtedness in accordance with the applicable provisions of this
Section 5.
(h) Notwithstanding the other provisions in this Section 5,
this Debenture may be converted into shares of the Company's Common
Stock on the terms set forth in this Debenture or on such other terms
as may be agreed to by the Company and the Holder at any time, subject
to Section 4(a) above.
(i) Subject to the prior payment in full of the Senior
Indebtedness, the Subordinated Creditor shall be subrogated to the
rights of the holders of the Senior Indebtedness to receive payments,
including interest, penalties and fees, or distributions of assets of
the Company made on the Senior Indebtedness until the Principal Amount
of and interest on this Debenture shall be paid in full; and, for the
purposes of such subrogation, no payments or distributions to the
holders of the Senior Indebtedness of any
JZM5841
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<PAGE>
cash, property or securities to which the Subordinated Creditor would
be entitled except for these provisions shall, as between the Company
and its creditors (other than the holders of the Senior Indebtedness),
be deemed to be a payment by the Company to or on account of the Senior
Indebtedness.
(j) The foregoing provisions of Section 5 are solely for the
purpose of defining the relative rights of the holders of the Senior
Indebtedness on the one hand and the Subordinated Creditor on the other
hand, and nothing in those provisions shall impair, as between the
Company and the Subordinated Creditor, the obligation of the Company,
which is unconditional and absolute, to pay to the Subordinated
Creditor the Principal Amount of and interest on this Debenture or
prevent the Subordinated Creditor from exercising all remedies
permitted by law upon default under this Debenture, subject to the
rights set forth above of the holders of the Senior Indebtedness to
receive cash, property or securities otherwise payable or deliverable
to the Subordinated Creditor and to prevent the Subordinated Creditor
from exercising such remedies upon default under this Debenture until
the Senior Indebtedness has been paid in full.
6. Ranking of Obligations. The obligations of the Company
hereunder do rank and will rank at least pari passu in priority of payment with
all other indebtedness of the Company except for Senior Indebtedness.
7. Covenants. Until satisfaction in full of all obligations of the
Company under this Debenture, the Company shall at all times comply with all of
the covenants of the Company set forth herein or in the Purchase Agreement,
which are hereby incorporated by reference herein as if each such covenant was
set forth in full in this Debenture, together with any necessary defined terms
from the Purchase Agreement.
8. Events of Default. The following events are hereby defined
for all purposes of this Debenture as Events of Default:
(a) Failure of the Company to pay any installment of principal
or interest hereunder when and as the same shall become due and
payable, which failure shall have continued for a period of 5 days.
(b) The breach by the Company of any of the other covenants
set forth in this Debenture or in the Purchase Agreement if such breach
is not cured within 30 days after written notice thereof is given by
the Holder.
(c) The institution by the Company of proceedings to be
adjudicated a bankrupt or insolvent, or the consent by it to the
institution of bankruptcy or insolvency proceedings against it, or the
filing by it of a petition or answer or consent seeking relief under
Title 11 of the United States Code, as now constituted or hereafter in
effect, or
JZM5841
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<PAGE>
any other applicable Federal or State bankruptcy, insolvency or other
similar law, or the consent by it to the institution of proceedings
thereunder or the filing of any such petition or to the appointment of
a receiver, liquidator, assignee, trustee, custodian, sequestrator (or
other similar official) of the Company or of any substantial part of
its property, or the making by the Company of an assignment for the
benefit of creditors, or the admission by the Company in writing of its
inability to pay its debts generally as they become due;
(d) The entry of a decree or order by a court having
jurisdiction for relief in respect of the Company, or adjudging the
Company a bankrupt or insolvent, or approving as properly filed
petition seeking reorganization, arrangement, adjustment or composition
of or in respect of the Company under Title 11 of the United States
Code, as now constituted or hereafter in effect, or any other
applicable Federal or State bankruptcy, insolvency or other similar
law, or appointing a receiver, liquidator, assignee, trustee (or other
similar official) of the Company or of any substantial part of its
property, or ordering the winding-up or liquidation of its affairs, and
the continuance of any such decree or order unstayed and in effect for
a period of 60 consecutive days; or
(e) A default shall occur under any other agreement, document
or instrument to which the Company is a party and such default is not
cured within any applicable grace period or waived in writing, and such
default (i) involves the failure to make any payment when due in
respect of any indebtedness (other than the Principal Amount and
interest thereon) of the Company in excess of Five Hundred Thousand
Dollars ($500,000) in the aggregate, or (ii) causes such indebtedness
or a portion thereof in excess of Five Hundred Thousand Dollars
($500,000) in the aggregate to become due prior to its stated maturity
or prior to its regularly scheduled dates of payment, or (iii) permits
any holder of such indebtedness or a trustee to cause such indebtedness
or a portion thereof in excess of Five Hundred Thousand Dollars
($500,000) in the aggregate to become due prior to its stated maturity
or prior to the regularly scheduled dates of payment and such default
is not cured or waived within 30 days after the occurrence thereof.
If one or more Events of Default shall happen and be continuing, then,
and in each and every such case, the Holder, at its option, by notice in writing
to the Company, may declare the entire Principal Amount and all interest accrued
thereon and any other sums due hereunder, if not already due and payable, to be
immediately due and payable. If there shall occur an Event of Default described
in Sections 8(c) or 8(d), the entire unpaid balance of the Principal Amount with
interest accrued thereon and all other sums due under this Debenture shall be
immediately due and payable without notice to the Company. If the entire unpaid
balance with interest accrued thereon shall, as a result of either of the
preceding two sentences, be immediately due and payable, the unpaid balance of
the Principal Amount shall accrue interest at the per annum rate of six percent
(6%) compounded annually to the date of default and thereafter at a rate
JZM5841
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<PAGE>
which shall be equal to a per annum rate of eight percent (8%) compounded
annually (the "Default Rate") and all other sums due by the Company hereunder
shall also be immediately due and payable; and payment thereof may be enforced
and recovered in whole or in part at any time by one or more of the remedies
provided to the Holder in this Debenture or under applicable law. In such case,
the Holder may also recover all costs of suit and other expenses in connection
therewith, together with reasonable attorney's fees for collection, together
with the interest on any judgment obtained by the Holder at the Default Rate,
including interest at that rate from and after the date of any execution,
judicial or foreclosure sale until actual payment is made to the Holder of the
full amount due the Holder.
9. Payment on Default. In the event that an Event of Default shall
occur, then the Company shall pay to the Holder the whole amount which then
shall have become due on this Debenture for principal and interest, and in
addition thereto, such additional amount as shall be sufficient to cover the
costs and expenses of collection.
No delay or omission of the Holder to exercise any rights or powers
accruing upon any default which shall not have been remedied shall impair any
such right or power, or shall be construed to be a waiver of any such default or
acquiescence therein; and every power and remedy given by this to the Holder may
be exercised from time to time and as often as may be deemed expedient by the
Holder.
10. Exchange of Debenture. At the option of the Holder, this Debenture
may be exchanged for other Debentures in denominations of $1,000 and any
integral multiple thereof and of a like aggregate principal amount and tenor.
Upon surrender of this Debenture to the Company for exchange, the Company shall
execute and deliver to the Holder the Debentures which the Holder is entitled to
receive in exchange.
11. Immunity of Incorporators, Stockholders, Officers, Directors and
Employees. No recourse shall be had for the payment of the principal or interest
on this Debenture or for any claim based thereon or otherwise in any manner in
respect thereof, to or against any subsidiary, incorporator, stockholder,
officer, director or employee, as such, past, present or future, of the Company
or any respective subsidiary, incorporator, stockholder, officer, director or
employees, as such, past, present or future, of any predecessor or successor
corporation, either directly or through the Company or such predecessor or
successor corporation, whether by virtue of any constitutional provision or
statute or rule of law, or by the enforcement of any assessment or penalty, or
in any other manner, all such liability being expressly waived and released by
the acceptance of this Debenture and as part of the consideration for the issue
thereof.
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12. Adjustment for Certain Events. In the event of any (i) stock split,
stock dividend or other distribution on or reclassification of the Common Stock
of the Company payable in securities of the Company, (ii) issuance by the
Company of rights or warrants to all holders of Common Stock at a price per
share less than the Adjusted Fair Market Value (as defined herein) of the Common
Stock on the date of such issuance, (iii) distribution to all holders of Common
Stock of evidences of the Company's indebtedness or assets, or (iv) any event as
to which the other provisions of this section are not strictly applicable but
the failure to make any adjustment would not fairly protect the conversion
rights of Holder as provided in this Debenture in accordance with the essential
intent and principles hereof, the Conversion Price shall be equitably adjusted,
if necessary, so that the Holder shall receive, in exchange for the Conversion
Price, such securities of other property which the Holder might have received
had the Holder converted the Debenture immediately prior to such event.
As used herein "Fair Market Value" means:
(a) If the Common Stock of the Company is traded on a national
securities exchange or listed on the Nasdaq national market quotation
system, the Fair Market Value of the Common Stock shall be the average
closing price for the Common Stock for the five consecutive trading
days prior to the date on which the Fair Market Value is determined; or
(b) if the Common Stock is not so traded on a national securities
exchange or listed on the Nasdaq national market quotation system, the
Fair Market Value shall be as agreed to by the Holder and the Company
and if the Holder and the Company do not agree, then the Fair Market
Value shall be determined by binding arbitration in accordance with the
rules of the American Arbitration Association.
As used herein "Adjusted Fair Market Value" means: Ninety-five percent
(95%) of Fair Market Value.
If at any time the Company shall issue any rights to subscribe for or
to purchase, or any options for the purchase of, Common Stock or any stock or
other securities convertible into or exchangeable for Common Stock, whether or
not such options, rights, securities convertible into or exchangeable for Common
Stock are immediately exercisable, and the price per share for which such Common
Stock is issuable is less than the Conversion Price or the Adjusted Fair Market
Value on the date of such issuance, the Conversion Price shall be reduced to
whichever of the following two Conversion Prices (calculated to the nearest
cent) shall be lower:
(1) the Conversion Price determined by dividing (A) an amount
equal to the sum of (x) the product derived by multiplying the
Conversion Price in effect immediately prior to such issue or sale
times the number of shares of Common Stock Deemed Outstanding
immediately prior to such issue or sale, plus (y) the consideration, if
any,
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<PAGE>
received by the Corporation upon such issue or sale, by (B) the number
of shares of Common Stock Deemed Outstanding immediately after such
issue or sale; or
(2) the Conversion Price determined by multiplying the
Conversion Price in effect immediately prior to such issue or sale by a
fraction, the numerator of which shall be the sum of (x) the number of
shares of Common Stock Deemed Outstanding immediately prior to such
issue or sale multiplied by the Adjusted Fair Market Value of the
Common Stock determined as of the time of such issue or sale plus (y)
the consideration, if any, received by the Corporation upon such issue
or sale, and the denominator of which shall be the product derived by
multiplying the Adjusted Fair Market Value of the Common Stock
determined as of the time of such issue or sale times the number of
shares of Common Stock Deemed Outstanding immediately after such issue
or sale.
For purposes hereof, "Common Stock Deemed Outstanding" as of any date
shall mean all shares of Common Stock issued and outstanding on such date and
all shares of Common Stock issuable upon exercise or conversion, as applicable,
of the option or convertible security then being issued.
The parties acknowledge and agree that, notwithstanding the foregoing,
no adjustment to the Conversion Price shall be made as a result of (i) the
issuance of up to 800,000 shares of Common Stock pursuant to certain outstanding
warrants of the Company which are "out of the money" as of the date of this
Debenture, (ii) the issuance of up to 1,500,000 shares of Common Stock pursuant
to certain outstanding options, warrants or other securities of the Company
convertible into Common Stock which are "in the money" as of the date of this
Debenture, (iii) the issuance of or granting of rights to acquire up to 790,000
shares of Common Stock to PacifiCorp Financial Services, Inc. or any of its
affiliates ("PacifiCorp"), or their respective assigns, pursuant to a
Convertible Loan and Security Agreement to be entered into between the Company
and PacifiCorp, (iv) the issuance of or granting of rights to acquire up to
515,000 shares of Common Stock to be sold by the Company pursuant to a Private
Placement Memorandum, (v) the issuance of or granting of rights to acquire up to
100,000 shares of Common Stock to LKD Partnership or its assigns pursuant to a
Convertible Debenture in the principal amount of approximately $1,000,000 issued
in November, 1996, (vi) the issuance of or granting of rights to acquire up to
2,000,000 shares of Common Stock to officers, directors, consultants or
employees of the Company, which rights vest over the next 9 to 10 years, and
(vii) the issuance of or granting of rights to acquire up to 400,000 additional
shares of Common Stock to any third parties in transactions other than those
contemplated in this paragraph.
13. Consolidations or Mergers. In case of any consolidation or merger
of the Company with or into another person, or any sale or transfer of all or
substantially all of the assets of the Company or any compulsory share exchange
pursuant to which share exchange the Common Stock of the Company is converted
into other securities, cash or property, the Company, or such successor or
purchasing corporation, as the case may be, shall, prior to such con-
JZM5841
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<PAGE>
solidation, merger, sale, transfer or share exchange, execute and deliver to the
Holder an agreement, in form and substance satisfactory to Holder, providing
that the Holder shall have the right thereafter to convert this Debenture into
the kind and amount of shares of stock or other securities, cash or other
property receivable upon such consolidation, merger, sale, transfer or share
exchange by a holder of the number of shares of Common Stock of the Company into
which this Debenture could have been converted immediately prior to such
consolidation, merger, sale, transfer or share exchange. Such agreement shall
also provide that the provisions of Sections 12 and 13 hereof shall be amended
without further action of the Company or any successor to apply to the shares of
stock or other securities of the successor issued to the stockholders of the
Company in any such consolidation, merger, sale, transfer or share exchange. The
Holder of the Debenture shall have the right thereafter to convert this
Debenture only into the kind and amount of shares of stock and other securities
and property receivable upon or deemed to be held following such consolidation,
merger, sale, transfer or share exchange by a holder of a number of shares of
the Common Stock of the Company into which the Debenture could have been
converted immediately prior to such consolidation, merger, sale, transfer or
share exchange. This provision shall similarly apply to successive
consolidations, mergers, sales, transfers or share exchanges.
14. Notice of Adjustment Event. The Company shall provide written
notice to the Holder of the Debenture at least at least 30 days prior to (i) the
occurrence of a stock split, stock dividend or other distribution on or
reclassification of the Common Stock of the Company payable in securities of the
Company, (ii) the issuance by the Company of rights or warrants to all holders
of Common Stock at a price per share less than the Adjusted Fair Market Value
(as defined herein) of the Common Stock on the date of such issuance, (iii) a
distribution to all holders of Common Stock of evidences of the Company's
indebtedness or assets, (iv) any consolidation or merger of the Company with or
into another person, or any sale or transfer of all or substantially all of the
assets of the Company or any compulsory share exchange pursuant to which share
exchange the Common Stock of the Company is converted into other securities,
cash or property, (v) the record date for a dividend (other than a dividend
payable in Common Stock or other securities of the Company) upon Common Stock
payable otherwise than out of earnings or earned surplus (determined in
accordance with generally accepted accounting principles consistently applied)
(a "Liquidating Dividend"); or (vi) the occurrence of an event as to which the
other provisions of this section are not strictly applicable but the failure to
make any adjustment would not fairly protect the conversion rights of Holder as
provided in this Debenture in accordance with the essential intent and
principles hereof. The Company shall provide notice to the Holder at least ten
(10) days prior to the record date for any dividend other than a Liquidating
Dividend or a dividend payable in Common Stock or other securities of the
Company. Such notice shall include an adjustment to the Conversion Price
including such information showing the calculation of any proposed adjustment or
stating that no such adjustment is necessary. The adjustment determined by the
Company shall be conclusive unless the Holder shall provide the Company with a
written notice objecting to such adjustment within 30 days of Holder's receipt
of written notice of such adjustment.
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<PAGE>
15. Notices. Unless otherwise provided, any notice required or
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified or upon
deposit with a reputable overnight courier or with the United States Post
Office, by registered or certified mail, postage prepaid and addressed to the
party to be notified at the address indicated for such party in the Purchase
Agreement, or at such other address as such party may designate by ten (10) days
advance written notice to the other party.
16. Miscellaneous.
(a) The Company hereby waives presentment, demand, protest,
notice of demand, notice of nonpayment or dishonor, notice of protest
and all other notices of any kind in connection with the delivery,
acceptance, performance default or enforcement of the payment of this
Debenture. 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.
(b) The Holder and the Company may from time to time enter
into written agreements amending or changing any provisions of this
Debenture or the Purchase Agreement or the rights of the Holder or the
Company hereunder or thereunder, or may grant written waivers or
consents to a departure from the due performance of the obligations of
the Company hereunder or thereunder.
(c) The Company agrees that its liability under this Debenture
shall be unconditional, without regard to the liability of any other
party, and shall not be affected in any manner by any indulgence,
extension of time, renewal, waiver or modification granted or consented
to by the Holder. No course of dealing and no delay or failure of the
Holder in exercising any right, power, remedy or privilege under this
Debenture or the Purchase Agreement shall affect any other or future
exercise thereof or operate as a waiver thereof; nor shall any single
or partial exercise thereof or any abandonment or discontinuance of
steps to enforce such a right, power, remedy of privilege preclude any
further exercise thereof or of any other right, power, remedy or
privilege. The rights and remedies of the Holder under this Debenture
and the Purchase Agreement are cumulative and not exclusive of any
rights or remedies which they would otherwise have. Any waiver, permit,
consent or approval of any kind or character on the part of the Holder
of any breach or default under this Debenture or any such waiver of any
provision or condition of this Debenture must be in writing and shall
be effective only to the extent specifically set forth in such writing.
(d) Whenever any payment or action to be made or taken
hereunder shall be stated to be due on a day which is not a business
day, such payment or action shall be made or taken on the next
following business day, and such extension of time shall be included in
computing interest or fees, if any, in connection with such payment or
action.
JZM5841
32
<PAGE>
(e) All notices, requests, demands, directions and other
communications (collectively, "notices") given to or made upon any
party hereto under the provisions of the Debenture shall be in writing
and shall be effective if given in accordance with the provisions of
the Purchase Agreement.
(f) The provisions of this Debenture are intended to be
severable. If any provision of this Debenture shall be held invalid or
unenforceable in whole or in part in any jurisdiction such provision
shall, as to such jurisdiction, be ineffective to the extent of such
invalidity or unenforceability without in any manner affecting the
validity or enforceability thereof in any other jurisdiction or the
remaining provisions hereof in any jurisdiction.
(g) This Debenture and the Purchase Agreement and other
documents delivered in connection herewith and therewith supersede all
prior understandings and agreements, whether written or oral, between
the parties hereto and thereto relating to the transactions provided
for herein and therein. Any Holder of this Debenture acknowledges that
such Holder is bound by the applicable provisions of the Purchase
Agreement and by the acceptance of this Debenture such Holder agrees to
the terms thereof.
(h) All representations and warranties of the Company
contained herein or made in connection herewith shall survive and shall
not be waived by the execution and delivery of this Debenture or by any
investigation by the Holder, but shall terminate upon Company's full
satisfaction and payment of all outstanding amounts in the Principal
Amount of or interest on this Debenture.
(i) This Debenture shall be binding upon and shall inure to
the benefit of the Holder, the Company and their respective successors
and assigns, except that the Company may not assign or transfer any of
its rights and obligations hereunder or any interest herein.
(j) Whenever the Holder's consent is required to be obtained
under this Debenture or the Purchase Agreement as a condition to any
action, inaction, condition or event, the Holder shall be authorized to
give or withhold such consent in its sole and absolute discretion and
to condition its consent upon the giving of additional collateral, the
payment of money or any other matter.
(k) The representations, warranties and covenants contained
herein shall be independent of each other and no exception to any
representation, warranty or covenant shall be deemed to be an exception
to any other representation, warranty or covenant contained herein
unless expressly provided, nor shall any such exceptions be deemed to
permit any action or omission that would be in contravention of
applicable law.
JZM5841
33
<PAGE>
(l) This Debenture shall be governed by, and construed in
accordance with, the laws of the State of Utah, excluding, however, the
rules relating to conflicts of law.
(m) In no event shall the rate of interest payable under this
Debenture exceed the maximum rate of interest permitted to be charged
by applicable law (including the choice of law rules) and any interest
paid in excess of the permitted rate shall be refunded to the Company.
Such refund shall be made by application of the excessive amount of
interest paid against any sums outstanding and shall be applied in such
order as the Holder may determine. If the excessive amount of interest
paid exceeds the sums outstanding, the portion exceeding the said sums
outstanding shall be refunded in cash by the Holder. Any such crediting
or refund shall not cure or waive any default by the Company hereunder.
The Company agrees, however, that in determining whether or not any
interest payable under this Debenture exceeds the highest rate
permitted by law, any non-principal payment, other than interest
payments, including, without limitation, fees and late charges, shall
be deemed, to the extent permitted by law, to be an expense, fee,
premium or liquidated damages, rather than interest.
(n) THE COMPANY AND THE HOLDER HEREBY WAIVE TRIAL BY JURY IN
ANY ACTION, SUIT, PROCEEDING OR COUNTERCLAIM OF ANY KIND DIRECTLY OR
INDIRECTLY ARISING OUT OF OR RELATED TO THIS DEBENTURE OR THE PURCHASE
AGREEMENT OR ANY ACT OR OMISSION WHICH EITHER PARTY ASSERTS RESULTED IN
ANY LIABILITY TO THE COMPANY, THE HOLDER OR THEIR RESPECTIVE OFFICERS,
DIRECTORS, STOCKHOLDERS, PARTNERS, EMPLOYEES OR AGENTS, TO THE FULL
EXTENT PERMITTED BY LAW.
JZM5841
34
<PAGE>
IN WITNESS WHEREOF, the Company, intending to be legally bound hereby,
has caused this Debenture to be duly executed by its respective authorized
officers on the day and year first above written.
COVOL TECHNOLOGIES, INC.
By:
Name:
Title:
[Corporate Seal]
ATTEST:
_______________, Secretary
Accepted and Agreed to as of the first
day referred to above
AJG FINANCIAL SERVICES, INC.
By:
Name:
Title:
JZM5841
35
<PAGE>
EXHIBIT A
[FORM OF HOLDER'S ELECTION TO CONVERT]
The undersigned owner of this Debenture hereby irrevocably exercises
the option to convert this Debenture or portion below designated, which shall be
$50,000 or greater and in an integral multiple of $1,000, into shares of Common
Stock of Covol Technologies, Inc., in accordance with the terms of this
Debenture, and directs that the shares issuable and deliverable upon conversion,
be issued in the name of and delivered to the undersigned.
Dated:
Signature (signature guarantee required if
shares are to be issued other than to owner)
If shares are to be issued otherwise than to owner:
Please print name and address
(including zip code number)
Social Security or other
Tax Identification Number:
Portion of Debenture to be converted
(no less than $50,000 and in an
integral multiple of $1,000, if less
than all): $
JZM5841
A-1
<PAGE>
EXHIBIT B
[FORM OF COMPANY'S ELECTION TO CONVERT]
The undersigned, Covol Technologies, Inc., hereby irrevocably exercises
its option to convert the entire outstanding Principal Amount of this Debenture
into shares of Common Stock of the Covol Technologies, Inc., in accordance with
the terms of this Debenture on _____________________, the Conversion Date.
Dated:
Signature
JZM5841
B-1
<PAGE>
EXHIBIT B
THIS DEBENTURE HAS BEEN ACQUIRED FOR INVESTMENT AND HAS NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), OR REGISTERED OR OTHERWISE QUALIFIED FOR SALE
UNDER THE SECURITIES LAWS OF ANY STATE. THIS DEBENTURE MAY NOT
BE TRANSFERRED OR SOLD OR OFFERED FOR SALE OR OTHERWISE
TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF SUCH
REGISTRATION OR QUALIFICATION OR AN EXEMPTION THEREFROM UNDER
SUCH ACT AND SUCH LAWS OR AN OPINION OF COUNSEL SATISFACTORY
TO THE ISSUER HAS BEEN DELIVERED TO THE ISSUER TO THE EFFECT
THAT SUCH REGISTRATION IS NOT REQUIRED.
SENIOR DEBENTURE DUE DECEMBER 20, 1999
Salt Lake City, Utah
[$2,900,000] December __, 1996
COVOL TECHNOLOGIES, INC., a Delaware corporation whose headquarters are
located at 3280 North Frontage Road, Lehi, Utah 84043 (the "Company"), promises
to pay to the order of AJG FINANCIAL SERVICES, INC., or its successors and
assigns (the "Holder"), the aggregate principal sum of [Two Million, Nine
Hundred Thousand Dollars ($2,900,000.00)] (the "Principal Amount"), in lawful
money of the United States of America, together with interest thereon from the
date hereof on the unpaid Principal Amount, on the terms and conditions as
hereinafter specified, until the Principal Amount is repaid in full.
1. Identification of Debenture. This Debenture is the "Senior
Debenture" defined in that certain Debenture Agreement and Security Agreement of
even date herewith between the Company and the Holder (the "Purchase Agreement")
and the Holder is entitled to all of the benefits that arise under the Purchase
Agreement from being the "Investor" and the holder of the "Senior Debenture"
thereunder.
2. Payment of Principal and Interest.
(a) The Principal Amount shall be payable on December 20, 1999
("Principal Repayment Date", also herein referred to as the "Maturity Date"). At
the Maturity Date, any final Prepayment (as defined in Section 3 below), any
acceleration of the Principal Amount
JZM5844
<PAGE>
pursuant to Section 8 below, any unpaid Principal Amount of this Debenture, all
interest accrued thereon and other sums payable hereunder shall be due and
payable in full, notwithstanding any other provision hereof.
(b) From and after the date hereof, interest on the unpaid balance of
the Principal Amount shall accrue and be due and payable at the per annum rate
equal to the prime interest rate publicly announced from time to time by Key
Bank of Utah (the "Bank"), plus two percent (2%) (the "Interest Rate"). Fifty
percent (50%) of the interest on the outstanding Principal Amount shall accrue
and be due and payable upon the Maturity Date, and fifty percent (50%) of the
interest on the outstanding Principal Amount shall be due and payable on each
December 20, commencing December 20, 1997, and upon the Maturity Date, provided
that upon any Prepayment and any acceleration of the Principal Amount pursuant
to Section 8 below, all accrued and unpaid interest on the principal amount of
the Prepayment or on the accelerated Principal Amount shall be immediately due
and payable. Interest shall be calculated on the basis of a 365-day year and the
actual number of days elapsed. In the event that all or any portion of the
Principal Amount is not paid on any regularly scheduled payment date of this
Debenture or upon acceleration (regardless of the reason therefor), the portion
of the Principal Amount not paid when due shall bear interest until paid at the
"Default Rate" (as defined in Section 8 below).
(c) All portions of the Principal Amount, all interest thereon and all
other sums due hereunder, shall be payable, without set-off or deduction, at the
offices of the Holder set forth above or at such other place as Holder, from
time to time may designate to the Company in writing, in cash, certified check
or check of the Company that the Holder has agreed in writing in advance to
accept or a wire transfer to such account as Holder may have previously
designated to the Company in writing.
3. Prepayment. The Company may prepay any portion of the Principal
Amount or any installment thereof, without penalty or premium, upon five (5)
days' written notice to Holder (a "Prepayment"). Any Prepayments shall be
applied first to any overdue payments of principal or interest that bear
interest at the "Default Rate", next to any other accrued but unpaid interest in
the inverse order of maturity and then to reduction of installments of principal
of the Principal Amount in the inverse order in which such installments are due.
Any prepayments shall not postpone the due date of or change the amount of any
subsequent installment of principal due hereunder.
If a Change in Control (as hereinafter defined) occurs, the Holder may,
by notice to the Company given not later than the date 10 days after the date
the Company has notified the Holder of such Change in Control, require the
prepayment of the entire unpaid Principal Amount of this Debenture and all
accrued but unpaid interest thereon; whereupon the Company shall, on the date 10
days after the date such notice is given by the Holder, prepay this Debenture.
The Company shall give the Holder notice of the occurrence of any Change in
Control not later than 10 days after such Change in Control occurred.
JZM5844
B-3
<PAGE>
As used herein, "Change in Control" of the Company means:
(a) any "person", as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), (other than the Company, any trustee or other fiduciary holding
securities under an employee benefit plan of the Company, or any
corporation owned, directly or indirectly, by the stockholders of the
Company in substantially the same proportions as their ownership of
stock of the Company), is or becomes the "beneficial owner" (as defined
in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing 30% or more of the combined
voting power of the Company's then outstanding securities;
(b) during any period of two consecutive years (not including
any period prior to the date of this Debenture), individuals who at the
beginning of such period constitute the Board, and any new director
(other than a director designated by a person who has entered into an
agreement with the Company to effect a transaction described in
paragraph (a), (c) or (d) of this Section) whose election by the Board
of Directors or nomination for election by the Company's stockholders
was approved by a vote of at least two-thirds (2/3) of the directors
then still in office who either were directors at the beginning of the
period or whose election or nomination for election was previously so
approved, cease for any reason to constitute at least a majority
thereof;
(c) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than (I)
a merger or consolidation which would result in the voting securities
of the Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into
voting securities of the surviving entity) more than 80% of the
combined voting power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger or
consolidation or (II) a merger or consolidation effected to implement a
recapitalization of the Company (or similar transaction) in which no
"person" (as hereinabove defined) acquires more than 30% of the
combined voting power of the Company's then outstanding securities; or
(d) the stockholders of the Company approve a plan of
complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all of the Company's
assets.
4. Adjustment of Interest Rate. The Interest Rate shall be
adjustable from time and each time the Bank announces a change in its prime
interest rate. The change in the Interest Rate shall be effective on the date
specified by the Bank as the effective date of the change.
5. Exchange of Debenture. At the option of the Holder, this
Debenture may be exchanged for other Debentures in denominations of $1,000 and
any integral multiple thereof and of a like aggregate principal amount and
tenor. Upon surrender of this Debenture to the
JZM5844
B-4
<PAGE>
Company for exchange, the Company shall execute and deliver to the Holder the
Debentures which the Holder is entitled to receive in exchange.
6. Ranking of Obligations. The obligations of the Company
hereunder do rank and will rank at least pari passu in priority of payment with
all other indebtedness of the Company.
7. Covenants. Until satisfaction in full of all obligations of the
Company under this Debenture, the Company shall at all times comply with all of
the covenants of the Company set forth herein or in the Purchase Agreement,
which are hereby incorporated by reference herein as if each such covenant was
set forth in full in this Debenture, together with any necessary defined terms
from the Purchase Agreement.
8. Events of Default. The following events are hereby defined
for all purposes of this Debenture as Events of Default:
(a) Failure of the Company to pay any installment of principal
or interest hereunder when and as the same shall become due and
payable, which failure shall have continued for a period of 5 days
after receiving written notice of such late payment.
(b) The breach by the Company of any of the other covenants
set forth in this Debenture or in the Purchase Agreement if such breach
is not cured within 30 days after written notice thereof is given by
the Holder.
(c) The institution by the Company of proceedings to be
adjudicated a bankrupt or insolvent, or the consent by it to the
institution of bankruptcy or insolvency proceedings against it, or the
filing by it of a petition or answer or consent seeking relief under
Title 11 of the United States Code, as now constituted or hereafter in
effect, or any other applicable Federal or State bankruptcy, insolvency
or other similar law, or the consent by it to the institution of
proceedings thereunder or the filing of any such petition or to the
appointment of a receiver, liquidator, assignee, trustee, custodian,
sequestrator (or other similar official) of the Company or of any
substantial part of its property, or the making by the Company of an
assignment for the benefit of creditors, or the admission by the
Company in writing of its inability to pay its debts generally as they
become due;
(d) The entry of a decree or order by a court having
jurisdiction for relief in respect of the Company, or adjudging the
Company a bankrupt or insolvent, or approving as properly filed a
petition seeking reorganization, arrangement, adjustment or composition
of or in respect of the Company under Title 11 of the United States
Code, as now constituted or hereafter in effect, or any other
applicable Federal or State bankruptcy, insolvency or other similar
law, or appointing a receiver, liquidator, assignee, trustee (or other
similar official) of the Company or of any substantial part of
JZM5844
B-5
<PAGE>
its property, or ordering the winding-up or liquidation of its affairs,
and the continuance of any such decree or order unstayed and in effect
for a period of 60 consecutive days; or
(e) A default shall occur under any other agreement, document
or instrument to which the Company is a party and such default is not
cured within any applicable grace period or waived in writing, and such
default (i) involves the failure to make any payment when due in
respect of any indebtedness (other than the Principal Amount and
interest thereon) of the Company in excess of Five Hundred Thousand
Dollars ($500,000) in the aggregate, or (ii) causes such indebtedness
or a portion thereof in excess of Five Hundred Thousand Dollars
($500,000) in the aggregate to become due prior to its stated maturity
or prior to its regularly scheduled dates of payment, or (iii) permits
any holder of such indebtedness or a trustee to cause such indebtedness
or a portion thereof in excess of Five Hundred Thousand Dollars
($500,000) in the aggregate to become due prior to its stated maturity
or prior to the regularly scheduled dates of payment and such default
is not cured or waived within 30 days after the occurrence thereof.
If one or more Events of Default shall happen and be continuing, then,
and in each and every such case, the Holder, at its option, by notice in writing
to the Company, may declare the entire Principal Amount and all interest accrued
thereon and any other sums due hereunder, if not already due and payable, to be
immediately due and payable. If there shall occur an Event of Default described
in Sections 8(c) or 8(d), the entire unpaid balance of the Principal Amount with
interest accrued thereon and all other sums due under this Debenture shall be
immediately due and payable without notice to the Company. If the entire unpaid
balance with interest accrued thereon shall, as a result of either of the
preceding two sentences, be immediately due and payable, the unpaid balance of
the Principal Amount shall accrue interest at the Interest Rate compounded
annually to the date of default and thereafter at a rate which shall be equal to
the Interest Rate plus two percent (2%) (the "Default Rate") and all other sums
due by the Company hereunder shall also be immediately due and payable; and
payment thereof may be enforced and recovered in whole or in part at any time by
one or more of the remedies provided to the Holder in this Debenture or under
applicable law. In such case, the Holder may also recover all costs of suit and
other expenses in connection therewith, together with reasonable attorney's fees
for collection, together with the interest on any judgment obtained by the
Holder at the Default Rate, including interest at that rate from and after the
date of any execution, judicial or foreclosure sale until actual payment is made
to the Holder of the full amount due the Holder.
9. Payment on Default. In the event that an Event of Default shall
occur, then the Company shall pay to the Holder the whole amount which then
shall have become due on the Debenture for principal and interest, and in
addition thereto, such additional amount as shall be sufficient to cover the
costs and expenses of collection.
JZM5844
B-6
<PAGE>
No delay or omission of the Holder to exercise any rights or powers
accruing upon any default which shall not have been remedied shall impair any
such right or power, or shall be construed to be a waiver of any such default or
acquiescence therein; and every power and remedy given by this to the Holder may
be exercised from time to time and as often as may be deemed expedient by the
Holder.
10. Immunity of Incorporators, Stockholders, Officers, Directors and
Employees. No recourse shall be had for the payment of the principal or interest
on this Debenture or for any claim based thereon or otherwise in any manner in
respect thereof, to or against any subsidiary, incorporator, stockholder,
officer, director or employee, as such, past, present or future, of the Company
or any respective subsidiary, incorporator, stockholder, officer, director or
employees, as such, past, present or future, of any predecessor or successor
corporation, either directly or through the Company or such predecessor or
successor corporation, whether by virtue of any constitutional provision or
statute or rule of law, or by the enforcement of any assessment or penalty, or
in any other manner, all such liability being expressly waived and released by
the acceptance of this Debenture and as part of the consideration for the issue
thereof.
11. Notices. Unless otherwise provided, any notice required or
permitted under this Debenture shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified or upon
deposit with a reputable overnight courier or with the United States Post
Office, by registered or certified mail, postage prepaid and addressed to the
party to be notified at the address indicated for such party in the Purchase
Agreement, or at such other address as such party may designate by ten (10) days
advance written notice to the other party.
12. Miscellaneous.
(a) The Company hereby waives presentment, demand, protest, notice of
demand, notice of nonpayment or dishonor, notice of protest and all other
notices of any kind in connection with the delivery, acceptance, performance
default or enforcement of the payment of this Debenture. 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.
(b) The Holder and the Company may from time to time enter into written
agreements amending or changing any provisions of this Debenture or the Purchase
Agreement or the rights of the Holder or the Company hereunder or thereunder, or
may grant written waivers or consents to a departure from the due performance of
the obligations of the Company hereunder or thereunder.
(c) The Company agrees that its liability under this Debenture shall be
unconditional, without regard to the liability of any other party, and shall not
be affected in any manner by any indulgence, extension of time, renewal, waiver
or modification granted or consented to by the
JZM5844
B-7
<PAGE>
Holder. No course of dealing and no delay or failure of the Holder in exercising
any right, power, remedy or privilege under this Debenture or the Purchase
Agreement shall affect any other or future exercise thereof or operate as a
waiver thereof; nor shall any single or partial exercise thereof or any
abandonment or discontinuance of steps to enforce such a right, power, remedy of
privilege preclude any further exercise thereof or of any other right, power,
remedy or privilege. The rights and remedies of the Holder under this Debenture
and the Purchase Agreement are cumulative and not exclusive of any rights or
remedies which they would otherwise have. Any waiver, permit, consent or
approval of any kind or character on the part of the Holder of any breach or
default under this Debenture or any such waiver of any provision or condition of
this Debenture must be in writing and shall be effective only to the extent
specifically set forth in such writing.
(d) Whenever any payment or action to be made or taken hereunder shall
be stated to be due on a day which is not a business day, such payment or action
shall be made or taken on the next following business day, and such extension of
time shall be included in computing interest or fees, if any, in connection with
such payment or action.
(e) All notices, requests, demands, directions and other communications
(collectively, "notices") given to or made upon any party hereto under the
provisions of this Debenture shall be in writing and shall be effective if given
in accordance with the provisions of the Purchase Agreement.
(f) The provisions of this Debenture are intended to be severable. If
any provision of this Debenture shall be held invalid or unenforceable in whole
or in part in any jurisdiction such provision shall, as to such jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without in any
manner affecting the validity or enforceability thereof in any other
jurisdiction or the remaining provisions hereof in any jurisdiction.
(g) This Debenture and the Purchase Agreement and other documents
delivered in connection herewith and therewith supersede all prior
understandings and agreements, whether written or oral, between the parties
hereto and thereto relating to the transactions provided for herein and therein.
Any Holder of this Debenture acknowledges that such Holder is bound by the
applicable provisions of the Purchase Agreement and by the acceptance of this
Debenture such Holder agrees to the terms thereof.
(h) All representations and warranties of the Company contained herein
or made in connection herewith shall survive and shall not be waived by the
execution and delivery of this Debenture or by any investigation by the Holder,
but shall terminate upon Company's full satisfaction and payment of all
outstanding amounts in the Principal Amount of or interest on this Debenture.
JZM5844
B-8
<PAGE>
(i) This Debenture shall be binding upon and shall inure to the benefit
of the Holder, the Company and their respective successors and assigns, except
that the Company may not assign or transfer any of its rights and obligations
hereunder or any interest herein.
(j) Whenever the Holder's consent is required to be obtained under this
Debenture or the Purchase Agreement as a condition to any action, inaction,
condition or event, the Holder shall be authorized to give or withhold such
consent in its sole and absolute discretion and to condition its consent upon
the giving of additional collateral, the payment of money or any other matter.
(k) The representations, warranties and covenants contained herein
shall be independent of each other and no exception to any representation,
warranty or covenant shall be deemed to be an exception to any other
representation, warranty or covenant contained herein unless expressly provided,
nor shall any such exceptions be deemed to permit any action or omission that
would be in contravention of applicable law.
(l) This Debenture shall be governed by, and construed in accordance
with, the laws of the State of Utah, excluding, however, the rules relating to
conflicts of law.
(m) In no event shall the rate of interest payable under this Debenture
exceed the maximum rate of interest permitted to be charged by applicable law
(including the choice of law rules) and any interest paid in excess of the
permitted rate shall be refunded to the Company. Such refund shall be made by
application of the excessive amount of interest paid against any sums
outstanding and shall be applied in such order as the Holder may determine. If
the excessive amount of interest paid exceeds the sums outstanding, the portion
exceeding the said sums outstanding shall be refunded in cash by the Holder. Any
such crediting or refund shall not cure or waive any default by the Company
hereunder. The Company agrees, however, that in determining whether or not any
interest payable under this Debenture exceeds the highest rate permitted by law,
any non-principal payment, other than interest payments, including, without
limitation, fees and late charges, shall be deemed, to the extent permitted by
law, to be an expense, fee, premium or liquidated damages, rather than interest.
(n) THE COMPANY AND THE HOLDER HEREBY WAIVE TRIAL BY JURY IN ANY
ACTION, SUIT, PROCEEDING OR COUNTERCLAIM OF ANY KIND DIRECTLY OR INDIRECTLY
ARISING OUT OF OR RELATED TO THIS DEBENTURE OR THE PURCHASE AGREEMENT OR ANY ACT
OR OMISSION WHICH EITHER PARTY ASSERTS RESULTED IN ANY LIABILITY TO THE COMPANY,
THE HOLDER OR THEIR RESPECTIVE OFFICERS, DIRECTORS, STOCKHOLDERS, PARTNERS,
EMPLOYEES OR AGENTS, TO THE FULL EXTENT PERMITTED BY LAW.
JZM5844
B-9
<PAGE>
IN WITNESS WHEREOF, the Company, intending to be legally bound hereby,
has caused this Debenture to be duly executed by its respective authorized
officers on the day and year first above written.
COVOL TECHNOLOGIES, INC.
By:
Name:
Title:
[Corporate Seal]
Attest:
, Secretary
Accepted and Agreed to as of
the first day referred to above
AJG FINANCIAL SERVICES, INC.
By:
Name:
Title:
JZM5844
B-10
<PAGE>
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT is made as of the 20th day of
December, 1996, by and among COVOL TECHNOLOGIES, INC., a Delaware corporation
(the "Company"), and AJG FINANCIAL SERVICES, INC. and its successors, assigns
and transferees (herein referred to collectively as the "Holders" and
individually as a "Holder").
W I T N E S S E T H:
WHEREAS, on the date hereof, Holder is the holder of that certain 6%
Convertible Subordinated Debenture due December 20, 1999, in the principal
amount of $1,100,000 (the "Debenture");
WHEREAS, pursuant to the terms of the Debenture, Holder and the Company
have the right to convert all or any portion of the outstanding principal amount
of the Debenture and any accrued and unpaid interest thereon into shares of
Common Stock of the Company; and
WHEREAS, the Company has agreed to provide the Holders with certain
registration rights as set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants and
undertakings contained herein, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, and subject to and
on the terms and conditions herein set forth, the parties hereto agree as
follows:
1. Definitions.
As used in this Agreement, the following capitalized defined terms
shall have the following meanings:
"Company" shall have the meaning set forth in the preamble and shall
also include the Company's successors.
"Company Common Stock" shall mean the shares of common stock, $.01 par
value per share, of the Company.
"Debenture" shall have the meaning set forth in the preamble.
"Effective Date" shall mean the date of this Agreement.
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"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time.
"Holder" or "Holders" shall have the meaning set forth in the preamble.
"Person" shall mean an individual, partnership, corporation, trust, or
unincorporated organization, or a government or agency or political subdivision
thereof.
"Prospectus" shall mean the prospectus included in a Registration
Statement, and any such prospectus as amended or supplemented by any prospectus
supplement with respect to the terms of the offering of any portion of the
Registrable Securities covered by a Registration Statement, and by all other
amendments and supplements to such prospectus, including post-effective
amendments, and in each case including all material incorporated by reference
therein.
"Public Sale" shall mean a public sale or distribution of Registrable
Securities, including a sale pursuant to Rule 144 (or any similar provision then
in effect) under the Securities Act.
"Registrable Securities" shall mean the Shares, excluding (i) Shares
for which a Registration Statement relating to the sale thereof by the Holder
shall have become effective under the Securities Act and which have been
disposed of by the Holder under such Registration Statement, and (ii) Shares
sold or otherwise distributed pursuant to Rule 144 under the Securities Act.
"Registration Expenses" shall mean any and all expenses incident to
performance of or compliance with this Agreement, including, without limitation:
(i) all SEC or National Association of Securities Dealers, Inc. ("NASD")
registration and filing fees, (ii) all fees and expenses incurred in connection
with compliance with state securities or blue sky laws (including reasonable
fees and disbursements of counsel in connection with blue sky qualification of
any of the Registrable Securities and the preparation of a Blue Sky Memorandum)
and compliance with the rules of the NASD, (iii) all expenses of any Persons
engaged by the Company in preparing or assisting in preparing, word processing,
printing and distributing any Registration Statement, any Prospectus,
certificates and other documents relating to the performance of and compliance
with this Agreement, (iv) all fees and expenses incurred in connection with the
listing, if any, of any of the Registrable Securities on any securities exchange
or exchanges pursuant to Section 3(a)(vii) hereof, and (v) the fees and
disbursements of counsel for the Company and of the independent public
accountants of the Company, including the expenses of any special audits or
"cold comfort" letters, if any, required by or incident to such performance and
compliance. Registration Expenses shall specifically exclude the fees and
disbursements of counsel representing a selling Holder and underwriting
discounts and commissions, and transfer taxes, if any, relating to the sale or
disposition of Registrable Securities by a selling Holder, all of which shall be
borne by such Holder in all cases.
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"Registration Statement" shall mean a registration statement of the
Company and any other entity required to be a registrant with respect to such
registration statement pursuant to the requirements of the Securities Act which
covers the Registrable Securities requested by Holders to be covered by such
registration statement, and all amendments and supplements to such registration
statement, including post-effective amendments, in each case including the
Prospectus contained therein, all exhibits thereto and all materials
incorporated by reference therein.
"SEC" shall mean the Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as amended from
time to time.
"Selling Holder" shall mean each Holder who elects to participate in an
underwritten public offering of Company Common Stock.
"Shares" shall mean Company Common Stock that is issued upon conversion
of all or any portion of the outstanding principal amount of the Debenture and
any accrued but unpaid interest thereon.
2. Registration Under the Securities Act.
(a) Filing of Registration Statement. As promptly as
practicable after the date hereof, the Company intends, but is not obligated, to
cause to be filed a Registration Statement providing for the issuance of the
Shares to the Holder to the extent allowed by applicable regulations and the
resale by the Holder of Registrable Securities then held by the Holder and
intends to use its best efforts to cause such Registration Statement if filed to
be declared effective by the SEC as soon as reasonably practicable. The Company
agrees to use its best efforts to keep such Registration Statement continuously
effective under the Securities Act for a period expiring on the date two (2)
years from the date of the last issuance of any Shares and further agrees to
supplement or amend the Registration Statement, if and as required by the rules,
regulations or instructions applicable to the registration form used by the
Company for such Registration Statement or by the Securities Act or by any other
rules and regulations thereunder for such Registration Statement.
(b) Demand Registration. In the event the Company has not
caused to be filed a Registration Statement as provided in Section 2(a) within
six (6) months from the date hereof, Holder shall have the right, at any time
and from time to time after such six (6) month period, to demand that the
Company cause to be filed a Registration Statement or an amendment to a
Registration Statement providing for the registration under the Securities Act
of the Shares to be issued to Holder to the extent allowed by applicable
regulations and the resale by the Holder of all Registrable Securities, or, in
the event the Company has filed a Registration Statement as provided in Section
2(a) within six (6) months from the date hereof, but such
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Registration Statement has not been declared effective by the SEC, Holder shall
have the right at any time and from time to time after January 1, 1998, to
demand that the Company cause to be filed a Registration Statement or an
amendment to a Registration Statement providing for the registration under the
Securities Act of the Shares to be issued to Holder and the resale by the Holder
of all Registrable Securities; provided, however, if at the time of such demand,
the Shares have been issued, such Registration Statement shall only relate to
sales by Holder. The Company agrees to use its best efforts to keep such
Registration Statement continuously effective under the Securities Act for a
period expiring on the date two (2) years from the date of the last issuance of
any Shares and further agrees to supplement or amend the Registration Statement,
if and as required by the rules, regulations or instructions applicable to the
registration form used by the Company for such Registration Statement or by the
Securities Act or by any other rules and regulations thereunder for such
Registration Statement.
(c) Cut-Back Registration. In the event that the Holder has
requested the inclusion of Registrable Securities in a registration statement
pursuant to Section 3(a) or Section 3(b) and all or a portion of the Registrable
Securities with respect to which the Holder has requested registration are not
registered by virtue of the provisions of said sections, Holder shall thereupon
have the right to require the registration under the Securities Act of such
Registrable Securities pursuant to the provisions of Section 2(b), irrespective
of whether the date upon which Registration is requested is within six months of
the date of this Agreement.
(d) Expenses. The Company shall pay all Registration
Expenses in connection with any Registration Statement filed pursuant to this
Section 2.
(e) Inclusion in Registration Statement. The Company may
require each Holder of Registrable Securities to furnish to the Company in
writing such information regarding the proposed offer or sale by such Holder of
such Registrable Securities as the Company may from time to time reasonably
request in writing. Any Holder who does not provide the information reasonably
requested by the Company in connection with the Registration Statement as
promptly as practicable after receipt of such request, but in no event later
than ten (10) days thereafter, shall not be entitled to have its Registrable
Securities included in the Registration Statement.
(f) Underwritten Demand by Holder. If at the demand of Holder,
the Company proposes to file a Registration Statement relating to an
underwritten public offering of any Registerable Securities and the investment
banking firm selected by Holder to act as lead underwriter in connection with
such public offering of securities by Holder advises in writing that, in such
firm's opinion, a registration of other securities of the Company at that time
would materially and adversely affect the offering by Holder, no person
(including the Company) shall have a right to have shares of common stock or
other securities included in such Registration Statement; provided, however,
that if an offering of some but not all of the shares requested to
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be registered by Holder would not adversely affect the offering by Holder, the
aggregate number of shares requested to be included in such offering by the
Company and each other person shall be reduced pro rata according to the total
number of securities proposed to be sold by the Company and other Person taken
as a whole; provided, in no event shall the shares requested by Holder to be
included in the Registration Statement shall be reduced.
(g) Rights to Subsequent Investors. The Company shall not
grant any rights to any other person which shall diminish in any way the rights
granted to the Holders hereunder. The Company may grant subsequent investors
rights of registration (such as those provided in Section 2 hereof); provided,
however, that (i) such rights are limited to shares of Common Stock (including,
in the case of any underwritten offering, shares issuable upon the conversion of
convertible securities or upon the exercise of warrants if such conversion or
exercise is effected by the sellers or the underwriters prior to sale to the
public in such offering), (ii) such rights are not inconsistent with the
provisions hereof; (iii) the instrument granting such rights specifically
confirms the rights of the Holders of Registrable Shares hereunder; (iv) the
rights of the Holder hereunder shall be the same as the rights of registration
granted to the subsequent investors.
3. Incidental Registration.
(a) If the Company proposes to register any shares of Company
Common Stock ("Other Securities") for public sale by the Company pursuant to an
underwritten offering under the Securities Act it will give prompt written
notice to Holders of its intention to do so, and upon the written request of
Holders delivered to the Company within fifteen (15) Business Days after the
giving of any such notice which request shall specify the number of Registrable
Securities intended to be disposed of by Holders and the Company shall include
such Registrable Securities in such Registration Statement. The Company will not
be required to effect any registration pursuant to this Section 3(a) if the
Company shall have been advised in writing (with a copy to the Selling Holders)
by a nationally recognized independent investment banking firm selected by the
Company to act as lead underwriter in connection with the public offering of
securities by the Company that, in such firm's opinion, a registration at that
time by other holders would materially and adversely affect the Company's own
scheduled offering, provided, however, that if an offering of some but not all
of the shares requested to be registered by Holder and other holders would not
adversely affect the Company's offering, the aggregate number of shares
requested to be included in such offering by each selling holder shall be
reduced pro rata according to the total number of securities proposed to be sold
by the selling holders taken as a whole.
(b) If at the demand of any other Person but the Holder
("Other Person"), the Company proposes to register Other Securities for public
sale pursuant to an underwritten offering under the Securities Act it will give
prompt written notice to Holder of its intention to do so, and upon the written
request of Holders delivered to the Company within fifteen (15) Business Days
after the giving of any such notice which request shall specify the number of
Registrable Securities intended to be disposed of by Holder and the Company
shall include such
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Registrable Securities in such Registration Statement. If the Other Person shall
have been advised in writing (with a copy to the Selling Holders) by a
nationally recognized independent investment banking firm acting as lead
underwriter in connection with the public offering of securities by the Other
Person that, in such firm's opinion, a registration by the Holders at that time
would materially and adversely affect the offering by the Other Person, the
Registrable Securities of the Holder shall not be included in such Registration,
provided, the number of shares requested to be included in such offering by the
Holders and all other Persons shall be reduced pro rata according to the total
number of securities proposed to be sold by the Holder and other selling holders
taken as a whole; provided, however, notwithstanding the foregoing paragraph,
the shares requested by the Other Person demanding registration to be included
in the Registration Statement shall not be reduced if required by an agreement
between such Other Person and the Company.
(c) With respect to any proposed sale or sale by the Holder of
Registrable Securities pursuant to this Section 3 the Company shall pay all
Registration Expenses.
(d) No registration of Registrable Securities effected under
this Section 3 shall relieve the Company of its obligation (if any) to effect
registrations of Registrable Securities pursuant to Section 2.
4. Registration Procedures.
(a) Obligations of the Company. In connection with any
Registration Statement pursuant to Sections 2 or 3 hereof, the Company shall:
(i) cause the Registration Statement to be available for the sale of the
Registrable Securities by Holders in one or more transactions, in negotiated
transactions, through the writing of options of the Registrable Securities, or a
combination of such methods of sale, and to comply as to form in all material
respects with the requirements of the applicable form and include all financial
statements required by the SEC to be filed therewith and in the event the
Company is listed on the NASDAQ National Market System ("NMS") in one or more
transactions on NMS or otherwise in special offerings, exchange distributions or
secondary distribution pursuant to and in accordance with the rules of the NMS,
in the over-the-counter market;
(ii) (A) prepare and file with the SEC such amendments and post-effective
amendments to any Registration Statement as may be necessary to keep each such
Registration Statement effective for the applicable period; (B) cause the
Prospectus included in each such Registration Statement to be supplemented by
any required
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prospectus supplement, and as so supplemented to be filed pursuant to Rule 424
or any similar rule that may be adopted under the Securities Act; (C) respond
promptly to any comments received from the SEC with respect to each Registration
Statement, or any amendment, post-effective amendment or supplement relating
thereto; and (D) comply with the provisions of the Securities Act with respect
to the disposition of all securities covered by each Registration Statement;
(iii) furnish to each Holder of Registrable Securities, without charge, as
many copies of each Prospectus, and any amendment or supplement thereto and such
other documents as they may reasonably request, in order to facilitate the
public sale or other disposition of the Registrable Securities; the Company
consents to the use of the Prospectus, by each such Holder of Registrable
Securities, in connection with the offering and sale of the Registrable
Securities covered by the Prospectus;
(iv) notify promptly each Holder of Registrable Securities and confirm such
advice in writing (A) of the issuance by the SEC or any state securities
authority of any stop order suspending the effectiveness of a Registration
Statement or the initiation of any proceedings for that purpose, (B) if the
Company receives any notification with respect to the suspension of the
qualification of the Registrable Securities for sale in any jurisdiction or the
initiation of any proceeding for such purpose, and (C) of the happening of any
event during the period a Registration Statement is effective as a result of
which such Registration Statement or the related Prospectus contains any untrue
statement of a material fact or omits to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made (in the case of the Prospectus), not
misleading;
(v) use its best effort to obtain the withdrawal of any order suspending
the effectiveness of a Registration Statement at the earliest possible moment;
(vi) use its best efforts to register or qualify the Registrable Securities
by the time the applicable Registration Statement is declared effective by the
SEC under all applicable state securities or "blue sky" laws of such
jurisdictions as any Holder of Registrable Securities covered by a Registration
Statement shall reasonably
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request in writing, keep each such registration or qualification effective
during the period such Registration Statement is required to be kept effective
or during the period offers or sales are being made by a Holder that has
delivered a Registration Notice to the Company, whichever is shorter, and do any
and all other acts and things which may be reasonably necessary or advisable to
enable such Holder to consummate the disposition in each such jurisdiction of
such Registrable Securities owned by such Holder; provided, however, that the
Company shall not be required to (A) qualify generally to do business in any
jurisdiction or to register as a broker or dealer in such jurisdiction where it
would not otherwise be required to qualify but for this Section 4(a)(vi), (B)
subject itself to taxation in any such jurisdiction, or (C) submit to the
general service of process in any such jurisdiction;
(vii) upon the occurrence of any event contemplated by Section 4(a)(iv)(C)
hereof, use its best efforts promptly to prepare and file a supplement or
prepare, file and obtain effectiveness of a post- effective amendment to a
Registration Statement or the 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, such Prospectus will
not contain any 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,
in the light of the circumstances under which they were made, not misleading;
(viii) use its best efforts to cause all Registrable Securities to be
listed on any securities exchange on which similar securities issued by the
Company are then listed;
(ix) provide a CUSIP number for all Registrable Securities, not later than
the effective date of the Registration Statement or amendment thereto relating
to such Registrable Securities;
(x) otherwise use its best efforts to comply with all applicable rules and
regulations of the SEC and make available to its security holders, as soon as
reasonably practicable, an earning statement covering at least twelve (12)
months which shall satisfy the provisions of Section 11(a) of the Securities Act
and Rule 158 thereunder; and
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(xi) use its best efforts to cause the Registrable Securities covered by a
Registration Statement to be registered with or approved by such other
governmental agencies or authorities as may be necessary by virtue of the
business and operations of the Company to enable Holders to consummate the
disposition of such Registrable Securities.
(b) Obligations of Holders. In connection with and as a
condition to the Company's obligations with respect to a Registration Statement
pursuant to Section 2 hereof and this Section 4, each Holder agrees that (i) it
will not offer or sell its Registrable Securities under the Registration
Statement until it has received copies of the supplemental or amended Prospectus
contemplated by Section 4(a)(ii) hereof and receives notice that any
post-effective amendment has become effective; and (ii) upon receipt of any
notice from the Company of the happening of any event of the kind described in
Section 4(a)(iv)(C) hereof, such Holder will forthwith discontinue disposition
of Registrable Securities pursuant to a Registration Statement until such Holder
receives copies of the supplemented or amended Prospectus contemplated by
Section 4(a)(vii) hereof and receives notice that any post-effective amendment
has become effective, and, if so directed by the Company, such Holder will
deliver to the Company (at the expense of the Company) all copies in its
possession, other than permanent file copies then in such Holder's possession,
of the Prospectus covering such Registrable Securities current at the time of
receipt of such notice.
(c) Lockup. In the event the Company proposes to effect the
distribution of its securities by the Company through an underwritten public
offering, each Holder who then beneficially owns in excess of 100,000 shares
agrees for a period of time, beginning seven (7) days prior to the effective
date of the underwriting agreement pertaining to such offering and ending thirty
(30) days after such effective date that such Holder will forthwith cease any
sale or other disposition of any of the Registrable Securities or sale or other
disposition of any of its Registrable Securities during such period of time, if
requested in writing by the representatives of the underwriters for any such
underwritten public offering; provided, however, that Holders shall not be
subject to more than one Lockup Period during any twelve (12) month period.
5. Indemnification; Contribution.
(a) Indemnification by the Company. The Company agrees to
indemnify and hold harmless each Holder, each officer and director of such
Holder, and each Person, if any, who controls any Holder within the meaning of
Section 15 of the Securities Act as follows:
(i) against any and all loss, liability, claim,
damage and expense whatsoever, as incurred,
arising out of any untrue statement or
alleged untrue statement of a material fact
contained in any Registration Statement (or
any amendment thereto) pursuant to
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which Registrable Securities were registered
under the Securities Act, including all
documents incorporated therein by reference,
or the omission or alleged omission
therefrom of a material fact necessary in
order to make the statements therein, in the
light of the circumstances under which they
were made, not misleading;
(ii) against any and all loss, liability, claim,
damage and expense whatsoever, as incurred,
to the extent of the aggregate amount paid
in settlement of any litigation, or
investigation or proceeding by any
governmental agency or body, commenced or
threatened, or of any claim whatsoever based
upon any such untrue statement or omission,
or any such alleged untrue statement or
omission, if such settlement is effected
with the written consent of the Company; and
(iii) against any and all expense whatsoever, as
incurred (including reasonable fees and
disbursements of counsel), reasonably
incurred in investigating, preparing or
defending against any litigation, or
investigation or proceeding by any
governmental agency or body, commenced or
threatened, in each case whether or not a
party, or any claim whatsoever based upon
any such untrue statement or omission, or
any such alleged untrue statement or
omission, to the extent that any such
expense is not paid under subparagraph (i)
or (ii) above;
provided, however, that the indemnity provided pursuant to this Section 4(a)
does not apply to any Holder with respect to any loss, liability, claim, damage
or expense to the extent arising out of any untrue statement or omission or
alleged untrue statement or omission made in reliance upon and in conformity
with written information furnished to the Company by such Holder expressly for
use in a Registration Statement (or any amendment thereto) or any Prospectus (or
any amendment or supplement thereto).
(b) Indemnification by the Holders. Each Holder severally
agrees to indemnify and hold harmless the Company and the other selling Holders,
and each of their respective directors and officers (including each director and
officer of the Company who signed the Registration Statement), and each Person,
if any, who controls the Company or any other selling Holder within the meaning
of Section 15 of the Securities Act, to the same extent as the indemnity
contained in Section 5(a) hereof (except that any settlement described in
Section 4(a)(ii) shall be effected only with the written consent of such
Holder), but only insofar as such loss, liability, claim, damage or expense
arises out of or is based upon (i) any untrue statement or omission, or alleged
untrue statements or omissions, made in a Registration Statement (or any
amendment thereto) or any Prospectus (or any amendment or supplement thereto) in
reliance upon and in conformity with written information furnished to the
Company
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by such selling Holder expressly for use in such Registration Statement (or any
amendment thereto) or such Prospectus (or any amendment or supplement thereto),
or (ii) such Holder's failure to deliver a Prospectus to any purchaser of
Registrable Securities where such a delivery obligation was applicable to such
Holder's sale of Registrable Securities and such Holder had been provided with
sufficient copies of such Prospectus for the relevant deliveries thereof. In no
event shall the liability of any Holder under this Section 4(b) be greater in
amount than the dollar amount of the proceeds received by such Holder upon the
sale of the Registrable Securities giving rise to such indemnification
obligation.
(c) Conduct of Indemnification Proceedings. Each indemnified
party shall give reasonably prompt notice to each indemnifying party of any
action or proceeding commenced against it in respect of which indemnity may be
sought hereunder, but failure to so notify an indemnifying party (i) shall not
relieve it from any liability which it may have under the indemnity agreement
provided in Section 4(a) or (b) above, unless and to the extent it did not
otherwise learn of such action and the lack of notice by the indemnified party
results in the forfeiture by the indemnifying party of substantial rights and
defenses and (ii) shall not, in any event, relieve the indemnifying party from
any obligations to any indemnified party other than the indemnification
obligation provided under Section 4(a) or (b) above. If the indemnifying party
so elects within a reasonable time after receipt of such notice, the
indemnifying party may assume the defense of such action or proceeding at such
indemnifying party's own expense with counsel chosen by the indemnifying party
and approved by the indemnified parties defendant in such action or proceeding,
which approval shall not be unreasonably withheld; provided, however, that, if
such indemnified party or parties reasonably determine that a conflict of
interest exists where it is advisable for such indemnified party or parties to
be represented by separate counsel or that, upon advice of counsel, there may be
legal defenses available to them which are different from or in addition to
those available to the indemnifying party, then the indemnifying party shall not
be entitled to assume such defense and the indemnified party or parties shall be
entitled to one separate counsel at the indemnifying party's expense. If an
indemnifying party is not entitled to assume the defense of such action or
proceeding as a result of the proviso to the preceding sentence, such
indemnifying party's counsel shall be entitled to conduct the defense of such
indemnified party or parties, it being understood that both such counsel will
cooperate with each other to conduct the defense of such action or proceeding as
efficiently as possible. If an indemnifying party is not so entitled to assume
the defense of such action or does not assume such defense, after having
received the notice referred to in the first sentence of this paragraph, the
indemnifying party or parties will pay the reasonable fees and expenses of
counsel for the indemnified party or parties. In such event, however, no
indemnifying party will be liable for any settlement effected without the
written consent of such indemnifying party. If an indemnifying party is entitled
to assume, and assumes, the defense of such action or proceeding in accordance
with this paragraph, such indemnifying party shall not be liable for any fees
and expenses of counsel for the indemnified parties incurred thereafter in
connection with such action or proceeding. The indemnification obligations
provided pursuant to Sections 4(a) and (b) hereof survive, with respect to a
Holder, the transfer of Registrable
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Securities by such Holder, and with respect to a Holder or the Company, shall
remain in full force and effect regardless of any investigation made by or on
behalf of any indemnified party.
(d) Contribution.
(i) In order to provide for just and equitable contribution in circumstances in
which the indemnity agreement provided for in this Section 4 is for any
reason held to be unenforceable although applicable in accordance with its
terms, the Company and the selling Holders shall contribute to the
aggregate losses, liabilities, claims, damages and expenses of the nature
contemplated by such indemnity agreement incurred by the Company and the
selling Holders, in such proportion as is appropriate to reflect the
relative fault of and benefits to the Company on the one hand and the
selling Holders on the other (in such proportions that the selling Holders
are severally, not jointly, responsible for the balance), in connection
with the statements or omissions which resulted in such losses, claims,
damages, liabilities or expenses, as well as any other relevant equitable
considerations. The relative benefits to the indemnifying party and
indemnified parties shall be determined by reference to, among other
things, the total proceeds received by the indemnified party and
indemnified parties in connection with the offering to which such losses,
claims, damages, liabilities or expenses relate. The relative fault of the
indemnifying party and indemnified parties shall be determined by reference
to, among other things, whether the action in question, including any
untrue or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact, has been made by, or relates to
information supplied by, such indemnifying party or the indemnified
parties, and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such action.
(ii) The Company and the Holders agree that it would not be just or equitable if
contribution pursuant to this Section 4(d) were determined by pro rata
allocation or by any other method of allocation which does not take account
of the equitable considerations referred to in the immediately preceding
paragraph. Notwithstanding the provisions of this Section 4(d), no selling
Holder shall be required to contribute any amount in excess of the amount
by which the total price at which the Registrable Securities of such
selling Holder were offered to the public exceeds the amount of any damages
which such selling Holder would otherwise have been required to pay by
reason of such untrue statement or omission.
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(iii)Notwithstanding the foregoing, no Person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities
Act) shall be entitled to contribution from any Person who was not guilty
of such fraudulent misrepresentation. For purposes of this Section 4(d),
each Person, if any, who controls a Holder within the meaning of Section 15
of the Securities Act and directors and officers of a Holder shall have the
same rights to contribution as such Holder, and each director of the
Company, each officer of the Company who signed the Registration Statement
and each Person, if any, who controls the Company within the meaning of
Section 15 of the Securities Act shall have the same rights to contribution
as the Company.
(iv) The contribution provided for in this Section 4(d) shall survive, with
respect to a Holder, the transfer of Registrable Securities by such Holder,
and with respect to a Holder or the Company, shall remain in full force and
effect regardless of any investigation made by or on behalf of any
indemnified party.
6. Rule 144 Sales.
(a) Reports. The Company covenants that it will file the
reports required to be filed by the Company under the Securities Act and the
Securities Exchange Act of 1934, as amended, and will take such further action
as any Holder of Registrable Securities may reasonably request, all to the
extent required to enable such Holder to sell Registrable Securities pursuant to
Rule 144 under the Securities Act.
(b) Certificates. In connection with any sale, transfer or
other disposition by any Holder of any Registrable Securities pursuant to Rule
144 under the Securities Act, the Company shall cooperate with such Holder to
facilitate the timely preparation and delivery of certificates representing
Registrable Securities to be sold and not bearing any Securities Act legend, and
enable certificates for such Registrable Securities to be for such number of
shares and registered in such names as the selling Holders may reasonably
request at least two (2) business days prior to any sale of Registrable
Securities.
7. Miscellaneous.
(a) Amendments and Waivers. The provisions of this
Agreement, including the provisions of this sentence, may not be amended,
modified or supplemented, and waivers
JZM5800
B-23
<PAGE>
or consents to departures from the provisions hereof may not be given without
the written consent of the Company and the Holders of a majority in amount of
the outstanding Registrable Securities; provided, however, that no amendment,
modification or supplement or waiver or consent to the departure with respect to
the provisions of Sections 2, 3, 4, 5, 6 or 7 hereof shall be effective as
against any Holder of Registrable Securities unless consented to in writing by
such Holder of Registrable Securities, as the case may be. Notice of any
amendment, modification or supplement to this Agreement adopted in accordance
with this Section 6(a) shall be provided by the Company to each Holder of
Registrable Securities at least thirty (30) days prior to the effective date of
such amendment, modification or supplement.
(b) Notices. All notices and other communications provided for or permitted
hereunder shall be made in writing by hand-delivery, registered first-class
mail, telex, telecopier, or any courier guaranteeing overnight delivery, (i) if
to a Holder, at the most current address given by such Holder to the Company by
means of a notice given in accordance with the provisions of this Section 6(b),
which address initially is, with respect to each Holder, the address set forth
next to such Holder's name on the books and records of the Company, or (ii) if
to the Company, at: COVOL Technologies, Inc., 3280 N. Frontage Road, Lehi, Utah
84043; Facsimile: (801) 768-4483; Attn: General Counsel.
All such notices and communications shall be deemed to have
been duly given: at the time delivered by hand, if personally delivered; five
(5) business days after being deposited in the mail, postage prepaid, if mailed;
when answered back, if telexed; when receipt is acknowledged, if telecopied; or
at the time delivered if delivered by an air courier guaranteeing overnight
delivery.
(c) Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the successors, assigns and transferees of each
of the Company and the Holders, including without limitation and without the
need for an express assignment, subsequent Holders. If any successor, assignee
or transferee of any Holder shall acquire Registrable Securities, in any manner,
whether by operation of law or otherwise, such Registrable Securities, as the
case may be, shall be held subject to all of the terms of this Agreement, and by
taking and holding such Registrable Securities such Person shall be entitled to
receive the benefits hereof and shall be conclusively deemed to have agreed to
be bound by all of the terms and provisions hereof.
(d) Headings. The headings in this Agreement are for the
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
(e) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE WITHOUT
GIVING EFFECT TO THE CONFLICTS OF LAW PROVISIONS THEREOF.
JZM5800
B-24
<PAGE>
(f) Specific Performance. The Company and the Holders hereto
acknowledge that there would be no adequate remedy at law if any party fails to
perform any of its obligations hereunder, and accordingly agree that each party,
in addition to any other remedy to which it may be entitled at law or in equity,
shall be entitled to compel specific performance of the obligations of any other
party under this Agreement in accordance with the terms and conditions of this
Agreement in any court of the United States or any State thereof having
jurisdiction.
(g) Entire Agreement. This Agreement is intended by the
Company as a final expression of its agreement and intended to be a complete and
exclusive statement of the agreement and understanding of the Company in respect
of the subject matter contained herein. This Agreement supersedes all prior
agreements and understandings of the Company with respect to such subject
matter.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
COVOL TECHNOLOGIES, INC.
By:
Name:
Title:
AJG FINANCIAL SERVICES, INC.
By:
Name:
Title:
JZM5800
B-25
[letterhead]
ARTHUR J. GALLAGHER & CO.
November 13, 1996
COVOL Technologies, Inc., and
Utah Synfuel #1, L.P.
3280 N. Frontage Rd.
Lehi, UT 84043
Gentlemen:
Arthur J. Gallagher & Co. or one of its subsidiaries (the "Investor") hereby
acknowledges receipt of:
(a) Synthetic Coal Investment Summary dated October 31, 1996 attached as
Exhibit A hereto:
(b) Financial Projections dated November 7, 1996 entitled Gallagher Newco -
Preliminary Proforma attached as Exhibit B hereto; and
(c) Outline dated November 12, 1996 entitled US1 Acquisition Structure
attached as Exhibit C hereto.
The items described in (a), (b) and (c) above are collectively referred to
herein as the "Memorandum," and are incorporated herein and are made a part
hereof by reference. The transaction described in the Memorandum is referred to
herein as the "Transaction," and all other capitalized terms herein have the
same meanings as in the Memorandum.
Based on the foregoing Memorandum, the Investor hereby states its intention to
Covol and US1 (i) to make an initial investment of $2.5 million, and subsequent
license fees and other payments at the times and at the rates described in the
Memorandum in respect of the Facility described in the Memorandum and an initial
investment of $2.5 million, and subsequent license fees and other payments at
the times and at the rates described in the Memorandum in respect of the
Expansion described in the Memorandum, in each case based upon production and
sales of Briquettes set forth in the Memorandum, and (ii) to use its best
efforts to consummate the Transaction and the relevant agreements described in
the Memorandum at substantially the same prices, fees and other consideration as
soon as the conditions set forth below are satisfied.
The Transaction as set forth above is subject to the reasonable satisfaction by
the Investor of each of the following conditions:
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(a) Covol Technologies, Inc. ("Covol") has entered into agreements with
third parties for the supply of coal fines (necessary to produce at
least 320,000 tons of the Briquettes) and has demonstrated the ready
availability of the chemical binder;
(b) Covol has demonstrated its ability to sell the Briquettes produced at
the Facility;
(c) Covol has entered into an extension of its lease with Railco, Inc.
with respect to the facility site until December 31, 2011;
(d) review by the Investor's engineers of Covol's patented technology to
ensure that it meets the requirements of the relevant Private Letter
Ruling issued by the Internal Revenue Service to Covol and to ensure
that there is no material environmental liability to the Investor as a
result of this investment;
(e) the issuance of all necessary permits and licenses for the
construction of the Facility and Covol's agreement to obtain the
necessary permits and licenses for the operation of the Facility and
an appropriate washer;
(f) the Facility has been placed in service for purposes of Section 29 of
the Internal Revenue Code;
(g) the receipt by the Investor of a tax opinion from reputable counsel,
in form and substance reasonably satisfactory to the Investor, to the
effect that the Investor will more likely than not be entitled (i) to
the tax credits under Section 29 of the Internal Revenue Code
projected from the Transaction and (ii) to prevail on the other tax
issues which are the most significant to a taxpayer in the position of
the Investor;
(h) the receipt by the Investor of a legal opinion from reputable counsel,
in form and substance reasonable satisfactory to the Investor, to the
effect that Newco has been validly formed and that the Investor's
liability as an owner of Newco is limited to the extent of its
required investment in Newco;
(i) the execution by US1 and Covol of the relevant agreements described in
the Memorandum in form and substance reasonably satisfactory to the
Investor, and a satisfactory review of the legal and accounting
aspects of the transaction by the Investor; and
(j) the Facility has commenced daily operations and has produced at least
5000 tons of Briquettes during a 30-day period.
In consideration of the foregoing, Covol and US1 hereby agree that for the next
30 days, they will not negotiate with, or commit to, any other party with
respect to the Transaction and that they will extend such period for another 30
days thereafter if, in their sole discretion, they determine that Investor has
made substantial progress in consummating the Transaction. Covol
2
<PAGE>
and US1 also hereby agree that during such exclusive period, they will use their
best efforts to satisfy the above conditions and consummate the Transaction with
the Investor. The Investor acknowledges that it is and continues to be bound by
that certain confidentiality letter agreement dated September 30, 1996 between
Arthur J. Gallagher & Co. and Coalco Corporation (for itself and on behalf of
Covol). Nothing in this letter shall limit Covol's right to describe or show the
facility to any third party during such exclusive period or to discuss similar
investments in similar facilities with such third parties.
All parties acknowledge that after review of the Memorandum, counsel may
restructure the Transaction and the relevant agreements described in the
Memorandum to better meet the accounting, tax and other objectives of the
parties; all parties agree to work with counsel to make such changes as long as
they do not adversely affect the underlying economics of the Transaction.
In addition, subject to execution by Covol of the relevant agreements in form
and substance reasonably satisfactory to the Investor, the Investor also hereby
commits to make two loans in the aggregate amount of $4 million to Covol upon
the terms and conditions set forth below:
I. Convertible Loan.
(a) Borrower: Covol
(b) Amount: $1,100,000
(c) Advance: The loan amount shall be advanced to Covol
within three business days of the execution
of the convertible debt instrument.
(d) Term: Three years from the date of the advance.
(e) Interest: Six percent per annum simple interest;
interest shall not be payable but shall
accrue until the end of the term, at which
time it will be payable in full.
(f) Conversion: At maturity; Covol may at any time, however,
elect to convert all or any portion of the
outstanding principal and interest owing
into shares of common stock of Covol. The
Investor shall receive one share of common
stock; such shares having registration
rights, for each $11 of principal and/or
interest converted. The Investor may
elect to receive cash in lieu of stock in
the event Covol exercises its option prior
to maturity.
(g) Antidilution: The conversion price shall be subject to
adjustment to protect the Investor from
dilution from adjustments following
distributions, recapitalizations, stock
splits, dividends, and mergers.
3
<PAGE>
II. Secured Loan
(a) Borrower: Covol
(b) Amount: $2,900,000
(c) Advances: Advances up to the $2,900,000 amount shall
be made from time to time upon the written
request of Covol. The first advance shall
be available within three business days of
the execution of the loan documents.
(d) Term: Three years from the date of the execution
of the loan documents.
(e) Interest: Prime plus 2% simple interest; 50% of
interest shall be payable annually; the
balance shall accrue until the end of the
term, at which time it will be payable in
full.
(f) Prepayment: Borrower may prepay the loan in whole or in
part without penalty.
(g) Security: The loan shall be secured by a lien on all
real and personal property purchased with
the loan proceeds and Covol will account
to the Investor for the expenditure of all
funds.
The parties understand that the consummation and funding of the above loans are
not dependent on the consummation of the Transaction or the preconditions to the
Transaction, except for satisfactory confirmation by the Investor of the
patented process and satisfactory confirmation of joint venture agreements
entered into or proposed by Covol. However, the Transaction will not be
completed until the loans have been funded.
This is a letter of intent and, except as provided in the first and third
sentences of the paragraph beginning at the bottom of page two, no binding
agreement is intended to be created hereby and the parties shall be bound only
pursuant to duly executed and delivered definitive agreements referenced herein.
4
<PAGE>
If the foregoing correctly states our understanding, please so indicate by
signing below and returning to the undersigned a copy of this letter.
Very truly yours,
ARTHUR J. GALLAGHER & CO.
/s/ David R. Long
David R. Long, Vice President
Accepted and agreed this
15th day of November, 1996
COVOL TECHNOLOGIES, INC.
By: /s/ Brent M. Cook
Name/Title: Brent M. Cook, President
UTAH SYNFUEL #1, L.P.
By: /s/ Brent M. Cook
Name/Title: Brent M. Cook, President
5
<PAGE>
EXHIBIT A
SYNTHETIC COAL - SECTION 29
Investment Summary
October 31, 1996
Project Type: Using a patented binding process, coal fines (small pieces of
coal and coal dust resulting from coal mining) can be converted into
solid formed coal briquettes. Because the molecular structure of the
coal fines is modified during the process, the Internal Revenue
Service ("IRS") has ruled that the coal is a synthetic fuel, the
production and sale of which enables the seller to claim tax credits
under Section 29 of the Internal Revenue Code ("Code").
Project Description: Utah Synfuel # 1, L.P. ("US1") is a Delaware
limited partnership established to own and operate a coal fines
processing facility ("Facility") in Carbon County, Utah. The
Facility is currently undergoing start-up procedures and should be
fully completed by November, 1996. The synthetic coal from the
Facility will be sold to US1 who will then resell it to a
railroad company which owns a rail terminal near the Facility. US1
may also sell the synthetic coal to electric utility companies or
industrial facilities who use it in their boilers or processes.
Developer: Covol Technologies, Inc. ("Covol") a Delaware corporation is the
general partner of US1. Covol is a public company traded on the OTC
Bulletin Board and has a current market capitalization of
approximately $70 million.
Marketing Agent: Coalco Corporation ("Coalco"), a Massachusetts corporation
is an affiliate of Palmer Capital Corporation and is the marketing
agent seeking investor(s) to purchase the Facility from US1.
Investor: A tax-oriented corporate investor ("Investor") who purchases the
Facility from US1. The Investor should be able to project a long-term
ability to use tax credits through 2007.
Newco: The Investor will create a newly-formed entity ("Newco") which will
be created as a vehicle for the Investor to buy the Facility from US1.
Investment: Newco will purchase the Facility and a proprietary license from
US1 for $25 million payable at the closing with subsequent payments of
6
<PAGE>
approximately xxx cents per million British thermal units ("MMBtus")
from the synthetic coal produced and sold. The subsequent payments
will be made on a quarterly "pay as you go" basis in arrears to US1.
The Investor will be entitled to the Section 29 tax credits generated
by the Facility, as well as depreciation and cash flow from
operations. In return for its initial investment and subsequent
contributions, the Investor can expect to receive approximately $121
million of tax credits and approximately $39 million of additional
after-tax benefits and cash through 2007. Because the vast majority of
payments will be made as benefits are received, the return on
investment is exceptionally high "an after-tax IRR in excess of 100%).
Section 29 Credits: Section 29 of the Code provides a credit against
regular tax liability in an amount equal to $1.005 per MMBtu (1995
rate) for qualifying fuels sold to an unrelated third party. All
synthetic coal manufactured is expected to be sold as a qualifying
fuel. The Facility is expected to have a total capacity of 360,000
tons per year. The projected Section 29 credits available in 1997
would be approximately $90 million. The Section 29 credit is available
for production and sales through 2007 for output from this Facility.
The value of the tax credit per MMBtu rises each year with an
inflation rate.
Section 29 tax credits allow a corporate investor to offset taxes on
almost all kinds of income. However, Section 29 credits cannot be
used to reduce one's tax liability below the Alternative Minimum Tax.
Section 29 credits can be carried forward indefinitely to the extent
that the credits cannot be used as a result of the Alternative Minimum
Tax.
IRS Ruling: In September 1995 Covol received a private letter ruling from
the IRS which confirmed that the synthetic coal manufactured by
Covol's patented binding process qualifies for the Section 29 credit.
The private letter cited the fact that the molecular structure of the
coal fines is altered when certain chemicals used in Covol's process
are added to the coal fines causing the fines to bind together. The
IRS based its ruling on the findings of Covol and its consultants. The
primary technological findings, utilizing infrared spectrometry and
thermogravimetric mass spectroscopy, were provided by Advanced
Combustion Engineering Research Center ("ACERC") which is affiliated
with the University of Utah and Brigham Young University.
Additional support for these findings was provided by the Department
of Energy, Sandia National Laboratory and the United States Patent
Office.
Proprietary
7
<PAGE>
Technology: Covol's patented technology combines its liquid binder with
coal fines which changes the structure of the carbon molecules so that
they can bind together as lump coal. Then an extruder or briquetter
forms the coal into usable shapes. This process enables the fuel to be
classified as a synthetic coal product, or synfuel, which is a
qualified fuel under Section 29.
In the process, a conditioner is sprayed on the coal fines. The
conditioner acts as a reducing agent which allows the oxygen
molecules of the coal to mix with the chemicals in the binder. The
introduction of the binder takes place in the pug mill or mixer. The
resulting moist granular mixture is then fed into the extruder. The
extrusions made by the extruder are called briquettes. The briquettes
emerge from the extruder and move on conveyor belts to the dryers
where the briquettes are heated to remove moisture. The finished
briquettes then emerge from the dryers. The binder and the Covol
chemical process of binding are both patented.
Facility Description: The manufacturing process uses an even-flow feeder, a
pug mill, an extruder, and dryers to form extrusions of compressed
coal (one inch in diameter by one to four inches in length).
The Facility is expected to produce approximately 360,000 tons per
year of synthetic coal. The synthetic coal is expected to have an
average heating value of 12,000 Btus per pound. Therefore, the sale
of a ton of synthetic coal generates over $25 in tax credits (12,000
Btus per pound times 2,000 pounds in a ton, divided by one million
times the tax credit rate, which is projected to be about $1.06 per
MMBtu in 1997.) Therefore, the total projected credits for 1997
from the operation are about $9 million increasing to about $12.8
million in 2007.
(A second production line is expected to be constructed in 1997 in the
same building with the first production line. This would double the
amount of tax credits available to approximately $19.6 million in
1998).
Equipment: With the exception of the two dryers, all of the major equipment
is new.
Land:The Facility is being constructed on land leased from the same
railroad company which will initially deliver fines and purchase the
synthetic coal output. The present lease is ten years, however, an
extension and renewal options are currently being negotiated.
US1 Structure: US1 is a Delaware limited partnership with Covol as the
majority owner and general partner. Covol has granted a non-exclusive
license for the technology to US1. US1 purchased and is installing the
Equipment under
8
<PAGE>
a turn-key contract with Lockwood Greene, a major engineering
and construction company headquartered in Spartanburg, SC. All
of US1's interest in the equipment necessary to make briquettes and
in the license for the technology is expected to be sold to Newco to
allow the Investor to claim the tax credits, depreciation and cash
flow from US1. Newco may retain Covol to operate and maintain the
Facility.
Operations: Covol will acquire and sell coal fines to Newco. Covol expects
to procure coal fines from nay suppliers located throughout Carbon
County and neighboring Emery County. For example, one supplier,
the railroad company on whose land the Facility is located, has
approximately 320,000 tons of coal fines located within one-half
mile of the Facility and is currently negotiating to sell and deliver
the coal fines to the Facility.
Covol has considerable experience in the production of the synthetic
fuel, having operated two similar facilities. Operating
experience of the Facility include personnel, a payment to Covol
for the liquid binder, a management fee to Covol, electricity from
Utah Power and Light, water from the Price Water District, and
natural gas. The Facility is projected to have an operating margin
of up to $1 per ton of synthetic coal produced.
US1 will purchase all of Newco's briquette output as produced and
will resell the briquettes to coal purchasers.
Coal Fines Supply: The conversion of coal Fines piles to a useable product
provides a significant environmental remediation benefit because coal
fines are essentially waste coal left behind at the mouth of a coal
mine. There are many coal fines piles in Carbon County and
neighboring Emery County including several which are under the
control of the State of Utah, Division of Oil and Gas and Mining
which is eager to begin clean-up and disposal of such coal fines
piles.
The Facility has been centrally located to allow Covol to utilize
coal fines from two major coal fines piles totaling about 6 million
tons located a few miles from the Facility. One of the coal fines
piles is only six miles from the Facility and is owned by a major
investor-owned utility which has closed its mining operations. The
other fines pile, located fifteen miles from the Facility, belongs
to a Fortune 500 mining Company. For both the utility and the mining
company, the coal fines piles are an environmental liability,
although for the utility it is a more pressing problem because the
utility has ceased operations at the site and has a large
reclamation bond which is frozen by the State of Utah until the pile
is removed.
9
<PAGE>
The coal fines from the utility and the mining company piles contain a
higher percentage of ash than the coal fines from the 320,000 ton fines
pile one-half mile from the Facility. With the ash removed, the utility's
and mining company's piles can easily supply the Facility for over 15
years. To reduce the percentage of ash in the coal, near the end of the
first year of operation at the Facility (before the 320,000 ton coal fines
pile has been exhausted), US1 Covol expects to purchase and install a coal
washer at a cost of $2-3 million using, in part, the proceeds from this
financing. Once removed from the coal fines piles, ash and waste coal will
typically be returned to the coal fines pile site or placed in local
landfills. Typically, the original seller of the fines will retain
responsibility for ash disposal.
Technology History: In 1992, Covol built a prototype briquetting facility
in Price, Utah, which is located about five miles from the Facility.
Covol's fundamental business strategy has been to commercialize the
briquette-making technology through joint ventures, licenses and
collaborative arrangements with steel, coke and coal producers or investors
by building briquette- making facilities.
Risks and Mitigating Factors: This project has risks including the
traditional risks of any relatively new technology and business venture.
Many of the risks in this Covol transaction are substantially mitigated for
the Investor because of the structure of the primarily "pay-as-you-go"
investment and because of the fact that equipment will be in place and
operating prior to the initial investment. A listing of some of the risks
and their mitigating factors follows:
The Facility may not be operated efficiently or reliably. Quarterly
payments by the Investor for the Facility will be contingent on processing
and sale of briquettes in the prior quarter. As operator of the Facility
and majority owner of US1, Covol has substantial incentive to maximize
output.
The Facility may not receive air quality permits. The Facility is a "de
minimis" source of emissions and the air quality permit will be in hand
before the Investor makes the first investment. Further, the Facility is
solving a major environmental problem, the disposal of waste coal fines,
and, as such, enjoys a favorable review by environmentalists and
governmental agencies. The wash plant will require a separate air quality
and operating permit.
10
<PAGE>
Section 29 tax credits may be reduced or eliminated because of higher oil
prices. In October 1992, Congress extended the availability of Section 29
credits to 2007 for coal synfuels (such as are produced by this Facility)
and gas produced from biomass. The Minimum Wage Increase Act of 1996
extended the grandfather dates for Section 29 projects to December 31, 1996
for binding construction contracts and June 30, 1998 for placement in
service. Therefore, the intent of Congress seems clearly in favor of
Section 29. With respect to the possible phase out of tax credits due to
high oil prices, oil prices would have to more than triple (to over $46 per
barrel) from the 1995 reference price ($14.62 per barrel) to begin to
reduce the availability of the credit and would have to quadruple to result
in a complete phase out of the credits. As the Investor would reap some of
the benefits from higher energy prices and only pays based on fuel produced
which qualifies for the credit, the Investor is well protected in this
scenario.
US1 may not be able to acquire the necessary coal fines. Before Newco buys
the Facility, US1 will have signed a contract with the railroad company to
deliver 320,000 tones of low-ash coal fines. This is nearly a one-year
supply and the railroad company will deliver the coal fines and take away
the briquettes. Negotiations are proceeding with the utility and the mining
company as explained above which would cover up to an additional 15 years
supply. Approximately 40 million tons of coal is mined each year in Carbon
County. There are additional coal fines piles located near the Facility
which need to be remediated.
Newco may not be able to sell the synthetic coal product. US1 will be
obligated to buy all the output of the Facility and then will be
responsible for reselling it to an end-user. Before Newco buys the
Facility, US1 will have signed a contract with the railroad company,
providing for the railroad to purchase the synthetic coal made from
the railroad company's own fines. Negotiations are proceeding with
other synthetic coal purchasers, including coal brokers and a mining
company for its cogeneration project near Salt Lake City. The
synthetic coal is desirable because it burns more evenly in a steam
boiler than does run-of-mine coal. Coal products from Utah enjoy
strong demand throughout the Western states and substantial amounts of
coal are sent from Utah to Asia, particularly Japan. Coal is a
commodity and synthetic coal will be sold for the same price per ton
as similar grades of coal.
11
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For further information, please contact Coalco Corporation, the
Marketing Agent.
Donald R. Logan
Vice President
Coalco Corporation
605 Willowglen Rd., Suite 200
Santa Barbara, CA 93105
Tel. (805) 687-2315
Fax (805) 687-2795
or
Gordon L. Deane
Executive Vice President
Palmer Capital Corporation
13 Elm Street, Suite 200
Cohasset, MA 02025
Tel. (617) 383-3200
Fax (617) 383-3205
12
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EXHIBIT B
GALLAGHER NEWCO
PRELIMINARY PROFORMA
13
<PAGE>
*** Missing informaiton my be available upon request to the Company
EXHIBIT C
US1 ACQUISITION STRUCTURE
November 12, 1996
1. Covol Technologies, Inc., a Delaware corporation ("Covol") is a public
company which has developed a patented technology to produce synthetic
coal products ("Briquettes") from coal fines mixed with a chemical
binder.
2. Covol is leasing from Railco, Inc. certain real estate (the
"Premises") near Price, Utah for a term (and extension) commencing on
June 20, 1996 and ending on December 31, 2011; it has also entered
into a construction contract with Lockwood Greene for the construction
of a facility to produce the Briquettes (the "Facility") on the
Premises.
3. Covol has formed Utah Synfuel #1,L.P., a Delaware limited partnership
("US1") having Covol ***.
4. Covol and US1 have entered into a license agreement under which Covol
has granted US1 a non-exclusive license of the patented technology for
15 years for a lump sum payment of *** and a sale agreement under
which Covol will sell the Facility to US1 upon completion and delivery
for *** in cash.
5. Coalco Corporation, a Massachusetts corporation ("Coalco"), has
entered into an exclusive financial advisor agreement with Covol and
US1 under which Coalco has been engaged to advise on maximizing the
value of the Facility and the license. Coalco is owned by Douglas
Kinney, Gordon Deane, Thomas Linden and Donald Logan. Geocapital,
Inc., an Illinois corporation ("Geo") is owned by George Fink.
6. Coalco, after discussions with Geo, has introduced Covol and US1 to
Arthur J. Gallagher & Co. (the "Investor") who is interested in
maximizing the value of the Facility and the license.
7. The Investor will form and own a limited partnership ("Newco") with
Covol or a subsidiary thereof as its general partner and then agree to
fund Newco on an ongoing basis in order to accomplish the transactions
described in this Memorandum. The Investor will agree with US1 and
Covol that it will honor its agreed-upon funding obligations to Newco.
The Investor will enter into an agreement with Geo under which Geo
will be compensated for its role in the transaction on a quarterly
basis tied to the level of Briquette production and sales at the
Facility.
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*** Missing information my be available upon request to the Company
8. Newco will enter into an acquisition agreement with US1 to acquire the
Facility for a purchase price of *** payable upon the Facility
passing the agreed-upon performance test described in paragraph (j) of
the accompanying letter.
9. US1 will also license the technology to Newco for 15 years for a fee
based on the amount of Briquettes produced and sold by Newco during
the prior quarter. The license fee will be at the rate of ***
(escalating with inflation). "Qualifying" means that the Briquettes
meet the standards represented in Covol's request dated March 22, 1995
for an IRS Private Letter Ruling.
10. Newco will give a first priority security interest over the Facility,
the license, and its related assets and rights back to US1 to secure
Newco's obligations under its agreements with US1 and Covol. If at any
time Newco defaults, US1 will be entitled to acquire the Facility and
related assets and license rights (for no consideration) through
foreclosure. If required by applicable laws to grant US1 additional
remedies as a secured creditor, Newco will deliver a ***
mortgage debt instrument to US1 at closing secured by the Facility.
This secured loan would be paid down during the next 11 years in equal
quarterly installments of principal. The preceding sentence modifies
the Financial Projections attached as Exhibit "B."
11. Covol will lease to Newco (i) the portion of the Premises on which the
Facility is located (ii) a portion of the building in which the
Facility is located, and (iii) certain equipment outside the building
(e.g. washer, truck scales, load equipment, etc.) which are incidental
but necessary to the Facility's operation. The lease will be in effect
until December 31, 2011 at a rental of *** per month (escalating
with inflation).
12. Newco will enter into an O&m Agreement with Covol for a fixed fee of
*** (escalating with inflation) payable quarterly. This fee will be
subject each quarter to an appropriate bonus (or penalty) which will
be payable (or assessed) to the extent of any excess (or shortfall)
in Briquettes produced and sold by Newco beyond or below) the
projected MMBtu's. The O&M fee is intended to cover routine O&M
expenses (including supplies, labor, etc.) for which Covol will be
responsible. In addition, Covol will wash the coal fines purchases by
Newco for a fee of *** per ton. Plus a reasonable ash disposal fee.
13. Newco, however, will be responsible for the actual expenses associated
with (a) utilities and coal fines washing; and (b) any necessary
modification or improvement of the Facility and for non-routine
repairs, provided that in each case such expenses do not exceed
annually the amount set forth in a 12-year "operations budget" and a
12-year "capital expenditure budget," respectively, agreed-upon
between Newco and Covol at closing. Covol will be responsible for any
expenditures in excess of the annual budgets. Newco will basically own
and operate the Facility in accordance with the assumptions in the
financial models.
15
<PAGE>
*** Missing information my be available upon request to the Company
14. Covol will enter into a supply agreement with Newco to use its best
efforts to supply and deliver until December 31, 2007 the coal fines
and the chemical binder necessary to produce the Briquettes at market
prices which are assumed for the purpose of the Outline to be ***
per ton for the coal fines and *** per ton for the chemical binder
(both prices escalating with inflation or a coal price index). In
turn, Covol will then have the obligation to locate and purchase
adequate coal fines from suppliers in the area and the necessary
chemical binder throughout the term of the supply agreement.
15. Using the coal fines and the chemical binder, Newco will then produce
the Briquettes and sell them to US1 pursuant to an 11-year "take or
pay" arrangement at a price equal to the *** (escalating at
the same rate as in #14 above - either with inflation or a coal price
index). Newco will have the right to sell the Briquettes to a third
party at a higher price but US1 will then have the right to match. In
turn, US1 will be responsible for selling all the Briquettes produced
at the Facility to willing end-users who would use the Briquettes to
provide energy for their manufacturing, industrial or other facility.
16. US1 will have the right under its acquisition agreement with Newco to
reacquire on January 1, 2008 the Facility and related assets for their
ten fair market value.
17. Newco will have the right to "abandon" the Facility and related assets
in the case where there is a material adverse change to the economics
of the transactions or the Investor is unable to utilize the tax
benefits. Newco will provide US1 with advance notice of its intention
to abandon the Facility. Such notice shall be six months in advance if
one line is in operation and three months in advance if two lines are
in operation. In each case, US1 will be required to use its best
efforts to resume possession and title to all such assets for fair
consideration (not to exceed 50% of the initial down payments) to
Newco. After three years from the closing of the Transaction, Newco
shall waive such fair consideration if it abandons the property
pursuant to this paragraph.
18. In addition, Covol will undertake to enter into a construction
agreement for the expansion of the Facility (the "Expansion") prior to
December 31, 1996. The Expansion, after completion, would be capable
to producing another 360,000 tons of Briquettes annually, Covol will
undertake to have the Expansion completed and in daily operation prior
to September 30, 1997 and to do all other things necessary to qualify
the production for credits under Section 29 of the Code.
19. Newco will acquire the Expansion upon startup for a purchase price of
*** payable as follows: *** when Briquette production from the
Facility reaches *** tons in any 30-day period; *** when Briquette
production from the Expansion reaches *** in any 30-day period; and
*** in three *** installments payable when Briquette production from
the Expansion reaches the ***, *** and *** cumulative ton milestones.
In addition, Newco, Covol and US1 will
16
<PAGE>
also consummate the relevant agreements (and on terms substantially
the same as are) set fothr in #8-17 above, except (i) Covol or its
designee will be the other party in each case instead of US1, and (ii)
the equipment (except the washer) and building leased in #11 (ii) and
(iii) will be transferred to Newco for no additional consideration.
20. All agreements described in this Outline are to be governed by the
laws of the State of Utah.
21. The parties will be responsible for their respective costs and
expenses (including all counsel fees) incurred in the consummating the
Transaction. The Investor will be responsible for the costs and
expenses (including all counsel fees) incurred in managing Newco's
business or affairs.
17
LEASE AGREEMENT
THIS LEASE, made and entered into this _____ day of December, 1996, by
and between U.P.C., INC., a Utah corporation, 53 West Angelo Avenue, Salt Lake
City, Utah 84115 ("Landlord"), and COVOL TECHNOLOGIES, INC., a Utah corporation,
3280 North Frontage Road, Lehi, Utah 84043 ("Tenant").
W I T N E S S E T H:
Landlord hereby leases, demises and lets unto Tenant, and Tenant hereby
leases, hires and takes from Landlord those certain premises, hereinafter called
the demised premises, described as follows:
See Exhibit "A" attached hereto
1. Term. This lease shall be for a term of ten years and six
months, commencing July 1, 1996 and ending December 31, 2007. Thereafter, this
lease may be renewed for an additional five (5) years, upon the mutual agreement
of the parties.
2. Monthly Rental. Tenant shall pay to Landlord during the term of this
Lease, as monthly rental for the demised premises, the sum of $250.00 per month
for the months of July 1996 through September 1996, and the sum of $600.00 per
month for the months of October 1996 through September 2001. Thereafter,
commencing October 2001, the monthly rental shall increase five percent (5%) per
annum, with each annual increase becoming effective October 1 of each year
through the end of the lease period. The monthly rental shall be paid in advance
on the first day of each calendar month throughout the term of this Lease. The
first and last month's rental and a security deposit as described in paragraph
21 below, shall be paid upon the execution of this Lease Agreement. In the event
Tenant fails to pay said rental on the due date or within five (5) days
thereafter, a late charge of $30.00 per month shall be added to said rental and
paid to Landlord. In addition, interest shall accrue on all delinquent amounts
thirty days or more past due, at the rate of eighteen percent (18%) per annum.
Remittance shall be made to Landlord at such address as shall from time to time
be designated by landlord to Tenant in writing.
3. Use. Tenant agrees to use and occupy the premises during the term
hereof for the purpose of constructing and operating a coal processing plant,
and for no other purpose whatsoever without the written consent of Landlord. All
construction and improvements shall be at Tenant's sole cost and expense, shall
be done in a workmanlike manner and shall conform to all applicable building
codes and governmental regulations. Tenant shall not allow or permit any
mechanic's or other liens to be assessed against the property and shall
indemnify and save Landlord harmless from any and all claims arising out of or
resulting from any construction or improvements on the leased premises. Tenant
shall not use, or permit said premises or any part thereof to be used for any
purpose or purposes other than the purpose or purposes for which the said
premises are hereby leased. Tenant shall accept and process only coal on the
demised premises, free from any toxic or hazardous substances. Tenant will not
store, generate, transport or release in or on the rented space or Landlord's
property any hazardous waste or substance and shall obey all laws respecting the
handling of such. Tenant shall allow Landlord the right to inspect and test the
<PAGE>
content of any incoming vehicles. Tenant shall upon termination of this Lease
Agreement, promptly remove all hazardous substances from the premises. Removal,
remediation and/or disposal shall always be the sole responsibility of the
Tenant, and Tenant shall remain the sole owner of any hazardous substance it
shall cause to be deposited in or on Tenant's rented space. Tenant shall be
responsible for all costs and shall indemnify and hold harmless Landlord, its
successors or assigns, or any party acting as a representative of Landlord, for
any damage arising from Tenant storing or depositing any hazardous substance in
or around the demised premises or on Landlord's property. Such indemnification
shall survive the termination of this Lease, both as to Tenant and as to any
guarantors of Tenant's obligations under this Lease Agreement. "Hazardous
substances" shall mean: (a) hazardous substances as defined in the Comprehensive
Environmental Response, Compensation and Liability Act, as amended, (b) "PCB's",
as defined in 40 C.F.R. 761 et seq. and "TCDD" as defined in 40 C.F.R. 755 et
seq., (c) "asbestos" as defined in 29 C.F.R. 1910-1001 et seq., (d) waste oils,
and (3) used tires. Tenant shall not be permitted to store or keep any waste or
waste product, whether from Tenant's processing operation or otherwise, on the
demised premises, or on any adjoining property owned or controlled by Landlord,
whether or not such waste or waste product is toxic or hazardous. All such waste
and waste product must be disposed of off the demised property. Notwithstanding
this paragraph 3, Tenant may store waste oil in suitable containers for use with
EPA approved waste oil heaters to provide heating for the plant; however, such
storage and use shall still be governed by the provisions of this paragraph 3.
4. Nuisance. Tenant shall not commit, or suffer to be committed,
any waste upon the demised premises, or any public or private nuisance, or other
act or thing which may disturb the quiet enjoyment of any other tenant or
occupant of the demised premises or of Landlord's adjoining property.
5. Construction and Alterations. Tenant agrees to submit all plans for
construction of the coal processing facility to Landlord for Landlord's prior
approval before construction begins, which approval will not be unreasonably
denied. Landlord agrees that such plans are confidential and will not disclose
the same to any third party without Tenant's prior consent. Once such plans are
approved by Landlord, Tenant shall not make or suffer to be made, any
alternations or additions to such plans or to any structures completed pursuant
to such loans, without the prior written consent of Landlord. Such structures,
alterations and/or additions, shall immediately become a part of the realty and
belong to the Landlord. However, if Landlord advises Tenant that Landlord
desires not to assume ownership and control of said structures, Tenant shall
remove the same and restore the demised premises to its condition before Tenant
entered thereon, upon the termination of this Lease. Tenant shall be free to
remove its equipment and personal property from the leased premises upon the
termination of this lease, provided Tenant is not then in default hereunder.
6. Abandonment. Tenant agrees not to vacate or abandon the premises at
any time during the demised term. Should Tenant vacate or abandon said premises
or be dispossessed by process of law or otherwise, such abandonment, vacation or
dispossession shall be a breach of this Lease and in addition to any other
rights which Landlord may have, Landlord may at once remove any property
belonging to Tenant which remains on the premises and store or dispose of the
same, the cost of such removal, disposal and/or storage to be charged to the
account of Tenant.
7. Maintenance, Repairs and Reclamation Bond. Tenant shall at
its sole cost, keep and maintain the demised premises and appurtenances and
every part thereof, in good, clean and sanitary order, condition and repair,
hereby waiving all right to make repairs or replacements at the expense of
Landlord. By entry hereunder, Tenant accepts the premises as being in good
<PAGE>
order, condition and repair and agrees on the last day of said term, or sooner
termination of this Lease, to surrender unto Landlord said premises with
improvements, in the same condition as when received or as improved, reasonable
wear and tear excepted, and to remove those improvements to the real property
that Landlord requests Tenant remove and all of Tenant's personal property form
the premises, repairing any damage caused thereby and restoring and reclaiming
the demised premises to its original condition, or as improved at Landlord's
request, or to such other condition as any federal, state or local agency may
require, upon the termination of Tenant's operation. As security for Tenant's
obligation to repair, restore and reclaim the demised premises, Tenant shall
obtain and maintain throughout the term of this Lease Agreement and so long
thereafter as Tenant occupies the leased premises, a reclamation and surety bond
to guarantee Tenant's obligations. Such bond shall be in favor of and be payable
to Landlord. At the commencement of this Lease, the bond shall be in the amount
of $2,000.00 per acre of land used or occupied by Tenant or such greater sum as
any Federal, State and/or local regulatory authority may require. Thereafter,
from time to time, based upon Tenant's use and activity on the leased premises,
Landlord may require Tenant to increase the amount of such bond as Landlord may
determine will be needed, from proposed clean-up, reclamation and restoration
plans which Tenant will periodically provide to Landlord as a condition of this
Lease.
8. Laws and Regulations. Tenant, at its own cost and expense,
shall comply with all laws, rules and orders of all federal, state, county and
municipal governments, or departments, which may be applicable to the use of the
leased premises.
9. Indemnification and Liability Insurance. Except for such loss or
damage as may be caused by the negligent or willful act of Landlord, its agents,
or employees, Landlord shall not be liable to Tenant, its officers, agents,
employees, customers, invitees, or third parties for loss of or damage to
property, including goods, wares and merchandise, or for injury or death to
persons, in, on, or about the premises and Tenant agrees to indemnify and save
and hold Landlord harmless from and on account thereof, howsoever arising or by
whomever caused. During the term hereof, Tenant shall maintain in full force and
effect with insurance companies of good reputation a comprehensive liability
insurance policy applicable to the premises and the activities of Tenant therein
with a combined single limit for bodily injury and property damage of not less
than $1,000,000.00. A certificate evidencing such coverage and providing that
the insurance may not be canceled without thirty (30) days prior written notice
to Landlord shall be provided to Landlord.
10. Signs. Tenant shall not affix or maintain upon the demised
premises, any sign or other like item, except such shall have first received
written approval of the landlord as to the size, type, location, nature and
display qualities. Landlord's approval hereunder shall not be unreasonably
withheld.
11. Utilities. Tenant, from the time it first enters the premises for
the purpose of setting fixtures, or from the commencement of the term of this
Lease, which ever comes first, and throughout the term of this Lease, shall pay
for all public and other utilities and related services rendered or furnished to
the premises, including but not limited to water, gas, electricity, telephone,
heat, light, sewer charges, installation and connection charges or deposits
therefor and refuse or garbage collection or disposal. Tenant shall not allow
refuse, garbage, or trash to accumulate inside or outside the demised premises.
12. Entry by Landlord. Tenant shall permit Landlord and its
agents to enter the demised premises at all reasonable times, to inspect the
same.
<PAGE>
13. Assignment. The parties acknowledge the limited purposes for which
the premises are to be used, and therefore agree that, except as hereinafter set
forth, Tenant shall not sublet the premises in whole or in part, or assign or
transfer this Lease, or any interest herein, without first obtaining the written
consent of Landlord, which consent may be withheld in the event Landlord
determines that such subletting, assignment or transfer would or could create
any additional risk, result in any additional liability or economic loss to
Landlord, or for any other reasons in the reasonable discretion of Landlord. No
consent to any subletting, assignment or transfer shall be construed as a
consent to any subsequent assignment, subletting, transfer, occupancy or use. No
sublease, assignment or transfer of any interest in this Lease shall release
Tenant from, or otherwise affect in any manner, any of Tenant's obligations
hereunder and Tenant hereby expressly agrees that it shall continue to be liable
for the obligations hereunder notwithstanding any sublease, assignment or
transfer as contemplated by this paragraph. Any such assignment, subletting,
occupancy or use, without the prior written consent of Landlord shall be null
and void.
14. Default. Should the Tenant be in default hereunder with respect to
any rental payments or other charges to the Tenant hereunder, and should such
default continue for a period of three (3) days after written notice from
Landlord to Tenant; or should the Tenant be in default in the prompt and full
performance of any other of its promises, covenants or agreements herein
contained and should such default or breach of performance continue for more
than a reasonable time (in no event to exceed thirty (30) days) after written
notice thereof from the Landlord to Tenant specifying the particulars of such
default or breach of performance; or should Tenant vacate or abandon the
premises; or should Tenant or any agent of Tenant falsify any report required to
be furnished to Landlord pursuant to the terms of this Lease; or should Tenant
or any guarantor of this Lease become bankrupt or insolvent, or file any debtors
proceedings or take or have taken against Tenant or any guarantor of this Lease
in any court pursuant to any statute either of the United States or of any state
a petition in bankruptcy or insolvency of for reorganization or for the
appointment of a receiver of trustee of all or a portion of Tenant's or any
guarantor's property, or if Tenant or any such guarantor makes an assignment for
the benefit of creditors, or petitions for or enters into an arrangement or if
Tenant shall suffer this Lease to be taken under any writ of execution; then the
Landlord may treat the occurrence of any one or more of the foregoing events as
a breach of this Lease, and in addition to any and all other rights or remedies
of the Landlord hereunder and by the law provided, it shall be, at the option of
the Landlord, without further notice or demand of any kind to Tenant or any
other person: (a) The right of the Landlord without declaring this Lease ended
to re-enter the premises and take possession thereof and remove all persons
therefrom and Tenant shall have no further claim thereon or thereunder, or (b)
The right of the Landlord without declaring this Lease ended to re-enter the
premises and occupy or lease the whole or any part thereof for an on account of
the Tenant and upon such terms and conditions and for such rent as the Landlord
may deem proper and to collect said rent and any other rent that may thereafter
become payable and apply the same toward the amount due or thereafter to become
due from the Tenant and on account of such expenses of such subletting and any
other damages sustained by the Landlord; and should such rental be less than
that herein agreed to be paid by Tenant, the Tenant agrees to pay such
deficiency to the Landlord in advance on the day of each month herein before
specified for payment and to pay to Landlord forthwith upon any such reletting
the costs and expenses the Landlord may incur by reason thereof; or (c) The
right of Landlord, even though it may have relet said premises, to thereafter
elect to terminate this Lease and all the rights of the Tenant in or to the
premises. Should the Landlord have relet the premises under the provisions of
subparagraph (b) above, it may execute any such lease either in its own name or
in the name of Tenant as it shall see fit, the Tenant therein named shall be
under no obligation whatsoever to see to the application by Landlord of any rent
<PAGE>
collected by Landlord from such tenant nor shall the Tenant hereunder have any
right of authority whatever to collect any rent from such tenant. The Landlord
shall not be deemed to have terminated this Lease, or the liability of the
Tenant to pay rent thereafter to accrue or its liability for damage under any of
the provisions hereof, by any such re-entry or by any action in unlawful
detainer, or otherwise, to obtain possession of the premise, unless the Landlord
shall have notified the Tenant in writing that it has so elected to terminate
this Lease, and the Tenant further covenants that the services by Landlord of
any notice pursuant to the unlawful detainer statutes of the State of Utah and
the surrender of possession pursuant to such notice shall not (unless the
Landlord elects to the contrary at the time of or at any time subsequent to the
service of such notices and such election be evidenced by a written notice to
the Tenant) be deemed to be a termination of this Lease. Nothing herein
contained shall be construed as obligating the Landlord to relet the whole or
any part of the premises. In the event of any entry or taking possession of the
premises as aforesaid, the Landlord shall have the right but not the obligation,
to remove therefrom all or any part of the personal property located thereon and
may place the same in storage at a public warehouse at the expense and risk of
the owner or owners thereof. In the event of Tenant's default and Landlord's
retaking of possession of the premises, whether this Lease is terminated by
Landlord or not, Tenant agrees to pay to Landlord as an additional item of
damages the cost of repairs, alterations, redecoration, leasing commissions,
attorneys fees and Landlord's other costs and expenses incurred in retaking the
premises and in reletting the premises to a new tenant. Should the Landlord
elect to terminate this Lease under the provisions of subparagraph (a) or (c)
above, the Landlord shall thereupon, without waiting for the end of the term
hereof, be entitled to recover from Tenant as damages, the difference, if any,
between the then reasonable rental value of the premises for the period of the
term reserved in the Lease and the amount of rental and other charges payable by
Tenant for the balance of the term of this Lease, together with the rent then
unpaid, if any. For all purposes of this Paragraph 14, the rental agreed to be
paid by Tenant or the amount of rental payable by the Tenant shall be deemed to
be the monthly rental and all other sums required to be paid by Tenant pursuant
to the terms of this Lease. In the event of default, all of the Tenant's
fixtures, furniture, equipment, improvements, additions, alterations, and other
personal property, shall remain on the subject premises and in that event, and
continuing during the length of said default, Landlord shall have the right to
take the exclusive possession of same and to use same, rent or charge free,
until all defaults are cured, or at its option, at any time during the term of
this Lease, to require Tenant to forthwith remove same. Notwithstanding any
other provisions of this paragraph, the Landlord agrees that if the default
complained of, other than for the payment of money, or of such a nature that the
same cannot be rectified or cured within the thirty (30) day period requiring
such rectification or curing as specified in the written notice relating
thereto, then such default shall be deemed to be rectified or cured if the
Tenant within such period of thirty (30) days shall have commenced the
rectification and curing thereof and shall continue thereafter with all due
diligence to cause such rectification and curing and does so complete the same
with the use of such diligence as aforesaid. The remedies given to Landlord in
this paragraph shall be in addition and supplemental to all other rights or
remedies which the Landlord may have under the laws then in force.
15. Voluntary Surrender. The voluntary or other surrender of this
Lease by tenant, or a mutual cancellation thereof, shall not work a merger, but
shall, at the option of Landlord, terminate all or any existing subleases or
subtenancies, or operate as an assignment to it of any or all such subleases or
subtenancies.
16. Attorney's Fees. If Landlord shall be made a party to any
litigation commenced by or against Tenant, Tenant shall pay all costs, expense
and attorney's fees incurred by Landlord in connection with such litigation
<PAGE>
except in the event that such litigation shall determine that Landlord is liable
therefor. In the event of any action at law or in equity between Landlord and
Tenant to enforce any of the provisions and/or rights hereunder, the
unsuccessful party to such litigation covenants and agrees to pay to the
successful party all costs and expenses, including reasonable attorney's fees
incurred therein by such successful party, and if such successful party shall
recover judgment in any such action or proceeding, such costs, expenses and
attorney's fees shall be included in and as part of such judgment.
17. Notices. All notices to be given to Tenant or Landlord hereunder
may be given in writing personally or by depositing the same in the United
States mail, certified, postage prepaid, and addressed to such party at the
address specified herein, or such other address as may hereafter be specified by
such party to the other in writing.
18. Waiver. The waiver by Landlord of any breach of any term, covenant
or condition herein shall not be deemed to be a waiver of any other term,
covenant or condition or any subsequent breach of the same or any other term,
covenant, or condition herein contained. The subsequent acceptance of rent
hereunder by Landlord shall not be deemed to be a waiver of any preceding breach
by Tenant of any term, covenant or condition of this Lease, other than the
failure of Tenant to pay the particular rental so accepted, regardless of
Landlord's knowledge of such preceding breach at the time off acceptance of such
rent.
19. Holding Over. Any holding over after the expiration of the
said term, with the consent of Landlord, shall be construed to be a tenancy from
month to month, and shall be on the terms and conditions herein specified, so
far as applicable.
20. Successors. All the terms, covenants and conditions hereof shall be
binding upon and inure to the benefit of the heirs, executors, administrators,
successors and assigns of the parties hereto, provided that nothing in this
paragraph shall be deemed to permit any assignment, subletting, occupancy or use
contrary to the provisions of paragraph 13.
21. Security Deposit.
(a) Tenant has deposited with Landlord the sum of $28,600.00,
as a security deposit, receipt of which is hereby acknowledged, with
sum represents the reclamation bond referred to in paragraph 7 above,
plus $600.00. Said deposit shall be held by Landlord, without liability
for interest, as security for the faithful performance by Tenant of all
the terms of this Lease by said Tenant to be observed and performed.
The security deposit shall not be mortgaged, assigned, transferred, or
encumbered by Tenant without the written consent of Landlord and any
such act on the part of Tenant shall be without force and effect and
shall not be binding upon Landlord.
(b) If any of the rents herein reserved or any other sums
payable by Tenant shall be overdue and unpaid or should Landlord make
payments on behalf of Tenant, or should Tenant fail to perform any of
the terms of this Lease, then Landlord may, at its option and without
prejudice to any other remedy which Landlord may have on account
thereof, appropriate and apply said entire deposit or so much thereof
as may be necessary to compensate Landlord toward the payment of rent
or additional rent or expense or loss or damage sustained by Landlord
due to such breach on the part of Tenant, and Tenant shall forthwith
upon demand restore said security to the original sum deposited. Should
Tenant comply with all of said terms, promptly pay all of the rentals
as they fall due and all other sums payable by Tenant to Landlord, and
<PAGE>
should Tenant reclaim the demised premises to the satisfaction of
Landlord and all regulatory agencies, said deposit shall be returned to
Tenant at the end of the term.
(c) In the event of bankruptcy or other debtor-creditor
proceedings against Tenant, such security deposit shall be deemed to be
applied first to the payment of rent and other charges, including
reclamation expenses, due Landlord for all periods prior to the filing
of such proceedings.
(d) Landlord may deliver the funds deposited hereunder by
Tenant to the purchasers of Tenant's interest in the premises in the
event that such interest be sold and thereupon Landlord shall be
discharged from any further liability with respect to such deposit, and
this provision shall apply to any subsequent transferees.
22. Brokers. Tenant agrees to hold Landlord harmless from any
cost, expense or liability for any compensation, commission or other charges
claimed by any realtor, broker or agent other than Landlord's representative.
23. Interest. Any sum accruing to Landlord under the terms and
provisions of this Lease which is not paid when due shall bear interest at the
rate of eighteen percent (18%) per annum from the date when the same becomes due
and payable by the terms and provisions hereof until paid, notwithstanding
specific reference thereto elsewhere in this Lease.
24. Taxes. Landlord shall pay the real property taxes assessed against
the leased premises, however, Tenant shall reimburse Landlord for all real
property taxes assessed against the leased premises within thirty (30) days of
receipt of an invoice from Landlord for the taxes. Such reimbursement shall be
additional rent hereunder. Tenant shall also pay as additional rent hereunder,
prior to delinquency, all such taxes assessed against the property and any
increase assessed thereon, as a result of structures, buildings, improvement or
other changes made to the leased premises by Tenant. Tenant shall also pay prior
to delinquency, all taxes assessed against and levied upon fixtures,
furnishings, equipment and all other personal property of Tenant contained on
the demised premises.
25. Free from Liens. Tenant shall keep the demised premises, including
the improvements made thereon by Tenant, and the property on which the demised
premises are situated, completely free and clear from any liens arising out of
any work performed, material furnished, or obligations incurred by Tenant.
26. Landlord's Right to Require Move. Landlord shall have the right at
any time during the term of this Lease or any extension hereof, to require
Tenant to remove and relocate any and all of Tenant's property and improvements
from the demised premises to an alternate location of Landlord's choosing,
anywhere on property now owned or hereafter acquired by Landlord. Upon written
notice to Tenant from Landlord that Tenant must relocate its improvements,
Tenant shall have twelve (12) months from the date of such notice to remove its
property from the demised premises to the alternate location and to commence
restoration and reclamation of the demised premises. Landlord shall also have
the right at any time during the term of this Lease or any extension, upon 180
days notice, to require Tenant to move Tenant's radial stacker and storage area
to a location west of Tenant's building, on land of Landlord's choosing, of the
same size as that then being used by Tenant.
27. First Right on Freight, Loading and Purchase of Product. As
partial consideration for this Lease, Tenant hereby grants unto Landlord the
first right to transport any coal or coal fines to Tenant's processing facility
and any finished coal product from Tenant's processing facility. For any such
coal, coal fines and finished product to be transported, Tenant shall advise
Landlord of its best good faith bid for such transporting service and Landlord
shall be entitled to match such bid, either personally or through a
subcontractor, and thereby obtain the right to perform such transporting service
for Tenant on the same terms and conditions as the matched bid. Tenant also
hereby grants unto Landlord the first right to load Tenant's finished load
product on the rail at the Railco load-out facility near the leased premises, by
matching any good faith bid obtained by Tenant for the loading of Tenant's coal
product. Tenant also hereby grants unto Landlord the first right to purchase any
or all of the finished coal product produced by Tenant, by Landlord agreeing to
pay Tenant the same price for said product, on the same terms, that Tenant
offers to any other buyers.
28. Construction of Acceleration Lane. As partial consideration for
this Lease, in order to avoid traffic congestion on roads servicing the demised
premises and surrounding businesses, Tenant agrees that upon the execution of
this Lease, Tenant will immediately commence construction of, and will
diligently pursue to completion, an acceleration lane on the demised property,
from the access road on the south of the demised premises, to the north boundary
of the demised premises. The design and layout of the acceleration lane shall be
subject to the approval of Landlord, will be suitable for heavy truck traffic,
and will be continuously maintained at Tenant's sole cost, during the entire
term of this Lease and so long as Tenant occupies the premises.
29. Weighing Trucks. As partial consideration for this Lease, during
the term of this Lease and as long as Tenant occupies the demised premises, at
Landlord's option, Tenant agrees to weigh trucks hauling material to the Railco
load-out facility, on Tenant's scales, for $1.00 per truck.
30. Lessor's Lien. Notwithstanding any other provision of this Lease
Agreement, no furniture fixtures, equipment, buildings or other property of
Tenant located on the leased premises may be removed from the same unless and
until Tenant is current in all obligations to Landlord under this Lease
Agreement, and Tenant hereby grants unto Landlord a lien upon such furniture,
fixtures, equipment, buildings and other property to secure faithful performance
and full payment by Tenant of the terms, conditions and obligations of this
Lease Agreement.
31. Miscellaneous.
(a) Time is of the essence of this Lease and of all
provisions hereof.
(b) This Lease shall be construed and enforced in
accordance with the laws of the State of Utah.
(c) No payment by Tenant or receipt by Landlord of a lesser
amount than the monthly rent herein stipulated shall be deemed to be
other than on account of the earliest stipulated rent, nor shall any
endorsement of statement on any check or any letter accompanying any
check or payment as rent be deemed an accord and satisfaction and
Landlord may accept such check or payment without prejudice to
Landlord's right to the balance of such rent or pursue any other remedy
in this Lease provided.
(d) This Lease Agreement sets forth all of the covenants,
promises, agreements, conditions and understandings between Landlord
and Tenant concerning the leased premises and there are no covenants,
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promises, agreements conditions and understandings, either oral or
written, between them other than are herein set forth. Except as
herein otherwise provided, no subsequent alteration, amendment,
change or addition to this Lease shall be binding upon Landlord or
Tenant unless reduced to writing and signed by them.
(e) Landlord does not by this Lease Agreement, in any way or
for any purpose, become a partner or joint venturer of Tenant in the
conduct of Tenant's business or otherwise.
(f) If any term, covenant, or condition of this Lease or the
application thereof to any persons or circumstances shall, to any
extent, be invalid or unenforceable, the remainder of this Lease, or
the application of such term, covenant or condition to persons or
circumstances other than those as to which it is held invalid or
unenforceable, shall not be affected thereby and each term, covenant or
condition of this Lease shall be valid and be enforced to the fullest
extent permitted by law.
IN WITNESS WHEREOF, the parties have duly executed this Lease
Agreement, the day and year first written above.
U.P.C., INC. COVOL TECHNOLOGIES, INC.
Landlord Tenant
By: /s/ B.E. Crossley By: /s/ Brent M. Cook
STANDARD FORM OF AGREEMENT BETWEEN
OWNER AND DESIGN/BUILDER
DESIGN AND CONSTRUCTION AGREEMENT
AGREEMENT made as of the 20th day of Deccember , 1996, (Contract No. CL-003)
BETWEEN the Owner: Covol Technologies, Inc.
(Name and address) 3280 North Frontage Road
Lehi, UT 84043
and the Design/Builder: Centerline Engineering Corporation
A Lockwood Greene Company
(Name and address) 12450 Perry Highway
Post Office Box 249
Wexford, PA 15090
For the following Project:
(Include Project name, location and detailed description of scope.)
The Design/Builder shall provide to the Owner or its successors or assigns one
(1) Coal Fines Agglomeration Facility ("Facility").
Article 14.1, Scope of Work, shall provide a detailed description of the Coal
Fines Agglomeration Facility to be provided by the Design/Builder.
The Owner and the Design/Builder agree as set forth below.
ARTICLE 1
GENERAL PROVISIONS
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1.1 Basic Definitions
1.1.1 The Contract Documents consist of this Agreement together with its
Exhibits, the Construction Documents identified in Exhibit "C" and Modifications
issued after execution of the Agreement. A Modification is a Change Order or a
written amendment to the Agreement, signed by both parties. These form the
Contract, and are as fully a part of the Contract as if attached to this
Agreement or repeated herein.
1.1.2 The Project is the total design and construction for which the
Design/Builder is responsible under the Agreement, including all professional
design services and all labor, services, materials and equipment used or
incorporated in such design and construction.
1.1.3 The Work comprises the completed construction designed under the Project
and includes labor necessary to produce such construction, and materials and
equipment incorporated or to be incorporated in such construction.
1.1.4 The Design/Builder accepts the relationship of trust and confidence
established between it and the Owner by this agreement. The Design/Builder
agrees to furnish the engineering and construction services set forth herein and
agrees to furnish efficient business administration and superintendence, and to
use its best efforts to perform the services in an expeditious and economical
manner consistent with the interest of the Owner.
1.1.5 The Design/Builder shall act as Agent for the Owner in all dealings with
the vendor(s), supplier(s) and contractor(s) under this agreement. All contracts
with the vendor(s), supplier(s) and contractor(s) shall be with the Owner and
not the Design/Builder. Prior to making any financial commitments, the
Design/Builder shall obtain the Owner's written approval except within the scope
of the Project where time constraints make advance approval impractical or in
cases of extreme emergencies which might involve life or property damage. The
Design/Builder will immediately notify the Owner of such orders or commitments.
Owner and Design/Builder shall execute a separate Limited Agency Agreement to
define the terms and conditions of this agency relationship. This Limited Agency
Agreement is attached as Exhibit "D." Nothing in this paragraph shall be
construed as a release or limitation, in whole or in part, of Design/Builder=s
obligations under this Agreement.
1.2 Execution, Correlation and Intent
1.2.1 This Agreement shall be signed in not less than duplicate by the Owner and
the Design/Builder.
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1.2.2 It is the intent of the Owner and Design/Builder that the Contract
Documents include all items necessary for proper execution and completion of the
Work. The Contract Documents are complementary, and what is required by any one
shall be as binding as if required by all. Work not covered in the Contract
Documents will not be required unless it is consistent with and is reasonably
inferable from the Contract Documents as being necessary to produce the intended
results. Words and abbreviations which have well-known technical or trade
meanings are used in the Contract Documents in accordance with such recognized
meanings.
1.3 Ownership and Use of Documents
1.3.1 The drawings, specifications and other documents furnished by the
Design/Builder are the property of the Owner whether or not the project for
which they are made is commenced. Drawings, specifications and other documents
furnished by the Design/Builder may be used by the Owner on other projects at
the sole responsibility and risk of the Owner for correctness, fitness for
purpose, and suitability of application for use. The Owner shall indemnify and
hold harmless the Design/Builder for any use of these documents for any purpose
other than the originally intended project.
1.3.2 (Deleted)
ARTICLE 2
Design/Builder
2.1 Services and Responsibilities
2.1.1 Design services shall be performed by qualified engineers and other
professionals selected and paid by the Design/Builder. The professional
obligations of such persons shall be undertaken and performed in the interest of
the Design/Builder. Construction services shall be performed by qualified and
licensed construction contractors and suppliers, selected by the Design/Builder.
The Design/Builder shall negotiate and prepare the contract documents between
the Owner and such contractors and suppliers. The Design/Builder shall retain
control and management of the contractors and suppliers. Payments shall be made
by the Owner upon Design/Builder=s approval.
2.2 Basic Services
2.2.1 The Design/Builder=s Basic Services are described below and in Article
14.
2.2.2 The Design/Builder shall submit Construction Documents for review and
approval by the Owner. Construction Documents shall include technical drawings,
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schedules, diagrams and specifications, setting forth in detail the requirements
for construction of the Work.
2.2.3 (Deleted)
2.2.4 Unless otherwise provided in the Contract Documents, the Design/Builder
shall provide or cause to be provided and shall pay for design services, labor,
materials, equipment, tools, construction equipment and machinery, water, heat,
utilities, transportation and other facilities and services necessary for proper
execution and completion of the Work, whether temporary or permanent and whether
or not incorporated or to be incorporated in the Work. Tools and materials
purchased by Design/Builder specifically for the Project shall belong to the
Owner.
2.2.5 The Design/Builder shall be responsible for and shall coordinate all
construction means, methods, techniques, sequences and procedures.
2.2.6 The Design/Builder shall keep the Owner informed on a timely basis of the
progress and quality of the work.
2.2.7 (Deleted)
2.2.8 The Design/Builder shall correct on a timely basis and at its own expense,
work which does not conform to the Construction Documents.
2.2.9 The Design/Builder warrants to the Owner that materials and equipment
incorporated in the Work will be new unless otherwise specified by separate
written notice to Owner prior to installation, and that the Work will be of good
quality, free from faults and defects, and in conformance with the Contract
Documents. Work not conforming to these requirements shall be corrected in
accordance with Article 9.
2.2.10 The Design/Builder shall secure and pay for building and other permits
and governmental fees, licenses and inspections necessary for the proper
execution and completion of the Work which are either customarily secured after
execution of the Agreement or are legally required at the time the
Design/Builder=s Proposal was first submitted to the Owner.
2.2.11 The Design/Builder shall give notices and comply with laws, ordinances,
rules, regulations and lawful orders of public authorities relating to
Design/Builder=s business activities with respect to the Project.
2.2.12 The Design/Builder shall pay royalties and license fees. The
Design/Builder shall defend suits or claims for infringement of patent rights
and shall save the Owner harmless from loss on account thereof, except that the
Owner shall be responsible for such loss when a
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particular design, process or product of a particular manufacturer is required
by the Owner.
2.2.13 The Design/Builder shall be responsible to the Owner and shall bear the
costs of defending Owner for acts and omissions of the Design/Builder=s
employees and parties in privity of contract with the Design/Builder to perform
a portion of the Work, including their agents and employees.
2.2.14 The Design/Builder shall keep the premises free from accumulation of
waste materials or rubbish caused by the Design/Builder=s operations and shall
remove same in compliance with applicable regulations and ordinances. At the
completion of the Work, the Design/Builder shall remove from and about the
Project, the Design/Builder=s tools, construction equipment, machinery, surplus
materials, waste materials and rubbish.
2.2.15 The Design/Builder shall prepare Change Orders for the Owner=s approval
and execution in accordance with the Agreement and shall have authority to make
minor changes in the design and construction consistent with the intent of the
Agreement not involving an adjustment in the contract sum or an extension of the
contract time. The Design/Builder shall promptly inform the Owner, in writing,
of minor changes in the design and construction.
2.2.16 The Owner shall notify the Design/Builder when the Work or an agreed
portion thereof is substantially completed by issuing a Certificate of
Substantial Completion which will establish the Date of Substantial Completion,
shall state the responsibility of each party for security, maintenance, heat,
utilities, damage to the Work, and insurance, shall include a list of items to
be completed or corrected and shall fix a time within which the Design/Builder
shall complete items listed therein. Disputes between the Owner and
Design/Builder regarding the Certificate of Substantial Completion shall be
resolved by arbitration in accordance with Article 10.
2.2.17 The Design/Builder shall maintain in good order at the site one record
copy of the drawings, specifications, product data, samples, shop drawings,
Change Orders and other Modifications, marked currently to record changes made
during construction. These "as built" drawings and materials shall be delivered
to the Owner upon completion of the design and construction and prior to final
payment.
ARTICLE 3
OWNER
3.1 The Owner shall designate a representative authorized to act on the
Owner's behalf with respect to the Project.
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3.2 The Owner shall appoint an on-site project representative to observe the
Work. Design/Builder shall give the representative access to the Project and all
records on a timely basis.
3.3 The Design/Builder shall assist the Owner in securing all building and other
permits, licenses and inspections and the Design/Builder shall pay the fees for
such permits, licenses and inspections as part of the Contract Price.
3.4 The Owner shall furnish services by land surveyors, geotechnical engineers
and other consultants for subsoil, air, and water conditions for use by the
Design/Builder.
3.5 The Owner shall provide a Site properly zoned, with access thereto as
necessary for the Design/Builder to perform the Work.
3.6 The Owner shall provide all environmental permits and regulatory agency
approvals.
3.7 If the Owner observes or otherwise becomes aware of a material fault or
defect in the Work or nonconformity with the Construction Documents, the Owner
shall give prompt written notice thereof to the Design/Builder. 3.8 The Owner
shall furnish required information and services and shall promptly render
decisions pertaining thereto to avoid delay in the orderly progress of the
design and construction.
3.9 The Owner shall, at the request of the Design/Builder and upon execution of
this Agreement provide a certified or notarized statement of funds available for
the Project and their source.
3.10 The Owner shall communicate with contractors and suppliers, only through
the Design/Builder or with the Design/Builder=s knowledge and approval, provided
Design/Builder is not in default under this Agreement.
ARTICLE 4
TIME
4.1 The Design/Builder shall provide services consistent with reasonable skill
and care and the orderly progress of the design and construction.
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4.2 Time limits stated in the Contract Documents are of the essence of the
Agreement. The Work to be performed under this Agreement shall commence within
ten (10) days of the Design/Builder=s receipt of the Owners Notice to Proceed.
Failure by Owner to issue Notice to Proceed by September 1, 1997, will
constitute a breach of this Agreement unless the Parties agree to the Notice to
Proceed at a later date.
4.3 The Work shall be Mechanically Complete within two hundred ten (210) days
following receipt of the Notice to Proceed by the Design/Builder, unless the
parties mutually agree in writing to an earlier or later date. Mechanically
Complete is the stage of the Work in which all of the Facility systems and
components have been installed, checked out and are completely ready for
start-up, commissioning, and Performance and Operational Testing. Seven (7)
working days before Design/Builder expects to achieve Mechanical Completion, he
shall notify Owner of same and request a Mechanical Completion inspection. The
Owner will promptly inspect and accept or reject the project for Mechanical
Completion. If rejected, a list of reasons will be issued by Owner, which
Design/Builder shall promptly accomplish or remedy. If accepted, Owner will
issue a Certificate of Mechanical Completion to Design/Builder.
4.4 Upon receipt of the Certificate of Mechanical Completion, the Design/Builder
will work with the Owner in scheduling the start-up and commissioning, as well
as the Performance Demonstration. Seven (7) work days before the start of the
Performance Demonstration, the Design/Builder shall notify the Owner of such
tests.
4.5 The Date of Substantial Completion of the Work shall be no later than sixty
(60) days following the Date of Mechanical Completion unless the parties
mutually agree in writing to an earlier or later date. But in no event shall the
Date of Substantial Completion be later than June 30, 1998. Substantial
Completion is defined as the date when the Performance and Operational Testing
is complete and the Work is sufficiently complete, so the Owner can occupy and
operate the Facility. If after the date established for the Date of Substantial
Completion, Design/Builder has sufficiently completed the Work but the Facility
fails the Performance Tests through no fault of the Design/Builder, the Facility
will be deemed Substantially Complete for purposes of payment to the
Design/Builder and the beginning of the warranty periods.
4.6 Not more than fourteen (14) days after the receipt by Design/Builder of the
Notice to Proceed, the Design/Builder shall submit a written progress schedule
indicating each major category or unit of general work to be performed at site,
properly sequenced and intermeshed and showing completion of the work consistent
with the time period established in this Article 4. The Design/Builder shall
provide the Owner with written monthly updates of the progress schedule
indicating completed activities and any changes in sequencing or activity
durations.
4.7 If the Design/Builder is delayed in the performance of the Project by
any acts of or
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neglect of the Owner, or by an employee, agent or representative of the Owner,
or by changes ordered in the Work by the Owner, and not required to correct
design problems or discrepancies, or by the combined action of the Owner and any
of its employees, agents or representatives and is in no way caused by or
resulting from default or collusion on the part of the Design/Builder or by any
other cause, which the Design/Builder could not reasonably control or
circumvent, then the Scheduled Completion Date shall be extended for a period
equal to the length of such delay.
ARTICLE 5
PAYMENTS
5.1 Progress Payments
5.1.1 The Design/Builder shall deliver to the Owner itemized Applications for
Payment by the 5th day of each month. Design/Builder shall submit with each
Application for Payment proper vouchers or other evidence satisfactory to Owner
certifying its payments for labor, and where applicable, to subcontractors and
for materials. Each Application for Payment shall include a breakdown of the
cost of labor, materials, sales tax and services in the form as prescribed by
Owner.
5.1.2 Properly submitted and correct Applications for Payment, received by Owner
by the 5th will be paid on the 20th day of each month, respectively. Any
disputed amounts will be withheld from the invoice and the undisputed amount
paid on time.
5.1.3 The Application for Payment shall constitute a representation by the
Design/Builder to the Owner that the design and construction have progressed to
the point indicated; the quality of the Work covered by the application is in
accordance with the Contract Documents; and the Design/Builder is entitled to
payment in the amount requested.
5.1.4 The Design/Builder shall pay each contractor, upon receipt of payment from
the Owner, out of the amount paid to the Design/Builder on account of such
contractor=s work, the amount to which said contractor is entitled in accordance
with the terms of the Design/Builder=s contract with such contractor. The
Design/Builder shall, by appropriate agreement with each contractor, require
each contractor to make payments to subcontractors in similar manner.
5.1.5 The Owner shall have no obligation to pay or to be responsible in any way
for payment to a contractor of the Design/Builder, except as otherwise required
by law.
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5.1.6 No progress payment or partial or entire use or occupancy of the Project
by the Owner shall constitute an acceptance of Work not in accordance with the
Contract Documents.
5.1.7 The Design/Builder warrants that: (1) title to Work, materials and
equipment covered by an Application for Payment will pass to the Owner either by
incorporation in construction or upon receipt of payment by the Design/Builder,
whichever occurs first; (2) Work, materials and equipment covered by previous
Applications for payment for which payment has been received are free and clear
of liens, claims, security interests or encumbrances, hereinafter referred to as
Aliens@; and (3) no Work, materials or equipment covered by an Application for
Payment will have been acquired by the Design/Builder, or any other person
performing work at the site or furnishing materials or equipment for the
Project, subject to an agreement under which an interest therein or an
encumbrance thereon is retained by the seller or otherwise imposed by the
Design/Builder or such other person.
5.1.8 The Contract provides for up to 5% retainage. At the date of Substantial
Completion or occupancy of the Work or any agreed upon portion thereof by the
Owner, whichever occurs first, the Design/Builder may apply for and the Owner,
if the Design/Builder has satisfied the requirements of Paragraph 5.2.1 and any
other requirements of the Contract relating to retainage, shall pay the
Design/Builder the amount retained, if any, for the Work or for the portion
completed or occupied, less the reasonable value of incorrect or incomplete
Work. Final payment of such withheld sum shall be made upon correction or
completion of such Work.
5.1.9 Concurrent with Article 4.2, Notice to Proceed, the Owner shall furnish to
the Design/Builder an advance payment of $250,000 and any advance payments
required for the procurement of long lead time equipment which will assist in
the expediting of the Project. The payment shall be made within thirty (30) days
of the Notice to Proceed.
5.2 Final Payment
5.2.1 Neither final payment nor amounts retained, if any, shall become due until
the Design/Builder submits to the Owner (1) an affidavit that payrolls, bills
for materials and equipment, and other indebtedness connected with the Project
for which the Owner or Owner=s property might be liable have been paid or
otherwise satisfied, (2) consent of surety, if any, to final payment, (3) a
certificate acceptable to Owner that insurance required by the Contract
Documents is in force following completion of the Work, and (4) if required by
the Owner, other data establishing payment or satisfaction of obligations, such
as receipts, releases and waivers of liens arising out of the Agreement, to the
extent and in such form as may be designated by the Owner. If a contractor
refuses to furnish a release or waiver required by the Owner, the Design/Builder
may furnish a bond satisfactory to the Owner to indemnify the Owner against such
lien. If such Lien remains unsatisfied after payments are made, the
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Design/Builder shall promptly reimburse the Owner for moneys the latter may be
compelled to pay in discharging such lien, including all costs and reasonable
attorneys= fees.
5.2.2 Final payment constituting the entire unpaid balance due shall be paid by
the Owner to the Design/Builder upon the Owner=s receipt of a correct
Design/Builder=s final Application for Payment when the Work has been completed
and the Contract fully performed except for those responsibilities of the
Design/Builder which survive final payment.
5.2.3 The making of final payment shall constitute a waiver of all claims by the
Owner except those arising from:
.1 unsettled liens;
.2 faulty or defective Work appearing after Substantial
Completion;
.3 failure of the Work to comply with requirements of the
Contract Documents; or
.4 terms of special warranties required by the Contract
Documents.
.5 outstanding contractual issues identified in writing at
the time of final payment.
5.2.4 Acceptance of final payment shall constitute a waiver of all claims by
the Design/Builder.
5.3 Interest Payments
5.3.1 Payments due the Design/Builder under the Agreement which are not paid
when due shall bear interest from the date due at the rate specified in Article
13.
ARTICLE 6
PROTECTION OF PERSONS AND PROPERTY
6.1 The Design/Builder shall be solely responsible for initiating, maintaining
and providing supervision of safety, precautions and programs in connection with
the Work.
6.2 The Design/Builder shall take reasonable precautions for safety of, and
shall provide reasonable protection to prevent damage, injury or loss to: (1)
employees on the work and other persons who may be affected thereby; (2) the
Work and materials and equipment to be incorporated therein; and (3) other
property at or adjacent to the site.
6.3 The Design/Builder shall give notices and comply with applicable laws,
ordinances, rules, regulations and orders of public authorities bearing on the
safety of persons and property and their protection from damage, injury or loss.
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6.4 The Design/Builder shall be liable for damage or loss to property at the
site caused in whole or in part by the Design/Builder, a contractor of the
Design/Builder or anyone directly or indirectly employed by either of them or by
anyone for whose acts they may be liable, except damage or loss attributable to
the acts or omissions of the Owner, the Owner=s separate contractors or anyone
directly or indirectly employed by them or by anyone for whose acts they may be
liable, and not attributable to the fault or negligence of the Design/Builder.
ARTICLE 7
INSURANCE AND BONDS
7.1 Design/Builder's Liability Insurance
7.1.1 The Design/Builder shall purchase and maintain in a company or companies
authorized to do business in the state in which the Work is located such
insurance as will protect the Design/Builder from claims set forth below which
may arise out of or result from operations under the Contract by the
Design/Builder or by a contractor of the Design/Builder, or by anyone directly
or indirectly employed by any of them, or by anyone for whose acts they may be
liable:
.1 claims under workers= or workmen=s compensation, disability benefit
and other similar employee benefit laws which are applicable to the
Work to be performed;
.2 claims for damages because of bodily injury, occupational sickness
or disease, or death of the Design/Builder=s employees under any
applicable employer=s liability law;
.3 claims for damages because of bodily injury, sickness or disease,
or death of persons other than the Design/Builder=s employees;
.4 claims for damages covered by usual personal injury liability
coverage which are sustained (1) by a person as a result of an offence
directly or indirectly related to employment of such person by the
Design/Builder or (2) by another person;
.5 claims for damages, other than to the Work at the site, because of
injury to or destruction of tangible property, including loss of use;
and
.6 claims for damages for bodily injury or death of a person or property
damage arising out of ownership, maintenance or use of a motor vehicle.
7.1.2 The insurance required by the above Subparagraph 7.1.1 shall be written
for not less than the limits of liability specified in the Contract Documents or
required by law, whichever are greater.
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7.1.3 The Design/Builder=s liability insurance shall include contractual
liability insurance applicable to the Design/Builder's obligations under
Paragraph 11.7.
7.1.4 Certificates of Insurance, and copies of policies if requested, acceptable
to the Owner shall be delivered to the Owner prior to commencement of design and
construction. These Certificates as well as insurance policies required by this
Paragraph shall contain a provision that coverage will not be canceled or
allowed to expire until at least thirty (30) days= written notice has been given
to the Owner. If any of the foregoing insurance coverages are required to remain
in force after final payment, an additional certificate evidencing continuation
of such coverage shall be submitted along with the application for final
payment.
7.2 Owner=s Liability Insurance
7.2.1 The Owner shall be responsible for purchasing and maintaining, in a
company or companies authorized to do business in the state in which the
principal improvements are to be located, Owner=s liability insurance to protect
the Owner against claims which may arise from operations under this Project.
7.3 Property Insurance
7.3.1 Unless otherwise provided under this Agreement, the Owner shall purchase
and maintain, in a company or companies authorized to do business in the state
in which the principal improvements are to be located, property insurance upon
the Work at the site to the full insurable value thereof. Property insurance
shall include interests of the Owner, Mortgagees, the Design/Builder, and their
respective contractors and subcontractors in the Work. It shall insure against
perils of fire and extended coverage and shall include all risk insurance for
physical loss or damage including, without duplication of coverage, theft,
vandalism and malicious mischief. If the Owner does not intend to purchase such
insurance for the full insurable value of the entire work, the Owner shall
inform the Design/Builder in writing prior to commencement of the Work. The
Design/Builder may then effect insurance for the Work at the site which will
protect the interests of the Design/Builder and the Design/Builder=s contractors
and subcontractors, and by appropriate Change Order the costs thereof shall be
charged to the Owner. If the Design/Builder is damaged by failure of the Owner
to purchase or maintain such insurance without notice to the Design/Builder,
then the Owner shall bear all reasonable costs properly attributable thereto. If
not covered under the all risk insurance or not otherwise provided in the
Contract Documents, the Owner shall effect and maintain similar property
insurance on portions of the Work stored off-site or in transit when such
portions of the Work are to be included in an Application for Payment.
7.3.2 Unless otherwise provided under this Agreement, the Owner shall
purchase and maintain
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such machinery insurance as may be required by the Contract documents or by law
and which shall specifically cover such insured objects during installation and
until final acceptance by the Owner. This insurance shall cover interests of the
Owner, Lenders, Mortgagees, the Design/Builder, and the Design/Builder=s
contractors and subcontractors in the Work.
7.3.3 A loss insured under Owner=s property insurance is to be adjusted with the
Owner and made payable to the Owner as trustee for the insureds, as their
interests may appear, subject to requirements of any applicable mortgagee clause
and of Subparagraph 7.3.8. The Design/Builder shall pay contractors their share
of insurance proceeds received by the Design/Builder, and by appropriate
agreement, written where legally required for validity, shall require
contractors to make payments to their subcontractors in similar manner.
7.3.4 Before an exposure to loss may occur, the Owner shall file with the
Design/Builder a copy of each policy required by this Paragraph 7.3. Each policy
shall contain only those endorsements specifically related to this Project. Each
policy shall contain a provision that the policy will not be canceled or allowed
to expire until at least thirty (30) days= prior written notice has been given
the Design/Builder.
7.3.5 If the Design/Builder requests in writing that insurance for Project risks
other than those described herein or for other special hazards be included in
the property insurance policy, the Owner shall, if possible, obtain such
insurance, and the cost thereof shall be charged to the Design/Builder by
appropriate Change Order.
7.3.6 The Owner and Design/Builder waive all rights against each other and the
contractors, subcontractors, agents and employees, each of the other, for
damages caused by fire or other perils to the extent covered by property
insurance obtained pursuant to this Paragraph 7.3 or other property insurance
applicable to the Work, except such rights as they may have to proceeds of such
insurance held by the Owner as trustee. The Owner or Design/Builder, as
appropriate, shall require from contractors and subcontractors by appropriate
agreements, written where legally required for validity, similar waivers each in
favor of other parties enumerated in this Paragraph 7.3. The policies shall be
endorsed to include such waivers of subrogation.
7.3.7 If required in writing by a party in interest, the Owner as trustee shall
provide, upon occurrence of an insured loss, a bond for proper performance of
the Owner=s duties. The cost of required bonds shall be charged against proceeds
received as trustee. The Owner shall deposit proceeds so received in a separate
account and shall distribute them in accordance with such agreement as the
parties in interest may reach, or in accordance with an arbitration award in
which case, the procedure shall be provided in Article 10. If after such loss,
no other special agreement is made, replacement of damaged Work shall be covered
by appropriate Change Order.
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7.3.8 The Owner, as trustee, shall have power to adjust and settle a loss with
insurers, unless one of the parties in interest shall object, in writing, within
ten (10) days after occurrence of loss, to the Owner=s exercise of this power.
If such objection be made, the Owner as trustee shall make settlement with the
insurers in accordance with the decision of arbitration as provided in Article
10. If distribution of insurance proceeds by arbitration is required, the
arbitrators will direct such distribution.
7.3.9 If the Owner finds it necessary to occupy or use a portion or portions of
the Work before Substantial Completion, such occupancy or use shall not commence
prior to a time agreed to by the Owner and Design/Builder and to which the
insurance company or companies providing property insurance have consented by
endorsement to the policy or policies. The property insurance shall not lapse or
be canceled on account of such partial occupancy or use. Consent of the
Design/Builder and of the insurance company or companies to such occupancy or
use shall not be unreasonably withheld.
7.4 Loss of Use Insurance
7.4.1 The Owner, at the Owner=s option, may purchase and maintain such insurance
as will insure the Owner against loss of use of the Owner=s property due to fire
or other hazards, however caused. The Owner waives all rights of action against
the Design/Builder, and its contractors and their agents and employees, for loss
of use of the Owner=s property, including consequential losses due to fire or
other hazards, however caused, to the extent covered by insurance under this
Paragraph 7.4.
7.5 Performance Bond and Payment Bond
7.5.1 At Owner s request, the Design/Builder shall furnish a surety bond for the
installation amount (labor and materials) of the Contract covering the faithful
performance of the Contract and the payment of all obligations arising
thereunder. The cost of any such surety bond shall be paid by the Owner.
7.6 Professional Liability Insurance
7.6.1 The Design/Builder shall provide a Professional Liability Insurance
Project Policy for a minimum amount of $5,000,000 aggregate in a form acceptable
to the Owner.
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ARTICLE 8
CHANGES IN THE WORK
8.1 Change Orders
8.1.1 A Change Order is a written order signed by the Owner and Design/Builder,
and issued after execution of the Agreement, authorizing a change in the Work or
adjustment in the contract sum or contract time. The contract sum and contract
time may be changed only by Change Order.
8.1.2 The Owner=s designated representative, without invalidating the Agreement,
may order changes in the Work within the general scope of the Agreement
consisting of additions, deletions or other revisions and the contract sum and
contract time shall be adjusted accordingly. Such changes in the Work shall be
authorized by Change Order, and shall be performed under applicable conditions
of the Contract Documents.
8.1.3 (Deleted)
8.1.4 Cost or credit to the Owner resulting from a change in the Work shall be
determined in one or more of the following ways: .1 by mutual acceptance of a
lump sum properly itemized and supported by sufficient substantiating data to
permit evaluation; .2 by unit prices stated in the Contract Documents or
subsequently agreed upon; .3 by cost to be determined in a manner agreed upon by
the parties and a mutually acceptable fixed or percentage fee; or .4 by the
method provided below.
8.1.5 If none of the methods set forth in Clauses 8.1.4.1, 8.1.4.2, or 8.1.4.3
is agreed upon, the Design/Builder, provided a written order signed by the Owner
is received, shall promptly proceed with the Work involved. The cost of such
Work shall then be determined on the basis of reasonable expenditures and
savings of those performing the Work attributable to the change, including the
expenditures for design services and revisions to the Contract Documents. In
case of an increase in the contract sum, the cost shall include a 15% allowance
for overhead and profit, and shall be exclusive of existing soft costs or
overhead. In case of the methods set for the Clauses 8.1.4.3 and 8.1.4.4, the
Design/Builder shall keep and present an itemized accounting together with
appropriate supporting data for inclusion in a Change Order. Unless otherwise
provided in the Contract Documents, cost shall be limited to the following: cost
of materials, including sales tax and cost of delivery; cost of labor, including
social security, old age and unemployment insurance; and fringe benefits
required by agreement or custom;
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workers= or workmen=s compensation insurance, bond premiums; rental cost of
equipment and machinery; and fees paid to architects, engineers and other
professionals. The amount of credit to be allowed by the Design/Builder to the
Owner for deletion or change which results in a net decrease in the contract sum
will be actual net cost. When both additions and credits covering related Work
or substitutions are involved in a change, the allowance for overhead and profit
shall be figured on the basis of the net increase, if any, with respect to that
change.
8.1.6 (Deleted)
8.2 CONCEALED CONDITIONS
8.2.1 If concealed or unknown conditions of an unusual nature that affect the
performance of the Work and vary from those indicated by the Contract Documents
are encountered below ground or in an existing structure other than the Work,
which conditions are not ordinarily found to exist or which differ materially
from those generally recognized as inherent in work of the character provided
for in this Part 2, notice by the observing party shall be given promptly to the
other party and, if possible, before conditions are disturbed and in no event
later than 21 days after first observance of the conditions. The contract sum
shall be equitably adjusted for such concealed or unknown conditions by Change
Order upon claim by either party made within twenty-one days after the claimant
becomes aware of the conditions.
8.3 Regulatory Changes
8.3.1 The Design/Builder shall be compensated for changes in the Work
necessitated by the enactment or revision of codes, laws or regulations
subsequent to the execution of this Agreement.
ARTICLE 9
CORRECTION OF WORK
9.1 The Design/Builder shall promptly correct at Contractor=s own expense, Work
rejected by the Owner or known by the Design/Builder to be defective or failing
to conform to the Construction Documents, whether observed before or after
Substantial Completion and whether or not fabricated, installed or completed,
and shall correct Work under this Agreement found to be defective or
nonconforming within a period of one (1) year from the date of Substantial
Completion of the Work or designated portion thereof, or within such longer
period provided by an applicable special warranty in the Contract Documents.
9.2 Nothing contained in this Article 9 shall be construed to establish a
period of limitation
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with respect to other obligations of the Design/Builder under this Agreement.
Paragraph 9.1 relates only to the specific obligation of the Design/Builder to
correct the Work, and has no relationship to the time within which the
obligation to comply with the Contract Documents may be sought to be enforced,
nor to the time within which proceedings may be commenced to establish the
Design/Builder=s liability with respect to the Design/Builder=s obligations
other than correction of the Work.
9.3 If the Design/Builder fails to correct defective Work as required or
persistently fails to carry out Work in accordance with the Contract Documents,
the Owner, by written order signed personally or by an agent specifically so
empowered by the Owner in writing, may order the Design/Builder to stop the
Work, or any portion thereof, until the cause for such order has been
eliminated; however, the Owner=s right to stop the Work shall not give rise to a
duty on the part of the Owner to exercise the right for benefit of the
Design/Builder or other persons or entities.
9.4 If the Design/Builder defaults or neglects to carry out the Work in
accordance with the Contract Documents and fails within seven (7) days after
receipt of written notice from the Owner to commence and continue correction of
such default or neglect with diligence and promptness, the Owner may give a
second written notice to the Design/Builder and, seven days following receipt by
the Design/Builder of that second written notice and without prejudice to other
remedies the Owner may have, correct such deficiencies. In such case an
appropriate Change Order shall be issued deducting from payments then or
thereafter due the Design/Builder costs of correcting such deficiencies. If the
payments then or thereafter due the Design/Builder are not sufficient to cover
the amount of the deduction, the Design/Builder shall pay the difference to the
Owner. Such action by the Owner shall be subject to arbitration, in accordance
with Article 10.
ARTICLE 10
ARBITRATION
10.1 Claims, disputes and other matters in question between the parties to this
Agreement arising out of or relating to this Agreement shall be decided by
arbitration in accordance with the Construction Industry Arbitration Rules of
the American Arbitration Association then in effect unless the parties agree
otherwise. No arbitration arising out of or relating to this Agreement shall
include, by consolidation or joinder or in any other manner, an additional
person not a party to this Agreement except by written consent containing
specific reference to this Agreement and signed by the Owner, Design/Builder and
any other person sought to be joined. Consent to arbitration involving an
additional person or persons shall not constitute consent to arbitration of a
dispute not described or with a person not named therein. This provision shall
be specifically enforceable in any court of competent jurisdiction.
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10.2 Notice of demand for arbitration shall be filed in writing with the other
party to this Agreement and with the American Arbitration Association. The
demand shall be made within a reasonable time after the claim dispute or other
matter in questions has arisen. In no event shall demand for arbitration be made
after the date when the applicable statute of limitations would bar institution
of a legal or equitable proceeding based on such claim, dispute or other matter
in question.
10.3 The award rendered by arbitrators shall be final, and judgment may be
entered upon it in accordance with applicable law in any court having
jurisdiction.
10.4 Unless otherwise agreed in writing, the Design/Builder shall carry on the
Work and maintain its progress during any arbitration proceedings, and the Owner
shall continue to make payments to the Design/Builder in accordance with the
Contract Documents, except where arbitration originates from Owner=s stop work
order.
10.5 This Article 10 shall survive completion or termination of this
Agreement.
ARTICLE 11
MISCELLANEOUS PROVISIONS
11.1 This Agreement shall be governed by the laws of the state where the
Facility is located. Until the site is identified by the Owner pursuant to
written notice to Design/Builder prior to or with the Notice to Proceed, this
Agreement shall be governed by the laws of the state of Utah.
11.2 (Deleted)
11.3 In case a provision of this Agreement is held to be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not be affected.
11.4 Subcontracts
11.4.1 The Design/Builder, as soon as practicable after receipt of the Notice to
Proceed, shall furnish to the Owner in writing the names of the persons or
entities the Design/Builder will engage as contractors for the Project.
11.4.2 Nothing contained in the Design/Build Contract Documents shall create a
professional obligation or contractual relationship between the Owner and any
third party.
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11.5 Work By Owner Or Owner=s Contractors
11.5.1 The Owner reserves the right to perform work related to, but not part of,
the Project and to award separate contracts in connection with other work at the
site. If the Design/Builder claims that delay or additional cost is involved
because of such action by the Owner, the Design/Builder shall make such claims
as provided in Paragraph 11.6.
11.5.2 The Design/Builder shall afford the Owner=s separate contractors
reasonable opportunity for introduction and storage of their materials and
equipment for execution of their work. The Design/Builder shall incorporate and
coordinate the Design/Builder=s Work with work of the Owner=s separate
contractors as required by the Contract Documents.
11.6 Claims For Damages
11.6.1 If the Design/Builder suffers any injury or damage to person or property
because of an act or omission of the Owner, the Owner=s employees or agents, or
another for whose acts the Owner is legally liable, any claim shall be made in
writing in the form of a Request for Change Order within ten (10) days after
such injury or damage is or should have been first known to Design/Builder. Any
and all claims not made within ten (10) days are barred, waived, released and
discharged. The decision of the Owner shall be final and binding on both parties
unless the Design/Builder files a Demand for Arbitration within ten (10) days of
the Owner=s decision. If the Design/Builder files a Demand for Arbitration, the
claim will be arbitrated in accordance with Article 10.
11.7 Indemnification
11.7.1 To the fullest extent permitted by law, the Design/Builder shall
indemnify and hold harmless the Owner and the Owner=s consultants and separate
contractors, any of their subcontractors, sub-tier-contractors, agents and
employees from and against claims, damages, losses and expenses, including but
no limited to attorneys= fees, arising out of or resulting from performance of
the Work. These indemnification obligations shall be limited to claims, damages,
losses or expenses (1) that are attributable to bodily injury, sickness, disease
or death, or to injury to or destruction of tangible property (other than the
Work itself) including loss of use resulting therefrom, and (2) to the extent
such claims, damages, losses or expenses are caused in whole or in party by
negligent acts or omissions of the Design/Builder, the Design/Builder=s
contractors, anyone directly or indirectly employed by either or anyone for
whose acts either may be liable, regardless of whether or not they are caused in
party by a party indemnified hereunder. Such obligation shall not be construed
to negate, abridge or otherwise reduce other rights or obligations of indemnity
which would otherwise exist as to a party or person described in this Paragraph
11.7. The above indemnification shall not extend to include indirect or
consequential damages.
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11.7.2 In claims against the Owner or its consultants and its contractors, any
of their subcontractors, sub-tier-contractors, agents or employees by an
employee of the Design/Builder, its contractors, anyone directly or indirectly
employed by them or anyone for whose acts they may be liable, the
indemnification obligation under this Paragraph 11.7 shall not be limited by a
limitation on amount or type of damages, compensation or benefits payable by or
for the Design/Builder, or a Design/Builder=s contractor, under workers= or
workmen=s compensation acts, disability benefit acts or other employee benefit
acts.
11.7.3 Under no circumstances shall Design/Builder be liable to Owner for, nor
shall Owner make claim to Design/Builder for, consequential loss or damage,
including but not limited to loss or damage resulting from loss of use, loss of
profits or revenues, cost of capital, loss of good will, claims of Owner=s
customers, or like items of loss or damage, and Owner hereby releases
Design/Builder therefrom.
11.8 Successors and Assigns
11.8.1 This Agreement shall be binding on successors, assigns, and legal
representatives of and persons in privity of contract with the Owner or
Design/Builder. The Design/Builder shall not assign, sublet or transfer an
interest in the Agreement without written consent of the Owner.
11.8.2 This Paragraph 11.8 shall survive completion or termination of the
Agreement.
11.9 In case of termination of the Engineer, the Design/Builder shall provide
the services of another lawfully licensed person or entity against whom the
Owner makes no reasonable objection.
11.10 Extent of Agreement
11.10.1 Since the Facility to be designed and constructed under this Agreement
is expected, once operational, to provide tax credits under Section 29 of the
Internal Revenue Code of 1986, it is the express intent of the parties that this
Agreement qualify as a binding contract for the purposes of construing Section
29(g)(1)(A) of the Internal Revenue Code. In the event that any one or more of
the provisions or parts of any provisions contained in this Agreement are held
or found to cause this Agreement not to be "binding" within the meaning of
Section 29(g)(1)(A), such provision or provisions shall automatically be struck
from this Agreement, but the validity, legality and enforceability of the
remaining provisions of this Agreement shall not be affected or impaired
thereby.
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11.11 Design/Builder shall check all materials, equipment and labor entering
into the Work and shall keep such full and detailed accounts as may be necessary
for proper financial management under this Agreement, and the accounting methods
shall be satisfactory to the Owner. Owner shall be afforded access for timely
review in a practical manner of all Design/Builder=s records, books,
correspondence, instructions, drawings, receipts, vouchers, memoranda, and
similar data relating to the Cost of the Work and Design/Builder=s Fee.
Design/Builder shall be preserve all such documents for a period of three (3)
years after the final payment by Owner.
ARTICLE 12
TERMINATION OF THE AGREEMENT
12.1 Termination By The Owner
12.1.1 The Agreement may be terminated by the Owner upon fourteen (14) days=
written notice at the Owner=s election. In the event of termination at the
Owner=s election and not due to the fault of the Design/Builder, the
Design/Builder shall be compensated for services performed to termination date,
together with reasonable industry standard demobilization expenses, reasonable
close-out costs, reimbursable expenses then due, and a reasonable overhead and
profit on work performed; provided, however, that in no event shall the
compensation paid pursuant to this Subparagraph 12.1.1 (excluding reimbursement)
be less than 6% of the Total Contract Price as defined in Subparagraph 13.2.1.
If the Total Contract Price has not been established, the minimum 6%
compensation in this Subparagraph shall be based on the Guaranteed Maximum Price
specified in Subparagraph 13.2.1.
12.1.2 If the Design/Builder defaults or persistently fails or neglects to carry
out the work in accordance with the Contract Documents or fails to perform the
provisions of the Agreement, the Owner may give written notice that the Owner
intends to terminate the Agreement. If the Design/Builder fails to correct the
defaults within fourteen (14) days after being given notice, the Owner may
without prejudice to any other remedy make good such deficiencies and may deduct
the cost thereof from the payment due the Design/Builder or, at the Owner=s
option, may terminate the employment of the Design/Builder and take possession
of the site and of all materials, equipment, tools and construction equipment
and machinery thereon owned by the Design/Builder as well as all drawings,
plans, and specifications and finish the Work by whatever means the Owner may
deem expedient. If the expense to complete the Work exceeds the unpaid balance
of the Contract Sum, the Design/Builder shall pay the difference to the Owner.
12.2 Termination by the Design/Builder
12.2.1 If the Owner fails to make payment when due or is otherwise in default
with this
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Agreement, the Design/Builder may give written notice of the Design/Builder=s
intention to terminate the Agreement. If the Design/Builder fails to receive
payment within fourteen (14) days after receipt of such notice by the Owner, the
Design/Builder may give a second written notice and, fourteen (14) days after
receipt of such second written notice by the Owner, may terminate the Agreement
and recover from the Owner payment for the cost of the Work executed and for
proven losses sustained upon materials, equipment, tools, and construction
equipment and machinery, including reasonable profit and applicable damages;
provided, however, that in no event shall the compensation paid pursuant to this
Subparagraph 12.2.1 (excluding reimbursement) be less than 6% of the Total
Contract Price as defined in Subparagraph 13.2.1. If the Total Contract Price
has not been established, the minimum 6% compensation in this Subparagraph shall
be based on the Guaranteed Maximum Price specified in Subparagraph 13.2.1.
ARTICLE 13
BASIS OF COMPENSATION
The Owner shall compensate the Design/Builder in accordance with Article 5,
Payments, and the other provisions of this Agreement as described below.
13.1 Compensation
13.1.1 FOR BASIC SERVICES, as described in Paragraphs 2.2.2 through 2.2.17, and
for any other services included in Article 14 as part of Basic Services, Basic
Compensation shall be as follows:
13.2 Project Prices
13.2.1 Owner shall pay Design/Builder for the faithful performance of this
Agreement, subject to the additions or deductions provided herein. The parties
intend within 30 days of the Notice to Proceed to establish a lump sum price
("Total Contract Price"). Until such Total Contract Price is established,
Design/Builder will proceed with the Work on a cost-reimbursable basis in accord
with Exhibit "B" ("Cost Plus Proposal"); provided that once the Total Contract
Price is established, credit will be allowed for any payments made on the
cost-reimbursable basis. Both the Total Contract Price and the Cost Plus
Proposal covers all Work required to reach Contract Completion. In no event
shall the Total Contract Price or the Cost Plus Proposal exceed $5,300,000
without written approval of the Owner ("Guaranteed Maximum Price").
13.2.2 A detailed breakdown of the Total Contract Price as well as a list of
allowances and clarifications to the Scope of Work, shall be provided and
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attached hereto as Exhibit "A." 13.2.3 The adjustments to Total Contract Price
shall be adjusted by Change Orders as outlined in Article 8, Changes in Work.
13.2.4 Costs reimbursable by the Owner will include all materials, shipping, and
procurement costs, engineering costs, construction management, equipment costs,
subcontract costs, and all other costs directly related to the design and
construction of the Facility. Engineering and field construction management
personnel will be billed in accordance with Exhibit "B." Any general overhead
costs and profit shall be included in the Design/Builder=s Fixed Fee.
13.2.5 The Total Contract Price, subject to modification as provided herein,
shall include a Fixed Fee of $300,000.00. The Fixed Fee will be paid
proportionately with the rest of the Total Contract Price, as the Work is
performed.
13.2.6 No casual, spot, or discretionary overtime will change the Total Contract
Price. In the case of other overtime, the same shall increase the Total Contract
Price only if authorized in writing by Owner and incorporated by Change Order.
13.2.7 (Deleted)
13.2.8 (Deleted)
13.3.1 If Total Contract Price, as adjusted, is exceeded, Owner will pay for
labor, as set forth in Paragraphs 13.2.4 and shall pay other agreed properly
substantiated Design/Builder costs. The first $100,000.00 of the excess over the
Total Contract Price will be deducted from the Fee otherwise payable under
Paragraph 13.2.5.
13.3.2 If Total Contract Price is underrun, then Owner and Design/Builder shall
share the underrun 25/75 (25 percent to Design/Builder and 75 percent to Owner),
and in addition, Design/Builder shall receive the Fee set forth in Paragraph
13.2.5 of this Agreement.
13.4 Reimbursable Expenses
13.4.1 Reimbursable Expenses are in addition to the compensation for Basic and
Additional Services and include actual expenditures made by the Design/Builder
in the interest of the Project for the expenses listed in Exhibit "B."
13.4.2 For Reimbursable Expenses, compensation shall be as specified in
Exhibit
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"B."
13.5 Interest Payments
13.5.1 The rat e of interest for past due payments shall be as follows: prime
rate plus 2%, compounded annually.
ARTICLE 14
OTHER PROVISIONS
14.1 Scope of Work
14.1.1 The Design/Builder shall provide all engineering, materials, labor, and
equipment associated with the construction at a Coal Fine Agglomeration Facility
to be constructed at a site to be designated by the Owner.
14.1.2 The Design/Builder will construct the Facility in accordance with one of
the following two options, as specified by Owner at the time Owner issues the
Notice to Proceed: (i) for Option A, the Design/Builder will construct the
Facility in accordance with Exhibit AC,@ Specification For The Construction Of A
Coal Agglomeration Facility, dated November 15, 1996 and prepared by Centerline
Engineering Corporation; or (ii) for Option B, the Design/Builder will provide
the Facility in accordance with Exhibit "E," Skid Mounted Agglomeration
Facility.
14.1.2.1 The agglomeration equipment for the Facility shall be a Model 90AD
extruder supplied by J.C. Steele and Sons, Statesville, North Carolina, unless
Owner specifies a different piece of equipment. The Owner may specify a
different piece of agglomeration equipment, including but not limited to a Bepex
Model MS-450 Briquetter or a CPM Pelletmill Model 7932- 6 pelletizer, in order
to adapt to the particular characteristics and properties of the expected raw
material feedstock or the product specifications of the expected purchaser of
the finished product, or based on availability. The Owner may also specify a
different equivalent model and brand of extruder, briquetter or pelletizer,
provided that the agglomeration equipment that is selected shall have a rated
total product output capacity equal to the Model 90AD extruder from J.C. Steele.
The use of other agglomeration equipment shall be added through Change Orders.
14.1.3 The site location will be determined by the Owner in Southern West
Virginia.
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Any site demolition work, construction of utility above normal service
extensions and connections, and major earthwork required will be added through
Change Orders.
14.1.6 All utilities, including fuel, electricity and water, will be the
responsibility of the Owner.
14.1.7. The Design/Builder will provide five (5) sets of all Operation and
Maintenance Manuals, Spare Part Lists and other plant-related documents. The
Design/Builder shall also provide start-up and operational testing for the first
month of plant operation. The Owner and Design/Builder will mutually develop an
acceptable operational testing program ninety (90) days before mechanical
completion. The start-up and operational testing will be performed on a cost
reimbursable basis in accordance with Exhibit "B."
14.2 Warranty
14.2.1 For a period of (1) one year following the date of Substantial
Completion, the Design/Builder warrants to the Owner that materials and
equipment furnished under the Contract will be of good quality and new unless
otherwise required or permitted by the Agreement, that the Work will be free
from defects not inherent in the quality required or permitted, and that the
Work will conform with the requirements of the Contract Documents. Work not
conforming to these requirements, including substitutions not properly approved
and authorized, may be considered defective. The Design/Builder=s warranty
excludes remedy for damages or defect cause by abuse, modifications not executed
by the Design/Builder, improper or insufficient maintenance, improper operation,
or normal wear and tear under normal usage. If required by the Owner, the
Design/Builder shall furnish satisfactory evidence as to the kind and quality or
materials and equipment.
14.2.2 The Design/Builder agrees to assign to the Owner at the time of final
completion of the Work, any and all manufacturer=s warranties relating to
materials and labor used in the Work and further agrees to perform the Work in
such manner so as to preserve any and all such manufacturer=s warranties. The
parties agree that Design/Builder=s warranties relating to the performance of
Design/Builder furnished equipment, is limited to that reasonably obtainable
from suppliers.
14.2.3 THE WARRANTIES DESCRIBED HEREIN ARE IN LIEU OF ANY OTHER WARRANTIES,
EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO ANY IMPLIED WARRANTY OR
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
14.3 Project Meetings
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14.3.1 Owner will hold frequent Project Meetings on a regularly scheduled basis
for the purpose of ensuring orderly and expeditious completion of the Work. Such
meetings will include Design/Builder=s Project Manager and responsible
representatives or subcontractors, and when desirable, vendors or suppliers.
14.3.2 At these meetings, schedule and progress shall be reviewed, work
activities and administrative procedures coordinated, problem areas identified
and corrective actions initiated, pending changes discussed, and safety
activities reported. Any other pertinent or timely subjects should be included
on the meeting agenda. 14.3.3 Minutes of each meeting shall be promptly issued
by Design/Builder to all attendees and/or designated persons.
14.4 Design/Builder shall, in addition to other information required by the
Contract Documents, provide, in a format acceptable to Owner, the following
reports, compiled separately for each facility, and cumulatively: Project
Procedures Manual; Monthly Progress Report (will include procurement status
report and schedule updates).
This Agreement (Contract No. CL-003) entered into as of the day and year first
written above.
OWNER DESIGN/BUILDER
/s/ Steven R. Brown /s/ Andrew Kapusta
Steven R. Brown, Vice President Andrew Kapusta, President
Covol Technologies, Inc. Centerline Engineering Corp.
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THE SECURITIES REPRESENTED BY THIS INSTRUMENT OR DOCUMENT HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR THE SECURITIES LAWS OF CERTAIN STATES. SUCH SECURITIES MAY NOT BE
SOLD, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED AT ANY TIME, EXCEPT UPON
(1) SUCH REGISTRATION OR (2) DELIVERY TO THE PARTNERSHIP OF AN OPINION OF
COUNSEL SATISFACTORY TO THE GENERAL PARTNER THAT REGISTRATION IS NOT REQUIRED
FOR SUCH TRANSFER OR (3) SUBMISSION TO THE GENERAL PARTNER OF SUCH OTHER
EVIDENCE AS MAY BE SATISFACTORY TO THE GENERAL PARTNER TO THE EFFECT THAT ANY
SUCH TRANSFER WILL NOT BE IN VIOLATION OF THE SECURITIES ACT OF 1933, AS
AMENDED, APPLICABLE STATE SECURITIES LAWS, OR ANY RULES OR REGULATIONS
PROMULGATED THEREUNDER.
CERTIFICATE AND AGREEMENT
OF
LIMITED PARTNERSHIP
OF
Utah Synfuel #1 Ltd.
THIS CERTIFICATE AND AGREEMENT OF LIMITED PARTNERSHIP, made this ___
day of February, 1996, by and among Covol Technologies, Inc., as General
Partner, and all persons and entities whose names and addresses are set forth on
Exhibit "A" hereto as Limited Partners.
ARTICLE I
Section 1.1 FORMATION OF PARTNERSHIP. Subject to the provisions hereof,
the General Partner, and the Limited Partners hereby form the Partnership as a
limited partnership pursuant to the provisions of the Delaware Act. The General
Partner, and the Limited Partners hereby enter into this Agreement in order to
set forth the rights and obligations of the Partners and certain matters related
thereto. Except as expressly provided herein to the contrary, the rights and
obligations of the Partners and the administration and dissolution of the
Partnership shall be governed by the Delaware Act. The partnership Interest of
any Partner shall be personal property for all purposes.
Section 1.2 DEFINITIONS
"Adjusted Capital Account" means the Capital Account maintained for
each Partner as of the end of each fiscal year of the Partnership (a) increased
by any amounts which such Partner is obligated to restore under the standards
set by Treasury Regulation Section 1.704-1(b)(2)(ii)(c) (or is deemed obligated
to restore under Treasury Regulation Sections 1.704-2(g)(1) and 1.704-2(i)(5))
and (b) decreased by (a) the amount of all losses and deductions that, as of the
end of such fiscal year, are reasonably expected to be allocated to such Partner
<PAGE>
in subsequent years under Sections 704(e)(2) and 706(d) of the Code and Treasury
Regulation Section 1.751-1(b)(2)(ii) and (b) the amount of all distributions
that, as of the end of such fiscal year, are reasonably expected to be made to
such Partner in subsequent years in accordance with the terms of this Agreement
or otherwise to the extent they exceed offsetting increases to such Partner's
Capital Account that are reasonably expected to occur during (or prior to) the
year in which such distributions are reasonably expected to be made (other than
increases pursuant to a minimum gain chargeback pursuant to Sections 11.1.2(i)
or 11.1.2(ii)). The foregoing definition of Adjusted Capital Account is intended
to comply with the provisions of Treasury Regulation Section
1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith.
"Adjusted Property" means any property the Carrying Value of which has
been adjusted pursuant to Section 4.4.4. Once an Adjusted Property is deemed
distributed by, and recontributed to, the Partnership for federal income tax
purposes upon a termination thereof pursuant to Section 708 of the Code, such
property shall thereafter constitute a Contributed Property until the Carrying
Value of such property is further adjusted pursuant to Section 4.4.4.
"Adjusted Value" means, with respect to an Adjusted Property, the fair
market value of such property as determined by the General Partner, in its sole
discretion at the time such property became an Adjusted Property.
"Affiliate" means any Person that directly or indirectly controls, is
controlled by, or is under common control with the Person in question. As used
herein, the term "control" means the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of a
Person, whether through ownership of voting securities, by contract or
otherwise, and the terms "controlling" and "controls" shall have meanings
correlative to the foregoing.
"Agreed Value" means, with respect to any property contributed to the
Partnership, the fair market value of such property at the time of contribution
as determined by the General Partner using such reasonable method of valuation
as it may adopt.
"Agreement" means this Certificate and Agreement of Limited
Partnership, as is presently in effect or as may be hereafter amended which
establishes the relationships among the Partners.
"Allocation Regulations" means Treasury Regulation Section 1.704-1(b),
Treasury Regulation Section 1.704-2, and Treasury Regulation Section 1.704-3 as
such regulations may be amended and in effect from time to time (including
temporary regulations) and any corresponding provisions of succeeding
regulations.
"Book-Tax Disparity" means, with respect to any item of Contributed
Property or Adjusted Property, as of the date of any determination, the
difference between the Carrying Value of such Contributed Property or Adjusted
Property and the adjusted basis thereof for federal income tax purposes as of
such date. A Partner's share of the Partnership's Book-Tax Disparities in all of
its Contributed Property and Adjusted Property will be reflected by the
difference between such Partner's Capital Account balance as maintained pursuant
to Section 4.4
<PAGE>
and the hypothetical balance of such Partner's Capital Account computed as if it
had been maintained strictly in accordance with federal income tax accounting
principles.
"Capital Account" means the capital account maintained for a Partner
pursuant to Section 4.4.
"Capital Investment" means the aggregate cash or property contributed
to the Partnership by the Limited Partners pursuant to their investment in Units
of the Partnership. No distributions, credits, charges (including depreciation
and amortization) or adjustments shall be used in computing "Capital
Investment", except as specified herein.
"Carrying Value" means (a) with respect to a Contributed Property, the
Agreed Value of such property reduced (but not below zero) by all depreciation,
depletion (computed as a separate item of deduction), amortization and cost
recovery deductions charged to the Partners' Capital Accounts, (b) with respect
to an Adjusted Property, the Adjusted Value of such property reduced (but not
below zero) by all depreciation and cost recovery deductions charged to the
Partner's Capital Accounts and (c) with respect to any other Partnership
property, the adjusted basis of such property for federal income tax purposes,
all as of the time of determination.
"Certificate of Limited Partnership" means the certificate of limited
partnership filed with the Secretary of State of the State of Delaware pursuant
to Section 5.2 hereof, as such certificate may be amended or restated from time
to time.
"Class A Limited Partners" means the Limited Partners other than "Class
B Limited Partners" and any successors in interest.
"Class B Limited Partners" means the General Partner, in its capacity
as a limited partner and any successors in interest.
"Code" means the Internal Revenue Code of 1986, as amended, and in
effect from time to time, and any successor to such statute.
"Contributed Property" means any property, other than cash, contributed
to the Partnership by a Partner.
"Delaware Act" means the Delaware Revised Uniform Limited Partnership
Act as it may be amended and in effect from time to time, and any successor to
such statute.
"Distributable Cash" means the gross cash revenues received by the
Partnership in the conduct of Partnership business including cash received from
financing or refinancing of Partnership property or other borrowing by the
Partnership from any source, reduced by the sum of the following, to the extent
made from such cash revenues: (a) all principal and interest payments on
mortgages and other indebtedness of the Partnership and all other sums paid to
lenders (including loans made by Partners), (b) all cash expenditures (including
expenditures for capital improvements) incurred incident to the normal operation
of the Partnership's business,
<PAGE>
including any compensation to the General Partner or its affiliates, and (c)
such cash reserves as the General Partner, in its sole discretion, deems
reasonable, prudent, necessary and appropriate for proper operation of the
Partnership's business.
"Fiscal Year" means the calendar year.
"General Partner" means Covol Technologies Inc. or its successor in
interest.
"Limited Partners" means the Persons listed as such on Exhibit "A" and
any other person or entity who subsequently becomes a Limited Partner in
accordance with the requirements of Articles IV and VII of the Agreement.
"Net Agreed Value" means (a) in the case of any Contributed Property,
the Agreed Value of such property reduced by any liabilities either assumed by
the Partnership upon such contribution or to which such property is subject when
contributed and (b) in the case of any property distributed to a Partner or
Assignee by the Partnership, the Partnership's Carrying Value of such property
at the time such property is distributed, reduced by any indebtedness either
assumed by such Partner or Assignee upon such distribution or to which such
property is subject at the time of distribution as determined under Section 752
of the Code.
"Net Capital Investment" means the aggregate cash or property
investments in the Partnership actually made by the Limited Partners pursuant to
their investment in Units of the Partnership, less all sums of cash and the fair
market value of property of whatever character or nature distributed, from time
to time, to Limited Partners.]
"Nonrecourse Deductions" has the meaning set forth in Section
1.704-2(b)(1) of the Allocation Regulations.
"Nonrecourse Liability" has the meaning set forth in Section
1.704-2(b)(3) of the Allocation Regulations.
"Participating Percentage" means, as to the General Partner, 1% with
respect to the General Partner's general partner interest, 49% with respect to
the Class B Limited Partner's limited partner interest and to each Class A
Limited Partner, at any specified time, the percentage derived by dividing the
total number of Units held by such Class A Limited Partner by the total number
of Units then outstanding held by all Class A Limited Partners and multiplying
the quotient by fifty percent (50%).
"Partners" means the General Partner and the Limited Partners.
"Partner Nonrecourse Debt" has the meaning set forth in Section
1.704-2(b)(4) of the Regulations.
"Partner Nonrecourse Debt Minimum Gain" means that amount, with respect
to each Partner Nonrecourse Debt, equal to the Partnership Minimum Gain that
would result if such
<PAGE>
Partner Nonrecourse Debt were treated as a Nonrecourse Liability, determined in
accordance with the principles of Regulations Section 1.704-2(i)(3).
"Partner Nonrecourse Deductions" means any and all items of loss,
deduction or expenditure (including any expenditure described in Sections
705(a)(2)(B) of the Code) that in accordance with the principles of Regulations
Section 1.704-2(i)(1) and (2) are attributable to a Partner Nonrecourse Debt.
"Partnership" means the limited partnership being formed pursuant to
the Agreement
"Partnership Minimum Gain" has the meaning set forth in Sections
1.704-2(b)(2) and of the Allocation Regulations.
"Recapture Income" means any gain recognized by the Partnership
(computed without regard to any adjustment required by Sections 734 or 743 of
the Code) upon the disposition of any property or asset of the Partnership,
which gain is characterized as ordinary income because it represents the
recapture of deductions previously taken with respect to such property or asset.
"Unit" means an interest in the capital, profits and losses of the
Partnership, as well as the rights, privileges and powers appurtenant thereto,
as set forth in this Agreement.
"Unrealized Gain" attributable to any item of Partnership property
means, as of any date of determination, the excess, if any, of (a) the fair
market value of such property (as determined under Section 4.4.4 as of such
date), over (b) the Carrying Value of such property as of such date (prior to
any adjustment to be made pursuant to Section 4.4.4) as of such date.
"Unrealized Loss" attributable to any item of Partnership property
means, as of any date of determination, the excess, if any, of (a) the Carrying
Value of such property as of such date (prior to any adjustment to be made
pursuant to Section 4.4.4 as of such date, over (b) the fair market value of
such property (as determined under Section 4.4.4) as of such date.
Section 1.3 PARTNERSHIP NAME. The business of the Partnership shall be
conducted under the name "Utah Synfuel #1 Ltd." or under such other name as the
General Partner may determine.
Section 1.4 PRINCIPAL PLACE OF BUSINESS. The principal place of
business of the partnership shall be in Utah County, Utah, but additional places
of business may be established at such other locations in Utah as the General
Partner may determine.
Section 1.5 ADDRESS OF PARTNERS. The address of the General Partner and
the Partnership is 3280 North Frontage Road, Lehi, Utah 84043. The addresses of
the Limited Partners shall be as stated after their names set forth in Exhibit
"A" to this Agreement or such other addresses as are subsequently established by
the Limited Partners upon receipt of notice thereof by the General Partner.
<PAGE>
Section 1.6 TERM OF PARTNERSHIP. The Partnership shall be formed and
shall be effective from the date of filing for record of the Certificate of
Limited Partnership in accordance with the Delaware Act and shall continue in
existence until December 31, 2015 unless sooner terminated in accordance with
the dissolution provisions of this Agreement or as otherwise provided by law.
ARTICLE II
Section 2.1 POWER OF ATTORNEY. Each Limited Partner does irrevocably
constitute and appoint the General Partner as his true and lawful attorney and
agent, with full power and authority in his name, place and stead to execute,
acknowledge, deliver, file and record in the appropriate public offices (a) all
certificates and other instruments (including counterparts of this Agreement)
which the General Partner deems appropriate to qualify or continue the
Partnership as a limited partnership in jurisdictions in which the partnership
may conduct business, or which the General Partner deems advisable to effect the
admission of additional Limited Partners or substituted Limited Partners,
including amendments as may be appropriate from time to time to reduce the
capital accounts of Limited Partners following distributions thereof, (b) all
instruments which the General Partner deems appropriate to effect a change or
modification of the Partnership in accordance with the terms of this Agreement
or which the General Partner deems necessary to maintain the tax status of the
Partnership, upon advice of counsel, (c) all conveyances and other instruments
which the General Partner deems appropriate to effect the dissolution and
termination of the Partnership, (d) all instruments relating to the admission or
substitution of a Partner and (e) all agreements and other instruments relating
to any merger or consolidation of the Partnership pursuant to Article XV hereof.
The power of attorney granted herein is hereby declared to be
irrevocable and a power coupled with an interest, and it shall survive the
death, incompetency, disability, dissolution, bankruptcy or termination of any
Partner and the transfer of all or any portion of his Partnership Interest and
shall extend to such Partner and the transfer of all or any portion of his
Partnership Interest and shall extend to such Partner's heirs, successors,
assigns and personal representatives. Each Partner hereby agrees to be bound by
any representations made by the General Partner, acting in good faith pursuant
to such power of attorney. Each Partner hereby waives any and all defenses that
may be available to contest, negate or disaffirm the action of the General
Partner, taken in good faith under such power of attorney. Each Partner shall
execute and deliver to the General Partner, within fifteen (15) days after
receipt of its request therefore, such further assignations, powers of attorney
and other instruments as the General Partner deems appropriate or necessary to
effectuate this Agreement and the purposes of the Partnership.
The Limited Partners agree to be bound by all representations of the
General Partner as their said attorney-in-fact and waive any and all defenses
which may be available to them to contest, negate or disaffirm the actions of
the General Partner or its successors under the power of attorney, and ratify
and confirm all acts which the said attorney-in-fact may take in that capacity
in all respects as though performed by the Limited Partners.
ARTICLE III
<PAGE>
Section 3.1 PURPOSES AND POWERS OF PARTNERSHIP. The Partnership is
formed for, and shall have the power to accomplish, the following objectives and
purposes:
3.1.1 To enter into a license with the General Partner to use certain
patented technology of the General Partner necessary to convert coal dust and
coal fines into briquettes of synthetic fuel.
3.1.2 To construct for investment purposes a coal briquetting facility
in Utah.
3.1.3 To borrow all funds necessary to carry out the objectives and
purposes of the Partnership and to pledge or encumber any and all items of
property of the Partnership for the payment of such loans.
3.1.4 To enter into operating, management, maintenance or any other
type of agreements with respect to the assets and businesses of the Partnership.
3.1.5 To do each and every thing necessary, suitable or proper for the
accomplishment of any of the purposes or the attainment of any one or more of
the objectives herein enumerated, either alone, or in association with, or as
agent or representative for other corporations (whether public, governmental or
private), partnerships, individuals, or entities, or to accomplish any other
lawful business whatsoever, or which shall at any time appear conducive to or
expedient for the protection or benefit of this Partnership and its assets and
businesses.
3.1.6 To exercise all other powers necessary to or reasonably connected
with the Partnership's business which may be legally exercised by limited
partnerships in the State of Delaware.
3.1.7 To carry on any other business that a limited partnership
organized under the Delaware Act may carry on.
ARTICLE IV
Section 4.1 CAPITAL CONTRIBUTIONS OF COVOL TECHNOLOGIES, INC. Covol
Technologies, Inc. shall contribute all of its rights under a certain
engineering/construction contract referenced Exhibit A hereto to the capital of
the Partnership for its General Partner and its Class B Limited Partner
interest. The Agreed Value of the engineering/construction contract shall be
equal to the amount set forth on Exhibit A.
Section 4.2 CAPITAL CONTRIBUTIONS BY CLASS A LIMITED PARTNERS. The
initial capital contributions of the Limited Partners shall be the amounts set
forth opposite the name of each Limited Partner on Exhibit "A" attached hereto.
Section 4.3 CAPITAL CONTRIBUTIONS OF ADDITIONAL CLASS A LIMITED
PARTNERS. The General Partner is authorized to admit, from time to time,
additional Class A Limited Partners and to issue to all such additional Limited
Partners not greater than an aggregate of four thousand (4,000) Units of Class A
Limited Partner interests upon such terms
<PAGE>
and conditions as the General Partner deems appropriate, but in no event shall
the purchase price per Unit be less than One Thousand Dollars ($1,000) per Unit.
An issuance of additional Units will dilute only the Units held by the Class A
Limited Partners. Limited Partners have no preemptive rights to such additional
Units. Upon the admission of such additional Class A Limited Partners, an
amendment to the Agreement reflecting such admission shall be filed in the
appropriate office. Prior to admission, each additional Class A Limited Partner
shall become a signatory to this Agreement. The original counterparts of this
Agreement executed by the respective Limited Partners and the General Partner,
taken together, shall constitute a single instrument.
Section 4.4 CAPITAL ACCOUNTS.
4.4.1 The Partnership shall maintain for each Partner a separate
Capital Account in accordance with Treasury Regulation Section
1.704-1(b)(2)(iv). Such Capital Account shall be increased by (a) the cash
amount or Net Agreed Value of all Capital Contributions made by such Partner to
the Partnership pursuant to this Agreement and (b) all items of Partnership
income and gain computed in accordance with Section 4.4.2 and allocated to such
Partner pursuant to Section 11.1. Such Capital Account shall be decreased by (x)
the cash amount or Net Agreed Value of all actual and deemed distributions of
cash made to such Partner pursuant to this Agreement, and (y) all items of
Partnership deduction and loss computed in accordance with Section 4.4.2 and
allocated to such Partner pursuant to Section 11.1
4.4.2 For purposes of computing the amount of any item of income, gain,
deduction or loss to be reflected in the Partners' Capital Accounts, the
determination, recognition and classification of such items shall be the same as
its determination, recognition and classification for federal income tax
purposes; provided, that:
(a) Any deductions for depreciation, cost recovery or
amortization attributable to a property contributed to the Partnership
shall be determined as if the adjusted basis of such property on the
date it was acquired by the Partnership was equal to the Agreed Value
of such property and shall be allocated among the Partners in
accordance with their Percentage Interests (in effect at the time of
the contribution of such property). Upon an adjustment pursuant to
4.4.4 to the Carrying Value of any Partnership property subject to
depreciation, cost recovery or amortization, any further deductions for
such depreciation, cost recovery or amortization attributable to such
property shall be determined (i) as if the adjusted basis of such
property were equal to the Carrying Value of such property immediately
following such adjustment and (ii) using a rate of depreciation, cost
recovery or amortization derived from the same method and useful life
(or, if applicable, the remaining useful life) as is applied for
federal income tax purposes; provided however, if the asset has a zero
adjusted basis for federal income tax purposes, depreciation, cost
recovery or amortization deductions shall be determined using any
reasonable method that the General Partner may adopt.
(b) Any gain or loss attributable to the taxable disposition
of any Partnership Property shall be determined by the Partnership as
if the adjusted basis of such property
<PAGE>
as of such date of disposition was equal in amount to the Partnership's
Carrying Value of such property as of such date.
(c) All fees and other expenses incurred by the Partnership to
promote the sale of (or to sell) a Partnership Interest that can
neither be deducted nor amortized under Section 709 of the Code shall,
for purposes of Capital Account maintenance, be treated as an item of
deduction and shall be allocated among the Partners pursuant to Section
11.1.
(d) Except as otherwise provided in Treasury Regulation
Section 1.704-1(b)(2)(iv)(m), the computation of all items of income,
gain, loss and deduction shall be made without regard to any election
under Section 754 of the Code which may be made by the Partnership and,
as to those items described in Section 705(a)(1)(B) or Section
705(a)(2)(B) of the Code, without regard to the fact that such items
are not includable in gross income or are neither currently deductible
nor capitalizable for federal income tax purposes.
4.4.3 Generally, a transferee of a Partnership Interest will succeed to
the Capital Account relating to the Partnership Interest transferred. However,
if the transfer causes a termination of the Partnership under Section
708(b)(1)(B) of the Code, the Partnership properties shall be deemed to have
been distributed in liquidation of the Partnership to the Partners (including
the transferee of a Partnership Interest) pursuant to Section 13.1.3 and
recontributed by such Partners and transferees in reconstitution of the
Partnership. The Capital Accounts of such reconstituted Partnership shall be
maintained in accordance with the principles of this Section 4.4.
4.4.4 Consistent with the provisions of Treasury Regulation Section
1.704-1(b)(2)(iv)(f), on an issuance of additional Partnership Interests for
cash or other property, the Capital Accounts attributable to the General
Partner's general partner interest and to the Class B Limited Partner, and the
Carrying Value of each Partnership property immediately prior to such issuance
shall be adjusted upward or downward to reflect any Unrealized Gain or
Unrealized Loss attributable to such property, as if the Unrealized Gain or
Unrealized Loss had been recognized on an actual sale of each such property
immediately prior to such issuance and had been allocated to cause the General
Partner's Capital Account attributable to its general partner interest to equal
1% of all Capital Accounts after assurance of additional Partnership Interests
and the Class B Limited Partner's Capital Account to equal 49% of all Capital
Accounts after issuance of Additional Partnership Interests. It is agreed that
the Carrying Value of the Partnership's property immediately prior to issuance
shall be an amount such that the Agreed Value of the assets (including cash)
contributed to the Partnership pursuant to such Capital Contribution will be in
the same ratio to the Carrying Value of all Partnership property immediately
after the Capital Contribution that corresponds to the Participating Percentage
attributed to such additional Partnership Interest. In accordance with Treasury
Regulation Section 1.704-1(b)(2)(iv)(f), immediately prior to the distribution
of any Partnership property (other than an oil and gas property), the Capital
Accounts of all Partners and the Carrying Value of each Partnership property
shall be adjusted upward or downward to reflect any Unrealized Gain or
Unrealized Loss attributable to such property, as if such Unrealized Gain or
<PAGE>
Unrealized Loss had been recognized in a sale of such property immediately prior
to such distribution for an amount equal to its fair market value and had been
allocated among the Partners in the manner provided in Article 11.1.
Section 4.5 INTEREST. Interest earned on Partnership funds shall inure
to the benefit of the Partnership, but Limited Partners, as such, shall not
receive interest on funds contributed by them.
Section 4.6 ADVANCES BY THE GENERAL PARTNER. The General Partner or any
of its affiliates may, but are not obligated to, loan monies to the Partnership
for use by the Partnership in its operation. The aggregate amount of such loans
shall become an obligation of the Partnership to the person(s) or entity(s)
making the loans, in accordance with the terms of such loans, payable from gross
revenues of the Partnership with interest two percent (2%) above the prime rate
as quoted from time to time by Key Bank, Salt Lake City, Utah, but not to exceed
the maximum legal rate of interest. Such loans shall not be deemed a capital
contribution. To the extent that any such loans are unpaid upon the dissolution
and liquidation of the Partnership, the same, together with the accrued and
unpaid interest, shall become immediately due and payable prior to any
distributions to the Partners.
ARTICLE V
Section 5.1 RIGHTS AND OBLIGATIONS OF THE GENERAL PARTNER.
5.1.1 The General Partner shall have full, exclusive and complete
discretion in the management and control of the affairs of the Partnership for
the purposes herein stated and shall make all decisions affecting partnership
affairs, including all decisions made regarding the administration, supervision,
and management of the partnership's business. In amplification and not in
limitation of the general powers of the partnership, the General Partner shall
have the power and authority, on behalf of and in the name of the partnership:
(a) to buy, sell, acquire, exchange, trade, receive, deliver,
hold, encumber, pledge, release and otherwise deal in and with and
dispose of Partnership property, whether in the ordinary course of
business of the Partnership or otherwise;
(b) to execute and deliver such documents or instruments
relating to Partnership affairs as may in their opinion be appropriate
in the conduct of the Partnership's business, including without
limitation, licenses, employment, consultation and management
agreements, notes, leases, joint venture agreements, guaranty
agreements, documents of transfer and conveyance, and bills of sale;
(c) to open, maintain and close bank accounts as shall be
designated by the General Partner and to draw checks and other orders
on such accounts for the payment of money signed on behalf of the
General Partner or by its authorized representatives;
(d) to hold title to Partnership property as nominee for the
Partnership;
<PAGE>
(e) to borrow money and to make, issue, accept, endorse and
execute promissory notes, drafts, bills of exchange and other
instruments and evidences of indebtedness, all without limit as to
amount, and to pay or repay with respect thereto and to secure the
payment thereof by security interest, mortgage, deed of trust, pledge
or assignment of, all or any part of any property then owned or
hereafter acquired by the partnership and to prepay, refinance,
increase, modify, consolidate or extend any mortgage, deed of trust,
security interest, or other encumbrance of any kind or nature;
(f) to employ such employees, consultants, accountants,
managers, agents, appraisers, attorneys, mortgage brokers and other
persons in the operation, conduct, administration, supervision and
management of the business of the Partnership as in the judgment of the
General Partner are necessary or desirable, and to pay the reasonable
expenses and fees of the same out of Partnership funds;
(g) to purchase, at the expense of the Partnership, liability
and other insurance coverage that the General Partner in its sole
discretion determines to be necessary to protect the Partners from
liability created in pursuit of or in the furtherance of Partnership
business or which is related to its business affairs;
(h) to perform any and all other acts or activities, customary
or incidental to the business, objectives and purposes of the
Partnership as set forth herein;
(i) to be reimbursed (or reimburse its affiliates) for all
expenses incurred in conducting the Partnership's business including
all general and administrative expenses allocable to operations of the
Partnership, including, without limitation, allocable employee
salaries, office rental, and miscellaneous office supplies and
expenses; and
(j) to apply for or file notices of claims of exemptions from
registration under the Utah Uniform Securities Act, the Securities Act
of 1933, or any other federal or state securities statutes, rules or
regulations for the sale of securities of the Partnership; to secure
any and all other authorizations or permits which the General Partners
deem necessary or appropriate in connection with the business of the
partnership, and to execute, acknowledge, file and deliver any and all
applications, documents and consents which the General Partner may deem
appropriate in connection therewith.
5.1.2 The General Partner shall devote such time to the Partnership as
it deems necessary to conduct the business and affairs of the Partnership. The
General Partner may engage in a business which is the same as or similar to the
business of the Partnership, irrespective of whether such business shall be
competitive with the Partnership or otherwise and may act as General Partner in
limited partnerships formed for the same purpose as the Partnership. The General
Partner shall do what is advised by the Partnership's counsel or what is
required of it by the Internal Revenue Service, to the extent of its ability, to
obtain or maintain classification of the Partnership as a partnership for
federal income tax purposes.
<PAGE>
5.1.3 The General Partner shall maintain or cause to be maintained
complete and accurate records of all real and personal property acquired,
leased, rented and disposed of by the Partnership, account records of all
Partners, insurance policies or copies of certificates thereof, and opinions of
counsel received by the Partnership. Such documents, opinions and records,
together with receipts, vouchers and other supporting evidence thereof, will be
available for inspection by any Limited Partner or his duly authorized
representative during normal business hours at the principal office of the
General Partner.
5.1.4 The General Partner shall keep the Limited Partners informed of
the status of the business and affairs of the Partnership by means of periodic,
written, unaudited reports of operations. Such reports shall be rendered not
less often than annually.
5.1.5 The General Partner shall maintain or cause to be maintained
complete and accurate records and accounts of all income and expenditures and
furnish the Limited Partners with annual statements of account which may be
included in the applicable reports referred to in Section 5.1.4 hereof, together
with all necessary tax reporting information. Such records and accounts shall be
maintained in accordance with generally accepted accounting principles applied
on a consistent basis and shall be available for inspection by any Limited
Partner or his duly authorized representative during normal business hours at
the office of the General Partner; however, the General Partner shall not be
required to maintain such records and material referred to herein for a period
in excess of six (6) years from the date of the making or receipt thereof.
5.1.6 The General Partner shall not have authority to act in
contravention of this Agreement, to do any act which would make it impossible to
carry on the ordinary business of the Partnership, to confess a judgment against
the Partnership or to admit any persons as a General or Limited Partner except
as provided by this Agreement.
5.1.7 No person, firm or corporation dealing with the Partnership shall
be required to inquire into the authority of the General Partner to take any
action or make any decision and they may rely conclusively on the power and
authority of the General Partner as set forth in this Agreement.
Section 5.2 CERTIFICATE OF LIMITED PARTNERSHIP. The General Partner
shall file the Certificate of Limited Partnership as required by the Delaware
Act and shall cause to be filed such other certificates or documents as may be
determined by the General Partner to be necessary or appropriate for the
formation or qualification and operation of a limited partnership (or a
partnership in which the Limited Partners have limited liability) in the State
of Delaware or any other state in which the Partnership may elect to do
business. If the General Partner in its sole discretion determines such action
to be necessary or appropriate, the General Partner in its sole discretion
determines such action to be necessary or appropriate, the General Partner shall
file amendments to the Certificate of Limited Partnership and shall do all
things to maintain the Partnership as a limited partnership (or a partnership in
which the Limited Partners have limited liability) under the laws of the State
of Texas or any other state in which the Partnership may elect to do business.
Subject to applicable law, the General Partner may omit from the Certificate of
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Limited Partnership and any other certificates or documents, and from all
amendments thereto, the names and addresses of the Limited Partners and
information relating to the Capital Contributions and shares of profits and
compensation of the Limited Partners, or may state such information in the
aggregate rather than with respect to each individual Limited Partner.
ARTICLE VI
Section 6.1 RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS.
6.1.1 No Limited Partner shall be personally liable for any
of the debts of the Partnership or any of the losses thereof beyond
(a) the amount contributed by him to the capital of the
Partnership;
(b) any obligations to the Partnership resulting from
unpaid subscriptions; and
(c) his share of undistributed accumulated profits of the
Partnership. It is acknowledged that, to the extent required by the
Delaware Act, a Limited Partner who has received the return in whole or
in part of his capital contribution may be liable to the Partnership in
an amount, not in excess of such sum with interest, necessary to
discharge its liabilities to all creditors who extended credit or whose
claims arose before such return.
6.1.2 No Limited Partner, as such, shall take part in the management of
the business or transact any business for the Partnership, and no Limited
Partner shall have power to sign for or to bind the Partnership.
6.1.3 No salary shall be paid to any Limited Partner, as such, nor
shall any Limited Partner have a drawing account.
6.1.4 No Limited Partner shall have the right to demand distribution of
his capital account except on the dissolution and liquidation of the Partnership
or as otherwise provided for in this Agreement.
6.1.5 Even though distribution may be made in cash or in kind, or both,
as herein set forth, no Limited Partner shall have the right to demand property
other than cash in return for his respective interest.
6.1.6 Except as herein provided, no Limited Partner shall have priority
over any other Limited Partner either as to distributions, return of
contributions of capital, or as to allocation of profits, losses, credits or tax
deductions.
6.1.7 No Limited Partner shall have the right to designate a
substituted Limited Partner except in accordance with the provisions of Article
VII hereof.
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6.1.8 Subsequent to the execution of this Agreement as provided herein,
the Partnership agrees to, and does hereby, indemnify the General Partner and
hold it harmless against loss, damage or liability for, and the Limited Partners
will make no claim against the General Partner for, any act or failure to act
with respect to the business of the Partnership unless such act or omission is
the result of gross negligence or willful misconduct.
6.1.9 Limited Partners holding at least thirty five percent (35%) of
the Units then outstanding (other than Units held by the General partner) may
propose to remove the General Partner by submitting their proposal in writing to
the General Partner in the manner provided for giving notice. Within forty-five
(45) days after the receipt of any such proposal, the General Partner shall
submit the proposal to the vote of all Limited Partners. An affirmative vote of
seventy-five percent (75%) of the Units then outstanding (other than Units held
by the General Partner) as required by Section 14.1.1 shall be necessary for
such removal. Any removal of a General Partner shall not cause a forfeiture, or
otherwise deprive the removed General Partner of any rights then owned by the
removed General Partner to share in allocations of profits, losses, credits and
deductions or distributions or any other rights given herein and to compensation
or remuneration earned by such General Partner. Any removal of General
Partner(s) shall be effective as of the date sixty (60) days following the count
of such vote. Prior to any action contemplated by the Limited Partners pursuant
to this Section 6.1.9 hereof, the General Partner shall obtain an opinion
rendered by the Partnership's general counsel which opinion shall indicate that
the Limited Partners, by taking such contemplated action, will not lose the
benefits of limited liability as described in Section 6.1.1 hereof and in the
Delaware Act.
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ARTICLE VII
Section 7.1 ASSIGNMENT BY LIMITED PARTNERS.
7.1.1 Each Limited Partner represents and acknowledges that he has
acquired his Units for his own investment purposes only and not with a view to
distribution or fractionalization thereof. Each Limited Partner further
acknowledges that, due to the speculative nature of the Partnership's business,
and the restrictions contained herein, sale or other assignment of Units may be
practicably impossible.
7.1.2 A Limited Partner may assign his Units provided:
(a) the General Partner consents, in its sole discretion,
in writing to the assignment;
(b) the General Partner may impose a reasonable transfer
fee as a condition to the assignment;
(c) the assignment has been registered under the Securities
Act of 1933, as amended, and applicable state securities laws, rules
and regulations or an exemption to registration is available, and the
Limited Partner has supplied the Partnership, at his own cost and
expense, if requested by the General Partner, with an opinion of
counsel in form and substance acceptable to the General Partner to the
effect that the interest to be assigned has been registered under the
Securities Act of 1933, as amended, and applicable state securities
laws, rules and regulations, or that an exemption to such registration
is available for the proposed transfer;
(d) the interest assigned may not be less than the total
interest of a Limited Partner in the Partnership unless, in the opinion
of the General Partner, the Limited Partner has sufficient interest to
be divided;
(e) all assignments shall be effective as of the last day
of the calendar quarter during which each assignment is made.
7.1.3 No assignee of an interest of a Limited Partner may be admitted
to the Partnership as a substitute Limited Partner without the consent of the
General Partner which consent may be exercised in the General Partner's sole
discretion. Any Assignee seeking substitution as a Limited Partner must consent,
in writing in form satisfactory to the General Partner, to be bound by the terms
of this Agreement in the place and stead of the assigning Limited Partner.
7.1.4 Upon the death or legal incompetency of an individual Limited
Partner, his legal representative shall have all of the rights of a Limited
Partner for the purpose of settling or managing his estate, and such power as
the decedent or incompetent possessed to substitute a successor as an assignee
of his interest in the Partnership and to join with such assignee in making
application to substitute such assignee as a Limited Partner.
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7.1.5 Without limiting the discretion of the General Partner to
withhold its consent to any assignment, the General Partner shall not consent to
any transfer which would cause a termination of the Partnership under the
Internal Revenue Code of 1954, as amended.
7.1.6 Upon the bankruptcy, insolvency, dissolution or the cessation to
exist as a legal entity of a Limited Partner, the legal representative of such
person or entity shall have the rights of a Limited Partner for the purpose of
effecting the orderly disposition of the Units of such Limited Partner;
provided, however, the terms and conditions of this Article VII shall be
complied with as a condition precedent to any assignment by such legal
representative.
ARTICLE VIII
Section 8.1 FISCAL YEAR. The fiscal year of the Partnership shall be
the calendar year, and the General Partner shall keep or cause to be kept
complete and accurate books of account, in accordance with generally accepted
accounting practices applied on a consistent basis. The books and records as so
prepared shall be conclusive on all Partners except for fraud or manifest error.
Section 8.2 AUDIT. The books of the Partnership may be audited annually
by such independent public accountants as the General Partner shall designate.
Section 8.3 INCOME TAX MATTERS
8.3.1 The General Partner shall arrange for the preparation (at the
Partnership's expense) and timely filing of all returns of Partnership income,
gains, deductions and losses necessary for federal and state income tax purposes
and shall use reasonable efforts to cause copies of such returns or all
pertinent information contained therein to be furnished to the Partners within
ninety (90) days of the close of the taxable year. A copy of the Partnership's
federal income tax return will be furnished to any Partner upon request at such
Partner's own expense.
8.3.2 Except as otherwise provided herein, the General Partner shall
determine whether to make any available election (including the election
provided for in Section 168 of the Code). The General Partner shall make the
election under Section 754 of the Code upon the request of the transferee of a
Unit or, upon a distribution of property to the Limited Partners, upon the
consent of all Limited Partners. The General Partner may seek to revoke any such
election upon the General Partner's determination that such revocation is in the
best interests of the Limited Partners, provided that the General Partner shall
not seek to revoke any such election unless it receives an opinion of counsel
that such revocation would not result in the loss of limited liability of the
Limited Partners in the Partnership or cause the Partnership to be treated as an
association taxable as a corporation for federal income tax purposes.
8.3.3 Subject to the provisions hereof, the General Partner is
designated as the Tax Matters Partner (as defined in Section 6231 of the Code),
and is authorized and required to represent the Partnership (at the
Partnership's expense) in connection with all examinations of the Partnership's
<PAGE>
affairs by tax authorities, including resulting administrative and judicial
proceedings, and to expend Partnership funds for professional services and costs
associated therewith. Each Limited Partner agrees to cooperate with the General
Partner to do or refrain from doing any or all things reasonably required by the
General Partner to conduct such proceedings.
8.3.4 The Partnership shall elect to deduct expenses incurred in
organizing the Partnership ratably over a sixty (60) month period as provided in
Section 709 of the Code.
8.3.5 No election shall be made by the Partnership, or any Partner for
the Partnership to be excluded from the application of any of the provisions of
Subchapter K, Chapter 1 of Subtitle A of the Code or from any similar provisions
of any state tax laws.
ARTICLE IX
Section 9.1 COMPENSATION TO GENERAL PARTNERS AND AFFILIATES.
9.1.1 It is anticipated that the Partnership will engage the General
Partner or its affiliates to provide management services to the Partnership with
respect to the assets and small businesses of the Partnership which require
management services. The Partnership shall pay the General Partner or affiliates
a fee for all such services which shall be fifty cents ($0.50) per ton of coal
produced at the facility.
9.1.2 The General Partner shall be reimbursed for all expenses,
disbursements and advances incurred or made in connection with the organization
and start-up of the Partnership, the Offering, the qualification of the
Partnership and the General Partner to do business and any subsequent offerings
of Units or other securities by the Partnership. The General Partner shall be
reimbursed on a monthly basis for all direct out-of-pocket expenses it incurs or
makes on behalf of the Partnership. The General Partner shall determine the
expenses that are allocable to the Partnership in any manner that is reasonable
and fair to all parties.
Section 9.2 REPORTS OF COMPENSATION.
9.2.1 The General Partner, with respect to each calendar year, shall
inform the Limited Partners of all transactions between them, or its affiliates,
and the Partnership regarding commissions, compensation or other benefits, paid
or accrued during such year, to the General Partner or its affiliates.
ARTICLE X
Section 10.I DISTRIBUTIONS OF DISTRIBUTABLE CASH.
10.1.1 The General Partner shall have the right to accumulate all
Distributable Cash of the Partnership until dissolution and liquidation of the
Partnership. The General Partner may, however, at its complete discretion from
time to time declare a distribution of Distributable Cash to be distributed to
<PAGE>
the Limited Partners and to the General Partner, as of the record date set by
the General Partner for such distribution, in proportion to their respective
Participating Percentages.
ARTICLE XI
Section 11.1 ALLOCATION OF PROFIT AND LOSS FOR CAPITAL ACCOUNT
PURPOSES.
11.1.1 Except as hereinafter provided in this Article XI for purposes
of maintaining the Capital Accounts and in determining the rights of the
Partners among themselves, the income, gain, losses, deductions and credits from
operations of the Partnership for each fiscal year will be allocated among the
Limited Partners and the General Partner in the following manner:
(a) Net Income. After giving effect to the special allocations
set forth in Section 11.1.2, Net Income for each taxable period and all
items of income, gain, loss, and deduction taken into account in
computing Net Income shall be allocated as follows:
(1) first, 100% to the General Partner until the
aggregate Net Income allocated to the General Partner pursuant
to this Section 11.1.1(a)(1) for the current and all previous
taxable periods is equal to the aggregate Net Losses allocated
to the General Partner pursuant to Section 11.1.1(b)(2) for
all previous taxable years; and
(2) second, the balance, if any, to the Partners
in accordance with their respective Participating Percentages.
(b) Net Losses. After giving effect to the special allocations
set forth in Section 11.1.2, Net Losses for each taxable period and all
items of income, gain, loss and deduction taken into account in
computing Net Losses for such taxable period shall be allocated as
follows:
(1) First, to the Partners in accordance with their
respective Participating Percentages; provided, that Net
Losses shall not be allocated pursuant to this Section
11.1.1(b)(1) to the extent such allocation would cause any
Limited Partner to have a deficit balance in his Adjusted
Capital Account at the end of such taxable year (or increase
any existing balance in his Adjusted Capital Account); and
(2) second, the balance, if any, to the General
Partner.
11.1.2 The following mandatory allocations shall be made prior to
making any allocations provided for in 11.1.1 above:
(a) Minimum Gain Chargeback. Notwithstanding any other
provisions of this Article XI, except as provided in Regulation Section
1.704-2(f), if there is a net decrease
<PAGE>
in Partnership Minimum Gain during any Fiscal Year, each Partner shall
be allocated items of Partnership income and gain for such year (and,
if necessary, subsequent years) in an amount equal to such Partner's
share of the net decrease in Partnership Minimum Gain determined in
accordance with Regulations Section 1.704-2(g). Allocations pursuant to
the previous sentence shall be made in proportion to the respective
amounts required to be allocated to each Partner pursuant thereto. The
items to be so allocated shall be determined in accordance with
Sections 1.704-2(f)(6) and 1.704-2(j)(2) of the Regulations. This
Section 11.2.1(a) is intended to comply with the minimum gain
chargeback requirement in Section 1.704-2(f) of the Regulations and
shall be interpreted consistently therewith.
(b) Chargeback of Partner Nonrecourse Debt Minimum Gain.
Notwithstanding the other provisions of this Article XI (other than
Section 11.2.1(a), except as provided in Regulation Section
1.704-2(i)(4)), if there is a net decrease in Partner Nonrecourse Debt
Minimum Gain during any Partnership Fiscal Year, any Partner with a
share of Partner Nonrecourse Debt Minimum Gain, determined in
accordance with Section 1.704-2(i)(5) of the Regulations, shall be
allocated items of Partnership income and gain for such period (and if
necessary, subsequent periods) in an amount equal to such Partner's
share of the net decrease in Partner Nonrecourse Debt Minimum Gain
attributable to such Partner Nonrecourse Debt, determined in accordance
with Regulations Section 1.704-2(i)(4). Allocations pursuant to the
previous sentence shall be made in proportion to the respective amounts
required to be allocated to each Partner pursuant thereto. The items to
be so allocated shall be determined in accordance with Sections
1.704-2(i)(4) and 1.704-2(j)(2) of the Regulations. This Section
11.2.1(b) is intended to comply with the minimum gain chargeback
requirement in Section 1.704- 2(i)(4) of the Regulations and shall be
interpreted consistently therewith.
(c) Qualified Income Offset. Except as provided in
Section 11.1.2(d) hereof, in the event any Partner unexpectedly
receives any adjustments, allocations or distributions described in
Treasury Regulation Sections 1.704-1 (b) (2) (i) (d) (4),
1.704-1(b)(2)(ii)(d)(5), or 1.704-1(b)(2)(ii)(d)(6), items of
Partnership income and gain shall be specifically allocated to such
Partner in an amount and manner sufficient to eliminate, to the extent
required by the Allocation Regulations, the deficit balance, if any, in
its Adjusted Capital Account created by such adjustments, allocations
or distributions as quickly as possible, provided that an allocation
pursuant to this Section 11.1.2(c) shall be made only if and to the
extent that the Partner would have an Adjusted Capital Account Deficit
after all other allocations provided for in this Article XI have been
tentatively made as if this Section 11.1.2(c) were not in the
Agreement. This Section 11.1.2(c) is intended to constitute a
"qualified income offset" within the meaning of Treasury Regulation
Section 1.704-1(b)(2)(ii)(d), and shall be interpreted consistently
therewith..
(d) Gross Income Allocations. In the event any Partner
has a deficit balance in its Adjusted Capital Account at the end of any
Partnership taxable period, such Partner shall be specially allocated
items of Partnership gross income and gain in the amount of such excess
as quickly as possible; provided, that an allocation pursuant to this
Section 11.1.2(d) shall be made only if and to the extent that such
<PAGE>
Partner would have a deficit balance in its Adjusted Capital Account
after all other allocations provided in this Section 11.1 have been
tentatively made as if Sections 11.1.2(c) and 11.1.2(d) were not in the
Agreement.
(e) Nonrecourse Deductions. Nonrecourse deductions for any
fiscal year of the Partnership shall be allocated to the Partners in
accordance with their Participating Percentages.
(f) Partner Nonrecourse Deductions. Any Partner Nonrecourse
Deductions for any fiscal year of the Partnership or other period shall
be specially allocated to the Partner who bears the economic risk of
loss with respect to the Partner Nonrecourse Debt to which such Partner
Nonrecourse Deductions are attributable in accordance with Treasury
Regulation Section 1.704-2(i)(1).
(g) Code Section 754 Adjustment. To the extent an
adjustment to the adjusted tax basis of any Partnership asset pursuant
to Section 734(b) or 743(b) of the Code is
required, pursuant to the Allocation Regulations, to be taken into
account in determining Capital Accounts, the amount of such adjustment
to the Capital Accounts shall be treated as an item of gain (if the
adjustment increases the basis of the asset) or loss (if the adjustment
decreases such basis), and such item of gain or loss shall be specially
allocated to the Partners in a manner consistent with the manner in
which their Capital Accounts are required to be adjusted pursuant to
the Allocation Regulations.
(h) Curative Allocation. The s pecial allocations set
forth in Section 11.1.2(a), (b), (c), (d), (e), (f), and (g) (the
"Regulatory Allocations") are intended to comply with the Allocation
Regulations. Notwithstanding any other provisions of this Section 11.1,
the Regulatory Allocations shall be taken into account in allocating
items of income, gain, loss and deduction among the Partners such
that, to the extent possible, the net amount of allocations of such
items and the Regulatory Allocations to each Partner shall be equal to
the net amount that would have been allocated to each Partner if the
Regulatory Allocations had not occurred.
Section 11.2 TAX ALLOCATIONS
11.2.1 For federal income tax purposes, except as otherwise provided in
this Section 11.2, each item of Partnership income, gain, loss, deduction and
credit shall be allocated among the Partners in the same manner as corresponding
items are allocated in Section 11.1.
11.2.2 In the case of Contributed Property, any income, gain, loss or
deduction attributable to such property shall for federal income tax purposes be
allocated first among the Partners to take account of the variation between the
Agreed Value of such property and its adjusted basis for federal income tax
purposes at the time of contribution and thereafter in the same manner as its
correlative book gain or loss is allocated pursuant to Section 11.1. In the case
of Adjusted Property, first in a manner consistent with the principles of
Section 704(c) of the Code to take into account the Unrealized Gain or
Unrealized Loss attributable to such property and the allocations thereof
pursuant to Section 4.4.4. Second, in the event the property
<PAGE>
was originally a Contributed Property, in a manner to take into account the
Agreed Value of such property and its adjusted basis for federal income tax
purposes at the time of contribution; and thereafter, in the same manner as its
correlative "book" gain or loss is allocated pursuant to Section 11.1.
11.2.3 It is intended that the allocations in Section 11.2.2 hereof
effect an allocation for federal income tax purposes pursuant to Section 704(c)
of the Code and the regulations thereunder and comply with any limitations or
restrictions therein. Such allocations are designed to eliminate, to the extent
possible, disparities that otherwise exist between the balances of the Partners'
Capital Accounts, as maintained pursuant to Section 4.4 and such balances had
such Capital Accounts been maintained strictly in accordance with tax accounting
principles. The General Partner shall have discretion to make the allocation in
any reasonable manner permitted under such Code section.
11.2.4 Any gain allocated to the Partners upon the sale or other
taxable disposition of any Partnership asset shall, to the extent possible,
after taking into account other required allocations of gain pursuant to this
Section 11.2 be characterized as Recapture Income in the same proportions and to
the same extent as such Partners have been allocated any deductions directly or
indirectly giving rise to the treatment of such gains as Recapture Income.
11.2.5 In the event of the transfer of a Partnership Interest during a
year, each item of Partnership income, gain, loss, deduction and credit
attributable to the transferred Partnership Interest shall, for federal income
tax purposes, be prorated between the transferor and the transferee on a daily
or other reasonable basis, as required by Section 706 of the Code.
11.2.6 If the Participating Percentage of a Limited Partner or an
Assignee is changed during a taxable year for any reason other than the transfer
of a Partnership Interest to another Person, such Limited Partner's or
Assignee's share of taxable income or loss shall be determined for federal
income tax purposes by prorating all items of taxable income or loss on a daily
or other reasonable basis and allocating such items among the Partners taking
into account the applicable Participating Percentages in the Partnership on each
such day (or other reasonable period) and each such Partner's varying share
thereof as required by Section 706 of the Code.
11.2.7 All items of income, gain, loss, deduction, credit and basis
allocation recognized by the Partnership for federal income tax purposes and
allocated to the Partners in accordance with the provisions hereof shall be
determined without regard to any election under Section 754 of the Code which
may be made by the Partnership; provided, however, such allocations, once made,
shall be adjusted as necessary or appropriate to take into account those
adjustments permitted by Sections 734 and 743 of the Code.
ARTICLE XII
Section 12.1 WITHDRAWAL OR DEATH OF A LIMITED PARTNER.
<PAGE>
12.1.1 The withdrawal or death of any Limited Partner shall not affect
the continuation of the Partnership and shall not cause a dissolution of the
Partnership.
ARTICLE XIII
Section 13.1 DISSOLUTION, LIQUIDATION AND TERMINATION.
13.1.1 The Partnership shall be dissolved upon the occurrence
of any of the following:
(a) the expiration of twenty (20) years from the date
hereof or upon the sale of substantially all of the Partnership's
assets, whichever occurs first;
(b) by affirmative vote of Limited Partners owning not less
than seventy-five percent (75%) of the Units then outstanding (other
than Units held by the General Partner);
(c) by any event which makes it unlawful for the
Partnership's business to be continued;
(d) by the written notice of the General Partner of its
election to dissolve the Partnership; or
(e) by bankruptcy, adjudication of insolvency, removal, death
or withdrawal (on sixty (60) days prior written notice from the General
Partner to all Partners) of the General Partner.
In the event of a dissolution of the Partnership pursuant to Section
13.1.1(e), the remaining Partners may elect to continue the Partnership in
accordance with the terms of this Agreement and, if the Partnership is
continued, the remaining Partners owning in excess of 50% of the Units appoint a
new general partner or general partners who shall succeed to the general partner
interest of the former General Partner.
13.1.2 Upon a dissolution of the Partnership, the Partnership shall not
terminate, but shall cease to engage in further business except to the extent
necessary to perform existing contracts and preserve the value of its assets,
and the General Partner shall take full account of the Partnership assets and
liabilities and shall wind up its affairs and liquidate its assets. During the
course of liquidation, the provisions of this Agreement shall continue to bind
the parties and apply to the activities of the Partnership.
13.1.3 After the Partnership's affairs have been wound up and its
assets liquidated, the General Partner (or the person acting in its stead) shall
distribute the proceeds therefrom in the following order:
(a) to creditors of the Partnership, other than Partners,
in the order of priority as provided by law; and
<PAGE>
(b) to the payment of any loans or advancements made by the
Partners or their affiliates and to the payment of compensation or fees
for services rendered to which the General Partner or its affiliates
are entitled by reason of their management of the Partnership or
otherwise; and
(c) to the Partners in proportion to and to the extent of the
positive balances in their respective Capital Accounts after taking
into account all adjustments to the Capital Account balances pursuant
to Sections 4.4 and 11.1; and provided however, that the Liquidator may
place in escrow a reserve of cash or other assets of the Partnership
for contingent liabilities in an amount determined by the Liquidator as
appropriate for such purposes.
13.1.4 No Limited Partner shall be obligated to restore any negative
balance in its Capital Account or have any obligation to make additional
contributions of capital upon liquidation.
13.1.5 Upon completion of the dissolution, winding up, liquidation, and
distribution of the liquidation proceeds and any other Partnership assets, the
Partnership shall terminate.
ARTICLE XIV
Section 14.1 VOTING RIGHTS OF LIMITED PARTNERS. All actions and votes
of Limited Partners required or permitted under the terms of this Agreement
shall be conducted pursuant to the following terms and provisions:
14.1.1 Each Limited Partner shall have the right to cast one vote for
each Unit owned of record on the books of the Partnership by such Limited
Partner. Limited Partners shall not be entitled to cumulate their votes. Except
with respect to removal of a General Partner, in which case the affected General
Partner shall have no vote, a General Partner shall have full voting rights as
Limited Partner with respect to any Units he may own.
14.1.2 The General Partner shall set a record date for determining the
Limited Partners entitled to cast a ballot and to vote, which date shall not be
more than sixty (60) or less than twenty (20) days prior to the date on which
such ballots are deposited in the mails or otherwise delivered to the Limited
Partners.
The General Partner shall give notice to each Limited Partner and shall transmit
with any such notice the following:
(a) a description of each matter being voted upon;
(b) a ballot providing for each Limited Partner to cast
his number of votes for or against each matter being voted upon;
<PAGE>
(c) a statement of the date by which each Limited Partner's
ballot must be received by the General Partner, which date shall be not
less than twenty (20) days from the date on which such ballots are
deposited in the regular mails or otherwise delivered to the Limited
Partners; and
(d) an envelope self-addressed to the General Partner at
the General Partner's address.
14.1.3 All ballots must be returned to the General Partner not later
than the date indicated on the ballot pursuant to Section 15.1.2(iii). ballots
received after said twenty (20) day period shall be considered void.
14.1.4 Within ten (10) days after the date indicated on the ballot
pursuant to Section 14.1.2(c), the General Partner shall count the vote. All
ballots not returned, or returned after the twenty (20) day period, shall not be
counted in the vote. The General Partner shall within ten (10) days after
tallying the vote notify the Limited Partners of the outcome of said vote by
written notice.
14.1.5 Unless otherwise specified in this Agreement, any matters which
shall be submitted to a vote of the Limited Partners shall be deemed approved if
Limited Partners owning not less than seventy-five percent (75%) of the Units
then outstanding (other than Units held by the General Partner) and who are
entitled to vote in accordance with the provisions of Section 14.1.1 shall cast
their votes in favor of any such matter.
ARTICLE XV
Section 15.1 MERGER OR CONSOLIDATION
15.1.1 The Partnership may merge or consolidate with one or more
limited partnerships formed under the laws of the State of Delaware or another
state of the United States of America pursuant to a written agreement of merger
or consolidation ("Merger Agreement") in accordance with this Article XV.
15.1.2 Merger or consolidation of the Partnership pursuant to this
Article XV requires the prior written consent of the General Partner. If the
General Partner determines, in the exercise of its sole discretion, to consent
to the merger or consolidation, the General Partner shall approve the merger
agreement, which shall set forth:
(a) the names and states of domicile of the limited partnerships
proposing to merge or consolidate;
(b) the name and states of domicile of the limited partnership
into which they propose to merge or consolidate (hereafter designated as the
"Surviving Limited Partnership");
(c) the manner and basis of exchanging or converting the general and
limited partnership interest of each merging limited partnership for, or into,
cash, property, general or
<PAGE>
limited partnership interests, rights, securities or obligations of the
Surviving Limited Partnership, and (1) if any general or limited partnership
interests of whether merging limited partnership are not to be exchanged or
converted solely for, or into, cash, property, general or limited partnership
interests, rights, securities or obligations of the Surviving Limited
Partnership, the cash, property, general or limited partnership interests,
rights, securities or obligations of any limited partnership (other than the
Surviving Limited Partnership), corporation, trust or other entity which the
holders of such general or limited partnership interests are to receive in
exchange for, or upon conversion of, their general or limited partnership
interests and (2) in the case of general or limited partnership interests
represented by certificates, upon the surrender of such certificates, which
cash, property, general or limited partnership interest are to receive in
exchange for, or upon conversion of, their general or limited partnership
interests, rights, securities or obligations of the Surviving Limited
Partnership or any limited partnership (other than the Surviving Limited
Partnership), corporation, trust or other entity, or evidences thereof, are to
be delivered;
(e) a statement of any changes in the certificate of limited
partnership of the Surviving Limited Partnership to be effected by such merger
or consolidation;
(f) the effective time of the merger or consolidation, which may be the
date of the filing of the certificate of merger pursuant to Section 15.1.4 or a
later date specified in or determinable in accordance with the merger agreement
(provided that if the effective time of the merger or consolidation is to be
later than the date of the filing of the certificate of merger, the effective
time shall be fixed at or prior to the time of the filing of the certificate of
merger and stated therein); and
(g) such other provisions with respect to the proposed merger or
consolidation as are deemed necessary or desirable.
Section 15.1.3
(a) The General Partner, upon approving a Merger Agreement, shall
direct that the merger Agreement be submitted to a vote of Limited Partners
either at a meeting or by written consent, in either case in accordance with the
requirements of Article XIV. A copy or a summary of the Merger Agreement shall
be included in or enclosed with the notice of a meeting or the written consent.
(b) The Merger Agreement shall be approved upon receiving the
affirmative vote or consent of the holders of at least fifty percent (50%) of
the Units outstanding (other than Units held by the General Partner), unless the
merger agreement contains any additional voting requirements or contains any
provision which, if contained in an amendment to the Agreement, would require
the vote or consent of a greater percentage of the Percentage Interests of the
Limited Partners, in which case such greater percentage vote or consent shall be
required for approval of the merger agreement.
(c) No vote or consent of Limited Partners shall be required if, on the
date that the merger agreement is approved by the General Partner, the
<PAGE>
Partnership is the Surviving Limited Partnership and is the owner of at least
ninety (90%) percent of the partnership interests (determined with respect to
participation in the capital or profits of the partnership) of the other
partnership that is a party to the merger.
(d) After such approval by vote or consent of the Limited Partners, and
at anytime prior to filing of the certificate of merger pursuant to Section
15.1.4, the merger or consolidation may be abandoned pursuant to provisions
therefore, if any, set forth in the merger agreement.
15.1.4 Upon the required approval by the General Partner and Limited
Partners of a merger agreement, a certificate of merger shall be executed and
filed with the Secretary of State in conformity with the requirements of the
Delaware Act.
ARTICLE XVI
Section 16.1 NOTICES. All notices or other communications required or
permitted to be given pursuant to this Agreement shall, in the case of notices
to be given to the Limited Partners, be in writing and shall be considered as
properly given or made if mailed from within the United States by first class
mail, postage prepaid, or if sent by prepaid telegram, and addressed to the
address set forth opposite a Limited Partner's name on Exhibit "A" to this
Agreement or as set forth in such Limited Partner's Subscription Documents. In
the case of notices required or permitted to be given to the General Partner,
the same shall be in writing and shall be considered as properly given or made
if mailed by United States certified or registered mail, return receipt
requested, addressed to the General Partner at 3280 North Frontage Road, Lehi,
Utah 84043. Any Limited Partner may change his address by giving notice in
writing, stating his new address, to the General Partner, and the General
Partner may change its address by giving such notice to all Limited Partners.
Commencing on the tenth (10th) day after the giving of such notice, such newly
designated address shall be such Partner's address for the purpose of all
notices or other communications required or permitted to be given pursuant to
this Agreement.
Section 16.2 LAW GOVERNING. This agreement shall be governed by and
construed in accordance with the laws of the State of Delaware.
Section 16.3 AMENDMENTS. Except as otherwise herein provided to the
contrary, this Agreement is subject to amendment only upon the approval of the
Limited Partners owning of record, on the books of the partnership, not less
than fifty-one percent (51%) of the then outstanding Units (other than Units
held by the General Partner); provided, however, no amendment shall alter,
modify, expand or extend the obligations or liabilities of the General Partner
without its prior written consent, and provided that no amendment shall reduce
the percentage vote required under Section 6.1.9 hereof to remove a General
Partner.
Section 16.4 SUCCESSORS AND ASSIGNS. This Agreement and all the terms
and provisions hereof shall be binding upon the partners, their respective legal
representatives, heirs, successors and assigns.
<PAGE>
Section 16.5 COUNTERPARTS. This Agreement may be executed in multiple
counterparts, each of which shall constitute this Agreement.
Section 16.6 NECESSARY DOCUMENTS . Each Limited Partner agrees upon
request of the General Partner, to execute such certificates or other documents
and perform such acts as the General Partner deems necessary for purposes and
business of the Partnership.
Section 16.7 HEADINGS AND PRONOUNS. Paragraph titles or captions
contained in this Agreement are inserted only as a matter of convenience and for
reference and in no way define, limit or describe the scope of this Agreement or
the intent of any provision hereof. Whenever the singular number is used in this
Agreement and when required by the context, the same shall include the plural,
and the masculine gender shall include the feminine and neuter genders and the
word "person" shall include corporation, partnership, firm, association or other
entity.
Section 16.8 VALIDITY. If any provision of this Certificate and
Agreement of Limited Partnership or the application of such provision to any
person or circumstance shall be held invalid, the remainder of this Certificate
and Agreement of Limited Partnership, or the application of such provision to
persons or circumstances other than those as to which it is held invalid, shall
not be affected thereby.
Section 16.9 MODIFICATION TO BE IN WRITING. This Agreement constitutes
the entire understanding of the parties hereto with respect to the subject
matter hereof and no amendment, modification or alteration of the terms hereof
shall be binding unless the same be in writing.
Section 16.10 WAIVER OF ACTION OF PARTITION. Each of the Partners
hereto irrevocably waives during the term of the Partnership any right it may
have to maintain any action of partition with respect to any property of the
partnership.
Section 16.11 LIMITATION ON TRANSFER OF UNITS. An appropriate legend
noting the restrictions on transfer shall be placed conspicuously on the face of
all certificates representing Units and a notation restricting transfer will be
placed in the books and records of the Partnership. All transferees of Units
shall be treated similarly and corresponding notations shall be placed on new
certificates for Units issued upon transfer as well as in the Partnership
records.
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Certificate and
Agreement of Limited Partnership as of the ___ day of February, 1996.
GENERAL PARTNER:
Covol Technologies, Inc.
By_________________________________
Its President
LIMITED PARTNERS:
-----------------------------------
-----------------------------------
STATE OF UTAH)
: ss.
COUNTY OF UTAH)
On the _____, day of ____________, 1996, personally appeared before me
Kirby Cochran, who being by me duly sworn did say that he is the President of
Covol Technologies, Inc., and did execute the foregoing instrument as a General
Partner, and that the information contained therein is true and correct, and
that ____________________________ and _________________________________, also,
executed the same as a Limited Partner.
-----------------------------------
NOTARY PUBLIC
My Commission Expires: Residing at:
- - ------------------------- --------------------
<PAGE>
EXHIBIT "A"
TO
CERTIFICATE AND AGREEMENT
OF
LIMITED PARTNERSHIP
OF
Utah Synfuel #1
Capital
Units Contributions
GENERAL PARTNER:
Covol Technologies, Inc.
3280 North Frontage Road
Lehi, Utah 84043
LIMITED PARTNERS:
COVOL TECHNOLOGIES, INC.
List of Subsidiaries
Name Jurisdiction of
Organization
Industrial Management and Engineering, Inc. Utah Corporation
State Incorporated Utah Corporation
Central Industrial Construction, Inc. Utah Corporation
Larson Limestone Company, Inc. Utah Corporation
Utah Synfuel #1 Delaware limited
partnership
Alabama Synfuel #1, Ltd. Delaware limited
partnership
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<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 490106
<SECURITIES> 0
<RECEIVABLES> 77744
<ALLOWANCES> 0
<INVENTORY> 162757
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<BONDS> 1109066
0
0
<COMMON> 7714
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<SALES> 195165
<TOTAL-REVENUES> 295165
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<INCOME-PRETAX> (12931815)
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<EXTRAORDINARY> 0
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<NET-INCOME> (13836320)
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