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, 1997
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 15, 1997 was $96,571,353.
The number of shares outstanding of each of the registrant's classes
of common stock as of December 15, 1997 was 9,298,175.
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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................................................. 19
ITEM 3. LEGAL PROCEEDINGS.......................................... 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........ 21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS........................................ 21
ITEM 6. SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA............ 27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................ 30
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK................................................ 38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................ 38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE........................ 38
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......... 39
ITEM 11. EXECUTIVE COMPENSATION..................................... 45
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................. 50
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............. 53
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K.... 56
Statements in this Form 10-K, including those concerning the Registrant's
expectations regarding its business, and certain of the information presented in
this report, constitute forward looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. As such, actual results may
vary materially from such expectations. For a discussion of the factors that
could cause actual results to differ from expectations, please see the caption
entitled "Forward Looking Statements" in Item 1 and 7 hereof. There can be no
assurance that the Registrant's results of operations will not be adversely
affected by such factors.
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PART I
ITEM 1. BUSINESS
The Company
The primary business of Covol Technologies, Inc. (the "Company" or
"Covol") is to commercialize patented and proprietary technologies (the
"Briquetting Technology") used to recycle waste by-products from the coal, steel
and other industries into a marketable source of fuel, revert materials and
other marketable resources in the form of briquettes, extrusions or pellets
("briquettes").
Covol 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 and changed its name to
McParkland Properties, Inc. ("McParkland"). 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 consisting
of 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 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 "Construction Companies."
In September 1995, the Company made a strategic decision to focus its
efforts exclusively on commercializing the Briquetting Technology and to divest
itself of the Construction Companies. Accordingly, on February 1, 1996, the
Company entered into a Share Purchase Agreement ( the "Agreement") with Michael
McEwan and Gerald Larson, former principals of the Construction Companies (the
"Buyers"), to sell all of the common shares of the Construction Companies to
Buyers. See "ITEM 1. BUSINESS--Construction and Limestone Businesses."
Partnerships. In June 1996, the Company formed Utah Synfuel #1, Ltd.
("US #1") and Alabama Synfuel #1, Ltd. ("AS #1"), each a Delaware limited
partnership (collectively the "Partnerships"). The Company has retained a 60%
interest in US #1 and a 80% interest in AS #1 and privately placed the remaining
partnership interests in the Partnerships. The limited partners paid $3,277,500
for the remaining partnership interests in US #1 and $2,062,500 for the
remaining partnership interests in AS #1.
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Funds raised in AS #1 and US #1 were used to purchase equipment and
begin construction on the synthetic coal briquetting plants in Birmingham,
Alabama (the "Alabama Plant"), through AS #1, and in Price, Utah (the "Utah
Plant"), through US #1. The Company and AS #1 subsequently entered into a
contract to sell the Alabama Plant to Birmingham Syn Fuel, L.L.C. ("BSF"), an
affiliate of PacifiCorp Financial Services, Inc. ("PacifiCorp"). See "ITEM 1.
BUSINESS--Business of the Company--Alabama Plant." The Utah Plant was sold to
Coaltech No. 1 LP ("Coaltech"), a Delaware limited partnership, which consists
of the Company as a 1% general partner, AJG Financial Services, Inc. as a 24%
limited partner and Square D Company as a 75% limited partner. See "ITEM 1.
BUSINESS--Business of the Company--Utah Plant." Under the partnership agreements
for 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.
Flat Ridge Corporation. On October 15, 1997, the Company organized Flat
Ridge Corporation ("FRC"), a Utah corporation, as a wholly-owned subsidiary. The
purpose of FRC is to develop sites for the construction of briquetting
facilities. To date FRC has incurred costs for the permitting of a site in West
Virginia. There has been no other significant business conducted by FRC.
Covol Australia. On December 6, 1996, Covol Australia, Ltd. ("CAL"), an
Australian corporation, was formed by the Company and MT Technologies, Inc., a
British Virgin Islands corporation with offices in Hong Kong. The Company
initially retained a 15% interest in CAL and entered into a licensing agreement
with CAL for the use of the Briquetting Technology in Australia. On September
10, 1997, the Company acquired from the other CAL stockholders their interests
in exchange for 30,000 shares of Company common stock, thus making CAL a
wholly-owned subsidiary of the Company, amounts paid in excess of tangible
assets acquired are shown in the financial statements as payment for services.
The Company intends to commercialize its Briquetting Technology in Australia and
in other foreign countries. There was no significant business activity conducted
by CAL during the fiscal year ended September 30, 1997.
As of the filing of this report, the consolidated business of the
Company consisted of Covol as the parent company, FRC and CAL as wholly-owned
corporate subsidiaries, and US #1 and AS #1 as limited partnerships, of which
the Company is both the general partner and a limited partner, holding a 60% and
80% interest, respectively.
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 relating to its common stock. Effective
January 23, 1996, the Company implemented a two-for-one forward stock split
relating to its common stock. Except as otherwise indicated, all information set
forth herein has been adjusted to give effect to such stock splits. Effective
June 25, 1997, the Company approved a new class of preferred stock in an
authorized amount of 10,000,000 shares.
The Company anticipates that its expansion plans and working capital
requirements through the fiscal year ending September 30, 1998 will be met
through payments from the sale of briquetting facilities, advance license fees
which consist of a one-time payment for the use of the Briquetting Technology
royalties, based on production by licensees of the Company's Briquetting
Technology, profits from the sale of binder and proceeds from project financings
and equity and debt offerings as of the date of this Annual Report. Depending
upon the amount and timing of these capital resources, the Company may be
required to raise additional capital through private offerings of equity and
debt securities. No assurances can be made that the Company will operate
profitably, receive sufficient revenues from the sources listed above, or if
need be, will be able to raise sufficient capital through equity or debt
offerings.
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Business of Company
The Company has developed the Briquetting Technology to recycle waste
by-products such as iron revert, coke breeze and coal fines from the steel and
coal industries into marketable sources of fuel or raw materials 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 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. Notwithstanding the significant
potential value in the revert materials, coke breeze and coal fines, the steel
and coal industries historically have not been able to develop effective
processes whereby these valuable resources can be captured and utilized. Indeed,
these materials have 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
coal fines, coke breeze and revert materials into briquettes. The coal and coke
briquettes produced through use of the Briquetting Technology are suitable for
industrial and commercial use and are comparable to run-of-mine coal and formed
coke. The revert material briquettes 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 steel-making
industry. See "ITEM 1. BUSINESS--Briquetting Technology." The Company believes
that its coal and coke briquettes and reclaimed iron can be produced and
marketed at prices which are competitive with run-of-mine 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.
In addition to the uses described above, the Briquetting Technology may
also have other applications. The Company has successfully briquetted other
materials such as molybdenum, grinding swarf, lead dross and rutile to name a
few. The Company has not explored the commercial viability of these and other
applications.
The Company's fundamental business strategy is to commercialize the
Briquetting Technology through investors, limited partnerships, licenses, joint
ventures and collaborative arrangements with steel, coke and coal producers.
Because of the potential for tax credits in connection with the production of
synthetic fuels from coal fines at briquetting plants placed in service by June
30, 1998 (see "ITEM 1. BUSINESS--Tax Credits"), the principal focus of the
Company during fiscal year 1997 has been the development and commercialization
of the Briquetting Technology with respect to coal. The Company will continue to
focus on the coal application through fiscal year 1998.
Alabama Plant
The Company, through AS #1, is currently constructing the Alabama Plant
in Birmingham, Alabama. The plant will manufacture synthetic fuel from coal and
is expected to have an annual capacity of approximately 360,000 tons. The
Company anticipates that the construction of the Alabama Plant will be completed
by February 15, 1998. However, there are no assurances that the construction of
the Alabama Plant will be completed by that date or that it will produce at its
expected capacity.
Pursuant to the Alabama Project Purchase Agreement, dated as of March
20, 1997 (the "Alabama Purchase Agreement"), between the Company, AS #1 and
Birmingham Syn Fuel, L.L.C. ("BSF") a wholly-owned subsidiary of PacifiCorp
Financial Services, Inc. (together with any affiliates, "PacifiCorp"), the
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Company and AS #1 have agreed to sell, and BSF has agreed to buy, the Alabama
Plant, subject to the terms and conditions of the Alabama Purchase Agreement.
The purchase price for the Alabama Plant should approximate the cost of the
Alabama Plant and will be payable in the form of a nonrecourse promissory note
secured by certain portions of the Alabama Plant. There are several conditions
precedent to the closing of the sale of the Alabama Plant. One condition to
closing was the receipt by BSF of a Private Letter Ruling ("PLR") from the
Internal Revenue Service ("IRS"). BSF received a favorable PLR in August 1997.
The receipt of the PLR triggered the payment of $250,000 in advance license fees
under the license agreement, which was included in deferred revenue as of
September 30, 1997, and will be recognized upon completion of the Alabama Plant.
An additional fee of $250,000 is payable upon the completion of the Alabama
Plant construction. The Company believes that it has met or will meet all other
conditions for the sale of the Alabama Plant; however, there is no assurance
that all conditions will be met.
Pursuant to a license agreement, BSF will pay quarterly royalty
payments at a prescribed dollar amount multiplied by the amount of British
thermal units ("Btu") in the product produced and sold during the calendar
quarter. The prescribed dollar amount is subject to adjustment based upon the
"inflation adjustment factor" as set forth in Section 29(d)(2) of the Internal
Revenue Code of 1986, as amended (the "Code"). The amount to be paid is subject
to adjustment to the extent that BSF incurs an operating loss on the production
and sale of synthetic fuel (exclusive of the amount BSF pays as a license fee
for the use of the technology).
The Company also has agreed to provide binder material to BSF for the
manufacture and production of synthetic fuel at an amount equal to the Company's
cost plus a prescribed mark-up. The mark-up may be reduced to the extent BSF
incurs a loss on the production and sale of synthetic fuel, but not below the
Company's cost for such binder materials.
Pursuant to a conditional option agreement, the Company agreed to
purchase all of the rights, title and interests of certain PacifiCorp parties in
BSF and all interests of PacifiCorp in its original $5 Million draw down loan
(described herein, and subsequently amended to $7 Million) if a PLR was not
received. Based upon BSF's receipt of the PLR in August 1997, the Company
believes that the conditional option agreement has terminated according to its
terms.
Utah Plant
The Company, through US #1, constructed the Utah Plant in Price, Utah.
The Utah Plant is a synthetic fuel briquetting facility with a production
capacity of approximately 360,000 tons per year. On March 10, 1997, the Company,
together with US #1, finalized the sale of the Utah Plant for $3.5 Million, in
the form of a nonrecourse promissory note (the "Utah Note"), all in accordance
with a Utah Project Purchase Agreement, dated as of March 7, 1997, between the
Company, US #1 and Coaltech (the "Utah Purchase Agreement"). The sale of the
Utah Plant resulted in a loss of approximately $581,000. The aggregate principal
balance of the Utah Note accrues interest at a fixed interest rate of 9.6552%
per annum, and is to be repaid in forty-four (44) equal consecutive quarterly
installments of principal and interest in the amount of $130,000, commencing on
March 31, 1997. As of September 30, 1997, one payment has been received. The
Utah Note is secured by a security interest in the Utah Plant, and in the event
of a default under the Utah Note, the Company's and US #1's sole right to
recovery is limited to the Utah Plant as pledged collateral without any recourse
against Coaltech. Accordingly, payments under the Utah Note will be subject to
the profitable production and sale of briquettes at the Utah Plant. If payments
are made on the Utah Note and the sublicense agreement described below, the
Company is only entitled to receive a distribution, if any, in accordance with
its percentage ownership of US #1. Currently, the Company has a 60% interest in
US #1.
The purchaser of the Utah Plant, Coaltech, consists of AJG Financial
Services, Inc., a Delaware corporation and wholly-owned subsidiary of Arthur J.
Gallagher & Co. ("Gallagher"), and Square D Company, a Delaware corporation and
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wholly-owned subsidiary of Groupe Schneider, as 24% and 75% limited partners,
respectively, and the Company as a 1% general partner. Coaltech is a limited
partnership with no assets other than the Utah Plant, capital contributions made
by the partners and the sublicense described below.
In connection with the execution and delivery of the Utah Purchase
Agreement, US #1 granted Coaltech a non-exclusive sublicense of the Briquetting
Technology all pursuant to a License Agreement, dated as of March 7, 1997, by
and among US #1 as licensor, the Company as vendor, and Coaltech as licensee and
vendee (the "Utah License Agreement"). Under the Utah License Agreement, US #1
received an advance license fee of $1.4 Million, included in deferred revenue as
of September 30, 1997, and depending upon the amount of briquettes that are
produced and sold as "qualified fuels" under Section 29 of the Code, US #1 may
receive an earned license fee payable quarterly. The earned license fee is based
upon the product of an established dollar amount multiplied by the Btu of the
briquettes manufactured and sold at the Utah Plant. The established dollar
amount is subject to annual adjustment based upon an "inflation adjustment
factor" as set forth in Section 29(d)(2) of the Code. US #1 also has the
opportunity to receive an additional $1.1 Million as a goal fee if (i) the Utah
Plant during any consecutive seven day period produces and sells 7,140 tons of
qualifying briquettes, (ii) the Company completes the installation of additional
equipment at the facility (which has been installed), and (iii) notice is given
to Coaltech regarding such production and installation. The Company cannot
predict with any certainty the amount of ongoing license fees that may be
generated under the Utah License Agreement.
Also under the Utah License Agreement, the Company has agreed to sell
certain proprietary binder material necessary to produce the briquettes to
Coaltech at an established rate per ton subject to annual adjustment based upon
the producer price index. The Utah License Agreement extends to the later of (i)
January 1, 2008 or (ii) the corresponding date after which tax credits may not
be claimed or otherwise available under Section 29 of the Code.
The Company contracted with Coaltech to act as operator of the facility
for a quarterly fee based upon the amount of briquettes produced and sold per
year. The Company cannot predict with any certainty the amount of quarterly fees
that may be generated under its operation and maintenance agreement with
Coaltech. Moreover, the Company granted Coaltech a put option to require the
Company to purchase from Coaltech the Utah Project if (i) all of the Coaltech
limited partners are unable to utilize the federal income tax credits under
Section 29 of the Code, (ii) the economic benefits accruing to or experienced by
all of the Coaltech limited partners shall differ significantly from what was
initially projected, or (iii) there is a permanent force majeure or material
damage or destruction of the Utah Plant. If the put option is exercised prior to
the third anniversary date of the grant, the option price will be equal to the
fair market value of the limited partnership interests of the optionees on a
going concern basis, but in no event will the option price exceed 50% of the
capital contributions made by the optionees to fund payments due under the Utah
Note, the Utah License Agreement and broker fees. If the put option is exercised
on or after the third anniversary date, the option price will be $10 and the
optionees will not be entitled to any other payments.
As part of the sale of the Utah Plant, the Company and US #1 entered
into a Supply and Purchase Agreement with Coaltech. Under the agreement, the
Company agreed to provide coal fines to the Utah Plant for processing into
synthetic fuel at an amount equal to the Company's per ton costs (including any
wash costs). See discussion of wash plant below. Furthermore, US #1 agreed to
purchase from Coaltech the synthetic fuel produced at its cost plus one dollar
per ton. Coaltech has the right to market its synthetic fuel to a third party,
with US #1 having a right of first refusal to purchase such synthetic fuel. The
Company incurred a loss of $1,547,674 in the year ended September 30, 1997 in
connection with this agreement.
Finally, the building and surrounding property that accommodates the
Utah Plant was constructed so as to be capable of housing a second briquetting
facility. The Company granted to Coaltech the right to purchase a second line if
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constructed at the Utah Plant site under terms comparable to the sale of the
Utah Plant. If the Company sells a second line to Coaltech, it is also obligated
to sell the building, binder plant, and other equipment that were not part of
the Utah Plant sold. The decision to construct the second line is dependent
upon, among other things, identifying adequate fines to operate a second line,
marketing of the synthetic fuel from a second line, and financing for
construction of the second line. The Company can give no assurance that the
second facility will be built, or that, if built, such facility will be
purchased by Coaltech.
Since the Utah Plant was first placed in service it has experienced
several problems, including insufficient drying capability for the synthetic
fuel product, inadequate clean coal fines as a feedstock for operations, and
inability to market to end-consumers the synthetic fuel product produced from
the high ash feedstock. The steps the Company has taken or is taking to address
these problems are described below.
Subsequent to the sale of the Utah Plant and as a condition of the
sale, the Company removed the dryers that were then a part of the facility and
added a larger dryer having the capacity to dry the output from the Utah Plant.
This installation was completed in May 1997. The Company believes this
modification has remedied the drying problem.
In order to provide coal fines to the Utah Plant, the Company entered
into a purchase agreement with Earthco to acquire the NEICO coal fines. See
"ITEM 1. BUSINESS--Supply of Coal Fines--NEICO Fines Purchase." The estimated
amount of clean coal fines equivalent at the NEICO site is 2 million tons. The
NEICO fines require washing to remove ash and to otherwise improve the quality
of the fines. Hence the Company is constructing of a wash plant at the NEICO
fines site. The estimated cost of the wash plant is approximately $4 Million.
The financing for the construction of the wash plant is being provided by
Gallagher, and is evidenced by a promissory note executed and delivered by the
Company to Gallagher which is secured by the property purchased with the
proceeds of the loan. The promissory note bears interest at 6% per annum with
principal and interest being due and payable in two years. As additional
consideration to Gallagher for financing the wash plant, the Company, in October
1997, agreed to grant Gallagher warrants to purchase approximately 400,000
shares of Company common stock, with fifty percent of the shares having a
purchase price of $10 per share and fifty percent of the shares having a
purchase price of $20 per share. The warrants are immediately exercisable and
expire in two years. The Company estimates that the wash plant will be
operational in January 1998 and will be able to process approximately 80 tons of
clean fines per hour. If the wash plant operates at expected capacity, it will
provide sufficient quality feedstock to operate the Utah Plant at its capacity.
As stated above, and in accordance with the Supply and Purchase Agreement with
Coaltech, the Company will provide the washed coal fines at its cost, which will
equal the amount paid under the NEICO Fines Purchase agreement plus washing
costs.
At the time the Company commenced construction and operation of the
Utah Plant there were sufficient clean coal fines held by third parties in the
general area of the Utah Plant to provide sufficient clean feedstock for
operating the plant without a wash plant until the wash plant was completed.
However, the clean coal fines held by third parties were sold to other
purchasers leaving the Company with no clean coal fines source to service the
needs of the Utah Plant. Without sufficient quality feedstock, the Utah Plant
has, therefore, operated at well below its capacity, processing approximately
18,000 tons of synthetic fuel all of which had a relatively high level of ash
and most of which has not been sold. Accordingly, the Company incurred a loss on
the production of synthetic fuel product at the Utah Plant. See "ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION."
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The Company has experienced problems with the marketing of the
synthetic fuel product manufactured at the Utah Plant site. The Company believes
that the marketing problem is principally due to the high ash content in the
product which resulted from the use of low quality coal fines. Most users of the
synthetic fuel product are not capable of handling a product with high levels of
ash. The Company expects that the marketing problems for the product will be
resolved once the quality of the coal fines used in the processing of the
product is improved. The Company believes this improvement will occur once the
wash plant is operational.
The Company can give no assurance that the Utah Plant will produce at
capacity once the Utah Plant and the wash plant are fully operational.
Furthermore, the Company can give no assurance that the finished product will be
commercially marketable.
License Agreements
In December 1996, the Company entered into agreements with various
third parties for the licensing of the Briquetting Technology. In order to
qualify for Section 29 treatment, the facilities that will be utilizing the
Briquetting Technology are required to be placed in service no later than June
30, 1998. 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 after the facilities have been placed into operation.
Additionally, while the Company expects several facilities to be placed in
service prior to June 30, 1998, some of the licenses granted will likely not be
used since all of the facilities anticipated to use the licenses may not be
constructed by June 30, 1998. There is no assurance that the facilities licensed
to use the Briquetting Technology as described below will be in service by June
30, 1998.
PacifiCorp. In December 1996, PacifiCorp Syn Fuel, L.L.C.
("PacifiCorp") entered into binding agreements with a third-party contractor for
the construction of six facilities in addition to the Alabama Plant. Each
facility is designed to manufacture approximately 360,000 tons annually. The
Company entered into a license agreement with PacifiCorp for the use of the
Briquetting Technology at the six facilities subject to the construction
agreements. PacifiCorp subsequently announced the construction of three
facilities, with the construction of two single-line synthetic fuel processing
facility located in Walker County, Alabama and a single-line facility located
in Tuscaloosa County, Alabama. Under the terms of the license agreement,
PacifiCorp will owe $1,000,000 in advance license fees and will pay a quarterly
license fee at a prescribed amount (subject to annual adjustment for inflation)
times the Btu of product produced and sold during the quarter. The Company will
also provide binder at its cost plus a prescribed mark-up. In October 1997,
PacifiCorp determined that it was not going forward with the remaining three
facilities for which it entered into binding contracts in 1996.
The Company can give no assurance that PacifiCorp will ultimately
construct and qualify the three facilities under Section 29, that the licensing
fees will be received, nor can assurance be given that the facilities will
operate at the estimated capacity.
Gallagher. In December 1996, AJG Financial Services, Inc., a
wholly-owned subsidiary of Arthur J. Gallagher & Co. ("Gallagher"), entered into
binding contracts with a third-party contractor for the construction of four
facilities in addition to the Utah Plant. Each facility has an estimated
capacity of 360,000 tons annually. The Company entered into a license agreement
with Gallagher to utilize the Briquetting Technology at the four facilities.
Gallagher has indicated to the Company that it is developing the site for the
four facilities, has ordered the necessary equipment, and has otherwise
proceeded with the construction of the four facilities. Under the terms of the
license and other financing agreements with the Company, Gallagher will pay an
advance license fee in the amount of $500,000 for each facility, subject to
certain conditions, and will pay a prescribed amount of royalty each quarter
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(subject to annual adjustment for inflation), based on the amount of Btu of the
product produced and sold during the quarter. The Company will supply binder to
the four facilities at an amount equal to cost plus an agreed upon mark-up.
The Company can give no assurance that Gallagher will ultimately
construct and qualify the four facilities under Section 29, that the licensing
fees will be received, nor can assurance be given that the facilities will
operate at the estimated capacity.
Pace Carbon Fuels, L.L.C. In December 1996, Pace Carbon Fuels, L.L.C.,
a joint venture between C.C. Pace Resources and Carbon Resources of Florida
("Pace"), entered into binding contracts with a third-party contractor for the
construction of four facilities, having an estimated annual production capacity
of approximately 600,000 tons per plant. In December 1996, the Company entered
into a license agreement with Pace for the use of the Briquetting Technology at
these facilities.
Pace has indicated to the Company that it is financing and developing
the projects through a limited partnership, Pace Carbon Synfuels Investors, L.P.
("LP"). Interests in the LP are being sold to third-party investors. The LP has
filed for and received a favorable PLR from the IRS. Three of the facilities are
anticipated to be constructed in West Virginia and one facility in Virginia.
Sale of interests in the LP are being conducted independently by Pace and its
agent to qualified investors. The Company has not participated in, facilitated
or otherwise been involved in any part of the offering of interests in the LP by
Pace.
Under the license agreements, the Company will receive an advance
license fee of $1.39 per ton of rated capacity payable upon completion of the
financing of the facilities, but in no event later than January 31, 1998. In
addition, the plants will generate quarterly royalty fees measured by the amount
of Btu of the project produced and sold times a prescribed license fee rate
(subject to annual adjustment for inflation). The Company will also provide
binder material at the Company's cost plus an agreed upon mark-up.
A licensee of the Company, CoBon Energy ("CE"), introduced Pace to the
Company. The Company entered into an agreement that provided that if CE did not
complete projects with capacity of 1,500,000 tons, some portion or all of the
royalties flowing from 500,000 tons of the Pace capacity would be payable to CE.
Given the projects currently under development by CE, it is likely that
royalties on 500,000 tons will be payable to CE. See "ITEM 1. BUSINESS--Business
of the Company--Joint Ventures--CoBon Energy".
The Company can give no assurance that Pace will ultimately construct
and qualify the four facilities, that the licensing fees will be received by the
Company, nor can any assurance be given that the facilities will operate at the
estimated capacities.
Savage Mojave Plant. In November 1996, the Company entered into an
agreement with Savage Industries ("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 an upgraded briquetting facility
located in Laughlin, Nevada (the "Mojave Plant"); (ii) to provide binder
material on a cost plus basis; (iii) to provide, upon request, coal fines to the
Mojave Plant; (iv) to provide technical assistance to the Mojave Plant; and (v)
to reimburse to Savage, from the monthly license fees, an amount equal to 16% of
the cash capital required to upgrade the Mojave Plant. Savage filed for and
received a favorable PLR from the IRS with respect to this project. The plant
has an estimated annual capacity of 120,000 tons. Based on status reports by
Savage to the Company, the Company expects to receive monthly license fees
starting early 1998. No assurances can be made that Savage will be successful in
the production and sale of synthetic fuel. The agreement expires by its terms on
December 31, 2009.
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Pelletco Corporation. In September 1997, the Company entered into a
license agreement with Pelletco Corporation ("Pelletco"), a special-purpose
entity affiliated with Palmer Capital Corporation and Logan Capital Company. The
license is for up to six synthetic fuel projects with estimated annual capacity
of 360,000 tons per plant. Pelletco had entered into binding construction
contracts for the six projects prior to December 31, 1996. Under the terms of
the license agreement, the net profits from the projects will be shared equally
by the Company and Pelletco. The Company will also provide binder material to
the projects at the Company's cost plus an agreed upon mark-up. The Company can
give no assurance that one or more of the plants will be constructed, that the
licensing fees will be received, or that any facility that is constructed will
operate at the estimated capacity.
Joint Ventures
Savage. In November 1996, the Company signed a primary contract with
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 synthetic fuel facility. Under the
terms of the agreement, Savage was responsible for identifying and developing
the projects. However, these projects were not sufficiently developed in the
agreed upon time under the contracts. Accordingly, these projects are not
proceeding forward. The Company's share of liquidated damages for not building
the facilities is $205,000, payable in installments starting in November 1997
through June 1998, which liability has been recorded in the Company's financial
statements for the fiscal year ended September 30, 1997.
Ferro Resources. In December 1996, the Company together with Ferro
Resources, L.L.C. ("Ferro") as joint owners, entered into binding contracts with
a third-party contractor for the construction of two briquetting facilities with
a production capacity of 360,000 tons annually per plant. Under the terms of the
arrangement, Ferro was to develop the projects and the Company was to provide
the Briquetting Technology. The net proceeds of the projects were to be shared
equally by the Company and Ferro. In April 1997, the beneficial owner of Ferro,
Mr. Max E. Sorenson, joined the Company as an executive officer. See "ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS." Subsequent to the 1997 fiscal
year-end, the Company entered into discussions with Mr. Sorenson to purchase the
membership interests in Ferro for $10,000 plus a percentage of income from the
projects constructed under the Ferro/Company construction contracts. Under the
proposed terms of the agreement, Mr. Sorenson has the opportunity to receive up
to $1.5 Million over a period of up to ten years based upon performance factors
of the specified projects. The Company's purpose for entering into such an
agreement is to obtain all right, title and interest in the two Ferro/Company
construction contracts. Given the preliminary nature of the discussions with
Ferro, the terms described above may vary from the terms of the definitive
agreement, if consummated.
The Company is working with other parties in the financing and
developing of the projects that will be constructed under the Ferro/Company
contracts. If the facilities are not constructed, the Company is liable for
liquidated damages in the amount of 6% of the maximum contract price, or
approximately $636,000 in total. The Company can give no assurance that the
facilities will be constructed or that, if constructed, the facilities will
operate at estimated capacity.
CoBon Energy. 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. In
August 1996, CE and the Company modified the letter of understanding. Under the
modified letter of understanding, the Company agreed to give CE a 1.6% interest
in AS #1, plus a license to use the Briquetting Technology for specified plant
locations up to an aggregate capacity of 1.5 million tons of synthetic fuel per
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year. In consideration for the interest in AS #1 and the license, CE is required
to make a one-time payment of (i) $2.00 per ton for annual production of
synthetic fuel in the range of 500,001 to 1,000,000 tons and (ii) $2.50 per ton
for annual production in the range of 1,000,001 to 1,500,000 tons. The binder
material for these projects will be provided by the Company on a cost plus
basis.
In December 1996, CE introduced Pace to the Company. At that time, the
Company entered into an agreement with CE that provided that if CE did not
complete projects with aggregate annual capacity of 1,500,000 tons, some portion
or all of the royalties flowing from 500,000 tons of annual production of the
Pace projects would be payable to CE. Given the amount of estimated tonnage of
projects currently under development by CE, it is likely that the royalties
payable on 500,000 tons of capacity of Pace will be payable to CE.
In December 1996, CE entered into binding contracts for projects with
estimated annual capacity of at least 1.5 million tons in aggregate. CE has been
developing several different sites for the construction of briquetting
facilities. On November 14, 1997, the Company entered into an agreement with CE
to provide financing for the ordering of necessary equipment for a CE project
with an estimated annual production capacity of 680,000 tons and other services
in exchange for a percentage of the annual proceeds from such project.
Approximately $400,000 has been advanced by the Company under this financing.
The Company can give no assurance that any CE facilities will be constructed and
placed in service prior to June 30, 1998 or that any fees will be paid to the
Company pursuant to the agreement as described above.
Geneva Plant. In May 1995, the Company entered into a collaborative
agreement with Geneva Steel Company ("Geneva") to build and operate a commercial
iron revert briquetting plant in Vineyard, Utah (the "Geneva Plant"). That
agreement was amended and restated in May 1996. Currently, the Geneva Plant is
not operational and the Company is a tenant-at-will with respect to the
facility. The Company no longer expects the Geneva Plant to be used as an iron
revert briquetting facility at the Geneva site. In addition to its use as an
iron revert briquetter, the Company has also used the Geneva Plant in the
briquetting of coke breeze and synthetic fuel made from coal fines. In December
1996, the Company entered into a binding contract to install a dryer in the
Geneva Plant that would allow for the operation of the plant as a synthetic fuel
manufacturing facility. The Company plans to use the Geneva Plant for the
production of synthetic fuel, subject to the termination of the lease by Geneva.
No assurance can be given that the Geneva Plant will be operated as a qualified
synthetic fuel facility or that the Geneva Plant will be capable of operating
profitability either in the briquetting of synthetic fuel or iron revert.
Other Construction Agreements
In December 1996, in addition to the contracts previously described and
explained, the Company entered into eight design and construction agreements
(the "1996 Construction Agreements") for the design and construction of eight
new synthetic fuel facilities each having capacity of approximately 360,000 tons
per year. Depending upon the specific agreement, the contractor is either The
Industrial Company ("TIC"), CEntry Constructors, L.C. or Centerline Engineering
Corporation ("Centerline"), a Lockwood Greene Company. The 1996 Construction
Agreements, among other things, require that the plants 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 (or its assignee). The 1996 Construction
Agreements may be terminated at the Company's option with a penalty of 6% of the
total contract price. If the Company is unsuccessful in obtaining financing or
otherwise fails to construct a facility, the 6% penalty would be owed to the
contractor.
AT Massey/Fluor Corporation. The Company has assigned two of the
construction contracts with Centerline to Appalachian Synfuel L.L.C.
("Appalachian"), a wholly-owned subsidiary of Fluor Corporation. The notice to
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proceed has been issued on the two contracts. The facilities will be built as a
double-line solid synthetic fuel agglomeration facility to be located at A.T.
Massey Coal Company, Inc.'s ("AT Massey") Marfork Prep Plant Site in Boone
County, West Virginia. The double-line facility is expected to have an aggregate
annual capacity of approximately 720,000 tons. In conjunction with the
assignment of the two contracts, the Company entered into a license agreement
with Appalachian for the use of the Briquetting Technology. Under the agreement,
the Company will be paid an advance license fee of $1 Million, with $250,000
payable upon execution of the license agreement and the balance payable upon the
receipt by Appalachian of a PLR, if applied for, or upon the satisfaction of
certain conditions if the PLR is not applied for. A quarterly license fee will
also be paid at a prescribed amount (adjusted annually for inflation) for the
Btu of product that is produced and sold up to a prescribed amount of
production. The Company also granted to Appalachian the right to pay a lump sum
payment for the facilities, in lieu of quarterly license fees over the term of
the agreement. The Company will provide binder to the facility on a cost plus
basis. The agreement is subject to other conditions including the payment of
$300,000 to Appalachian if the facilities are not constructed. No assurance can
be given that Appalachian will construct and qualify the facilities for Section
29 treatment or that the plants will be operated at the estimated capacity.
Major Utility. The Company has entered into a non-binding letter of
interest to sell one synthetic fuel facility to Mountaineer Synfuel, L.L.C.
("Buyer"), a Delaware limited liability company and a wholly-owned subsidiary of
a major utility, and is in discussions regarding the sale of a second facility.
The agreement is subject to numerous conditions, including but not limited to,
the obtaining of a PLR from the IRS, the production of a product that meets
certain specifications, the obtaining of necessary permitting, and the securing
of coal fines sources. There is no assurance that the parties will reach an
agreement with respect to the sale of this facility. The Company has entered
into an interim construction financing agreement with this Buyer to finance up
to $1 Million for the Company's purchase of equipment and other project
development costs relating to other facilities described immediately above.
Approximately $560,000 has been advanced under this agreement with such advances
occurring after the Company's fiscal 1997 year end. The Company's obligation to
repay the amounts borrowed is secured by the collateral purchased with the
proceeds of the financing. Interest accrues on the amount advanced at a per
annum rate equal to the LIBOR rate plus 1% payable monthly commencing December
1, 1997. The principal amount of the financing is payable upon the closing of a
take-out construction loan or December 31, 1998, whichever occurs first. The
construction financing will be applied against the purchase of the facilities if
the Buyer elects to buy or will be repaid over time on terms and conditions to
be determined in a definitive construction financing agreement to be negotiated
by the parties. Under the terms of the non-binding letter of interest, the
Company will provide use of the Briquetting Technology and the Buyer, subject to
entering into a definitive agreement, will pay an advance license fee of $1
Million per plant upon completion of the plant and purchase by Buyer. The Buyer
will also pay a quarterly license fee determined by taking the product of a
prescribed amount (adjusted annually for inflation) times the Btu of the
synthetic fuel product produced and sold during the quarter. The Company will
also supply binder material to the project on a cost plus basis. With respect to
the additional site under discussion with the Buyer, which facility is commonly
referred to as Pocahontas Synfuel ("PS"), the Company has given notice to
proceed and has commenced construction. The plant is located in McDowell County,
West Virginia and is expected to have an annual capacity of 360,000 tons. In
addition to the synthetic fuel facility, a wash plant is also being built to
provide cleaned coal fines to the project. In the event no agreement is reached,
the Company will attempt to arrange alternative financing for the construction
of the facility or an alternative buyer.
If the facilities are not constructed, the Company will be subject to a
penalty in the amount of approximately $318,000 per plant. See ITEM 1.
BUSINESS--Business of Company--Other Construction Agreements-Construction
Penalties." The Company can give no assurance that the Buyer will elect to
purchase one or both of the facilities, that the facilities will be constructed
and qualified under Section 29 prior to June 30, 1998, or that the production of
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the facilities will be at the estimated annual capacity. If the Company reaches
a definitive agreement regarding the sale of one or both synthetic fuel
facilities to the Buyer, the terms of such sale will be disclosed.
Other Construction Contracts. Four additional projects are being
developed by the Company with various other parties. Due to various conditions
and requirements, including but not limited to, securing the necessary
financing, required permits, adequate fines sources and end product users, there
can be no assurance given that these projects will be constructed so as to
qualify for Section 29 or that, if constructed, the facilities will operate at
the estimated capacity.
Construction Penalties. Each of the construction contracts provide for
a 6% penalty if the construction is not pursued by the Company. The Company has
accrued as a liability the 6% penalty (approximately $1,272,000) that would be
due if four of the facilities are not constructed under the construction
agreements as the Company believes that it is probable four facilities will not
be constructed.
Indemnification to Centerline. In December 1996, the Company entered
into six indemnification agreements with Centerline whereby the Company agreed
to indemnify Centerline should it be required to pay liquidated damages to
PacifiCorp under various design and construction agreements for six coal
agglomeration facilities. See "ITEM 1. BUSINESS--Business of Company--License
Agreements--PacifiCorp." Under the original terms of the various design and
construction agreements, if the facilities are not completed by June 1, 1998
then $750,000 in liquidated damages for each facility would be due and payable
by Centerline. The indemnification agreement only applies if PacifiCorp actually
decides to build the facilities with Centerline as the design/builder.
PacifiCorp has elected to not build three of the projects, and therefore the
indemnity agreement with respect to those facilities will not longer apply.
Accordingly, the maximum amount of contingent liability to the Company under the
indemnification agreements is $2,250,000 ($750,000 per design and construction
agreement).
Supply of Coal Fines
The Company uses coal fines to produce synthetic fuel briquettes.
Accordingly, supply of coal fines is essential to the feasibility of a synthetic
fuel briquetting facility. In selecting sites for briquetting plants, the
Company considers the availability of coal fines near the plant site and
attempts to secure sufficient coal fines to operate its plants at capacity. In
so doing, the Company generally attempts to contractually arrange for the
purchase of coal fines prior to the construction of briquetting facilities. In
addition, the Company may in certain instances be contractually obligated to
provide coal fines to the purchaser of a synthetic fuel facility.
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 through 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. This agreement will be assigned by the Company to
BSF at the closing of the sale of the Alabama Plant to BSF.
NEICO Fines Purchase. In February 1997, the Company entered into a
contractual arrangement with a non-affiliated party, Earthco, to acquire the
NEICO coal fines and to conduct recovery and preparation activities at a
location near Wellington, Utah (approximately six miles from the Utah Plant
site). The estimated quantity of clean coal fines at this site is 2 million
tons. Total obligations to acquire the fines are approximately $5,500,000
between February 1997 and May 2002, of which $750,000 was paid upon execution of
the agreement. During the fiscal year, the Company made an additional payment of
approximately $396,000. Other than relatively minor amounts used in start-up
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production at the Utah Plant, these fines are available for future production.
Accordingly, the Company has accounted for the payments made to date as advance
payments for inventory. The Company will reflect in inventory the cost for such
fines as they are processed into clean coal fines.
Black Diamond Enterprises Agreement. In May 1997, the Company entered
into an arrangement with Black Diamond Enterprises, Inc. ("BDE") for the
purchase of coal fines in McDowell County, West Virginia. The fines will require
washing and will service the feedstock needs of the synthetic fuel facility that
is being constructed near Northfork, West Virginia, under the name Pocahontas
Synfuel. See ITEM 1. BUSINESS--Business of the Company--Other Construction
Agreements--Major Utility." The agreement provides that BDE will supply washed
coal fines with certain specifications at a prescribed price which includes a
percentage of the net proceeds received by the Company from the project. The
agreement also gives BDE certain rights to market the synthetic fuel produced at
the site.
Other Contracts
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, with extensions, on May 23, 2006. The Company intends to use the
facility in connection with the operations of the Alabama Plant.
Alabama Power Company. In April 1996, the Company entered into a sale
and purchase agreement for coal with Alabama Power Company. Due to delays
associated with the financing and construction of the Alabama Plant, the Company
was unable to perform under the contract and in February 1997 terminated the
contract in a letter to Alabama Power Company. While Alabama Power Company has
not expressly agreed to the termination, it has not indicated any intent to take
actions against the Company as a result of the termination, nor does the Company
believe any action will be taken as a result of the termination.
AGTC. 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. 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, based on the advice of counsel,
believes that AGTC's claim has no merit.
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 binding agents and fed into a briquetter, pelletizer or
extruder which utilizes pressure to combine the feed material into a briquette
having the desired shape, size and density. Briquettes are then dried to achieve
maximum strength. Cured briquettes are expelled onto a continuous belt for
handling and storage.
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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 certain equipment and machinery to be included
in synthetic fuel facilities currently under construction or that it plans to
construct by June 30, 1998. However, there can be no assurance that the Company
will be able to acquire all necessary equipment and machinery on terms
acceptable to the Company in sufficient time to complete and place in service
the synthetic fuel facilities.
Proprietary Protection
The Company has received four current United States patents and has one
United States patent application pending and two international patent
applications pending 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 patents or 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 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.
Coke and Revert Material Briquettes
The Company 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. There is no assurance that such arrangements will be profitable or
that the Company will be able to enter into arrangements with steel and coke
producers or to obtain the funding necessary to construct such plants.
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 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.
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
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Greystone Joint Venture Agreement and, accordingly, has received notice from the
Company 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. However, Greystone has indicated that
it believes the Greystone Joint Venture Agreement is still in effect. The
Company currently has no coke or revert briquetting operations and expects to
resolve this issue before any significant operations are begun.
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 $1,265,000,
$1,044,000 and $663,935 for years ended September 30, 1995, 1996 and 1997,
respectively. The Company at the present time is focusing its research and
development efforts principally upon its synthetic fuel binder with the intent
of enhancing the binding and other characteristics of the binder and/or to
further reduce binding process costs. The Company is also developing other
related technologies that could be implemented in steel mills and other mineral
industries.
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.
(These companies are collectively referred to as the "Construction Companies.")
In September 1995, the Company made a strategic decision to focus its
efforts exclusively on commercializing the Briquetting Technology and to divest
itself of the Construction Companies. On February 1, 1996, the Company entered
into a Stock Purchase Agreement (the "Agreement") with Michael McEwan and Gerald
Larsen ("Buyers"), former principals of the Construction Companies, to sell all
of the common shares of the Construction Companies to the Buyers for a
$5,000,000 face value 6% promissory note (the "Note"). Mr. McEwan is the son of
Lloyd C. McEwan, a former director of the Company. The Buyers subsequently
raised various contentions regarding the original Note and the Agreement. During
the past fiscal year, the Company has negotiated and has agreed to certain
modifications to the original terms of the sale of the Construction Companies.
Under the modified agreement, the interest on the Note is waived through January
31, 1998. Thereafter, annual payments of $514,814 are to be made January 31,
1999 through January 31, 2004. A final payment in the amount of $3,711,701 is
due January 31, 2005. The Note is guaranteed by the Buyers and is collateralized
with 130,000 shares of the Company's common stock and 50,000 options to purchase
the Company's common stock with a strike price of $1.50 per share. The Company
retains responsibility for certain retirement payments to a prior construction
company officer and certain lease obligations relating to the Construction
Companies. In satisfaction of payments made on behalf of the Construction
Companies by the Buyers that were attributable to the period prior to the
effective date of the sale, the Company transferred ownership of its office
building, subject to related debt, to the Buyers. See "ITEM 2. PROPERTIES."
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Government Regulation
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 new briquetting plants 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.
Failure to obtain necessary permits to construct and operate
briquetting plants could have a material adverse effect on the Company. Other
developments, such as the enactment of more stringent environmental 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 Construction Companies.
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 Credits
Section 29 of 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 qualified facility,
the Section 29 Credits generated by the facility are allocated pursuant to the
proportional interests of such persons in the facility.
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 PLR from the IRS in
which the IRS, based on representations made to it by the Company, agrees that
the Briquetting Technology results in a significant chemical change to coal
fines and transforms them into a solid synthetic fuel, and accordingly the IRS
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 IRS
noted that no temporary or final regulations pertaining to one or more of the
issues addressed in the PLR have been adopted and that the PLR 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 PLR. The IRS notes,
however, that a PLR 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 PLR was based, (iii) there has been no change in the applicable law,
(iv) the PLR was originally issued for a proposed transaction and (v) the
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taxpayer directly involved in the PLR acted in good faith in relying on the PLR,
and revoking the PLR retroactively would be to the taxpayer's detriment. The
Company received its PLR in September 1995. At least three other similar PLRs
have been obtained by third parties in connection with licenses of the Company's
technology. However, all PLRs are only binding with respect to the specific
projects addressed in the PLR and may only be relied on by the party that has
obtained the PLR.
The Section 29 Credit is subject to the passive activity rules of
Section 469, and therefore may not be available to individuals and closely held
corporations.
The Section 29 Credit is equal to $3.00 in 1979 dollars (or $5.95 in
1996 dollars) for each oil barrel equivalent ("OBE") of the qualifying fuel
produced and sold. This equates to approximately $20.00-$28.00 per ton of
synthetic fuel 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.
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 1996 dollars, the credit would have phased out had the
reference price for oil exceeded $46.62 per barrel, but the reference price
determined for 1996 was $18.46 and no phaseout occurred. There presently is no
reference price for 1997. The credit is also subject to 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.
Section 29 of the Code contains no provision for carryback or
carryforward of Section 29 Credits. Once earned, however, the 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.
During 1996, certain of the time periods applicable to the Section 29
Credit were extended. The Section 29 Credit will, under present law, be
available for sales of qualified fuels 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.
On February 6, 1997, the Treasury Department released the General
Explanations of the Administration's Revenue Proposals, which summarized the tax
related provisions from the President's Fiscal Year 1998 Budget submission to
Congress (the "Federal Budget"). The initial version of the Federal Budget
proposed that the placed-in-service date be changed to June 30, 1997 for
facilities constructed under binding contracts entered into on or before
December 31, 1996. On August 5, 1997, President Clinton signed the Taxpayer
Relief Act of 1997 (the "Act"). The Act did not include the proposed change to
Section 29. Hence, the June 30, 1998 deadline for placing in service synthetic
fuel plants remains intact.
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
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their pricing compared to other sources of coal, coke and scrap iron. The
Company anticipates that it will be able to compete effectively although there
can be no assurance that it will do so successfully.
Employees
The Company currently employs approximately 40 persons full-time.
Approximately 17 of such persons are in corporate administration, and 23 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 a briquetting plant where the Company
retains responsibility for the operations, the Company will seek to hire between
eight to ten persons per plant.
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 and
Exchange Commission as part of its ongoing reporting requirements under the
Securities Exchange Act of 1934, as amended. 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 other information presented in this Annual
Report on Form 10-K that are not purely historical by nature, including those
statements regarding the Company's future business plans, the construction and
estimated completion of facilities, the estimated capacity of facilities, the
availability of coal fines, the marketability of the synthetic fuel and other
briquettes and the financial viability of the proposed facilities, 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 Company's industry or the coal industry or the economy generally,
factors which could cause actual results to differ from expectations set forth
in the above-identified forward looking statements include, but is not limited
to, 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, including permits and raw
materials, for facilities to be constructed and operated.
(iv) Timely construction and completion of facilities, and in
particular, the coal briquetting facilities by the
placed-in-service date.
(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 which may result in operational shutdowns
of its facilities.
(vii) The availability of tax credits under Section 29 of the Code.
(viii) The commercial feasibility of the Briquetting Technology upon
the expiration of Section 29 tax credits.
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(ix) Ability to meet financial commitments under existing contractual
arrangements.
ITEM 2. PROPERTIES
The Company leases an approximately 5,000 square-foot building in Lehi,
Utah, which houses its executive offices ("Corporate Headquarters"). The Company
previously owned its Corporate Headquarters. However, in August 1997, the
Company sold its Corporate Headquarters to Michael L. McEwan and Gerald M.
Larson ("Buyers") and entered into a triple-net lease with Buyers, dated August
1, 1997 (the "Headquarters Lease"). The Headquarters Lease provides for a
monthly rent of $5,000 during the initial term which expires on July 31, 2000.
Thereafter, the Lease will automatically extend indefinitely for successive
one-year periods at the sole option of the Company, and the monthly rent will
increase by 5% per year. The Corporate Headquarters were transferred to Buyers
as part of the settlement and closing between the Company and the Buyers for the
sale of the Construction Companies. See "ITEM 1. BUSINESS--Construction and
Limestone Businesses."
In October 1997, 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. The property is subject to a 10-year $100,000
mortgage held by the seller. The equity in the property was pledged as part of
the collateral for a $2.9 Million loan to the Company from Gallagher. See "ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Liquidity and Capital Resources--Existing Debt Arrangements."
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--Joint
Ventures--Geneva Plant." 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 iron revert materials. Subsequent to the execution
of the Geneva Agreements, the lease with Geneva expired resulting in a
tenancy-at-will between the parties. The Company intends to use the Geneva
briquetting facility in the manufacture of synthetic fuel at the Geneva site or
some other location. See "ITEM 1. BUSINESS--Business of Company--Joint
Ventures--Geneva Plant."
As part of the acquisition of the Port Hodder facility, the Company
entered into a land lease for the Alabama Plant of approximately 15.45 acres
with a non-affiliated party for an annual rental of $1. See "ITEM 1.
BUSINESS--Business of the Company--Other Contracts--Port Hodder." The Alabama
Purchase Agreement provides for the assignment of this property to PacifiCorp as
part of the sale of the Alabama Plant. See "ITEM 1. BUSINESS--Business of the
Company--Alabama Plant."
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.
The land is the site on which the Utah Plant was constructed. The lease term
commenced on June 20, 1996 and expires on December 31, 2007 but may be extended.
See "ITEM 1. BUSINESS--Business of the Company--Utah Plant." In October 1996,
the Company commenced construction on the land of a 22,000 square-foot building
to house the Utah Plant. In March 1997, this building was leased by the Company
to Coaltech as part of the sale of the Utah Plant. However, the Company retained
responsibility for operations of the property pursuant to an Operations and
Maintenance Agreement between the Company and Coaltech. The Company has
constructed two ancillary buildings to the Utah Plant, a 1,650 square-foot
binder plant and a 3,400 square-foot wash plant. If the Company elects to
construct a second line at the Utah Plant location, Coaltech has the option to
acquire the second line. In addition, the option includes the purchase of other
equipment and the building housing the Utah Plant. See "ITEM
1.BUSINESS--Business of the Company--Utah Plant."
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In February 1997, the Company purchased the NEICO coal fines containing
approximately 2 million tons of coal fines from a non-affiliated party, Earthco.
The fines are located at a site approximately six miles from the Utah Plant. In
conjunction with the coal fines purchase, Earthco granted to the Company a lease
of the property whereon the fines are located. The leased property consists of
two parcels, consisting of approximately 30 acres and 357 acres respectively.
Under the terms of the agreement, the Company will pay $5,500,000 for the fines
with further adjustments if fines in excess of the estimated amount are
recovered. The Company has the option to purchase the property under lease
subject to certain conditions. See "ITEM 1. BUSINESS--Business of
Company--Supply of Coal Fines--NEICO Fines Purchase."
ITEM 3. LEGAL PROCEEDINGS
On June 5, 1997, Brandt Filtration Group, Inc. ("Brandt") filed a
complaint against the Company in the State Court for Gwinnett County, State of
Georgia. The plaintiff also named Pacific Power & Light Company ("Pacific") as a
defendant. The plaintiff sought $160,340 plus other unspecified damages and
legal expenses. The complaint alleges that the Company breached a contract to
purchase air filtration equipment for the Alabama Plant from Brandt and further
alleges that the Company acted as agent for Pacific. Pacific removed the action
to the United States District Court for the Northern District of Georgia (Civil
Action No. 1:97-CV-2018). On September 15, 1997, Brandt and the Company entered
into a settlement agreement whereby the Company agreed to pay an aggregate of
$156,964 ($122,111 plus cancellation charges of $34,253) and Brandt agreed to
dismiss all of its claims in the lawsuit with prejudice.
On June 26, 1997, Kirby Cochran, former President of the Company during
the period from September 1995 through May 1996, filed a complaint against the
Company in the Fourth Judicial District for Utah County, State of Utah (Civil
No. 970400507). The complaint alleged that Mr. Cochran was entitled to a
declaratory judgment awarding him options to purchase 600,000 shares of the
Company's stock and $50,000 as repayment of a purported loan. The complaint
further alleged claims of conversion, fraud, and breach of contract related to
the stock options and loan. Finally, the complaint alleged a claim for punitive
damages and other unspecified special or general damages. The Company filed a
petition to remove the action to the United States District Court for the
District of Utah (Civil No. 2:97CV0587G). On November 13, 1997, the parties
entered into a Settlement Agreement whereby Kirby Cochran agreed to release the
Company from all claims made by the lawsuit in exchange for payment on the
purported loan of $50,000.
In January 1996, a manager of the Company entered property owned by
NEICO, a subsidiary of Nevada Power Corporation, in connection with an offer by
the Company to purchase the property, and with certain other employees of the
Company, removed and contained over a two-day period some asbestos. The manager
allegedly failed to follow federal guidelines governing the handling and removal
of asbestos. This action was reported to the Division of Environmental Quality
for the State of Utah. An investigation followed in which the Company was fined
approximately $11,000 and was required by the State of Utah to properly dispose
of the asbestos using a qualified asbestos removal company. In the fall of 1997,
the Environmental Protection Agency began a review of the case and is currently
looking into the advisability of further claims or fines against the manager
and/or against the Company.
The Company entered into a letter of intent with Innovative
Technologies ("Innovative") in July of 1995 to apply the Company's Briquetting
Technology to certain metallic ores supplied by Innovative. The Company
conducted numerous tests of the ore through the fall of 1995, and concluded from
the results that the venture was not economically viable. Accordingly, final
agreement to process the ore was never reached. On March 4, 1997, Innovative
Holding Company, Inc., a California corporation, and ORO Limited, a California
limited partnership, filed a civil complaint against the Company alleging breach
of the letter of intent in the amount of $500,000 plus damages. The complaint
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was filed in the Superior Court of California, County of Orange (Case No.
776083). The Company intends to defend the suit.
On January 30, 1997, S.C. Marketing, Inc., a California corporation,
filed a civil complaint against the Company alleging breach of contract in the
amount of $137,440 plus damages. The complaint was filed in the Superior Court
of California, County of Orange (Case No. 774760). On March 26, 1997, the
Company entered into a settlement agreement with S.C. Marketing, Inc. whereby it
issued 20,913 shares of Company common stock in payment of a previously accrued
liability in settlement of the complaint.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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."
On October 29, 1997, the Company submitted an Application for Initial
Inclusion on the Nasdaq National Market System. While the Company believes it
meets the quantitative requirements for inclusion on the Nasdaq National Market
System, the Company does not know what, if any, qualitative requirements may be
applied by Nasdaq and there is no assurance that the Company's application will
be granted by Nasdaq.
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 mark-ups, mark-downs 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 bid price may not be representative of actual trades. 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 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
Calendar 1997
First Quarter $ 7.875 $15.75
Second Quarter $ 6.75 $ 8.875
Third Quarter $ 6.25 $10.125
Fourth Quarter(*) $ 8.875 $13.625
---------------
(*) Through December 15, 1997
Effective June 14, 1995, the Company implemented a one-for-twenty
reverse stock split. The Company implemented a two-for-one forward stock split
effective January 23, 1996. The bid prices set forth above have been adjusted to
reflect the effect of the stock splits.
As of December 15, 1997, there were 673 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
of 1933, as amended. No underwriters were involved in any stock issuances nor
were any commissions or similar fees paid in connection therewith. However, the
Company did pay finders fees in the form of cash, stock or warrants in
connection with various securities issuances.
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, notes, debentures and other securities were exempt from the registration
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requirements of the Securities Act of 1933, as amended, pursuant to the
exemption set forth in Section 4(2) thereof and the certificate for each
security bears a restricted legend.
In October 1996, the Company issued 80,000 shares of common stock at a
price of $7.00 per share to an accredited investor. Also in October 1996,
sharesof common stock was issued to an accredited investor at a price of $8.00
per share, shown as to be issued in 1996.
In November 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
debenture is convertible into Company common stock at $11 per share. 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. The above-listed investors
have represented to the Company that they are "accredited investors" as defined
under Rule 501 of the Securities Act of 1933, as amended.
In December 1996, the Company entered into a Debenture Agreement and
Security Agreement with AJG Financial Services, Inc., an affiliate of A.J.
Gallagher & Co. ("Gallagher"), whereby the Company borrowed $1,100,000, and
could, 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"). On May 5, 1997, Gallagher converted the
Subordinated Debenture and the Company issued 140,642 shares of common stock to
Gallagher in exchange for the entire $1,100,000 Subordinated Debenture and
accrued interest based on a conversion price of $8.00 per share. The Company has
granted piggy-back and demand registration rights to Gallagher for the Company
common stock issued upon conversion of the Subordinated Debenture.
On December 13, 1996, the Company granted options to acquire 2,500
shares to each of Raymond J. Weller and DeLance W. Squire, each a Director of
the Company, as director compensation. The exercise price is $1.50 per share.
The Company also granted 20,000 options to an employee at an exercise price of
$1.50 per share. Compensation recognized or deferred from these agreements to
total 256,250.
In early fiscal year 1997, the Company issued senior debentures (the
"Senior Debentures") to Gallagher in the aggregate principal amount of
$2,900,000 pursuant to the above-referenced Debenture Agreement and Security
Agreement. The Senior Debentures accrue interest at prime plus two percent (2%)
and mature three years from the date of issuance. The Senior Debentures are
collateralized by all real and personal property purchased by the Company with
the proceeds of the Senior Debentures. The proceeds of the Subordinated
Debenture and the Senior Debentures may be used to satisfy contractual
obligations of the Company, for working capital and to purchase equipment to be
used to construct synthetic fuel facilities to be managed and/or sold by the
Company or affiliates of the Company.
On January 1, 1997, the Company granted 50,000 stock options, valued as
deferred compensation of $562,500, to Stanley M. Kimball, an executive of the
Company, at an exercise price of $1.50 per share. The options vest over a
two-year period starting January 1, 1997 and ending December 31, 1998.
On January 2, 1997, 25,000 shares of common stock were issued for
$47,500, which consisted of 3,000 shares of common stock issued to an employee
of the Company in exercise of options at $1.50, 10,000 shares of common stock
issued to an accredited investor in exercise of options at $2.50 and 12,000
shares of common stock issued to an existing stockholder in exercise of warrants
at $1.50.
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On January 13, 1997, the Company issued 100,000 shares of common stock
to a former executive of the Company in exercise of options at $1.50 per share.
The consideration was paid partly in cash and partly in offset of amounts owing
to the individual by the Company.
On or about January 27, 1997, the Company agreed to and on June 6,
1997, the Company issued 40,330 shares to certain principals of RAS Securities
Corp., each accredited investors, valued at $8.50 per share in settlement of
their claim totaling $342,765.
On February 21, 1997 and March 6, 1997, the Company issued 1,905 and
2,929 shares of common stock, respectively, to a consultant in exchange for
consulting services valued at a total amount of $40,500.
On March 24, 1997, the Company issued 60,000 shares of common stock,
previously shown to be issued, to an accredited investor in a private placement
in connection with the purchase of property for the Alabama Plant. The Company
was given a credit of $585,000 for the purchase of the property in exchange for
the 60,000 shares.
As described in "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Liquidity and Capital Resources,"
on March 20, 1997, the Company executed and delivered a promissory note in the
aggregate principal amount of up to $5,000,000 to PacifiCorp in consideration
for a loan of up to $5,000,000. The loan is convertible into approximately
714,286 shares of common stock of the Company based on a $7.00 per share
conversion price. In December 1997, the amount of the note was increased to
$7,000,000 and PacifiCorp was granted the right to convert the greater of (i)
$6,000,000 of the loan and loan commitment or (ii) the actual loan balance
outstanding, to common stock at a price of $7.00 per share, subject to
adjustment.
As described in "ITEM 1. BUSINESS--Business of Company--Alabama Plant,"
on March 20, 1997, the Company executed and delivered a conditional option
agreement to PacifiCorp relating to the repurchase of their interest in
Birmingham Syn Fuel, L.L.C. and the loan made by PacifiCorp.
On March 26, 1997, the Company issued 20,913 shares of Company common
stock, valued at $138,396, recorded as a liability in 1996, in settlement of
litigation with S.C. Marketing, Inc., which the Company believes is an
accredited investor.
On April 1, 1997, the Company granted 50,000 stock options to Max
E. Sorenson, an executive of the Company, which was recorded as deferred
compensation and valued at $312,500. The exercise price is $1.50 per share for
50,000 options. The Company also issued 20,000 stock options to an employee at
an exercise price of $8.00 together with 10,000 additional stock options that
were later forfeited. In addition another employee received 5,000 stock options
with an exercised price of $1.50 per share valued at $31,250.
On April 1, 1997, the Company granted 2,500 stock options, valued at
$15,625, to Vern T. May, a Director of the Company, as director compensation.
The exercise price is $1.50 per share.
On April 15, 1997, the Company granted incentive stock options to
acquire 180,000 shares, at an exercise price of $8.25 per share, to 9 employees
of the Company.
On May 6, 1997, the Company received funds and accepted subscriptions
for the sale of 12,499 units (the "Units"), from three accredited investors.
Each Unit consisted of (i) four shares of Company common stock and (ii) four
warrants to acquire Company common stock at a price of $7.25 per share, for a
total purchase price per Unit of $24.00, or a total of $299,976. The warrants
are exercisable at any time prior to the second anniversary of their issuance.
The shares of Company common stock issuable under the warrants have piggy-back
registration rights during the two-year period following the date of the
subscriptions.
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On May 19, 1997, the Company received $90,000 in the exercise of
options to purchase 50,000 shares of common stock at $1.80 per share, by two
accredited investors.
On July 3, 1997, the Company received funds and accepted subscriptions
for the sale of 14,285 units (the "Units") from an accredited investor. Each
Unit consisted of (i) one share of Company common stock, and (ii) one warrant to
acquire one share of Company common stock at a price of $8.00 per share for a
total purchase price per Unit of $7.00, or a total of $99,995. The warrants are
exercisable at any time prior to the second anniversary of their issuance.
On August 1, 1997, the Company granted 100,000 stock options to Dee J.
Priano, an executive officer of the Company, at an exercise price of $8.25 per
share.
On August 19, 1997, the Company privately sold 3,000 units (the
"Units") to an accredited investor for an aggregate purchase price of
$3,000,000. Each Unit consisted of (i) one share of the Company's Series A 6%
Convertible Preferred Stock, par value $.001 per share (the "Series A Preferred
Stock"), and (ii) a warrant to acquire 28.571 shares of Company common stock at
a price of $8.00 per share. The purchase price for each Unit was $1,000. The
warrants are exercisable at any time on or before August 31, 1999. The Series A
Preferred Stock sold as part of a Unit was issued pursuant to the terms of a
Certificate of Designation filed with the Delaware Secretary of State (the
"Series A Certificate of Designation"). Under the Series A Certificate of
Designation, the Series A Preferred Stock (i) accrues dividends on a daily basis
at a rate of 6% per annum on the liquidation value ($1,000) of each share from
the date of issuance until paid or converted (with no compounding of dividends
being authorized), payable semi-annually in the discretion of the Company, (ii)
is redeemable by the Company at any time after 30 days' written notice, (iii)
has no voting rights unless specifically authorized by the Delaware General
Corporate Law, (iv) is convertible at any time by the holder into common stock
at a conversion price of $7.00 per share, and (v) is convertible by the Company
at any time after August 31, 1999 after 30 days' written notice. Further, the
Series A Certificate of Designation provides for certain anti-dilution
protection to the holder of the Series A Preferred Stock if (i) certain
dividends are distributed on the common stock, (ii) a subdivision, combination
or reclassification of the outstanding common stock occurs or (iii) a
reorganization event (such as a consolidation, merger, sale of substantially all
assets or a statutory exchange) occurs. Similar anti-dilution protection was
also granted to the shares of common stock issuable under the warrants. The
Units were privately placed pursuant to the terms of a Preferred Stock Purchase
Agreement, dated August 19, 1997 (the "Purchase Agreement"), between the Company
and the accredited investor. Under the Purchase Agreement, the Company agreed
(i) to use its best efforts to create a vacancy on the Company's Board of
Directors for a term to expire on the date of the next annual meeting of the
stockholders of the Company, (ii) to submit to the Board of Directors, for their
consideration, the appointment of a representative of the accredited investor to
fill the vacancy referred to in clause (i) above, (iii) to demand registration
rights for any person owning at least 50% of the common stock issued or issuable
upon conversion of the Series A Preferred Stock and exercise of the warrants
(such shares are referred to herein as "Converted Shares") at any time prior to
August 31, 1998 subject to the rights of any other holder of common stock
previously granted demand registration rights, and (iv) to piggy-back
registration rights for the Converted Shares.
On September 16, 1997, the Company issued 10,000 shares of Company
common stock to a former employee, Mr. Dean Young, in exercise of options at
$1.50 per share. The consideration was paid in offset of amounts owing to the
individual by the Company. Mr. Young is a relative of Kenneth M. Young, the
Company's former Chief Executive Officer and Chairman of the Board.
25
<PAGE>
On September 17, 1997, the Company issued 43,167 shares of Company
common stock, valued at $388,503, to United Group, Inc., and Robinson & Wisbaum,
Inc., both of which the Company believes are accredited investors, in settlement
of a contract dispute regarding consulting services.
As of September 18, 1997, the Company privately sold 104,294 units (the
"Units") to three accredited investors for an aggregate purchase price of
approximately $2,200,000. Each Unit consisted of (i) three shares of the
Company's Series B Convertible Preferred Stock, par value $.001 per share (the
"Series B Preferred Stock"), and (ii) a warrant to acquire one share of Company
common stock, at a price of $8.00 per share. The purchase price for each Unit
was $21.00. The warrants are exercisable at any time on or before September 30,
1999. The Series B Preferred Stock sold as part of a Unit was issued pursuant to
the terms of a Certificate of Designation filed with the Delaware Secretary of
State (the "Series B Certificate of Designation"). Under the Series B
Certificate of Designation, the Series B Preferred Stock (i) accrues dividends
on a daily basis at a rate equal to the 2-year treasury bond rate plus one and
one-half percent (initially 7.29% per annum but subject to a one-time adjustment
on March 18, 1998) on the liquidation value of each share from the date of
issuance until paid or converted (with no compounding of dividends being
authorized) payable semi-annually in the discretion of the Company, (ii) is
redeemable by the Company at any time after 30 days' written notice at the
liquidation value plus accrued and unpaid dividends, (iii) has no voting rights
unless specifically authorized by the Delaware General Corporate Law, (iv) is
convertible by the Company at any time after September 30, 1998 at a conversion
price of $7.00 per share. The Units were privately placed pursuant to
subscription agreements between the Company and the accredited investors. In
connection with the sale of the Series B Preferred Stock, the Company issued, as
a finders fee to two accredited investors, warrants to acquire an aggregate of
62,576 shares of the Company's common stock at a price of $8.00 per share at any
time prior to September 30, 1999.
As of September 30, 1997 and October 13, 1997, the Company accepted
subscriptions from 49 accredited investors for the purchase of 119,557 units
(the "Units") pursuant to a Confidential Private Placement Memorandum, dated
August 28, 1997 (the "Memorandum"), at a price of $35.00 per Unit with an
aggregate purchase price of approximately $4,200,000. Each Unit consisted of
five shares of common stock of the Company together with a warrant to purchase
one additional share of common stock. The exercise price of the warrant is $8.00
per share and the warrant must be exercised by April 30, 1998. Pursuant to the
terms of the Memorandum, the Company has granted to purchasers of the Units
piggyback registration rights on the shares of common stock underlying the Units
and the shares of common stock which have or may become issuable from the
exercise of the warrants. In connection with the sale of the Units under the
Memorandum, the Company has agreed to issue to three accredited investors finder
fees in the form of warrants to acquire an aggregate of up to 199,262 shares of
the Company's common stock at a purchase price of $8.00 per share at any time
prior to October 31, 1999. As of September 30, 1997, 350,00 shares had been
issued and 462,285 share are shown as to be issued.
In September 1997, the Company granted options to acquire 2,500 shares
to James A. Herickhoff, a Director of the Company, as director compensation. The
exercise price is $9.00 per share.
In October 1997, the Company granted options to acquire 2,500 shares
to John P. Hill, Jr., a Director of the Company, as director compensation. The
exercise price is $11.50 per share.
On November 25, 1997, the Company issued 1,500 shares of Company common
stock to an accredited investor in exercise of warrants at $8.00 per share. The
consideration was paid in cash. The warrants were originally issued with units
privately placed on September 30, 1997 and October 13, 1997.
26
<PAGE>
On December 8, 1997, the Company issued 1,500 shares of Company common
stock to an accredited investor in exercise of warrants at $8.00 per share. The
consideration was paid in cash. The warrants were originally issued with units
privately placed on September 30, 1997 and October 13, 1997.
The Company believes that the following issuances of shares of common
stock and other securities were exempt from the registration requirements of the
Securities Act of 1933, as amended, pursuant to the exemption set forth under
Regulation S thereof:
On May 26, 1997 and July 7, 1997, and in reliance on Regulation S, the
Company received funds and accepted subscriptions for the sale of 224,000 units
and 60,000 units, respectively (the "Units"), from accredited non-U.S. persons
(the "Non-U.S. Persons"). Each Unit consisted of (i) one share of Company common
stock, and (ii) a warrant to acquire one share of Company common stock at a
price of $7.25 per share, for a total purchase price per Unit of $6.00, or a
total of $1,704,000. The warrants are exercisable at any time prior to the
second anniversary of their issuance. The shares of Company common stock
issuable under the warrants and the Finder Warrants (as defined below) have
piggy-back registration rights and conditional demand registration rights. The
conditional demand registration rights are triggered if within twelve months
from the date of subscription, the Securities and Exchange Commission imposes an
additional holding period requirement on securities issued under Regulation S,
other than the holding period restrictions currently in effect. Two Australian
entities acted as finders in the sale to the Non-U.S. Persons. As compensation
to the finders, the Company paid a cash fee of five percent of the proceeds of
such offerings to one finder and issued warrants (the "Finder Warrants") to the
other accredited investor finder to purchase 71,000 shares of Company common
stock at a price of $7.25 per share. The Finder Warrants are exercisable at any
time prior to the second anniversary of their issuance. Based upon
representations made to the Company, the finder receiving warrant was a Non-U.S.
Person and the Finder Warrants were issued in reliance on Regulation S.
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 year ended December 31, 1993, the
nine months ended September 30, 1994 and the years ended September 30, 1995
through 1997. The selected historical consolidated financial data as of and for
the year ended December 31, 1993, the nine months ended September 30, 1994 and
as of September 30, 1995 are derived from audited financial statements not
included elsewhere herein. The selected historical consolidated financial data
for the year ended December 31, 1995, and as of and for the years ended
September 30, 1996 and 1997 were derived from the financial statements of the
Company which have been audited by Coopers & Lybrand, L.L.P. included elsewhere
herein. This information should be read in conjunction with the consolidated
financial statements and notes thereto.
27
<PAGE>
<TABLE>
<CAPTION>
COVOL TECHNOLOGIES, INC.
(FORMERLY ENVIRONMENTAL TECHNOLOGIES GROUP INTERNATIONAL)
AND SUBSIDIARIES
Nine
Year Ended Months Ended Year Ended Year Ended Year Ended
December 31, September 30, September 30, September 30, September 30,
----------------------------------------------------------------------------------
1993 1994 1995 1996 1997
----------------------------------------------------------------------------------
Statement of Operations Data:
Revenues:
<S> <C> <C> <C> <C> <C>
License fees $ -- $ -- $ 100,000 $ 100,000 $ --
Synthetic fuel sales, net 12,688 19,867 29,310 195,165 41,841
Binder sales -- -- -- -- 208,836
--------------------------------------------------------------------------------
Total revenues 12,688 19,867 129,310 295,165 250,677
Operating costs and expenses:
Cost of coal briquetting operations 22,977 32,386 37,165 859,574 4,803,248
Research and development 393,300 387,128 1,265,072 1,044,192 663,935
Selling, general and
administrative 426,512 393,109 1,494,270 3,796,569 2,997,812
Compensation expense on
stock options, stock warrants
or issuance of common stock
-- -- 955,973 4,8796,569 2,058,126
Write-off of purchased
technology and trade secrets -- -- 344,900 -- --
Write-down of note receivable-related --
parties collateralized by common
stock and stock options -- -- 2,699,575 60,000
Loss on sale of facility -- -- -- -- 581,456
--------------------------------------------------------------------------------
Total operating costs and
expenses 842,789 812,623 4,097,380 13,273,229 11,164,577
-------------------------------------------------------------------------------
Operating loss (830,101) (792,756) (3,968,070) (12,978,064) (10,913,900)
Other income (expense):
Interest income -- -- 9,663 302,565 286,174
Interest expense (30,870) (21,158) (113,137) (94,706) (1,645,195)
Minority interest in net losses
of consolidated subsidiaries -- -- -- 4,456 1,245,226
-------------------------------------------------------------------------------
Other income (expenses) -- 3,200 35,169 (166,066) 32,615
-------------------------------------------------------------------------------
Total other income (expense) (30,870) (17,958) (68,305) 46,249 (81,180)
-------------------------------------------------------------------------------
Loss from continuing operations
before income tax (860,971) (810,714) (4,036,375) (12,931,815) 10,995,080
Income tax benefit (provision) -- 313,100 (488,000) (23,000) --
-------------------------------------------------------------------------------
Loss from continuing operations (860,971) (497,614) (4,524,375) (12,954,815) (10,995,080)
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
Nine
Year Ended Months Ended Year Ended Year Ended Year Ended
December 31, September 30, September 30, September 30, September 30,
----------------------------------------------------------------------------------
1993 1994 1995 1996 1997
----------------------------------------------------------------------------------
Discontinued operations (Note 15):
<S> <C> <C> <C> <C> <C>
Loss from discontinued
operations 145,965 609,354 (1,129,176) (881,505) --
--------------------------------------------------------------------------
Cumulative effect of
change in accounting principle -- 31,302 -- -- --
---------------------------------------------------------------------------
Net income (loss) ($715,006) $143,042 ($5,653,551) ($13,836,320) ($10,995,080)
--------------------------------------------------------------------------
Net income (loss) per common share
Loss per share from continuing
operations ($0.36) ($0.13) ($1.00) ($1.86) ($1.38)
Income (loss) per share from
discontinued operations 0.06 0.16 (0.25) (0.13) --
--------------------------------------------------------------------------
Income (loss) per share before
cumulative effect of change in
accounting principle (0.30) 0.03 (1.25) (1.99) ($1.38)
--------------------------------------------------------------------------
Income per share of cumulative
effect of change in accounting
principle 0.00 0.01 0.00 0.00 0.00
--------------------------------------------------------------------------
Net income (loss) per share ($0.30) $0.04 ($1.25) ($1.99) ($1.38)
--------------------------------------------------------------------------
Weighted average shares outstanding 2,417,568 3,789,996 4,524,056 6,941,424 8,080,102
--------------------------------------------------------------------------
<CAPTION>
Nine
Year Ended Months Ended Year Ended Year Ended Year Ended
December 31, September 30, September 30, September 30, September 30,
------------------------------------------------------------------------
1993 1994 1995 1996 1997
------------------------------------------------------------------------
Balance Sheet Data:
<S> <C> <C> <C> <C> <C>
Working capital ($423,570) ($619,907) ($480,420) ($3,482,227) ($3,195,420)
Net property and equipment 341,455 747,952 1,330,300 7,125,245 13,619,271
Total assets 2,129,885 4,852,637 2,659,977 8,772,072 26,360,814
Long-term debt 511,193 852,081 176,601 363,592 5,467,389
Total stockholders' equity 1,107,915 2,989,529 1,182,768 (233,364) 5,928,277
</TABLE>
29
<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, 1997 Compared to Year Ended September 30, 1996
The information set forth below compares the Company's operating
results for fiscal year 1997 with its operating results for fiscal year 1996.
Continuing Operations
Revenues. For the fiscal year ended September 30, 1997, total revenues
decreased by $44,488 to $250,677 from $295,165 for fiscal 1996. There were no
license fees recognized in fiscal 1997 as compared to $100,000 recognized for
the year ended September 30, 1996. The Company received payment for related
party license fees in fiscal 1997 which were attributable to a one-time advance
license fee paid by Coaltech, a partnership for which the Company serves as the
general partner, upon the sale of the Utah Plant. The Company also received a
$250,000 payment in fiscal 1997 of a one-time advance license fee from
Birmingham Syn Fuel, L.L.C. ("BSF") upon the issuance of a PLR to BSF by the
Internal Revenue Service. The Company anticipates that it will receive
additional advance license fees from Coaltech and BSF in fiscal year 1998 in the
amounts of $1.1 Million and $250,000, respectively. Because the Company is
obligated to render other services to Coaltech and BSF, the advance license fees
are recorded as deferred revenue and will be recognized into income over the
period over which such other services are rendered. The Company anticipates
additional license fees measured by a license fee rate (adjusted annually for
inflation) applied to the production and sale of qualified synthetic fuels from
the Utah Plant, the Alabama Plant and other plants that utilize the Briquetting
Technology. Net proceeds from the sale of briquettes decreased in the current
period by $153,324 to $41,841 from $195,165 in briquette sales for fiscal 1996.
Notwithstanding the Utah Plant having been placed in service in early 1997, its
production and sales of synthetic fuel were significantly curtailed due to the
lack of adequate quality feed stock for production at the Utah Plant. The
Company did produce approximately 18,000 tons of synthetic fuel during fiscal
1997; however, due to high levels of ash in the feedstock and hence in the end
product, the synthetic fuel was not marketable. The Company believes that upon
completion of a wash plant, it will be able to supply sufficient quality coal
fines to the Utah Plant to allow the plant to operate at or near capacity. The
Company has had various discussions with potential end-users of the synthetic
fuel product. However, there is currently no contract or obligation in place for
the sale of the synthetic fuel produced at the Utah Plant. See "ITEM 1.
BUSINESS--Business of Company--Utah Plant." The Company received revenues from
binder sales in the amount of $208,836 in fiscal 1997. No sales of binder were
made in fiscal 1996.
Operating Costs and Expenses. Operating costs and expenses decreased
$2,108,652 to $11,164,577 for the fiscal year ended September 30, 1997 from
$13,273,229 for the fiscal year ended September 30, 1996. Operating costs and
expenses attributable to the briquetting operations increased $3,943,674 to
$4,803,248 for fiscal 1997 from $859,574 for the fiscal year 1996. On or before
December 31, 1996, the Company entered into several contracts to construct
synthetic fuel facilities. In order for the contracts to be binding for purposes
of qualification for Section 29 treatment, the Company agreed to pay a penalty
of 6% of the expected contract price for the facilities if the Company did not
proceed with construction. As of the fiscal year ended September 30, 1997 and as
of the date of filing of this document, there were several contracts that will
not or may not be completed by June 30, 1998. Accordingly, the Company recorded
30
<PAGE>
the liability for the penalty for these facilities in fiscal 1997 in the amount
of $1,477,000. See ITEM 1. BUSINESS--Business of Company--Joint Ventures--Savage
and Other Construction Agreements--Construction Penalties." The Company also
incurred costs of $1,547,674 which were attributable to the start-up and
operation of the Utah Plant for Coaltech, a partnership for which the Company is
the general partner. When US #1 and the Company sold the Utah Plant to Coaltech,
US #1 entered into an agreement to purchase synthetic fuel produced at the Utah
Plant for costs incurred plus $1 per ton. The Utah Plant incurred significant
costs for coal fines, labor, binder materials, repairs and maintenance,
equipment rental and other costs to work through various operational issues.
These costs are included in the synthetic fuel purchase commitment and therefore
are included in the cost of coal briquetting operations. Once the wash plant is
operational and is providing quality coal fines to the Utah Plant, the Company
anticipates that the costs incurred per ton of synthetic fuel produced will be
more in line with the marketable value of the synthetic fuel. See ITEM 1.
BUSINESS--Business of Company--Utah Plant." The remaining costs for briquetting
operations in fiscal 1997 were more than fiscal 1996 costs due to material and
labor costs for the continuing refinement and implementation of the briquetting
process and is reflective of the phase of commercialization and operation the
Company was in for fiscal year 1997 as compared to fiscal 1996.
Research and development costs decreased $380,257 or 36.4% during the
year ended September 30, 1997 from $1,044,192 for the year ended September 30,
1996. This decrease is due to the Company's focus of resources and efforts on
the commercialization of its synthetic fuel technology through: the construction
and start-up of its first full scale briquetting facilities, the Utah and
Alabama Plants; the licensing of the Briquetting Technology to other licensees;
and the development of other projects that will utilize the Briquetting
Technology in the manufacture of synthetic fuels. The majority of the fiscal
1997 costs were principally attributable to research and development efforts
related to the Company's synthetic fuels technology.
Selling, general and administrative expense decreased $798,757 or 21.0%
to $2,997,812 for the year ended September 30, 1997 from $3,796,569 for the year
ended September 30, 1996. The decrease related principally to reductions in
costs for administrative labor, outside professional services and travel
expenses. The reduction in these expenses is due to the Company's use of
personnel, resources and efforts on the commercialization of the Company's
synthetic fuel technology.
Compensation expense on stock options, stock warrants and issuance of
common stock decreased $2,815,193 or 57.8% to $2,058,126 for the fiscal year
ended September 30, 1997 from $4,873,319 for the fiscal year ended September 30,
1996. The decrease is attributable to reduction in the use of stock options in
compensating employees and consultants of the Company. The reduction is also
reflective of a general change in the Company philosophy regarding the strike
price for options granted. Generally, stock options that are or will be granted
by the Company will not be "in-the-money", thus serving as an incentive to the
recipient of the options to add value to the Company.
In fiscal 1996, the Company was required, under generally accepted
accounting principles, to write down the discounted $5 Million 6% promissory
note (the "Note") from the sale of the Construction Companies to the
ascertainable value of the property collateralizing the Note. This accounting
treatment resulted in a write-down of $2,699,575 in fiscal 1996. The additional
write-down in the current period of $60,000 resulted from the change in the
value of the property collateralizing the Note. The Note is guaranteed by the
Buyers of the Construction Companies and there has been no event of default or
past due payment occur on the Note. The Company has no reason to believe that
the payments under the terms of the Note will not be made.
In fiscal 1997, US #1 sold the Utah Plant to Coaltech for $3.5 Million,
evidenced by a promissory note payable in 44 quarterly installments of $130,000
31
<PAGE>
starting March 31, 1997. The actual cost of US #1 to construct the Utah Plant
was $4,081,456. Accordingly, a loss was incurred from the sale of the Utah Plant
in the amount of $581,456.
Total Other Income and Expenses. In fiscal 1996, the Company had net
other income of $46,249 and in fiscal 1997 had net other expenses of $81,180 for
a net increase in other expenses of $127,429. This difference is made up
principally of interest expense of $1,645,200 of whick $1,438,000 that was
booked as a result of the transaction the Company entered into with PacifiCorp
with respect to the $5 Million convertible debt instrument (see discussion
below). This expense is partially offset by the net change in the addback for
minority interest in net losses of consolidated subsidiaries of $1,240,770
($4,456 in fiscal 1996 compared to $1,245,326 in fiscal 1997).
In late July 1996, the Company negotiated with PacifiCorp the general
terms of the sale of the Alabama Plant, including an arrangement for convertible
debt in the amount of up to $5 Million to fund working capital and construction
costs needed to complete the Alabama Plant. At the time of these negotiations,
the Company agreed to a conversion price of $7 per share, the trading price of
the Company's stock at the time the deal was initially negotiated. The actual
documents completing this agreement were not finalized until March 20, 1997, at
which time the bid price of the common stock of the Company was approximately $9
per share. Notwithstanding the fact that at the time the Company initially
negotiated the conversion price there was no discount, because there was a
discount as of the date the documents for the transaction were completed and
signed, the Company is required to reflect as interest expense the deemed
discounted value, the difference at the date of issue of the convertible debt
security between the conversion price and the fair market value of the common
stock into which the security is convertible, multiplied by the number of shares
into which the security is convertible. The expense will not require an actual
cash payment nor will it impact the net equity of the Company.
This accounting treatment is consistent with guidance issued by the
Securities and Exchange Commission and with guidance issued as of March 13, 1997
by the Emerging Issues Task Force of the AICPA (Statement EITF D-60: Accounting
for the Issuance of Convertible Preferred Stock and Debt Securities with a
Nondetachable Conversion Feature).
The minority interest in the loss of consolidated subsidiaries
increased $1,240,770 to $1,245,226 for fiscal 1997 from $4,456 for fiscal 1996.
The increase is attributable to the minority interest in the loss incurred by US
#1 in fiscal 1997. The current period represents the first full year of
operations of US #1. US #1 incurred losses in fiscal 1997 due to: the sale of
the Utah Plant at an amount less than its cost (after adjustment for the
installation of the new dryer), start-up costs for the facility, expense
incurred for license fees, and the obligation to purchase synthetic fuels
produced at a price equal to cost plus $1 per ton. See ITEM 1.
BUSINESS--Business of Company--Utah Plant."
Loss from Continuing Operations. For the year ended September 30, 1997,
the Company had a net decrease of $1,959,735 in loss from continuing operations.
The decrease is principally due to: reductions in research and development costs
and selling, general and administrative costs; reductions in expenses for
compensation expense from stock options, stock warrants and issuance of common
stock; and reduction in the writedown of notes receivable. These reductions were
partially offset by: increases in costs for briquetting operations, including
losses attributable to the Utah Plant and penalties for failure to proceed with
construction contracts; loss from the sale of the Utah Plant, and interest
expense booked on the PacifiCorp convertible debt.
32
<PAGE>
Discontinued Operations
For the fiscal year ended September 30, 1996, the Company incurred
losses from discontinued operations in the total amount of $881,505. No
additional losses were recorded from discontinued operations in the current
period.
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 sale 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.
In fiscal year 1996, the Company recognized compensation expense on the
issuance of stock options and stock 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, financing of the Company and its projects, marketing, and general
business strategy. The options generally vest over ten years. The Company
expensed the total value of certain of the options in fiscal 1996 in the amount
of $2,305,000. The increase in this expense also 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
33
<PAGE>
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 $5 Million 6% promissory note (the "Note") received from
the Buyers of the Construction Companies 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 event of default or past due payment occur
on the note. See "ITEM 1. BUSINESS--Construction and Limestone Businesses." See
discussion 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, stock
warrants and issuance of common stock; writedown of Buyers' note from the sale
of the Construction Companies; 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 in fiscal 1996
compared to $777,394 in fiscal 1995. The Company agreed to pay certain
liabilities associated with the Construction Companies as a condition of the
sale. The actual amount of the liabilities was greater than originally
estimated, resulting in an additional loss from discontinued operations in 1996.
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 for the
year ended September 30, 1995 from the $19,867 recognized in the nine months
ended September 30, 1994 primarily due to the 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 licensing of Company technology and with respect to coke
and iron revert.
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 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.
34
<PAGE>
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 of $807,527 on the
issuance of stock options and stock warrants at below market price, and
compensation expense on the issuance of common stock for services in the amount
of $148,446.
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 Construction
Companies' activities until a buyer could be found.
Liquidity and Capital Resources
Liquidity
For the fiscal year ended September 30, 1997, management believes the
Company made significant progress in its movement from a development company to
an operating company. The increase in cash used by the Company in operating
activities from $2,574,513 in fiscal year 1996 to $4,202,077 during fiscal year
1997 was largely due to expenditures made by the Company in the
commercialization of its Briquetting Technology, including the sale of the Utah
Plant to Coaltech, assistance to licensees of the Company's technology in the
development of projects that will utilize the Briquetting Technology,
development of projects that the Company intends to construct and sell to other
entities, and improvement of the binder and process technology related to
production of synthetic fuel. The Company was able to fund this growth
principally through the issuance of common stock, preferred stock, warrants and
convertible debt.
Capital Resources
During fiscal year 1997, the Company met its cash flow requirements
principally through issuance of debt and convertible debt, the sale of equity
and from advance license fees received. As of September 30, 1997, the Company
had a working capital deficit of $3,195,420, compared to a working capital
deficit of $3,482,227 at September 30, 1996. The Company believes that its
current cash on hand, additional advanced license fee to be received, and, if
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<PAGE>
nesseccary available financing will be sufficient to fund the operations of the
Company until cash flows from operations are sufficient to fund the Company's
operations. However, there is no assurance that the Company will be able to
obtain the necessary financing or receive cash flows from operations during
fiscal year 1998.
The Company anticipates that cash flow from: (i) licensing and royalty
fees from plants utilizing the Briquetting Technology; (ii) cash distributions
from US #1 and AS #1; (iii) the sale of chemical binder to plants utilizing the
Briquetting Technology; (iv) operating fees for the operation of facilities
owned by third parties; (v) payments on notes receivable and (vi) proceeds of
equity and debt offerings will be available and used to fund working capital and
other operating needs.
In the second and third quarters of the fiscal year ending September
30, 1998, the Company anticipates payments of advance license fees for each site
utilizing the Company's Briquetting Technology, except for the Savage Mojave
project. The timing for and amount of such fees varies and is tied to the
commencement of construction, the completion of construction, the receipt of a
PLR for a particular project, or receipt of project financing. Since these
conditions should be met no later than June 30, 1998, all such advance license
fees, if any, should be received by the end of the third fiscal quarter of 1998.
The Company anticipates license fees from the production and sale of
synthetic fuel from the Utah Plant, Alabama Plant and Savage Mojave project, if
any, after the second quarter of fiscal year 1998. The balance of the
briquetting facilities licensing the Briquetting Technology are expected to be
placed into service late in the second quarter and in the third quarter of 1998.
Accordingly, the Company expects that there will be earned license fees paid
from production and sales from these plants after the third quarter of 1998,
with more significant fees paid after the end of fiscal year 1998.
Advance license fees and ongoing license fees attributable to the Utah
Plant and the Alabama Plant are payable to US #1 and AS #1, respectively. The
Company will receive its share of such license fees, net of partnership
expenses, in the form of cash distributions in proportion to the Company's
interests in the partnerships, 60% for US #1 and 80% for AS #1.
The Company has contracted with its licensees to provide binder
materials on a cost plus basis. The Company expects to make income from the sale
of binder materials to the Utah Plant, Alabama Plant and Savage Mojave in the
second quarter of fiscal year 1998. As previously mentioned, the balance of the
synthetic fuel facilities that will be utilizing the Briquetting Technology are
expected to be placed in service late in the second quarter and in the third
quarter of the fiscal year ending September 30, 1998. The Company will earn the
gross profit from the sale of binder to these other plants when they commence
production and in amounts that are proportionate to their production.
Under current contracts, the only facility for which the Company has
operational responsibility is the Utah Plant. The Company will earn a prescribed
amount per ton for production at the Utah Plant. The Company expects that there
will be other plants for which the Company will have operational responsibility
and for which it will earn an operation and maintenance fee. The Company does
not expect that operation and maintenance fees will constitute a material
portion of its income.
During fiscal year 1998, the Company anticipates receiving its
proportionate share (60% for US #1 and 80% for AS #1) of payments made by
Coaltech and BSF for the purchase of the Utah and Alabama Plants, respectively.
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The Company intends to seek project specific financing for the
financing of construction of certain synthetic coal facilities. That financing
may be in the form of traditional debt financing, convertible debt, debt with an
interest in the cash flow attributable to the facility being financed, or
financing by a potential purchaser of the facility. The Company and AS #1 are
financing the construction of the Alabama Plant through a convertible debt
arrangement with PacifiCorp (see details of arrangement under "Existing Debt
Arrangements" below). The Company has made initial payments for one facility
through construction financing provided by the wholly-owned subsidiary of a
major utility (see details of arrangement under "Existing Debt Arrangements"
below). The Company has entered into a conditional letter agreement with
Gallagher, whereby financing for up to four facilities, subject to its approval
of the facility and other conditions would be provided in exchange for an
interest in the royalties receivable from the facilities and other fees. The
agreement is subject to several conditions and there is no assurance that the
financing will be provided. If financing for four facilities were provided, the
Company estimates such financing to be in an aggregate amount of approximately
$25 Million. Facilities being built by licensees of the Company's technology
will generally be financed by such Licensees. There is no assurance that the
Company or its licensees will be able to obtain the necessary financing to
construct the synthetic fuel facilities.
Existing Debt Arrangements
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 remaining obligations
for lease payments totalling $465,000 through February 2000 at which time the
Company has the option to purchase the equipment from the bank for approximately
$124,000.
In November 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
debenture is convertible into Company common stock at $11 per share. 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.
In December 1996, the Company entered into several construction
agreements. In each agreement, the Company agreed to penalty clauses in the
aggregate amount of $3,012,000 if they failed to build the facilities. The
Company booked a liability in the current period in the amount of $1,477,000 for
facilities that will not or may not be built. See "ITEM 1. BUSINESS--Business of
Company-- Joint Ventures--Savage and Other Construction Agreements--Construction
Penalties."
In December 1996, the Company entered into indemnity agreements with
Centerline for contingent liabilities aggregating $4,500,000. The Company
believes the maximum contingent liability as of the filing of this document
under the indemnity agreements is $2,250,000. See "ITEM 1. BUSINESS--Business of
Company--Other Construction Agreements-- Indemnification to Centerline."
In December 1996, the Company entered into a Debenture Agreement and
Security Agreement with AJG Financial Services, Inc., an affiliate of Gallagher
("Gallagher"), whereby the Company borrowed $1,100,000, pursuant to a
Convertible Subordinated Debenture accruing interest at 6% per annum and
maturing three years from its date of issuance (the "Subordinated Debenture")
and $2,900,000 pursuant to Senior Debentures accruing interest at prime plus two
percent (2%) and maturing three years from the date of issuance (the "Senior
Debenture"). The Subordinated Debenture (including accrued interest) was
37
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converted to 140,642 shares of the Company's common stock on May 5, 1997. The
Company has granted piggy-back and demand registration rights to Gallagher for
the Company common stock issued on conversion of the Subordinated Debenture. The
Senior Debentures are 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 were used to satisfy contractual
obligations of the Company, for working capital and to purchase equipment used
to construct coal briquetting facilities to be managed and/or sold by the
Company or affiliates of the Company.
The Company is constructing a wash plant to provide washed coal fines
to the Utah Plant for the manufacture of synthetic fuel. The construction is
being financed through Gallagher. The total estimated cost for the wash plant is
approximately $4 Million. As of September 30, 1997, the Company had borrowed
$945,104. The financing is evidenced by a promissory note executed and delivered
by the Company to Gallagher and is secured by the wash plant. The note currently
bears interest at 6% per annum with principal and interest due and payable two
years from the time the debt was incurred. As additional consideration to
Gallagher for financing the wash plant, the Company agreed, subsquent to fiascal
1997, to grant Gallagher warrants to purchase approximately 400,000 shares of
the Company common stock with fifty percent of the shares having a purchase
price of $10 per share and fifty percent of the shares having a purchase price
of $20 per share. The warrants are immediately exercisable and expire in two
years.
In 1997, 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. The property is subject to a 10-year $100,000 mortgage held by
the seller. The equity in the property was pledged as part of the collateral for
a $2.9 Million loan to the Company from Gallagher.
On March 20, 1997, the Company entered into a Convertible Loan and
Security Agreement (the "Loan Agreement") with PacifiCorp. On December 12, 1997,
the Company and PacifiCorp amended the Loan Agreement. Under the amended Loan
Agreement terms, the Company may borrow up to $7,000,000 as evidenced by a draw
down promissory note (the "Promissory Note") payable to PacifiCorp. As of
September 30, 1997, the Company had drawn $3,302,422 under the Loan Agreement.
Principal and accrued interest on the Promissory Note are due and payable on
August 31, 1998 (the "Due Date"), unless the Promissory Note is converted into
Company common stock. Interest due on the Promissory Note is calculated based on
a 360 day year and the actual number of days lapsed, and will be compounded
monthly. The interest rate is a rate per annum equal to the lesser of (i) the
highest rate allowed by law, or (ii) the sum of the rate of interest publicly
announced by Morgan Guaranty Trust Company of New York in New York City from
time to time plus two percent (2%) per annum. The proceeds of the loan (the
"Loan") may be used by the Company to: (i) complete construction of the Alabama
Plant; (ii) finance the purchase of coal fines for the Alabama Plant; (iii) fund
the net working capital needs of the Alabama Plant; (iv) finance the development
and construction of a wash plant for coal fines; and (v) other uses related to
the Alabama Plant approved by PacifiCorp in its sole discretion. The Company's
obligation to repay the Loan is secured by a security interest and lien on
certain property relating to the Alabama Plant. In addition, PacifiCorp has the
right to convert the greater of $6,000,000 or the actual amount borrowed by the
Company up to $7 Million at a conversion price of $7.00 per share, subject to
certain adjustments as provided in the Loan Agreement. On May 5, 1997,
PacifiCorp filed a Schedule 13D with the Securities and Exchange Commission
reporting its beneficial ownership as being in excess of 5% of the shares of
Company common stock should PacifiCorp convert the full amount of the Loan.
Pursuant to the Registration Rights Agreement, dated as of March 20, 1997,
between the Company and PacifiCorp, PacifiCorp has been granted certain demand
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and piggy-back registration rights with respect to shares of Company common
stock that could be acquired by PacifiCorp pursuant to the Loan Agreement.
Subsequent to the fiscal year ended September 30, 1997, the Company
entered into an interim construction financing agreement with the wholly-owned
subsidiary of a major utility to finance up to $1 Million for the Company's
purchase of equipment and payment of other project development costs relating to
certain facilities. As of the filing of this report, approximately $560,000 has
been advanced under this financing agreement. The Company's obligation to repay
the amounts borrowed is secured by the collateral purchased with the proceeds of
the financing. Interest accrues on the amount advanced at a per annum rate equal
to the LIBOR rate plus 1% payable monthly commencing December 1, 1997. The
principal amount of the financing is payable upon the closing of a take-out
construction loan or December 31, 1998, whichever occurs first. See ITEM 1.
BUSINESS--Business of Company--Other Construction Agreements--Major Utility."
Forward Looking Statements
Statements in this Item 7 regarding the Company's expectations as to
the financing, development and construction of facilities utilizing its
Briquetting Technology, the receipt of licensing and royalty fees, revenues, the
receipt of operation and maintenance fees, the receipt of fees for sale of
binder materials, and other information presented herein that are not purely
historical by nature, 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 Company's industry or the coal industry or
the economy generally, factors which could cause actual results to differ from
expectations set forth in the above-identified forward looking statements
include, but is not limited to, the following: (i) timely construction and
completion of facilities, and in particular, the coal briquetting facilities by
the placed-in-service date; (ii) ability to obtain needed additional capital on
terms acceptable to the Company; (iii) changes in governmental regulation or
failure to comply with existing regulation which may result in operational
shutdowns of its facilities; or (iv) the availability of tax credits under
Section 29 of the Code. See "ITEM 1. BUSINESS--Forward Looking Statements" for a
description of additional factors which could cause actual results to differ
from expectations.
Impact of Recently Issued Accounting Standards
In March of 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings Per Share". This statement simplifies the standards for
computing earnings per share previously found in APB Opinion No. 15, Earnings
Per Share, and makes them comparable to international EPS standards. It replaces
the presentation of primary EPS with a presentation of basic EPS. It also
requires dual presentation of basic and diluted EPS on the face of the income
statement for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation. This statement is
effective for financial statements for fiscal years ending after December 15,
1997. The Company has not determined the possible effect of this standard on its
financial statements.
In June of 1997, the Financial Accounting Standards Board issued SFAS
No. 130 "Comprehensive Income." This Statement establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. This Statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
39
<PAGE>
other financial statements. This Statement does not require a specific format
for that financial statement but requires that an enterprise display an amount
representing total comprehensive income for the period in that financial
statement. This statement is effective for financial statements for fiscal years
ending after December 15, 1997. The Company has not determined the possible
effect of this standard on its financial statements.
Impact of Inflation
During fiscal year 1997, cost increases to the Company were not
materially impacted by inflation.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
None.
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
There are no changes in or disagreements with Accountants on accounting
and financial statement disclosure.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company as of December 15,
1997 are as follows:
Name Age Position
- ------------------- ------- -----------------------------------------
Brent M. Cook 37 President, Chief Executive Officer
and Director
Stanley M. Kimball 43 Chief Financial Officer, Treasurer
and Director
Alan D. Ayers 40 Vice President of Administration
George W. Ford, Jr. 52 Vice President of Research and Development
Steven R. Brown 39 Vice President of Engineering and
Construction
Russell G. Madsen 47 Vice President
Max E. Sorenson 48 Vice President
Dee J. Priano 52 Vice President
Asael T. Sorensen, Jr. 43 Secretary and General Counsel
Raymond J. Weller 51 Chairman of the Board of Directors
DeLance W. Squire 78 Director
Vern T. May 57 Director
James A. Herickhoff 55 Director
John P. Hill, Jr. 37 Director
Brent M. Cook has served as President and Chief Executive Officer and Director
since October 1996, and served as 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 except for the transaction
described in "ITEM 1. BUSINESS--Business of Company".
Stanley M. Kimball has served as Chief Financial Officer and Director since
January 1, 1997 and as Treasurer since May 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 Master of Accountancy, with emphasis in
41
<PAGE>
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.
Alan D. Ayers has served as Vice President of Administration since October 1997
and served as Chief Operating Officer from June 1996 through October 1997. Mr.
Ayers joined the Company in August of 1995 as Manager of the Company's investor
relations department. From June 1996 to February 1997, Mr. Ayers served as a
Director of the Company. From 1993 to 1995, Mr. Ayers was the General Manager
for Taylor Maid Beauty Supply and was responsible for the operations of the
regional supply company. From 1987 to 1993, Mr. Ayers was Director of Operations
for Knighton Optical, Inc. Mr. Ayers received his Master of Business
Administration from the University of Utah.
George W. Ford, Jr. has served as Vice President of Research and Development of
the Company since August 1993. From August 1993 to February 1997, Mr. Ford
served as a Director of the Company. From 1982 to 1993, Mr. Ford was employed at
Ballard Medical Products, Inc. in research and development, principally in the
biomedical field. Mr. Ford 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 R. Brown has served as Vice President of Engineering and Construction of
the Company since February 1995. Mr. Brown served as a Director of the Company
from September 1995 to March 1997. 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.
Russell G. Madsen has served as Vice President of the Company since October 1996
and served as Vice President of Operations from August 1992 through October
1996. Mr. Madsen served as a Director of the Company between August 1992 and
January 1997, and was Interim Chairman of the Board of Directors between
November 1996 and January 1997. 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 over the Western Coal Division of 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 Company acquired briquetting
technology. Mr. Madsen graduated from Utah State University with a B.S. degree
in Agricultural Economics and a minor in Business Management.
Max E. Sorenson has served as Vice President of the Company since April 1997.
Prior to Mr. Sorenson's employment with the Company, Mr. Sorenson was Senior
Vice President of Operations, Engineering and Technology of Geneva Steel
Company. Mr. Sorenson began his employment with Geneva Steel Company in October
1989. During his employment with Geneva Steel Company, Mr. Sorenson also had
responsibility for raw materials, transportation contracts and information
systems and also served as Chief Engineer of Coke, Iron and Steel, and Vice
President of Engineering. Prior to joining Geneva Steel Company, Mr. Sorenson
worked for 16 years for Inland Steel, Inc., one of the largest steel companies
in the United States, where he served in various operation and technology
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management positions in ironmaking and steelmaking. Mr. Sorenson obtained a B.S.
degree in Metallurgical Engineering from the University of Utah in 1973 and a
Master of Science degree in Industrial Management from Purdue University in
1978.
Dee J. "DJ" Priano has served as Vice President of the Company since August
1997. Mr. Priano had been employed by Kennecott Corporation for more than 32
years prior to that time. Mr. Priano worked in several different positions at
Kennecott including Principal Planning Engineer for Kennecott's Bingham Canyon
mine, Manager of Operations Analysis, Controller of Kennecott's Bingham Canyon
mine as well as the Controller of Kennecott's U.S. Mines Division. In addition
to managing, general accounting and financial reporting activities, he was
responsible for the administration of purchasing, MIS and land and water
management functions. Mr. Priano received a BS degree and Master of Business
Administration from the University of Utah.
Asael T. Sorensen, Jr. joined the Company as its General Counsel in September
1995. He has also served as Corporate Secretary since June 1996. From 1982 to
1995, Mr. Sorensen was an in-house attorney for the Church of Jesus Christ of
Latter-Day Saints in Salt Lake City, Utah and 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 Master 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 and
since January 1997 has served as Chairman of the Board of Directors. 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 W. Squire has served as a Director of the Company since December 1996.
Mr. Squire was the founder of Squire & Co., Orem, Utah, a public accounting
firm, and retired in 1986. Since 1986, Mr. Squire has been the Executive
Director for the Commission for Economic Development, Orem, Utah. In addition,
Mr. Squire is a member of the Impact Fees Committee and the Strategic Plan
Committee to the City of Orem, Utah. He also serves as a member of the board of
trustees for Mountain View Hospital, Payson, Utah. Mr. Squire served as Mayor of
Orem from 1982 to 1985. Mr. Squire received his B.S. degree in Accounting from
Brigham Young University in 1947 and became a Certified Public Accountant in
1950.
Vern T. May has served as a Director of the Company since February 1997. Mr. May
was employed by Dow Chemical in various capacities from 1964 until his
retirement in 1995, including Technical Director of Organic Chemicals and
Ag/Pharma Process Research, Manager of Agricultural Chemicals Production and
Environmental Services, Director of Applied Science and Technology Laboratories,
and Director of Health and Environmental Sciences. At the time of his
retirement, Mr. May was chairman of the advisory board for the Center for Waste
Reduction Technologies, a member of the advisory board for the Advanced
Combustion Engineering Research Center at BYU, and a member of the board of the
California Engineering Foundation. Mr. May holds a BES degree in Chemical
Engineering from Brigham Young University.
James A. Herickhoff has served as a Director since August 1997. Mr. Herickhoff
is and has been a corporate consultant since 1994, and from 1987 to 1994 he
served as President of Atlantic Richfield Company's Thunder Basin Coal Company.
Mr. Herickhoff has over 25 years of experience in the coal and mining industries
and extensive experience in strategic positioning of these companies for
long-term growth and competitiveness. Mr. Herickhoff led the growth of the Black
Thunder and Coal Creek coal mines from 19 million to approximately 40 million
tons per year of production. Mr. Herickhoff previously served as President of
Mountain Coal Company, managing all of the ARCO's underground mining and
43
<PAGE>
preparation plants. Mr. Herickhoff is the past President of the Wyoming Mining
Association and a former Board member of the Colorado and Utah Mining
Associations. Mr. Herickhoff received his Bachelor degree in 1964 from St.
John's University, a Master of Science degree in 1966 from St. Cloud State
University and attended the Kellogg Executive Management Institute at
Northwestern University in 1986.
John P. Hill, Jr. has served as a Director since September 1997. Mr. Hill is the
president of Quince Associates, a closely held investment company. Since 1989,
Mr. Hill has also served as President of Trans Pacific Stores, Ltd., a privately
held operator of retail stores. Prior to 1989, Mr. Hill was the Chief Financial
Officer for various privately held retail and restaurant companies. Mr. Hill
received a Bachelor of Science degree in Accounting from the University of
Maryland and became a Certified Public Accountant in 1984.
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 expiration of their respective terms and until their successors
have been duly elected and qualified. Officers serve at the will of the Board of
Directors.
At the 1997 Annual Meeting of Stockholders, an amendment to the
Company's Bylaws was adopted to: (a) classify the Board of Directors into three
classes, as nearly equal in size as possible, serving staggered three-year,
terms; (b) set a minimum of five and maximum of nine directors on the Board; (c)
provide that a director may be removed from office at any time by the vote; or
written consent of stockholders representing not less than two-thirds of the
issued and outstanding stock entitled to vote and (d) provides that an increase
in the maximum size of the board requires the vote or written consent of
stockholders representing not less than two-thirds of the issued and outstanding
stock entitled to vote. Based on that amendment to the Bylaws, the Directors are
classified as follows:
================================================================================
CLASS I(1) CLASS II(2) CLASS III(3)
- --------------------------------------------------------------------------------
Vern T. May Raymond J. Weller Brent M. Cook
- --------------------------------------------------------------------------------
John P. Hill, Jr. -- --
- --------------------------------------------------------------------------------
James A. Herickhoff DeLance W. Squire Stanley M. Kimball
================================================================================
- --------------
(1) Term expires at the annual meeting of stockholders in 1998.
(2) Term expires at the annual meeting of stockholders in 1999.
(3) Term expires at the annual meeting of stockholders in 2000.
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 a
fee for each meeting attended and reimbursement of out-of-pocket expenses.
Section 16(a) Beneficial Ownership Reporting Compliance
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 stockholders are required by Securities and Exchange
Commission regulations to furnish the Company with copies of all Section 16(a)
44
<PAGE>
forms they file. Based solely on a review of the copies of such forms furnished
to the Company between October 1, 1996, and September 30, 1997, on year-end
reports furnished to the Company after September 30, 1997, and on
representations that no other reports were required, the Company has determined
that during the 1997 fiscal year all applicable 16(a) filing requirements were
met except as follows:
Russell G. Madsen, a Vice President of the Company, acquired an option
to purchase 25,000 shares of common stock of the Company on August 13, 1996. Mr.
Madsen filed a Form 4 reporting the transaction on September 18, 1996. The Form
4 should have been filed on or before September 10, 1996. Additionally, Mr.
Madsen disposed of 40,000 shares in January 1997 and disposed of 1,340 shares in
February 1997. Mr. Madsen filed Forms 4 to report the transactions on December
29, 1997. The Forms 4 should have been filed on or before February 10 and March
10, 1997, respectively.
George W. Ford, Jr., Vice President of Research and Development of the
Company, acquired an option to purchase 25,000 shares of common stock of the
Company on August 13, 1996. Mr. Ford filed a Form 4 reporting the transaction on
September 18, 1996. The Form 4 should have been filed on or before September 10,
1996. Mr. Ford disposed of 18,000 shares and acquired 100,000 shares through the
exercise of options in November 1996 and filed a Form 4 reporting such
transaction on December 18, 1996. The Form 4 should have been filed on or before
December 10, 1996. Additionally, Mr. Ford disposed of 3,000 shares in March of
1997, disposed of 7,000 shares in April of 1997, disposed of 9,000 shares in May
of 1997, disposed of 1,000 shares in June of 1997, disposed of 3,000 shares in
July of 1997, and disposed of 10,000 shares in October of 1997. Mr. Ford filed
Forms 4 to report the transactions on December 29, 1997. The Form 4's should
have been filed on or before April 10, May 10, June 10, July 10, August 10, and
November 10, 1997, respectively.
Michael Q. Midgley, a former officer and Director of the Company,
acquired options to purchase 300,000 shares of common stock of the Company on
August 13, 1996. Mr. Midgley filed a Form 4 to report the transaction on
September 18, 1996. The Form 4 should have been filed on or before September 10,
1996.
Kenneth M. Young, a former officer and Director of the Company,
acquired options to purchase 70,000 shares of common stock of the Company on
August 13, 1996. Mr. Young filed a Form 4 to report the transaction on September
18, 1996. The Form 4 should have been filed on or before September 10, 1996.
Max E. Sorenson was appointed Vice President of the Company effective
April 1, 1997, and thereby became subject to Section 16(a) reporting
requirements. Mr. Sorenson also acquired options to purchase 100,000 shares of
common stock of the Company. Mr. Sorenson did not file a timely Form 3. Mr.
Sorenson filed a Form 5 reporting both the holdings required to be reported on
Form 3 and the acquisition of the options on November 25, 1997. The Form 5
should have been filed on or before November 14, 1997.
Asael T. Sorensen, Jr., Secretary and General Counsel of the Company,
acquired 1,000 shares of common stock of the Company on April 24, 1997. The
acquisition should have been reported on a Form 4 for April 1997 and filed on or
before May 10, 1997. Mr. Sorensen filed a Form 5 reporting the transaction on
December 29, 1997. The Form 5 should have been filed on or before November 14,
1997. Additionally, Mr. Sorensen acquired options to purchase 100,000 shares of
common stock of the Company on August 13, 1996. Mr. Sorensen filed a Form 4 to
report the transaction on September 18, 1996. The Form 4 should have been filed
on or before September 10, 1996.
DeLance W. Squire, a Director of the Company, was appointed a Director
of the Company and received options to acquire 2,500 shares on December 13,
1996. He filed a Form 3 reporting the holdings on January 21, 1997. The Form 3
holdings should have been reported on a Form 3 filed on or before December 23,
1996.
45
<PAGE>
Dee J. Priano, a Vice President of the Company, filed a Form 5 to
report Form 3 holdings as a result of being appointed an officer of the Company
and the acquisition of options to acquire 100,000 shares on August 1, 1997. The
Form 5 was filed on December 29, 1997. The Form 5 should have been filed on or
before November 14, 1997. The Form 3 holdings should have been reported on a
Form 3 filed on or before August 10, 1997.
Vern T. May, a Director of the Company, filed a Form 5 to report Form 3
holdings as a result of being appointed a Director of the Company and the
acquisition of options to acquire 2,500 shares. The Form 5 was sent for filing
on or about January 13, 1998. The Form 5 should have been filed on or before
November 14, 1997. The Form 3 holdings should have been reported on a Form 3
filed on or before February 20, 1997.
James A. Herickhoff, a Director of the Company, filed a Form 5 to
report Form 3 holdings as a result of being appointed a Director of the Company
and the acquisition of options to acquire 2,500 shares. The Form 5 was sent for
filing on or about January 13, 1998. The Form 5 should have been filed on or
before November 14, 1997. The Form 3 holdings should have been reported on a
Form 3 filed on or before August 25, 1997.
John P. Hill, Jr., a Director of the Company, filed a Form 5 to report
Form 3 holdings as a result of being appointed a Director of the Company and the
acquisition of options to acquire 2,500 shares. The Form 5 was sent for filing
on or about January 13, 1998. The Form 5 should have been filed on or before
November 14, 1997. The Form 3 holdings should have been reported on a Form 3
filed on or before October 15, 1997.
Richard C. Lambert, a former officer of the Company, acquired options
to purchase 20,000 shares of common stock of the Company on August 13, 1996. Mr.
Lambert filed a Form 4 to report the transaction on September 18, 1996. The Form
4 should have been filed on or before September 10, 1996.
Raymond J. Weller, the Chairman of the Board of the Company, acquired
options to purchase 25,000 shares of common stock of the Company on August 13,
1996. Mr. Weller filed a Form 4 to report the transaction on September 18, 1996.
The Form 4 should have been filed on or before September 10, 1996.
Steven R. Brown, Vice President of Engineering and Construction of the
Company, acquired options to purchase 100,000 shares of common stock of the
Company on August 13, 1996. Mr. Brown filed a Form 4 to report the transaction
on September 18, 1996. The Form 4 should have been filed on or before September
10, 1996.
Alan D. Ayers, Vice President of Administration of the Company,
acquired options to purchase 100,000 shares of common stock of the Company on
August 13, 1996. Mr. Ayers filed a Form 4 to report the transaction on September
18, 1996. The Form 4 should have been filed on or before September 10, 1996. He
also sent a Form 5 for filing on or about January 13, 1998 to report Form 3
holdings as a result of being appointed an officer of the Company. The Form 3
should have been filed on or before August 10, 1996.
Stanley M. Kimball, Chief Financial Officer, Treasurer and a Director
of the Company, filed a Form 3 on January 21, 1997. The Form 3 should have been
filed on or before January 11, 1997.
Mr. Kimball acquired options to purchase 50,000 shares of common stock of the
Company on April 1, 1997. He sent for filing on or about January 13, 1998
aquired options. The Form 5 should have been filed on or before November 14,
1997.
46
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following sets forth the compensation paid by the Company for
services rendered by Brent M. Cook, the Company's President and Chief Executive
Officer, during the fiscal years ended September 30, 1996 and September 30,
1997. No other executive officer received compensation in excess of $100,000
during the most recently completed fiscal year.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation Long-Term Compensation
Other Annual Restricted All Other
Name and Compensation Stock Stock Options Compensation
Principal Position Year Salary($) Bonus ($) ($) Awards ($) (#) ($)
- ------------------ ---- --------- --------- ----------------- ---------- ---------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Brent M. Cook (1) 1996 $23,335 $60,000 $1,163,000(2) -- 40,000(2) --
President and CEO 1997 93,811 -- (3) -- -- -- --
- ------------------
</TABLE>
(1) 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.
(2) 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 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.
(3) Mr. Cook was awarded a performance based bonus of $50,000 in November
1997, which has been recorded as a bonus in fiscal year 1998 and,
accordingly, is not reflected in this table.
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 and dental
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.
Option Grants in Fiscal Year 1997
No options were granted to the named executive officer in fiscal year
1997.
Aggregated Option Exercises and Year-End Option Values in 1997
The following table summarizes for the named executive officer of the
Company the number of stock options, if any, exercised during fiscal year 1997,
the aggregate dollar value realized upon exercise, the total number of
unexercised options held at September 30, 1997 and the aggregate dollar value of
in-the-money unexercised options held at September 30, 1997. 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, 1997 is the difference
between its exercise price and the fair market value of the underlying stock on
September 30, 1997 which was $9.25 per share based on the last trade price of
the common stock on September 30, 1997. The underlying options have not been and
47
<PAGE>
may never be exercised. The actual gains, if any, on exercise will depend on the
value of the common stock on the actual date of exercise. There can be no
assurance that these values will be realized.
<TABLE>
<CAPTION>
Aggregated Option Exercises in Fiscal Year 1997
and Year-End Option Values
Number of Value of Unexercised
Unexercised Options In-the-Money Options
at 9/30/97(#) at 9/30/97($)
Shares Acquired Value
Name on Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
- ---- -------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Brent M. Cook -0- $-0- 104,000 36,000 $806,000 $ 279,000
</TABLE>
Long-Term Incentive Plan ("LTIP") Awards in Fiscal Year 1997
The Company has no LTIP.
Future Benefits of Pension Plan Disclosure in Fiscal Year 1997
The Company has no such benefit plans.
Employment Contracts and Termination of Employment and Change in Control
Arrangements
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 subsequently appointed as President and Chief
Executive Officer of the Company in October of 1996. The employment agreement
extends for a period of three years terminating on May 31, 1999. During the
first, second and third twelve month period, Mr. Cook's regular monthly salary
will be $6,667 ($80,004 annualized), $8,334 ($100,008 annualized) and $9,167
($110,004 annualized) respectively. Mr. Cook is entitled to participate in and
receive the benefits of bonus plans and other benefit plans generally available
to Company employees. In November 1997, the Company's Board of Directors awarded
Mr. Cook a bonus of $50,000. In accordance with the employment agreement, Mr.
Cook was issued stock options to purchase 100,000 shares of Company common stock
at a purchase price per share of $1.50 in fiscal year 1996. Also, Mr. Cook is
entitled to an automobile allowance, medical and dental coverage, and should Mr.
Cook die during the term of his employment agreement, his personal
representative or designated survivor will be entitled to receive all of the
salary and benefits provided thereunder for the remaining term of the employment
agreement. If Mr. Cook does not continue in the employ of the Company after
termination of the employment 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.
Max E. Sorenson. The Company entered into an employment agreement,
dated March 20, 1997, with Max E. Sorenson to act as Vice President. The
employment agreement extends for a period of three years unless terminated by
the Company for cause or death, or by the employer for certain Company actions
which constitute good cause or without good reason provided 60 days prior
written notice is given. During the first, second and third twelve month period,
Mr. Sorenson's regular monthly salary will be $6,667 ($80,004 annualized),
$10,833 ($129,996 annualized) and $10,833 ($129,996 annualized) respectively.
Mr. Sorenson is entitled to receive a bonus pursuant to the Company's bonus plan
in effect from time to time. Further, Mr. Sorenson will be issued stock options
to purchase 50,000 shares of Company common stock at a purchase price per share
of $1.50, vesting 25,000 immediately, 12,500 and 12,500 at the end of the first
48
<PAGE>
and second twelve month period of employment, respectively. Additionally, Mr.
Sorenson receives and received a monthly car allowance of $550, received a
signing bonus of $50,000, and may receive termination benefits at the expiration
of the employment agreement (whether or not Mr. Sorenson is offered employment
by the Company after the three years) equal to the sum of one year's annual
wages. In addition, Mr. Sorenson received options to acquire 50,000 shares of
common stock under the Option Plan (as defined below).
Stanley M. Kimball. The Company entered into an employment agreement,
dated January 1, 1997, with Stanley M. Kimball to act as Vice President and
Chief Financial Officer. The employment agreement extends for a period of three
years unless terminated by the Company for cause or disability, or by the
employee for certain Company actions which constitute good reason or without
good reason provided 90 days prior written notice is given. Mr. Kimball is
entitled to an annual base salary of at least $80,000. However, the agreement
provides that Mr. Kimball's base salary shall be in line with the salary paid to
the President and Chief Executive Officer of the Company. Effective June 1997,
Mr. Kimball's annual base salary was increased to $100,000. Mr. Kimball was
issued stock options to purchase 50,000 shares of Company common stock at a
purchase price per share of $1.50, vesting on a pro rata basis over two years
commencing January 1, 1997 and ending December 31, 1998. Additionally, Mr.
Kimball receives a monthly car allowance of $550 and is entitled to termination
benefits equal to 200% of the then current annual base salary if Mr. Kimball's
employment is terminated by the Company without cause or terminated by Mr.
Kimball for good reason. In addition, Mr. Kimball received options to acquire
50,000 shares of common stock under the Option Plan (as defined below).
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 a cash fee of $500 per meeting and reimbursement of out-of-pocket
expenses.
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 (900,000 shares in
June 1995 plus 1,500,00 approved by shareholders in January 1996) 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. During fiscal year 1997, the Company issued options under the
Option Plan to acquire 280,000 shares of common stock to 10 employees. Of the
options to purchase 280,000 shares, Mr. Dee J. Priano was issued options to
purchase 100,000 shares at an exercise price of $8.25 per share and nine
employees were issued options to purchase an aggregate of 180,000 shares at an
exercise price of $8.25 per share. Out of the nine employees, Messrs. Kimball
and Sorenson each received options to purchase 50,000 shares. As of September
30, 1997, options to purchase an aggregate of approximately 1,180,000 shares of
common stock were issued under the Option Plan, of which 900,000 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
49
<PAGE>
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 addition to options issued under the Option Plan, the
Company has granted options to executive officers, employees and directors
outside the Option Plan that were not qualified for tax purposes, all as set
forth below in more detail.
The following table sets forth information with respect to such options
granted to the Company's executive officers and directors during fiscal year
1997:
Number of Exercise
Name Options Price
- --------------------- ------------- --------------
Stanley M. Kimball 50,000 $1.50
Max E. Sorenson 50,000 $1.50
Vern T. May 2,500 $1.50
Raymond J. Weller 2,500 $1.50
DeLance W. Squire 2,500 $1.50
James A. Herickhoff 2,500 $9.00
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.
Board Meetings
The Board held a total of eleven regular meetings during fiscal year
1997 and one special meeting during fiscal year 1997. All directors attended
over 75% of the aggregate number of the regular meetings of the Board.
Committees Of The Board
As of September 9, 1997, the Board of Directors established an Audit
Committee and a Compensation Committee. The Compensation Committee consists of
Mr. May, as chair, and Mr. Weller. The Audit Committee consists of Mr.
Herickhoff, as chair, Mr. Squire, and Mr. Hill. The board elected to organize
50
<PAGE>
the Compensation Committee and Audit Committee solely with outside directors.
The Audit Committee held its first meeting on December 16, 1997. The
Compensation Committee did not hold any meetings in fiscal year 1997.
Compensation Committee Report on Executive Compensation
As of September 9, 1997, the Company established a Compensation
Committee consisting of two members of the Board of Directors. The Compensation
Committee is responsible for overseeing the institution of compensation relating
to the Company's officers and key personnel, including the named executives. In
the past, because of cash flow concerns of the Company, the Compensation
Committee has not implemented changes in the Company's compensation structure.
Future compensation polices will be dependent on the Company's cash flow and
employee performance.
The Committee is currently reviewing compensation guidelines and is
considering retention of an outside company to recommend and bid on compensation
and benefit services. Any program recommended will consider factors such as
current competitive market compensation, growth of the Company and overall
business conditions as part of the total benefit package for employees.
The Compensation Committee strives 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 stockholders.
Compensation Committee,
Vern T. May, Chairman
Raymond J. Weller
January 5, 1998
Stockholder Return Performance Graph
Federal regulation requires the inclusion of a line graph comparing the
yearly percentage change in the Company's cumulative total stockholder return on
the common stock with the cumulative total return, assuming reinvestment of
dividends, of (1) the NASDAQ Composite Index and (2) a published industry
orline-of-business index. The comparison assumes $100 was invested on September
30, 1994. 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. The Company has not paid dividends on its common stock.
51
<PAGE>
Comparison of Cumulative Total Return
[GRAPHIC OMITTED]
Total Returns Assume Reinvestment of Dividends
<TABLE>
<CAPTION>
9/30/94 9/30/95 9/30/96 9/30/97
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COVOL $100 $230 $265 $296
S&P ENERGY COMPOSITE 100 120 150 220
NASDAQ COMPOSITE (US) 100 137 161 221
</TABLE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of December 15,
1997, regarding the beneficial ownership of all of the Company's outstanding
common stock, par value $.001 per share, for: (i) each person (or group of
affiliated persons) who, insofar as the Company has been able to ascertain,
beneficially owned more than 5% of the outstanding shares of common stock; (ii)
each director and named executive officer of the Company; and (iii) all
directors and executive officers of the Company as a group. The Company has
relied on information received from each stockholder as to beneficial ownership,
including information contained on Schedules 13D and Forms 3, 4 and 5. As of
December 15, 1997, there were 9,298,175 shares of common stock outstanding. As
of that date, there were outstanding options to purchase 1,631,500 shares of
common stock, of which 681,793 were vested, warrants to purchases 1,718,933
shares of common stock, of which 1,295,183 were in the money, debt convertible
into 1,090,908 shares of common stock and preferred stock convertible into
994,037 shares of common stock.
52
<PAGE>
Name and Address of Amount and Nature of
Beneficial Owner (1) Beneficial Ownership (2) Percent of Class
-------------------- ------------------------ ----------------
PacifiCorp Financial Services, Inc. 857,143(3) 8.44%
775 NE Multnomah, Suite 775
Portland, OR 97232
Diamond Jay Ltd. Co. 514,285(4) 5.24
c/o Trans Pacific Stores, Ltd.
555 Zang Street
Lakewood, CO 80228
Joe K. Johnson 486,346(5) 5.00
8989 S. Schofield Circle
Sandy, Utah 84093
Brent M. Cook 108,000(6) 1.15
Stanley M. Kimball 59,126(7) *
Alan D. Ayers 44,500(8) *
George W. Ford, Jr. 134,700(9) 1.45
Steven R. Brown 93,600(10) *
Russell G. Madsen 470,461(11) 4.11
Max E. Sorenson 33,334(12) *
Dee J. Priano 24,000(13) *
Asael T. Sorensen, Jr. 90,424(14) *
Raymond J. Weller 266,465(15) 2.86
DeLance W. Squire 2,500(16) *
Vern T. May 2,500(16) *
James A. Herickhoff 2,500(16) *
John P. Hill, Jr. 2,500(16) *
All directors and executive
officers as a group
(fourteen (14) persons) 1,334,610 13.83
- ------------------
* Less than 1%
(1) Unless otherwise indicated, 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 December 15, 1997 upon the exercise of options. The record
53
<PAGE>
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 December 15, 1997 have been exercised. The
beneficial ownership does not include any options that are not
exercisable within 60 days of the reported date. The total outstanding
shares used to calculate each beneficial owner's percentage includes
such options.
(3) Consists of approximately 857,143 shares of common stock issuable upon
funding of the loan from PacifiCorp Financial Securities, Inc. to
$6,000,000 and conversion to common stock at $7.00 per share.
(4) Consists of approximately 85,714 shares of common stock, issuable on
exercise of warrants to acquire common stock at a purchase price of
$8.00 per share and 428,571 shares of common stock issuable on
conversion of the Company's Series A 6% Convertible Preferred Stock.
(5) Consists of 54,547 shares owned by Mr. Johnson and warrants to purchase
431,799 shares held by Mr. Johnson which are currently exercisable.
(6) Consists of options to purchase 108,000 shares which are currently
exercisable.
(7) Consists of 1,200 shares owned by Mr. Kimball and options to purchase
57,926 shares which are currently exercisable. Lee Kimball, the son of
Mr. Kimball, owns 250 shares of which Mr. Kimball disclaims beneficial
ownership.
(8) 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 12,000 shares held by Mr. Ayers which
are currently exercisable.
(9) Consists of 124,700 shares owned by Mr. Ford and options to purchase
10,000 shares held by Mr. Ford which are currently exercisable.
(10) Consists of 76,100 shares owned by Mr. Brown and options to purchase
17,500 shares held by Mr. Brown which are currently exercisable.
(11) Consists of 410,140 shares owned by Mr. Madsen, 213 shares owned by Mr.
Madsen's spouse, 12,608 shares owned by Mr. Madsen in an IRA account,
and options to purchase 47,500 shares held by Mr. Madsen which are
currently exercisable. Melissa Baker, the daughter of Mr. Madsen, and
her husband own 526 shares of which Mr. Madsen disclaims beneficial
ownership.
(12) Consists of options to acquire 33,334 shares which are currently
exercisable.
(13) Consists of options to acquire 24,000 shares which are currently
exercisable.
(14) Consists of 44,450 shares owned by Mr. Sorensen, 28,474 shares owned by
Mr. Sorensen, his wife and his children in trust, and options to
purchase 17,500 shares held by Mr. Sorensen which are currently
exercisable.
(15) Consists of 253,965 shares owned by Mr. Weller and options to purchase
12,500 shares held by Mr. Weller which are currently exercisable.
(16) Consists of options to purchase 2,500 shares which are currently
exercisable.
54
<PAGE>
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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PacifiCorp. During fiscal year 1997, the Company entered into various
transactions with PacifiCorp Financial Services, Inc. and certain of its
affiliates ("PacifiCorp"). The transactions include (i) the Alabama Purchase
Agreement (see "ITEM 1. BUSINESS--Business of Company--Alabama Plant"), (ii) the
PacifiCorp Convertible Loan Agreement and related agreements (see "ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Liquidity and Capital Resources"), and (iii) the PacifiCorp licenses
(see "ITEM 1. BUSINESS--Business of Company--License Agreements"). As a result
of the PacifiCorp Convertible Loan Agreement, PacifiCorp is the beneficial owner
of approximately 857,143 shares (approximately 8.44%) of the Company's common
stock.
Gallagher. During fiscal year 1997, the Company entered into various
transactions with Arthur J. Gallagher & Company and certain of its affiliates
("Gallagher"). The transactions include (i) the Utah Purchase Agreement (see
"ITEM 1. BUSINESS--Business of Company--Utah Plant"), (ii) the Gallagher Senior
Debentures and Subordinated Debentures (see "ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Liquidity and Capital
Resources") and (iii) the Gallagher licenses (see "ITEM 1. BUSINESS--Business of
Company--License Agreements.")
Extension of Warrants. During fiscal year 1997, the Company agreed to
extend the exercise period of warrants to acquire 431,799 shares of the
Company's common stock held by Joe K. Johnson, a beneficial owner of
approximately 5% of the outstanding common stock of the Company and a director
of the Company until July 17, 1997. The warrants are now exercisable until June
30, 1999 as follows: (i) warrants to purchase 110,250 shares at $7.00 per share;
(ii) warrants to purchase 71,332 shares at $10.00 per share; (iii) warrants to
purchase 65,215 shares at $15.00 per share; and (iv) warrants to purchase
185,002 shares at $30.00 per share. Prior to the extension granted by the
Company, the warrants were to expire on December 31, 1998.
Employment Agreements. The Company has entered into employment
agreements with Messrs. Cook, Sorenson and Kimball which provide for significant
benefits. See "ITEM 11. EXECUTIVE COMPENSATION--Employment Contracts and
Termination of Employment and Change in Control Arrangements."
$500,000 Loan from Certain Officers. In November 1996, Steven R. Brown
loaned $280,000 and Asael T. Sorensen, Jr. loaned $220,000 to the Company which
accrues interest at approximately prime plus 2% per annum. Principal and
interest is due on or before November 26, 2002. As of December 15, 1997,
approximately $100,000 has been paid by the Company toward the repayment of the
loans. The purpose of the loans were to provide operating capital for the
Company.
Related Partnerships. In June 1996, the Company formed Utah Synfuel #1,
Ltd. ("US #1") and Alabama Synfuel #1, Ltd. ("AS #1"), 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--The
Company--Partnerships" and "--Business of Company--Alabama Plant, --Utah Plant."
In connection with the sale of the Utah Plant under the Utah Purchase Agreement,
55
<PAGE>
the Company transferred the Utah Plant to US #1 and ranted US #1 a non-exclusive
license to the Briquetting Technology. In exchange for the transfer of the Utah
Plant and license granted by the Company, the Company received a payment of
$500,000 from US #1. The Company anticipates that similar transactions between
the Company and AS #1 will occur with respect to the Alabama Plant upon the
closing of the Alabama Purchase Agreement, if that agreement is consummated.
These transactions are not based on an arms-length negotiation by the parties.
Key Bank Loan. 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 accrued 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 agreed to rollover the remaining $600,000 principal balance of the loan
for another 90 days, until January 29, 1997, which was later extended until May
30, 1997. Additional payments of principal and interest were paid in March and
May, 1997 totalling $110,000. Key Bank thereafter notified the Company that it
was in default on the loan. The Company paid off the principal and interest on
the loan in the amount of $522,516 on August 20, 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
individually and be severally liable on the Key Bank Note, the Company loaned
$100,000 each to Mr. Russell G. Madsen, Mr. Dean Young, Mr. Kenneth M. Young,
Mr. Alan D. Ayers, Mr. Asael T. Sorensen, Jr., Mr. Steven R. Brown and Mr.
Michael Q. 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 US #1 and AS #1. Mr.
Russell G. Madsen invested $50,000 of the loan in AS #1 and $50,000 of the loan
in US #1. The remaining Individuals invested the full amount of their respective
loans in US #1. The Company has not received any direct payments from the
Individuals. On March 21, 1997, US #1 made cash distributions to each of the
limited partners of US #1 in the aggregate amount of $272,000. The cash
distributions attributable to the interests in US #1 acquired through the loan
to the Individuals as described above were made directly to the Company and
applied against the principle and interest due from the Individuals. Future
distributions, if any, from US #1 will be applied first against the amounts
owing from the Individuals before distributions are made directly to the
Individuals.
Settlement Agreement with Former CEO. In November of 1996, the Company
entered into a settlement agreement with Kenneth M. Young, the Company's former
Chief Executive Officer and Chairman of the Board. 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 per
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 of which the remaining 200,000 options were rescinded) and (vi) to allow
options representing 50,000 shares of Company common stock at $1.50 per 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 options were rescinded).
Settlement Agreement with Former Officer. In November of 1996, the
Company entered into a settlement agreement with Michael Q. Midgley, the
Company's former President and Chief Financial Officer. 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
56
<PAGE>
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 at $1.50 per
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 350,000
shares of which the remaining 300,000 options were rescinded) and (iv) to allow
options representing 25,000 shares of Company common stock at $1.50 per 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 options were rescinded).
Ferro Resources. Max E. Sorenson, a Vice President of the Company,
beneficially owns Ferro Resources, L.L.C., a Utah limited liability company
("Ferro"). The Company and Sorenson have entered into discussions regarding the
sale of the membership interests in Ferro to the Company. See "ITEM 1.
BUSINESS--Business of Company--Joint Ventures--Ferro Resources." These
transactions are not based on an arms-length negotiation by the parties.
Option Exercise Notes. In fiscal year 1995, the Company entered
into laon agreements with 16 current and former employees of the Company in
payment of the exercise price of options to purchase 900,000 shares of Company
common stock. Out of the 16 individuals, 9 are current or former officers and
directors in fiscal year 1997. Specifically Messrs. Madsen, Ford, Brown, Weller,
Sorensen, Ayers, Lambert, Young and Midgley are indebted to the Company in the
principal amounts of $516,875, $488,519, $388,519, $417,265, $322,503, $251,250,
$279,318, $587,765 and $516,875 respectively. The promissory notes bear interest
at 5.7% per annum with principal and interest due in December 2000 and are
collateralized by the shares purchased.
57
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
Consolidated Financial Statements of Covol Technologies, Inc.
Report of Independent Public Accountants................................. F-1
Consolidated Balance Sheets as of September 30, 1995, 1996 and
September 30, 1997.............................................. F-2
Consolidated Statements of Operations
for the years ended September 30, 1995, 1996 and 1997........... F-4
Consolidated Statements of Changes in Stockholders' Equity
for the years ended September 30, 1995, 1996 and 1997........... F-6
Consolidated Statements of Cash Flow
for the years September 30, 1995, 1996 and 1997................. F-11
Notes to Consolidated Financial Statements............................... F-13
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.
2. Exhibits
All exhibits listed hereunder, unless otherwise indicated, have
previously been filed as exhibits to the Company's Form 10, Form 10/A, Form
10-K, Form 10-Qs, and Form 8-Ks. 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.
Exhibits 10.11.3, 10.11.4 , 10.39.2, 10.39.5 , 10.42, 10.45, 10.46,
10.47, 10.48, 10.49 and 10.50 , contain confidential information which has been
omitted pursuant to a Confidential Treatment Request filed separately with the
Securities and Exchange Commission.
58
<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, 1996 and 1997, and the
consolidated statements of operations, changes in stockholders' equity
(deficit), and cash flows for the years ended September 30, 1995, 1996, and
1997. 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, 1996 and 1997, and the
consolidated results of their operations and their cash flows for the years
ended September 30, 1995, 1996 and 1997, in conformity with generally accepted
accounting principles.
Salt Lake City, Utah
December 31, 1997
F-1
<PAGE>
<TABLE>
<CAPTION>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
as of September 30, 1996 and 1997
1996 1997
---------------- ---------------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 490,106 $ 4,780,301
Receivables 77,744 12,595
Receivable - stock subscriptions - 577,500
Inventories 162,757 1,818,991
Advances on inventories - 1,086,964
Notes receivable - related parties, current 3,733 275,516
Prepaid expenses and other current assets 44,733 51,865
-------------- -------------
Total current assets 779,073 8,603,732
-------------- -------------
Property, plant and equipment, net of
accumulated depreciation 7,125,245 13,619,271
-------------- -------------
Other assets:
Cash surrender value of life insurance 152,112 184,592
Notes receivable - related parties, non-current 700,000 3,816,604
Deposits and other assets 15,642 136,615
-------------- -------------
Total other assets 867,754 4,137,811
-------------- -------------
Total assets $ 8,772,072 $ 26,360,814
============== =============
The accompanying notes are an integral part of the consolidated financial statements
F-2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
as of September 30, 1996 and 1997, Continued
1996 1997
--------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
<S> <C> <C>
Accounts payable $ 2,183,278 $ 1,045,147
Payable for coal briquetting equipment - 1,967,686
Due to related party - 1,038,667
Accrued liabilities 333,936 1,023,126
Accrued contractor liability - 1,477,000
Notes payable and convertible debentures, current 958,086 5,247,526
Notes payable - related parties, current 786,000 -
-------------- -------------
Total current liabilities 4,261,300 11,799,152
-------------- -------------
Long-term liabilities:
Accrued interest - 204,402
Notes payable and convertible debentures, non-current 150,980 2,900,000
Notes payable - related parties, non-current - 489,096
Deferred revenues from advance licensing fees - 1,650,000
Deferred compensation 212,612 223,891
-------------- -------------
Total long-term liabilities 363,592 5,467,389
-------------- -------------
Total liabilities 4,624,892 17,266,541
-------------- -------------
Minority interest in consolidated subsidiaries 4,380,544 3,165,996
-------------- -------------
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $0.001 par value: authorized 10,000,000 shares, issued and
outstanding 0 shares at September 30, 1996 and 303,024 shares at September
30, 1997 (aggregate liquidation
preference of $5,125,914 at September 30, 1997) - 303
Common stock, $0.001 par value: authorized 25,000,000 shares,
issued and outstanding 7,610,373 shares at September 30,
1996 and 8,627,290 shares at September 30, 1997 7,610 8,627
Common stock to be issued, 103,750 shares at September 30, 1996
and 462,285 shares at September 30, 1997 104 462
Capital in excess of par value - preferred - 5,094,634
Capital in excess of par value - common 32,780,515 41,818,549
Capital in excess of par value - common stock to be issued 934,896 3,291,783
Accumulated deficit (21,196,476) (32,191,556)
Notes and interest receivable - related parties from issuance
of or collateralized by common stock (net of allowance) (7,580,071) (7,411,278)
Deferred compensation from stock options (5,179,942) (4,683,247)
-------------- -------------
Total stockholders' equity (deficit) (233,364) 5,928,277
-------------- -------------
Total liabilities and stockholders' equity (deficit) $ 8,772,072 $ 26,360,814
============== =============
The accompanying notes are an integral part of the consolidated financial statements
F-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended Year ended Year ended
September 30, September 30, September 30,
1995 1996 1997
------------- ------------- -------------
Revenues:
<S> <C> <C> <C>
License fees $ 100,000 $ 100,000 -
Synthetic fuel sales, net 29,310 195,165 $ 41,841
Binder sales - related party - - 208,836
----------- ------------ ------------
Total revenues 129,310 295,165 250,677
----------- ------------ ------------
Operating costs and expenses:
Cost of coal briquetting operations 37,165 859,574 4,803,248
Research and development 1,265,072 1,044,192 663,935
Selling, general and administrative 1,494,270 3,796,569 2,997,812
Compensation expense on stock options, stock
warrants or issuance of common stock 955,973 4,873,319 2,058,126
Write-off of purchased technology and trade secrets 344,900 - -
Write-down of note receivable - related parties
collateralized by common stock - 2,699,575 60,000
Loss on sale of facility - - 581,456
----------- ------------ ------------
Total operating costs and expenses 4,097,380 13,273,229 11,164,577
----------- ------------ ------------
Operating loss (3,968,070) (12,978,064) (10,913,900)
----------- ------------ ------------
Other income (expense):
Interest income 9,663 302,565 286,174
Interest expense (113,137) (94,706) (1,645,195)
Minority interest in net losses of
consolidated subsidiaries - 4,456 1,245,226
Other income (expense) 35,169 (166,066) 32,615
----------- ------------ ------------
Total other income (expense) (68,305) 46,249 (81,180)
----------- ------------ ------------
Loss from continuing operations before income tax (4,036,375) (12,931,815) (10,995,080)
Income tax provision (488,000) (23,000) -
----------- ------------ ------------
Loss from continuing operations (4,524,375) (12,954,815) (10,995,080)
Discontinued operations (Note 15):
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) (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) -
----------- ------------ ------------
Loss from discontinued operations (1,129,176) (881,505) -
----------- ------------ ------------
Net loss $(5,653,551) $(13,836,320) $(10,995,080)
=========== ============ ============
- Continued -
The accompanying notes are an integral part of the consolidated financial statements
F-4
</TABLE>
<PAGE>
<TABLE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS, Continued
Year ended Year ended Year ended
September 30, September 30, September 30,
1995 1996 1997
---------------- ---------------- ----------------
Net loss per common share:
<S> <C> <C> <C>
Loss per share from continuing operations $ (1.00) $ (1.86) $ (1.38)
Loss per share from discontinued operations (0.25) (0.13) -
--------------- ----------------- ---------------
Net loss per share $ (1.25) $ (1.99) $ (1.38)
=============== ================= ===============
Weighted average shares outstanding 4,524,056 6,941,424 8,080,102
=============== ================= ===============
The accompanying notes are an integral part of the consolidated financial statements
F-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
Notes and
interest
receivable - Deferred
Common stock to be issued related parties compen-
Capital in Capital in Accumu- from issuance of, sation
Common Stock excess of excess of lated 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>
Balances at
September 30, 1994 3,935,584 $ 3,936 $4,092,198 175,000 $ 175 $ 699,825 $(1,706,605) $ (100,000) $ 0
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)
- Continued -
The accompanying notes are an integral part of the consolidated financial statements
F-6
<PAGE>
<CAPTION>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT), Continued
Notes and
interest
receivable - Deferred
Common stock to be issued related parties compen-
Capital in Capital in Accumu- from issuance of, sation
Common Stock excess of excess of lated 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>
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)
--------- ------ ---------- ------- ----- -------- ----------- ----------- -----------
Balances 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
- Continued -
The accompanying notes are an integral part of the consolidated financial statements
F-7
<PAGE>
<CAPTION>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT), Continued
Notes and
interest
receivable - Deferred
Common stock to be issued related parties compen-
Capital in Capital in Accumu- from issuance of, sation
Common Stock excess of excess of lated 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)
--------- ------ ----------- ------- ----- -------- ------------ ----------- -----------
Balances 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)
- Continued -
The accompanying notes are an integral part of the consolidated financial statements
F-8
<PAGE>
<CAPTION>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT), Continued
Notes and
interest
receivable - Deferred
Common stock to be issued related parties compen-
Capital in Capital in Accumu- from issuance of, sation
Common Stock excess of excess of lated 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>
Common stock issued for
cash received in
the prior period 103,750 $104 $ 934,896 (103,750) $(104) $ (934,896)
Common stock issued
for cash, including
exercise of stock
options and warrants 603,281 603 2,773,414
Deferred compensation
related to the issuance
of stock options at
below market value to
officers, directors
and employees 1,178,125 $(1,178,125)
Common stock issued
for services 98,331 98 789,106
Expense to induce
conversion of
notes payable into
common stock 323,000
Common stock issued to
repay note payable
- related parties 20,913 21 135,979
Common stock issued
in conversion of
note payable 140,642 141 1,124,993
Common stock issued
under a subscription
agreement 50,000 50 349,950
Common stock to be
issued for cash
received, including
exercise of stock options 399,785 400 2,798,095
Common stock to be
issued for distribution
rights 30,000 30 266,220
- Continued -
The accompanying notes are an integral part of the consolidated financial statements
F-9
<PAGE>
<CAPTION>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT), Continued
Notes and
interest
receivable - Deferred
Common stock to be issued related parties compen-
Capital in Capital in Accumu- from issuance of, sation
Common Stock excess of excess of lated 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>
Common stock to be
issued under
subscription
agreements 32,500 $ 32 $ 227,468
Amortization of
deferred compensation
on stock options $ 1,674,820
Interest expensed
based upon issuance
of convertible debt
at a discount $ 1,428,571
Cash received in
payment on notes
receivable -
related parties
from issuance of
common stock $ 108,793
Write down of notes
receivable - related
party 60,000
Net loss for year
ended September 30, 1997 $(10,995,080)
--------- ------ ----------- ------- ---- ---------- ------------ ----------- -----------
Balance at
September 30, 1997 8,627,290 $8,627 $41,818,549 462,285 $462 $3,291,783 $(32,191,556) $(7,411,278) $(4,683,247)
========= ====== =========== ======= ==== ========== ============ =========== ===========
<CAPTION>
Capital in
Preferred Stock excess of
Shares Amount par value
------ ------ ---------
<S> <C> <C> <C>
Balances at
September 30, 1996 - - -
Preferred stock
issued for cash, net 303,024 $303 $5,094,634
------- --- ---------
Balance at
September 30, 1997 303,024 $303 $5,094,634
======= === =========
The accompanying notes are an integral part of the consolidated financial statements
F-10
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended Year ended Year ended
September 30, September 30, September 30,
1995 1996 1997
---------------- ---------------- ----------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss $(5,653,551) $(13,836,320) $(10,995,080)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 125,861 187,581 193,675
Loss on disposal of discontinued subsidiaries 777,394 291,025 -
Write off of purchased technology and trade secrets 344,900 - -
Deferred income taxes 488,000 23,000 -
Common stock issued or to be issued for services 609,146 547,665 1,055,454
Amortization of deferred compensation and
compensation expense on stock options 703,527 4,772,959 1,674,820
Compensation expense on stock warrants 104,000 - -
Notes payable issued for services - 160,000 -
Interest earned on notes receivable - related parties,
issued for or collateralized by common stock - (264,855) -
Write-down of note receivable - 2,699,575 60,000
Services received in lieu of payments on notes
receivable issued for common stock - 687,766 -
Interest expense based upon issuance of
convertible debt at a discount - - 1,428,571
Inducement expense related to conversion of
notes payable into common stock - - 323,000
Loss on disposal of equipment 3,359 - -
Loss on sale of facility - - 581,456
Losses applicable to minority interests in subsidiaries - (4,456) (1,245,226)
Increase (decrease) from changes in assets and liabilities of continuing
operations:
Receivables (15,934) (55,739) 65,149
Inventories 37,165 (162,757) (61,234)
Advances on inventories - - (1,086,964)
Prepaid expenses and other current assets (12,525) (32,208) (7,132)
Deposits and other assets (36,298) 23,821 (120,973)
Accounts payable 619,413 1,436,141 (1,138,131)
Due to related party - - 1,038,667
Accrued liabilities 171,541 47,485 689,190
Accrued interest payable, non-current - - 204,402
Accrued contractor liability - - 1,477,000
Deferred revenues from advance license fees - - 1,650,000
Deferred compensation 9,943 10,711 11,279
Discontinued operations non-cash charges and
working capital changes 1,487,036 893,893 -
----------- ------------ ------------
Net cash used in operating activities (237,023) (2,574,713) (4,202,077)
----------- ------------ ------------
Cash flows from investing activities:
Purchase of property, plant and equipment (693,609) (5,055,732) (7,194,049)
Increase in cash surrender value of life insurance (29,240) (12,500) (32,480)
Issuance of notes receivable from related parties - (703,733) -
Proceeds from notes receivable - related parties - - 45,686
Investing activities of discontinued operations (485,361) - -
----------- ------------ ------------
Net cash used in investing activities (1,208,210) (5,771,965) (7,180,843)
----------- ------------ ------------
- Continued -
The accompanying notes are an integral part of the consolidated financial statements
F-11
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
Year ended Year ended Year ended
September 30, September 30, September 30,
1995 1996 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Cash flows from financing activities:
Payment on capital lease obligations $ (27,345) - -
Proceeds from issuance of notes payable and
convertible debentures - $ 700,000 $ 6,070,238
Payment on notes payable (19,530) (159,413) (1,109,066)
Proceeds from issuance of notes payable
- related parties 52,485 - 595,445
Payment on notes payable - related parties (965,160) (3,539,035) (756,349)
Proceeds from note receivable from issuance of
common stock - 171,393 108,793
Proceeds from issuance of common stock 2,224,200 7,570,260 5,749,966
Fees paid in issuing common stock - - (177,454)
Proceeds from issuance of limited partnership
interests in subsidiaries - 4,385,000 302,500
Allocation to limited partners - - (205,895)
Proceeds from issuance of preferred stock - - 5,094,937
Financing activities of discontinued operations 1,199,816 (1,582,587) -
------------- -------------- -------------
Net cash provided by financing activities 2,464,466 7,545,618 15,673,115
------------- -------------- -------------
Net increase (decrease) in cash 1,019,233 (801,060) 4,290,195
Total cash and cash equivalents, beginning of period 271,933 1,291,166 490,106
------------- -------------- -------------
Total cash and cash equivalents, end of period $ 1,291,166 $ 490,106 $ 4,780,301
============= ============== =============
Supplemental schedule of noncash investing and financing activities:
Common stock issued for notes receivable $ 140,000 $ 6,284,375 $ 577,500
Common stock issued to repay advances 112,613 - -
Common stock issued for equipment 10,304 - -
Common stock issued to repay notes payable 100,000 - 1,261,134
Discontinued operations - capital lease of equipment 500,000 - -
Payable for briquetting equipment - - 1,967,686
Obligations assumed in connection with sale of
subsidiaries - 4,636,435 -
Note payable issued and common stock to be issued to
acquire land - 926,794 -
Note payable issued for inventory - - 1,595,000
Note payable issued for equipment - - 1,607,422
Note payable issued for services - 160,000 -
Note receivable issued for sale of facility - - 3,500,000
Note receivable received for subsidiaries (net of
imputed interest) - 4,349,575 -
Allocation to minority limited partners offset
against note receivable - - 65,927
Supplemental disclosure of cash flow information: Cash paid for interest:
Continuing operations $ 112,171 $ 110,671 $ 207,903
Discontinued operations 217,001 98,358 -
The accompanying notes are an integral part of the consolidated financial statements
F-12
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Business Organization
Covol Technologies, Inc. (the Company) was originally incorporated in
Nevada in 1987 and reincorporated in Delaware in August, 1995. In
August 1995, the Company changed its name to Covol Technologies, Inc.
from Environmental Technologies Group International. In 1991, the
Company 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 currently developing and marketing the Briquetting
Technology.
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.
The Company's primary business is to commercialize the Briquetting
Technology used to recycle waste by-products from the coal and steel
industries into a marketable source of fuel and revert materials. The
Company's focus is currently on the construction of facilities and the
licensing of their Briquetting Technology to companies that are
constructing facilities that will convert coal fines into synthetic
fuel briquettes. The ability to achieve profitable operations is
contingent upon the receipt of advance licensing fees and ultimately
upon the successful completion of construction and attainment of
profitable operation of the coal briquetting facilities. Profitable
operation is contingent upon the facilities qualifying for federal
income tax credits under Section 29 of the Internal Revenue Code.
Management believes these operational issues will be substantially
resolved during 1998.
Construction and Limestone Businesses
On June 30, 1993, the Company acquired three 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).
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 15, "Discontinued Operations").
Continued
F-13
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
1. Summary of Significant Accounting Policies, Continued:
Principles of Consolidation
The 1995 and 1996 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 and 1997 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.
During 1997, the Company became a 1% general partner of Coaltech No. 1
L.P., (Coaltech) a Delaware limited partnership, for $10. The
Company's investment in Coaltech is accounted for using the equity
method of accounting with proportional elimination of intercompany
revenues and expenses, based upon the Company's lack of effective
control over Coaltech and the limited partners financial
responsibility for the operations of Coaltech.
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 when earned or when all significant
obligations have been met, which is normally when 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.
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.
Continued
F-14
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
1. Summary of Significant Accounting Policies, Continued:
Revenue and Cost Recognition, Continued
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.
Inventories
Inventories are stated at the lower of average cost or market, and
consist of coal fines, available for sale.
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.
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.
Continued
F-15
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
1. Summary of Significant Accounting Policies, Continued:
Property, Plant and Equipment
Interest costs on projects under development are capitalized to the
extent required by generally accepted accounting standards. Amounts to
be capitalized are determined by applying the Company's borrowing rate
to the average accumulated expenditures for the project. The borrowing
rate is determined by the Company, based upon rates applicable to the
actual borrowings outstanding to the Company during the period of
development. During 1997 the Company incurred total interest costs of
$2,022,854 (including $1,428,571 of interest based upon issuance of
convertible debt at a discount), of which $377,659 was capitalized.
Technology and Trade Secrets
Prior to being written off in June 1995, technology and trade secrets
related to the coal briquetting process, which had been purchased in
1991 and 1992 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
purchased technology and trade secrets.
Loss Per Share Calculation
Net 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.
At September 30, 1997, the Company's loss per common share is
determined after taking into account undeclared cumulative preferred
dividends of $23,745 and $165,298 of preferred dividends imputed based
upon the price of the Company's common stock at the date the
convertible preferred shares were issued.
Continued
F-16
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
1. Summary of Significant Accounting Policies, Continued:
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.
Reclassifications
Certain balances of the prior years have been reclassified to conform
with the current year's presentation. These reclassifications have no
effect on net income or total assets.
Accounting for Contingencies
The Company incurs liabilities in connection with litigation claims in
the normal course of business, construction contract penalties and
certain indemnification contingencies. For example, the Company has
entered into construction contracts that contain penalties if notice
to proceed is not given to the contractor by specified dates.
Litigation claims and construction contract penalties are recorded as
a liability when it is determined that it is probable that a liability
has been incurred or an asset has been impaired and the amount is
reasonably estimable. If the amount involved covers a range, the
lowest amount in the range is recorded as a liability and the
remaining contingent liability amount is disclosed.
2. Advances on Inventories:
During fiscal 1997, the Company entered into and made payments
totalling $1,086,964 under an agreement with Earthco to purchase coal
fines. The total amount paid has been recorded as advances on
inventory at September 30, 1997.
Under the agreement, the Company is obligated to pay Earthco a total
of $5,500,000 between February 1997 and May 2000 for rights to 2
million tons of coal fines (a price of $2.75 per ton). The Company
also has the right to purchase another 500,000 tons, if available, at
$2.75 per ton. No payment is required for any tons used in excess of
2.5 million.
Continued
F-17
<PAGE>
<TABLE>
<CAPTION>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
3. Notes Receivable - Related Parties:
Notes receivable - related parties consists of the following:
September 30, September 30,
1996 1997
------------- -------------
<S> <C> <C>
Note receivable from Coaltech (a limited partnership, of which Covol
is a 1% general partner), bearing interest at 9.7%, principal and
interest payments of $130,000 due each quarter beginning March 31,
1997 and ending December 31, 2007, collateralized by equipment used as
part of the Utah Synfuels #1 facility. As of September 30, 1997, one
payment of $130,000 had been received. - $3,419,995
Notes receivable from seven officers of the Company, bearing interest
at prime (8.5% at September 30, 1997) plus 2%, principal and interest
due on August 1, 2000, collateralized by a 8.1% interest in Utah
Synfuels #1 and a 0.6% interest in Alabama Synfuel #1. (No interest
revenue was recognized for fiscal 1996 or 1997). $700,000 672,125
Other notes receivable 3,733 -
-------- ----------
703,733 4,092,120
Less: current portion (3,733) (275,516)
-------- ----------
Total non-current $700,000 $3,816,604)
======= ==========
</TABLE>
Continued
F-18
<PAGE>
<TABLE>
<CAPTION>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
4. Property, Plant and Equipment:
Property, plant and equipment consists of the following:
Range of
estimated September 30, September 30,
useful lives 1996 1997
------------ ------------- ------------
<S> <C> <C> <C>
Buildings 10 - 20 years $ 338,234 $ 1,083,649
Machinery and equipment 5 - 10 years 1,805,091 2,102,228
Construction in progress 5,384,733 11,029,892
Accumulated depreciation (402,813) (596,498)
---------- -----------
Net property, plant and
equipment $7,125,245 $13,619,271
========== ===========
5. Due To Related Party:
Due to related party consists of the following:
<CAPTION>
September 30, September 30,
1996 1997
------------- -------------
<S> <C> <C>
Receivables from Coaltech related to
sale of binder and interest on note
receivable. - $ 509,007
Payable to Coaltech relating to the
purchase of synthetic fuel briquettes. - (1,547,674)
----------- ----------
Total due to related party $ 0 $(1,038,667)
=========== ==========
</TABLE>
Continued
F-19
<PAGE>
<TABLE>
<CAPTION>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
6. Notes Payable and Convertible Debentures:
Notes payable and convertible debentures consists of the following:
September 30, September 30,
1996 1997
------------- -------------
<S> <C> <C>
Note payable to a bank, bearing interest at prime 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, remaining balance paid in August 1997. $179,249 -
Note payable to a bank, bearing interest at prime plus 2%, principal
and interest originally due January 29, 1997 and extended to May 30,
1997, personally guaranteed by seven officers and former officers of
Covol, remaining balance paid in August 1997. 700,000 -
Note payable to a corporation, non-interest bearing (interest imputed
at 10.25%), due on demand, paid in November 1996. 229,817 -
Note payable to a corporation bearing interest at prime (8.5% at
September 30, 1997) plus 2%. Collateralized by plant and equipment.
Principal and interest due December 20, 1999. - $2,900,000
</TABLE>
Continued
F-20
<PAGE>
<TABLE>
<CAPTION>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
6. Notes Payable and Convertible Debentures, Continued:
September 30, September 30,
1996 1997
---- ----
<S> <C> <C>
Note payable to a corporation bearing interest at prime (8.5% at
September 30, 1997) plus 2%. Principal and interest due upon demand. - $ 945,104
Convertible Note payable to a corporation, bearing interest at prime
(8.50% at September 30, 1997) plus 2%, allows borrowing of up to
$5,000,000 at the Company's option. Principal and interest due
August 1998. Collateralized by plant, equipment and coal
fines. The entire $5,000,000 is convertible upon funding at the option
of the lender at $7.00 per share. - 3,302,422
Convertible debenture to two individuals and one trust, bearing
interest at prime (8.5% at September 30, 1997) plus 2%. Principal and
interest due June 30, 1998. Convertible at $11.00 per share. - 1,000,000
---------- ----------
1,109,066 8,147,526
Less: current portion (958,086) (5,247,526)
---------- ---------
Total non-current $ 150,980 $2,900,000
========== ==========
</TABLE>
Subsequent to year-end, the Company re-negotiated its $2,900,000 and
$945,104 notes payable shown above, decreasing the interest rate to
6%. In addition, the Company granted warrants in an amount equal to
10% of the amount financed estimated to be 400,000 warrants based upon
$4,000,000 in expected total financing. Half of these warrants will
have a strike price of $10 and half will have a strike price of $20.
Subsequent to year-end, the Company re-negotiated it's $3,202,422 Note
payable shown above, increasing the amount available under this Note
from $5,000,000 to $7,000,000. The Note contains certain covenants,
including restrictions on loans, advances on investments outside the
normal course of business.
Future maturities of notes payable and convertible debentures are as
follows:
Year ending September 30,
1998 $5,247,526
1999 0
2000 2,900,000
----------
Total $8,147,526
==========
Continued
F-21
<PAGE>
<TABLE>
<CAPTION>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
7. Notes Payable - Related Parties:
Note payable - related parties consists of the following:
September 30, September 30,
1996 1997
---- ----
<S> <C> <C>
Note payable to a shareholder, non-interest bearing, $4,000 due
monthly with all remaining principal and interest due in January,
1997, paid in March 1997 through issuance of common stock. $136,000 -
Obligations to two former officers and shareholders, non-interest
bearing, payable upon demand, paid in September 1997. 650,000 -
Note payable to two officers of Covol bearing interest at prime (8.5%
at September 30, 1997) plus 2%. Principal and interest due on or
before November 26, 2002. - $ 489,096
-------- ---------
786,000 489,096
Less: current portion 786,000 0
-------- --------
Total notes payable - related parties,
non-current $ 0 $ 489,096
======== =========
</TABLE>
Future maturities of notes payable - related parties are as follows:
Year ending September 30,
1998 -
1999 -
2000 -
2001 -
2002 $ 489,096
----------
Total $ 489,096
==========
Continued
F-22
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
8. 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.
9. 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.
As of September 30, 1997, the Company has net operating loss
carryforwards of approximately $16,842,000 which can be used to offset
future taxable income. The net operating loss carryforwards expire
from 2005 to 2011. The Company also has approximately $189,000 in
research and development tax credit carryforwards which can be used to
offset future tax liabilities. The tax credits expire from 2007 to
2011.
The provision for income taxes for the years ended September 30, 1996
and 1997 differs from the statutory federal income tax rate due to the
following:
<TABLE>
<CAPTION>
September 30, September 30, September 30,
1995 1996 1997
------------ ------------- ------------
<S> <C> <C> <C>
Tax benefit at statutory rates $ 1,372,000 $ 3,810,000 $ 3,738,000
Change in valuation allowance (1,971,000) (4,007,000) (3,840,000)
State income taxes, net of
federal tax effect 133,000 363,000 101,000
Redetermination of prior
years tax estimates (22,000) (189,000) 1,000
----------- ----------- ----------
Tax provision $ (488,000) $ (23,000) $ 0
=========== =========== ===========
</TABLE>
Continued
F-23
<PAGE>
<TABLE>
<CAPTION>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
9. Income Taxes, 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 net
operating losses and expenses related to compensatory stock options.
Other differences include 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 as of September 30, 1996 and 1997 are as
follows:
1996 1997
---------------- ---------------
Deferred tax assets (liabilities):
<S> <C> <C>
Net operating loss carryforwards $ 5,830,000 $ 6,282,000
Research and development tax credit
carryforwards 141,000 189,000
Amortization of trade and technology 72,000 43,000
Write-off of license - 104,000
Write-down of note receivable - 712,000
Compensation expense due to common stock options - 2,003,000
Reserve for contractor's liability - 551,000
Depreciation (65,000) (111,000)
Other - 45,000
----------- -----------
Total deferred tax assets 5,978,000 9,818,000
Valuation allowance (5,978,000) (9,818,000)
----------- -----------
Net deferred tax asset $ 0 $ 0
=========== ===========
</TABLE>
The valuation allowance changed by $3,840,000 during the year ended
September 30, 1997, representing the amount of deferred tax assets at
September 30, 1997 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 $9,818,000 should be provided
as of September 30, 1997. This estimate may change in the near term.
Continued
F-24
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
10. Leases:
Rental expense was $92,850, $330,006 and $317,817 for the years ended
September 30, 1995, 1996 and 1997, respectively. Rental expense
charged to discontinued operations was $429,472 for the year ended
September 30, 1995.
The Company has a noncancellable operating lease for equipment through
the year 2000 and other operating leases for real estate which both
expire prior to the year ended 2006. At September 30, 1997, minimum
rental payments due under these leases, are as follows:
Year Ending September 30,
1998 $202,194
1999 199,740
2000 87,425
2001 7,500
2002 7,500
--------
Total minimum payments due $504,059
========
Continued
F-25
<PAGE>
<TABLE>
<CAPTION>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
11. Notes and Interest Receivable - Related Parties, Collateralized by
Common Stock:
September 30, September 30,
1996 1997
------------- -------------
<S> <C> <C>
Note receivable from two shareholders, $5,000,000 face amount bearing
interest at 6% renegotiated in November 1997, principal and interest
of $514,814 due in annual payments beginning January 31, 1999, through
January 31, 2004, with remaining balance due January 31, 2005,
collateralized by 130,000 shares of the Company's common stock held by
the Company, 50,000 options to acquire 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
after renegotiation of $1,280,745 based upon imputed rate of 10.25%,
and allowance for impairment of $2,129,255 including the effects of
renegotiation and due to change in stock and stock options of the
Company held as collateral. Notes are shown at collateralized value
and no interest income was recognized during 1997. $1,650,000 $1,590,000
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. No
interest income was recognized during 1997 related to these Notes 2,191,157 2,191,157
Continued
F-26
<PAGE>
<CAPTION>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
11. Notes and Interest Receivable - Related Parties, Collateralized by
Common Stock, Continued:
September 30, September 30,
1996 1997
------------- -------------
<S> <C> <C>
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. No interest income was recognized during 1997 related to
these Notes. $3,613,914 $3,613,914
Other Notes receivable, collateralized by common stock of the Company. 125,000 16,207
---------- ----------
Total $7,580,071 $7,411,278
========== ==========
</TABLE>
12. Issuances of Preferred and Common Stock
Significant issues of common and preferred stock are detailed below:
Common Stock
In May 1997 and July 1997, the Company completed two private
placements of 224,000 and 60,000 units respectively. Each unit
consists of one share of common stock and one warrant to purchase a
share of common stock at $7.25 per share. The warrants are exercisable
at any time up to the second anniversary of their issuance. As of
September 30, 1997, all 284,000 shares relating to these private
placements had been issued.
Continued
F-27
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
12. Issuances of Preferred and Common Stock, Continued:
Common Stock, Continued
On August 28, 1997, the Company issued a private offering memorandum
for the placement of up to 100,000 units of common stock. Each unit
consists of five shares of common stock and a warrant to purchase an
additional share of common stock at $8 per share. These warrants must
be exercised by April 30, 1998. As of September 30, 1997, 50,000
shares had been issued and 32,500 shares remained to be issued under
subscription agreements totalling $577,500, shown as receivable-stock
subscriptions for which cash was received after year end. The Company
had also received $2,798,495 in cash under common stock subscriptions
for 399,785 shares which were included in common stock to be issued.
Preferred Series A - Non-Voting
During August 1997, Covol Technologies filed a Certificate of
Designation to establish a new non-voting class of preferred stock,
"Series A 6% Preferred" with a par value of $.001 per share. As of
September 30, 1997, 3,000 shares of Series A shares were issued and
outstanding for $3,000,000. The Series A preferred shares have the
following rights and privileges:
1. The holders of the shares are entitled to cumulative dividends at
the rate of 6% per year of the liquidation value of $1,000 per
share. These dividends accrue whether or not they have been
declared or the corporation has any profits. However, additional
shares of Series A Preferred stock may be issued in lieu of cash to
pay the accrued dividends on these shares.
2. Upon the liquidation of the Company, the holders of the Series A
preferred shares are entitled to receive $1,000 per share, together
with all accrued and unpaid dividends, if any.
3. Each share of Series A Preferred contains a warrant to purchase
28.571 or a total of 85,713 shares of common stock at a price of
$8.00 per share. These warrants expire on August 31, 1999.
Continued
F-28
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
12. Issuances of Preferred and Common Stock, Continued:
Preferred Series A - Non-Voting, Continued
4. The holders of the shares are entitled to convert their shares to
common shares at any time. The conversion price is the number of
preferred shares to be converted multiplied by $1,000 and divided
by the conversion price (i.e., $7.00 per share). At any time after
August 31, 1999, the Company has the right to require any holder of
the Series A preferred shares to convert their shares into common
stock.
No dividends have been declared through September 30, 1997. Cumulative
Series A preferred dividends in arrears at September 30, 1997 totaled
$20,712 or $20.71 per share of Series A preferred stock.
Preferred Series B - Non-Voting
During September 1997, the Company filed a Certificate of Designation
and subsequently a Certificate of Correction to amend their Articles
of Incorporation to allow for the issuance of 312,882 shares of
non-voting preferred stock to be designated as "Series B Convertible
Preferred shares". The par value of this stock is to be $.001 per
share. As of September 30, 1997, 300,024 shares of Series B shares
were issued and outstanding based upon a private offering to investors
at an offering price of $7 per share. The Series B preferred shares
have the following rights and privileges:
1. The holders of the shares are entitled to cumulative dividends at
the rate of 7.29% per year of the liquidation value of $7 per
share. On March 18, 1998, the dividend accrual percentage will be
modified to equal the rate for the two-year treasury bond plus
1.5%. These dividends accrue whether or not they have been declared
or whether the Company has any profits. Shares of Series B
Preferred stock may be issued in lieu of cash to pay the accrued
dividends on these shares.
2. Upon the liquidation of the Company, the holders of the Series B
preferred shares are entitled to receive $7 per share, together
with all accrued and unpaid dividends, if any.
Continued
F-29
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
12. Issuances of Preferred and Common Stock, Continued:
Preferred Series B - Non-Voting, Continued
3. Each unit (3 shares) of Series B Preferred contains a warrant to
purchase one share of common stock at a price of $8.00 per share,
which may be exercised at any time by the holder of the warrant.
4. The holders of the shares are entitled to convert their shares to
the same number of shares of common stock at any time (Subject to
adjustment for dilution) at the price of $7.00. Accrued dividends
may be converted by the Company at the conversion price of $7.00
per share.
No cash dividends have been declared through September 30, 1997. Based
upon the conversion price per share at the date of issuance a non-cash
dividend of $165,298 was imputed upon issuance. Cumulative preferred
dividends in arrears at September 30, 1997 totaled $3,033 or $0.02 per
share.
13. Stock Options and Warrants:
At September 30, 1997, the Company had one stock based compensation
plan and has issued non-qualified options which have not been
exercised, which are described below. The Company has elected to
continue to apply APB Opinion No. 25 to options issued to employees
and directors, as allowed by SFAS Statement No. 123. Had compensation
expense for the Company's stock-based compensation plans been
determined based upon the fair value at the grant date for these
awards, as outlined in FAS 123, the Company's net loss and loss per
share would have changed to the pro forma amounts below:
1996 1997
------------ ------------
Net loss As reported $(13,836,320) $(10,995,080)
============ ============
Pro forma $(14,530,000) $(11,610,000)
============ ============
Loss per share As reported $ (1.99) $ (1.38)
============ ============
Pro forma $ (2.09) $ (1.46)
============ ============
Continued
F-30
<PAGE>
<TABLE>
<CAPTION>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
13. Stock Options and Warrants, Continued:
The fair value of each option grant is estimated as of the date of the
grant, using the Black-Scholes option pricing model with the following
weighted average assumptions used for grants in the years ended
September 30, 1995, 1996 and 1997, respectively: expected volatility
of 70%, expected lives of 10 years and zero dividend yield assumed.
1997 1996 1995
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at begin-
ning of the year 1,366,500 $1.62 2,030,000 $ 2.37 296,300 $1.10
Granted 445,000 6.08 1,611,500 3.51 1,930,000 2.43
Exercised (73,000) 1.84 (1,085,000) 5.92 (196,300) 1.08
Forfeited (125,000) 1.50 (1,190,000) 1.54 0 0.00
--------- ---- ---------- ------- --------- ----
Outstanding at
end of the year 1,613,500 $2.85 1,366,500 $ 1.62 2,030,000 $2.37
Weighted average fair
value of options granted
during the year below
market $9.53 $ 12.66 $2.76
Weighted average fair
value of options granted
during the year at
market $5.57 $0 $0
Assumed risk free rates 7.80% 5.71% - 6.98% 6.40% - 7.09%
</TABLE>
Continued
F-31
<PAGE>
<TABLE>
<CAPTION>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
13. Stock Options and Warrants, Continued:
The following table summarizes information about stock options
outstanding at September 30, 1997:
Weighted
Options Average Weighted Exercisable Weighted
Outstanding at Remaining Average Options at Average
September 30, Life Exercise September 30, Exercise
Price 1997 (in years) Price 1997 Price
---------------- --------------- -------------- ---------------- --------------- ----------
<S> <C> <C> <C> <C> <C>
$1.50 to $3.50 1,311,000 9 $ 1.60 673,761 $1.70
$8.00 to $9.00 302,500 10 8.24 38,308 8.12
---------- -------
1,613,500 9 2.85 712,069 2.04
========= =======
</TABLE>
1995 Stock Option Plan
Under the Company's 1995 Stock Option Plan (the "Option Plan"), which
was adopted in June of 1995 and amended in January 1996, 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.
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.
Continued
F-32
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
13. Stock Options and Warrants, Continued:
1995 Stock Option Plan, Continued
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.
During 1995, 450,000 options were issued 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 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.
During 1997, the Company issued 280,000 options under the option plan
at a price of $8.25 and are exercisable through 2007. These options
remain unexercised at September 30, 1997.
Non-Qualified Options
Options are granted at the discretion of the Board of Directors.
In 1993 the Company issued 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.
Continued
F-33
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
13. Stock Options and Warrants, Continued:
Non-Qualified Options, Continued
During 1993, 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.
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. During 1997, all
50,000 options were exercised.
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 years ended September 30, 1996
and 1997, 35,000 and 10,000 of these options were exercised,
respectively, and 722,500 and 65,000 were forfeited or canceled,
respectively. The remaining 447,500 shares remain exercisable through
December 31, 2004 at a price of $1.50 per share. At September 30,
1997, 50,000 of these options are held by the Company as collateral on
a note receivable.
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.
Continued
F-34
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
13. Stock Options and Warrants, Continued:
Non-Qualified Options, Continued
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 and
3,000 were exercised and 35,000 and 0 were canceled during 1996 and
1997, respectively. At September 30, 1997, 102,000 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. Of these options, 10,000
were exercised during 1997 and 114,000 remain unexercised at September
30, 1997.
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, 1997, 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. During 1996 and 1997, 312,500 and 50,000 of these
options were canceled, respectively. At September 30, 1997, 415,000
shares remain unexercised.
During fiscal 1997, the Company issued options to purchase 165,000
shares of common stock to 13 employees, officers or directors at $1.50
to $9.00 per share. As of September 30, 1997, 10,000 of these options
had been forfeited and 155,000 options 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 according to the terms of the option.
Continued
F-35
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
13. Stock Options and Warrants, Continued:
Compensation From Stock Options
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. Deferred compensation
related to options issued in 1995, 1996 and 1997 that vest over time
was $1,888,750, $4,668,053 and $1,178,125, respectively. The amortized
compensation expense related to these options is $466,902, $909,959
and $1,572,320 for 1995, 1996 and 1997, respectively. Compensation
expense related to options that vest immediately was $236,625,
$3,863,000 and $102,500 for 1995, 1996 and 1997, respectively.
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 were exercised in 1997.
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, 1997, these warrants remain unexercised.
During 1997, the Company issued 682,495 warrants to purchase common
stock at prices ranging between $7 and $30 per share to investors in
connection with private placements of common stock. These warrants
expire between December 1998 and April 1999 and remain unexercised at
September 30, 1997.
In August and September 1997, the Company issued 571,403 warrants to
purchase common stock at $8 per share to investors and financial
advisors in connection with the issuance of preferred and common
stock. These warrants expire in June, August and September 1999 and
remain unexercised at September 30, 1997.
Continued
F-36
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
14. Patents:
The Company has received four current United States patents and has
one United States patent application pending and two international
patent application pending under the Patent Cooperation Treaty
covering certain aspects of the Briquetting Technology. 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 patents or pending patents.
15. 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 former director of the Company. The terms
of the original agreement were clarified in November 1997 and any
effect is included in the change in the allowance to reduce the Note
to collateral value (discussed below). The Note is collateralized by
130,000 shares of the Company's common stock and 50,000 options to
purchase common stock at $1.50 per share, personal guarantees of the
Buyers, and is payable together with interest at 6% per year (interest
imputed at 10.25%) as follows: interest has been waived through
January 31, 1998, principal and interest is then payable annually
January 31, 1999 through January 31, 2004; and all unpaid principal
and interest is payable January 31, 2005. 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 $3,719,255 as of the date of the renegotiated Agreement.
The original discount on the Note was included in the estimated loss
on disposal of discontinued operations in 1996.
Continued
F-37
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
15. Discontinued Operations, Continued:
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 and stock options held as collateral.
Because of a decrease in the trading price of the Company's common
stock subsequent to the date of the Agreement, allowances of
$2,129,255 and $2,699,575 are reflected in the Company's consolidated
financial statements as of September 30, 1997 and 1996, respectively.
Subsequent changes in the value of the collateral will be reflected in
the consolidated statement of operations and as an increase or
decrease to the Note.
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 also received 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 for 1995 and 1996. 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
1995 and 1996 in the Consolidated Statements of Cash Flows.
Revenues of the discontinued operations were $14,681,032 and
$1,396,641 for the year ended September 30, 1995 and the four months
ending February 1, 1996 (the date of sale), respectively.
Continued
F-38
<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 and convertible debentures
* Notes payable - related parties
* Notes receivable - related parties from issuance of or
collateralized by common stock
For each of the financial instruments listed above, the carrying value
approximates fair value of the instruments and each is reflected in
the financial statements at fair market value.
17. Commitments and Contingency:
During 1995 and 1996, the Company or its licensee entered into thirty
contracts for the construction of manufacturing facilities that would
use the Company's proprietary Briquetting Technology in the conversion
of coal fines into synthetic fuel. All of these construction contracts
contain penalties if the contracting party fails to proceed with the
construction of these facilities.
Fifteen of these construction contracts were entered into by
independent third parties and Covol Technologies was not a party. Four
contracts were entered into jointly by Covol and its joint venture
partners. The remaining eleven are Covol contracts. Accordingly, no
liability for failing to proceed exists with these contracts. Of the
contracts for which Covol has liability or shared liability there are
two joint venture facilities that will not be constructed and there
are four contracts where the Company believes it is probable that the
facilities will not be constructed. Accordingly, the Company has
accrued a liability of $1,477,000 for these potential penalties as of
September 30, 1997, which amount is reflected as accrued contractor
liability.
Continued
F-39
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
17. Commitments and Contingency, Continued:
In December 1996, the Company entered into six indemnification
agreements in connection with six of the construction contracts
entered into by independent third parties. These contracts contain
liquidating damages of $750,000 per contract if construction of the
facilities is not completed by June 1, 1998. The Company has
indemnified the contractor for these potential liabilities. The
contracting party has decided not to construct three of these
facilities and accordingly, no notice to proceed was given.
Accordingly, the Company believes the maximum contingent liability
under these indemnification agreements is $2,250,000. The Company
believes that payment of this amount is unlikely.
In June 1996, the Company formed Utah Synfuel #1 (US #1), a limited
partnership in which the Company is the general partner and a limited
partner and owns a 60% interest. US #1 received $3,277,500 from the
issuance of the 40% limited partner interests. The Company, through US
#1, constructed a coal briquetting facility in Price, Utah. The
facility was sold to Coaltech, a limited partnership in which the
Company is a one percent general partner, in March 1997 for $3,500,000
which resulted in a loss of approximately $581,000.
In connection with this sale, US #1 sold to Coaltech a license to use
the Company's Briquetting Technology for an advance license fee of
$1,400,000 and an earned license fee that is payable quarterly and is
based upon briquettes manufactured and sold at the Utah facility.
These advanced license fees will be recognized as income over the life
of the supply and purchase agreement discussed below. The Company
contracted with Coaltech to operate the facility for which they will
receive a quarterly fee which is also based upon briquettes produced
and sold.
Additionally, the Company and US #1 entered into a Supply and Purchase
agreement wherein the Company agreed to provide coal fines to Coaltech
for processing into synthetic fuel at a price equal to its cost per
ton. US #1 agreed to purchase from Coaltech the synthetic fuel
produced at its cost plus one dollar per ton. The plant has the
capacity to produce 360,000 tons per year. Based upon expected
manufacturing costs and current coal prices, the Company expects to
incur a loss under this supply and purchase agreement which will
reduce the earned license fees they will receive. The Company believes
the earned license fees will exceed any losses incurred under the
supply and purchase agreement.
Continued
F-40
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
17. Commitments and Contingency, Continued:
During February 1997, the Company entered into an agreement to
purchase coal fines for use at the Utah facility. The agreement
required a payment of $750,000 upon execution and quarterly payments
of approximately $400,000 beginning February 1997 through May 2000 for
a total commitment of $5,500,000. Amounts paid under this agreement
are reflected as advances on inventory in the accompanying balance
sheet. Advances on inventory will be expensed as the coal fines are
utilized in production.
The Company has experienced problems at the Utah facility including
inadequate clean coal fines as feedstock for operations. The synthetic
coal briquettes produced during the first few months of operation
contained high levels of ash and resulted in sales prices
significantly lower than the price paid under the supply and purchase
agreement. This resulted in a loss of $1,547,000 which is included as
cost of coal briquetting operations in the accompanying statement of
operations.
The Company is constructing a wash plant that will be used to remove
ash and otherwise improve the quality of the coal fines. The estimated
cost of the wash plant is approximately $4,000,000 and is being
financed by one of the Coaltech limited partners. As of September 30,
1997, the Company had incurred costs of approximately $1,972,000 in
connection with this construction. The Company believes the quality of
the coal fines and resulting synthetic fuel will improve once the wash
plant is operational.
In June 1996, the Company formed Alabama Synfuels #1 (AS #1), a
limited partnership in which the Company is the general partner and a
limited partner and owns 80%. AS #1 received $2,062,500 from the
issuance of the 20% limited partner interests. The Company, through AS
#1, is constructing a coal briquetting facility in Birmingham,
Alabama. The Company anticipates selling the facility when completed
for a price approximately equal to their cost. The Company had
incurred costs of approximately $4,600,000 in connection with this
construction through September 30, 1997.
Continued
F-41
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
17. Commitments and Contingency, Continued:
In connection with the construction of the Alabama facility, the
Company entered into a supply agreement for coal fines to be used at
the Alabama facility. Under the agreement, the Company is obligated to
purchase a minimum of 20,000 tons of coal fines per month beginning
October 1996 through December 2001. The Company anticipates assignment
of this agreement to the purchaser of the Alabama facility when the
sale is completed. As of September 30, 1997 the Company had purchased
coal fines totalling $1,736,000 under this agreement which are
reflected as inventory.
In May 1997 the Company entered into an agreement for the purchase of
coal fines for a facility located in West Virginia. The agreement
provides that the seller will supply washed coal fines with certain
specifications at prescribed prices. The agreement also provided the
seller with a percentage of the net proceeds received by the Company
from this facility.
In May 1995, the Company entered into an agreement with Geneva Steel
Company ("Geneva") to build and operate a commercial iron revert
briquetting plant (the "Geneva Plant"). The facility never reached
commercial productivity levels and is not operational. The agreement
with Geneva has expired and accordingly, the Company is a
tenant-at-will with respect to the property and building where the
briquetting equipment is located. The Company no longer expects the
Geneva Plant to be used as an iron revert briquetting facility at the
Geneva site. In December 1996, the Company agreed to install a dryer
in the Geneva Plant that would allow for the operation of the plant as
a synthetic fuel manufacturing facility. The Company plans to use this
equipment, carried at $870,000 in the accompanying balance sheet, for
the production of synthetic fuel.
In April 1996, the Company entered into a sale and purchase agreement
for coal with Alabama Power Company. Due to delays associated with the
financing and construction of the Alabama Plant, the Company was
unable to perform under the contract and in February 1997 formally
terminated the contract with Alabama Power Company. While Alabama
Power Company has not expressly agreed to the termination, it has not
indicated any intent to take actions against the Company as a result
of the termination, nor does the Company believe any action will be
taken as a result of the termination.
Continued
F-42
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Continued
17. Commitments and Contingency, Continued:
During January 1996, the Company entered into an agreement with an
entity to form five entities to commercialize and exploit the
Company's Briquetting Technology. This agreement was subsequently
modified and provides for the entity to receive a 1.6% interest in AS
#1 and the use of the Briquetting Technology for which they will pay
the Company a one-time license fee based upon annual synthetic fuel
production.
This entity also introduced the Company to one of the independent
third parties that is constructing four facilities as discussed above.
Under the agreement, this entity can receive royalties equal to the
amount to be received by the Company on approximately one facility if
the entity does not construct facilities so as to reach certain
production levels. Based upon current information, the Company
believes that the maximum amount of royalties under the agreement that
would otherwise be earned by the Company on one facility will be
payable to this entity.
The Company has issued orders for the purchase of equipment to be used
in certain coal briquetting facilities. The total commitment under
these equipment purchase orders at September 30, 1997 was $2,101,272.
The company entered into a letter of intent with Innovative
Technologies ("Innovative") in July of 1995 to apply the Company's
Briquetting Technology to certain metallic ores supplied by
Innovative. The Company conducted numerous tests of the ore through
the fall of 1995, and concluded from the results that the venture was
not economically viable. Accordingly, final agreement to process the
ore was never reached. On March 4, 1997, Innovative Holding Company,
Inc., filed a civil complaint against the Company alleging breach of
the letter of intent in the amount $500,000 plus damages. The Company
intends to defend the suit.
The Company is also involved in numerous legal proceedings that have
arisen out of the normal course of business. The Company believes that
many of these claims are without merit and in all cases intends to
vigorously defend their position. Management does not believe that the
outcome of these activities will have a significant effect upon the
statement of operations or the financial position of the Company.
The Company has entered into employment agreements with the Chief
Executive Officer, Chief Financial Officer and a Vice President of the
Company. The agreements extend for a period of three years and expire
June 1, 1999, January 1, 2000 and March 20, 2000, respectively. The
agreements provide for annual salaries and benefits. All three
agreements provide for termination benefits under specific conditions
ranging from 100% to 200% of the then current annual salaries.
F-43
<PAGE>
Section No. Exhibit No. Description Location
2 2.1 Agreement and Plan of Reorganization, dated (1)
July 1, 1993 between the Company and the
Stockholders of R1001
2 2.2 Agreement and Plan of Merger dated (1)
August 14, 1995 between the Company
and Covol Technologies, Inc., a
Delaware corporation
2 2.3 Stock Purchase Agreement, dated July 1, (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, (1)
effective as of September 30, 1994,
between the Company and Farrell F.
Larson regarding Larson Limestone
Company, Inc.
2 2.5 Stock Purchase Agreement dated February (1)
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 Larson Limestone Company, Inc.
2 2.5.1 Amendment to Share Purchase Agreement (1)
regarding the sale of the Construction
Companies
2 2.5.2 Amendment No. 2 to Share Purchase (2)
Agreement regarding the sale
of the Construction Companies
3 3.1 Certificate of Incorporation of (1)
the Company
3 3.1.1 Certificate of Amendment of the (1)
Certificate of Incorporation of the
Company dated January 22, 1996
3 3.1.2 Certificate of Amendment of the (6)
Certificate of Incorporation dated
June 25, 1997
3 3.1.3 Certificate of Designation, Number, (7)
Voting Powers, Preferences and
Rights of the Company's Series A 6%
Convertible Preferred Stock
(Originally designated as Exhibit
No. 3.1.2)
59
<PAGE>
3 3.1.4 Certificate of Designation, Number, (8)
Voting Powers, Preferences
and Rights of the Company's Series B
Convertible Preferred Stock
(Originally designated as Exhibit
No. 3.1.3)
3 3.2 By-Laws of the Company (1)
3 3.2.1 Certificate of Amendment to Bylaws (1)
of the Company dated January
31, 1996
3 3.2.2 Certificate of Amendment to the Bylaws (6)
dated May 20, 1997 (Originally designated
as Exhibit No. 3.2.1)
3 3.2.3 Certificate of Amendment to the (6)
Bylaws dated June 25, 1997
(Originally designated as
Exhibit No. 3.2.2)
9 9.1 Special Powers of Attorney Coupled With (1)
an Interest dated February 1, 1996
between the Company, Gerald Larson and
Michael McEwan
10 10.1 License Agreement, dated June 30, 1995, (1)
between the Company and Greystone
Environmental Technologies, relating to
the Greystone Joint Venture
10 10.1.1 First Amendment dated January 3, 1996 to (1)
the License Agreement dated June 30, 1995
between the Company and Greystone
Environment Technologies
10 10.2 Briquetting Services Agreement, dated (1)
May 5, 1995, between Geneva Steel Company
and the Company
10 10.2.1 Amended and Restated Briquetting (3)
Service Agreement, dated May 14, 1996,
between the Company and Geneva Steel Company
10 10.3 Lease Agreement, dated May 5, 1995 (1)
between Geneva Steel Company, as landlord,
and the Company, as tenant
10 10.3.1 First Amendment to Lease Agreement, (3)
dated May 14, 1996 between Geneva Steel
Company, as landlord, and the Company, as
tenant
10 10.4 Master Equipment Lease Agreement, dated (1)
May 4, 1995, between Keycorp Leasing Ltd.
and the Company
60
<PAGE>
10 10.5 1995 Stock Option Plan (1)
10 10.5.1 First Amendment to the 1995 Stock (1)
Option Plan
10 10.6 Employment Agreement, dated January (1)
1, 1992, with Kenneth M. Young
10 10.7 Employment Agreement, dated July 1, (1)
1992, with Russell Madsen
10 10.8 Lease Agreement, dated May 31, 1994, (1)
between the Company and Byrleen Hanson
regarding Carbon County, Utah
10 10.9 Standard Form of Agreement between Owner (1)
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 (1)
Lockwood Greene Engineers, Inc. dated
January 14, 1996
10 10.9.2 Letter Agreement with Lockwood Greene (1)
Engineers, Inc. to extend notice dates.
10 10.9.3 Letter dated July 26, 1996 from (3)
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 (3)
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, (1)
1995 by and between the Company and
Smith Barney
10 10.10.1 Termination Letter, dated July 8, (3)
1996, from Smith Barney
10 10.11 Letter of Understanding dated January (1)
30, 1996 between the Company and
CoBon Energy, LLC
10 10.11.1 Modification of Letter of Understanding (3)
dated August 20, 1996 between the
Company and CoBon Energy, LLC
61
<PAGE>
10 10.11.2 License Agreement dated September 10, (3)
1996, between the Company and CoBon
Energy, LLC
10 10.11.3 Project Development Agreement, dated *
December 30, 1996, between the Company
and CoBon Energy LLC
10 10.11.4 Modification of Project Development *
Agreement, dated December 31, 1996,
between the Company and CoBon Energy, LLC
10 10.12 [Intentionally Omitted] (1)
10 10.13 Promissory Note dated February 15, (1)
1996 in favor of the Company from
Michael McEwan and Gerald Larson
10 10.14 [Intentionally Omitted]
10 10.15 Agreement between Alabama Power Company (3)
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 (3)
with Brent M. Cook
10 10.16.1 Stock Option Agreement dated June 1, 1996 (3)
with Brent M. Cook
10 10.17 Letter Agreement, dated March 6, 1996, (3)
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 (3)
Company canceling the Site
Identification Agreement
10 10.19 Term Sheet, dated August 22, 1996, (3)
from Company to Byrleen Hanson
regarding purchase of Price, Utah
office building
10 10.20 Primary Agreement, dated November 6, (3)
1996, between the Company and Savage
Industries, Inc.
62
<PAGE>
10 10.20.1 Mojave Agreement, dated November 6, (3)
1996, between the Company and Savage
Industries, Inc.
10 10.21 Release to all claims, dated September (3)
13, 1996, executed by Maynard Moe
10 10.22 Letter of Understanding, dated (3)
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 (3)
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, (3)
1996, among the Company, K-Lee
Processing, Inc. and Concord Coal
Recovery Limited Partnership
10 10.25 PacifiCorp Financial Services, Inc. (3)
Letter of Intent (Covol Technologies)
dated September 12, 1996
10 10.26 Exclusive Financial Advisor Agreement, (3)
dated September 16, 1996, between the
Company and Coalco Corporation
10 10.27 Settlement Agreement, dated September (3)
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 (3)
Agreement, dated December 20, 1996,
between AJG Financial Services, Inc.
and the Company
10 10.29 Arthur J. Gallagher & Co. Letter of (3)
Intent, dated November 13, 1996
10 10.30 Lease Agreement, dated December 12, (3)
1996, between the Company and UPC,
Inc. regarding Price City, Utah property
63
<PAGE>
10 10.31 1996 Standard Form of Agreement between (3)
Owner and Design/Contractor
10 10.32 Form of Limited Partnership Agreements (3)
for Alabama Synfuel #1, Ltd. ("AS #1)
and Utah Synfuel #1, Ltd. (US #1)
10 10.33 Utah Project Purchase Agreement, dated (4)
as of March 7, 1997, by and among the
Company, US #1, a Delaware limited
partnership, and Coaltech No. 1, L.P.,
a Delaware limited partnership
("Coaltech")
10 10.34 License and Binder Purchase Agreement, (4)
dated as of March 7, 1997, by and among
the Company, US #1 and Coaltech
10 10.35 Operation and Maintenance Agreement, (4)
dated as of March 7, 1997, by and
between the Company and Coaltech
10 10.36 Purchase and Supply Agreement, dated (4)
as of March 7, 1997, by and among the
Company, US #1 and Coaltech
10 10.37 Abandonment Option Agreement, dated (4)
as of March 7, 1997, by and among the
Company and the limited partners of Coaltech
10 10.38 Convertible Loan and Security Agreement, (5)
dated as of March 20, 1997, by and between
the Company and PacifiCorp Financial
Services, Inc. ("PacifiCorp")
10 10.38.1 Amendment to Convertible Loan and *
Security Agreement, dated December 12,
1997 by and between the Company and
PacifiCorp
10 10.39 Alabama Project Purchase Agreement (5)
("Alabama Agreement") dated as of March
20, 1997, by and among the Company, AS #1
and Birmingham Syn Fuel, L.L.C.
("BSF")
10 10.39.1 Letter Amendment, dated June 27, 1997, *
to Alabama Agreement.
10 10.39.2 Letter Amendment, dated July 7, 1997, *
to Alabama Agreement.
10 10.39.3 Letter Amendment, dated August 28, 1997, *
to Alabama Agreement.
10 10.39.4 Letter Amendment, dated December 12, *
1997, to Alabama Agreement.
64
<PAGE>
10 10.39.5 Amended and Restated License Agreement, *
and Binder Purchase dated December 12,
1997, by and among the Company, AS #1 and
BSF.
10 10.40 Conditional Option Agreement, dated as (5)
of March 20, 1997, by and among Birmingham
Syn Fuel I, Inc., Birmingham Syn Fuel II,
Inc., PacifiCorp, AS #1 and the Company
10 10.41 Registration Rights Agreement, dated as of (5)
March 20, 1997, by and between the Company
and PacifiCorp
10 10.42 Amended and Restated Agreement Concerning *
Additional Facilities, dated December 12, 1997, by
and between PacifiCorp., Birmingham Syn Fuel, LLC
and the Company
10 10.43 Lease Agreement between Industrial *
Management Engineering, Inc. and the
Company
10 10.44 Employment Agreement, dated January 1, *
1997 with Stanley M. Kimball
10 10.45 License and Binder Purchase Agreement, *
dated December 14, 1997, between
Appalachian Synfuel, LLC and the Company
10 10.46 Financing Agreement, dated November 14, *
1997, between the Company and CoBon
Energy, L.L.C.
10 10.47 License Agreement, dated as of August 5, *
1997, by and between Pelletco Corporation
and the Company
10 10.48 Preparation Plant and Find Ponds Lease *
(Wellington, Utah), dated February 21,
1997, between Earthco and the Company
10 10.49 Agreement Concerning Additional *
Facilities, dated December 27, 1996,
between AJG Financial Services, Inc.
and the Company
10 10.50 Form of Agreement for Technology *
Licensing of Facilitation, dated
December 31, 1996, between PC West
Virginia Synthetic Fuel #1, LLC
and the Company
10 10.51 Employment agreement dated March 20, *
1997 with Max Sorenson
16 16.1 Letter to Securities and Exchange (1)
Commission, dated March 24, 1995,
from Jones, Jensen & Orton & Company,
certified public accountants
65
<PAGE>
21 21.1 List of Subsidiaries of the Company *
27 27.1 Financial Data Schedule *
- ------------------------
* Attached hereto.
(1) This exhibit is incorporated herein by reference to the exhibits filed
with the Company's Registration Statement on Form 10, filed February
26, 1996.
(2) This exhibit is incorporated herein by reference to the exhibits filed
with the Company's Registration Statement on Form 10/A, Amendment No.
2, dated April 24, 1996.
(3) This exhibit is incorporated herein by reference to the exhibits filed
with the Company's Annual Report on Form 10-K, for the fiscal year
ended September 30, 1996.
(4) This exhibit is incorporated herein by reference to the exhibits filed
with the Company's Current Report on Form 8-K, dated March 10, 1997.
(5) This exhibit is incorporated herein by reference to the exhibits filed
with the Company's Quarterly Report on Form 10-Q, for the quarterly
period ended March 31, 1997.
(6) This exhibit is incorporated herein by reference to the exhibits filed
with the Company's Quarterly Report on Form 10-Q, for the quarterly
period ended June 30, 1997.
(7) This exhibit is incorporated herein by reference to the exhibits filed
with the Company's Current Report on Form 8-K, dated August 19, 1997.
(8) This exhibit is incorporated herein by reference to the exhibits filed
with the Company's Current Report on Form 8-K, dated September 18,
1997.
b. Reports on Form 8-K
The Company filed a Report on Form 8-K, dated March 10, 1997, covering
Item 2, Acquisition or Disposition of Assets, with respect to the sale of the
Utah Plant to Coaltech. (See "ITEM 1. BUSINESS--Business of Company--Utah
Plant.")
The Company filed a Report on Form 8-K, dated May 23, 1997, covering
Item 9, Sales of Equity Securities Pursuant to Regulation S.
The Company filed a Report on Form 8-K, dated July 7, 1997, covering
Item 9, Sales of Equity Securities Pursuant to Regulation S.
The Company filed a Report on Form 8-K, dated August 19, 1997, covering
Item 5, Other Events, with respect to the issuance of the Series A 6%
Convertible Preferred Stock and the appointment of Mr. Herickhoff as a new
director.
66
<PAGE>
The Company filed a Report on Form 8-K, dated September 18, 1997,
covering Item 5, Other Events, with respect to the issuance of the Series B
Convertible Preferred Stock and a private placement of common stock.
67
<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 12, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Raymond J. Weller Chairman January 12, 1998
- ----------------------
Raymond J. Weller
/s/ Brent M. Cook Chief Executive Officer (Principal January 12, 1998
- ----------------------- Executive Officer) and Director
Brent M. Cook
/s/ Stanley M. Kimball Chief Financial Officer, Treasurer January 12, 1998
- ----------------------- and Director (Principal Financial and
Stanley M. Kimball Accounting Officer)
/s/ Alan D. Ayers Vice President of Administration January 12, 1998
- -----------------------
Alan D. Ayers
/s/ George W. Ford Vice President of Engineering and January 12, 1998
- ----------------------- Construction
George W. Ford
/s/ Steven R. Brown Vice President of Engineering and January 12, 1998
- ----------------------- Construction
Steven R. Brown
/s/ Russell G. Madsen Vice President January 12, 1998
- -----------------------
Russell G. Madsen
68
<PAGE>
/s/ Max E. Sorenson Vice President January 12, 1998
- ---------------------------
Max E. Sorenson
/s/ Asael T. Sorensen Secretary and General Counsel January 12, 1998
- ---------------------------
Asael T. Sorensen
/s/ Dee J. Priano Vice President January 12, 1998
- ---------------------------
Dee J. Priano
/s/ DeLance W. Squire Director January 12, 1998
- ---------------------------
DeLance W. Squire
/s/ Vern T. May Director January 12, 1998
- ---------------------------
Vern T. May
/s/ James A. Herickhoff Director January 12, 1998
- ---------------------------
James A. Herickhoff
/s/ John P. Hill, Jr. Director January 12, 1998
- ---------------------------
John P. Hill, Jr.
69
PROJECT DEVELOPMENT AGREEMENT
THIS AGREEMENT is made and entered into this 30th day of December,
1996, by and between Covol Technologies, Inc., a Delaware corporation, whose
address is 3180 No. Frontage Road, Lehi, Utah 84043, ("Covol"), and CoBon
Energy, L.L.C., a Utah limited liability company, whose address is 1145 East
South Union Avenue, Midvale, Utah 84047, hereinafter referred to as ("CoBon").
Covol and CoBon are sometimes referred to herein as the "Parties."
WITNESSETH:
Whereas, Covol and CoBon are parties to that certain "License
Agreement" dated September 10, 1996, in which Covol agreed to grant to CoBon the
rights to develop up to 1.5 million tons of annual production capacity using
Covol's patented Coal Technology, a copy of which is attached as Exhibit "A"
hereto and incorporated by reference, and
Whereas, pursuant to the License Agreement, CoBon has identified and
developed a business relationship and specified projects with and has been
negotiating with Pace Carbon Fuels, L.L.C., its affiliates and assigns
(collectively "Pace") regarding the final aspects of a sub-license agreement
respecting Pace's development and operation of coal manufacturing, briquetting
or extruding facilities and related product marketing operations that will use
Covol's patented Coal Technology and CoBon believes it is prepared to and can
finalize a sub-license agreement with regard thereto (the "Pace Agreement,"
attached as Exhibit "B"), and
Whereas it is the intent of the Parties, in consideration hereof, that
CoBon will discontinue further negotiations regarding the Pace Agreement draft
and CoBon and Pace will cancel the Pace Agreement and supersede it with a
separate agreement between Covol and Pace, incorporating the terms hereof, and
Whereas, the Parties wish to "carve out" the Pace Agreement from the
License Agreement, whereby CoBon will relinquish the exclusive rights it had to
develop the Pace projects, provided, however, that CoBon shall be entitled to
receive the full value of the Pace Agreement with respect to the Qualified
Tonnage hereinafter defined, including without limitation, the fulfillment of
all Sub-License, Royalty and Tax Credit payment terms to have been performed by
Pace, as provided herein.
Now, therefore, in consideration of the mutual covenants and conditions
contained herein, and for other good and valuable consideration, the sufficiency
and receipt of which are hereby acknowledge, the Parties, intending to be
legally bound, hereby amend the License Agreement as follows:
Page 1
* Confidential material has been omitted from this exhibit and filed separately
with the Securities and Exchange Commission (the "Commission").
<PAGE>
TERMS:
1. The amount of production capacity developed by Pace using Covol's
patented Coal Technology with respect to which CoBon will be entitled to
compensation (the "Qualifying Tonnage") shall be equal to the lesser of (a)
500,000 tons, or (b) 1.5 million tons less the annual aggregate capacity ("Total
Permitted Production") of all other projects developed by CoBon excluding Pace
("Other Projects").
For example, if CoBon develops an annual aggregate capacity of 1.1
million tons of qualifying fuel with Other Projects, CoBon will be entitled to
compensation for the first 400,000 tons of qualifying fuel produced each year by
Pace. If CoBon develops an annual aggregate capacity of 1.5 million tons of
qualifying fuel with Other Projects, CoBon will be entitled to no compensation
for any qualifying fuel produced each year by Pace. If CoBon develops an annual
aggregate capacity of less than 1.0 million tons of qualifying fuel with Other
Projects, CoBon will be entitled to compensation for the first 500,000 tons of
qualifying fuel produced each year by Pace.
2. With respect to the Qualifying Tonnage, Covol understands that CoBon
will be paid directly by Pace according to the terms of the Pace Agreement, the
material fee and payment terms of which are set forth in Exhibit "C" hereto, or
pursuant to an escrow arrangement to be arranged between Pace and CoBon
hereafter.
For example, if the Pace Agreement calls for Pace to pay directly to
CoBon Royalty Fee payments of * per ton and Tax Credit Fee payments * per * of
all Section 29 tax credits accruing to Pace per ton of qualifying fuel produced
by Pace, CoBon shall receive * per ton and * per * of all Section 29 tax credits
generated per ton of qualifying fuel produced each year by Pace, up to the
amount of the Qualifying Tonnage, for the duration of the Pace Agreement
including the Tax Credit term stated in the Pace Agreement. In no event will
CoBon receive compensation relating to the Pace projects for more than the
Qualifying Tonnage, nor will CoBon receive more compensation per ton than called
for in the Pace Agreement.
3. The production capacity developed by Pace will not apply against the
1.5 million tons of annual aggregate capacity to which CoBon is entitled under
Paragraph 3.1 of the License Agreement. However, to the extent Qualifying
Tonnage is claimed by CoBon, the Qualifying Tonnage will be included in the
calculation of the License Royalty Fee under Paragraph 4.2 of the License
Agreement. The Pace project will no longer be considered a CoBon project for
this or any other agreement. Nothing in this Agreement will be construed to
expand or diminish the annual aggregate capacity of 1.5 million tons to which
CoBon is entitled under the License Agreement.
4. For purposes of calculating the Qualifying Tonnage in Paragraph 1 of
this Agreement, CoBon shall project, within ninety (90) days following the
"Placed in Service" date for each facility from CoBon's Other Projects, the
annual production capacity of such facility. The quantity projected will
conclusively and permanently establish the annual production limit of such plant
and will become part of the Total Permitted Production which will then be
subtracted from the 1.5 million tons of
Page 2
* Confidential material has been omitted from this Exhibit and filed separately
with the Securities and Exchange Commission (the "Commission").
<PAGE>
aggregated capacity to calculate the Qualifying Tonnage in Paragraph 1.
5. The Parties understand that it is in their best interest to market
all Section 29 related projects in an orderly and controlled manner. To that
end, the Parties agree that CoBon will coordinate with Covol with respect to the
submission of any Section 29 private letter ruling requests. Nothing herein
shall be construed, however, to limit CoBon or its sublicensees from processing
any Section 29 private letter ruling applications.
6. Covol acknowledges and agrees that nonperformance or breach by any
of CoBon's sub-licensees or assignees of any applicable provision of the License
Agreement, which is not cured within thirty (30) days following receipt of a
Notice of Default and results in the sub-licensee's loss of its right to use the
Coal Technology, shall not be grounds to terminate or restrict the License
Agreement as it pertains to any other sub-licensee of CoBon. Nothing herein
shall be construed as modifying paragraph 6.3 of the License Agreement.
7. To effectuate the Parties' intent regarding the payment to CoBon of
the compensation referenced in the Pace Agreement (including Exhibit "C"
excerpts) and based on the Qualifying Tonnage, the Parties agree as follows:
(a) Sub-License fees shall be paid to CoBon at the time and as such
payments are due under the Pace Agreement. CoBon will acknowledge receipt of
such payments, in writing, to Covol. CoBon will make any applicable payments
therefrom to Covol as required by Article 4 of the License Agreement.
(b) Royalty and Tax Credit Fees shall be paid to CoBon at the time and
as such payments are due under the Pace Agreement. To the extent that the Other
Projects' production schedules do not permit calculation of the Qualifying
Tonnage at the time the Pace Agreement payments are due, the Royalty and Tax
Credit Fees shall be paid into an escrow account in the name of CoBon. The
escrow funds shall be disbursed to CoBon, or alternatively to Covol, upon and in
accordance with CoBon's furnishing the escrow agent, to be designated by the
Parties, with CoBon's projection under Paragraph 4 of the annual production
capacity of the Other Projects.
8. All other provisions of the License Agreement will remain in full
force and effect as if repeated herein.
9. Notwithstanding CoBon's desire and the Parties' expectation that
Pace will make payments directly to CoBon of the compensation referenced herein
based upon the Qualifying Tonnage, Covol promises, immediately upon receipt
thereof, to make all such payments to CoBon, in accord with the Pace Agreement,
in the event Pace pays such compensation to Covol. To the extent CoBon obtains
Pace's acknowledgement and agreement to make the foregoing compensation payments
directly to CoBon, the foregoing guarantee shall be of no effect.
10. In consideration hereof, CoBon relinquishes the exclusive rights it
had to select and develop the Pace projects, and relinquishes any present, past
or future rights it may have for any compensation with respect to the Pace
projects, except as expressly provided in this Agreement,
Page 3
<PAGE>
including its attachments.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by a duly authorized officer and the Agreement shall be effective as of
the date first above written.
COBON ENERGY, L.L.C. COVOL TECHNOLOGIES, INC.
By: /s/ Steven Nash By: /s/ Brent M. Cook
--------------------- -----------------------
Its: President Its: President
Date: 12/30/96 Date: 30 December, 1996
Acknowledgement
Pace Carbon Fuels, L.L.C. ("Pace") hereby acknowledges that the draft
Pace Agreement attached as Exhibit "C" and incorporated herein (i.e.,
Sub-License Agreement), including its payment terms (as excerpted in pertinent
part in Exhibit "C"), is true, correct and accurately reflects the status and
nature of the discussions and agreements to date between Pace and CoBon. Pace
further acknowledges its understanding of the foregoing terms regarding CoBon's
exclusive right to Sublicense the Coal Technology regarding the Pace projects
and CoBon's willingness to assign and relinquish such right in consideration of
the terms of this Project Development Agreement and License Addendum, including
Pace's obligation to pay compensation provided for in the Pace Agreement based
upon the Qualifying Tonnage directly to CoBon.
Dated this ____ day of December, 1996.
Pace Carbon Fuels, L.L.C.
By:_________________________________
Its:_________________________________
Page 4
CoBon Energy, L.L.C.
1145 E. South Union Ave.
Midvale, UT 84047
December 31, 1996
Via Telecopy (801) 768-4483
(801) 766-1979
Covol Technologies, Inc.
Attn: Brent M. Cook
3280 No. Frontage Rd.
Lehi, Utah 84043
Re: Modification to Project Development Agreement and License Agreement
Dear Brent:
This letter confirms our discussions and further agreements this
morning regarding Covol's licensure of Coal Technology to Pace Carbon as
described in our December 30, 1996 Project Development Agreement ("Agreement")
and shall constitute a further amendment to the parties' License Agreement. Pace
has proposed a licensing arrangement to Covol that involves CoBon's right to the
development of the Pace projects, a copy of which is attached hereto as Exhibit
"A".
CoBon has agreed and will agree to accept in lieu of the payment of the
Sub-License, Royalty and Tax Credit fees described in the Agreement as follows:
License Royalty Fees (see Section 4.2 of License Agreement) to be paid
to Covol by CoBon for purposes of the Pace projects only shall be modified as
follows: 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 * in U.S. dollars per ton for all annual production capacity in
the range of 500,001 to 1,500,000 tons. In other words, CoBon shall retain the
entire * per ton license fee proposed and to be paid by Pace to Covol to the
extent the Pace projects are determined by CoBon to fall within the initial
500,000 ton development block and shall retain * of the * per ton license fee
proposed and to be paid by Pace to Covol to the extent the Pace projects are
determined by CoBon to fall within the 500,001 to 1,500,000 ton development
block.
In addition, with regard to the Pace projects, CoBon shall accept a
royalty fee of * multiplied by the total MMBtu content of the extrusions and
briquettes produced and sold by that project that qualifies for Section 29 tax
credits under the agreement between Covol and Pace which is expected to be
executed later today.
* Confidential material has been omitted from this Exhibit and filed separately
with the Commission.
<PAGE>
For purposes hereof, CoBon shall treat the Pace developed capacity (i)
as within the first block of the License Agreement if CoBon develops and/or
licenses no other facilities; (ii) as within the second block of the License
Agreement if CoBon develops and/or licenses facilities in a capacity range up to
500,000 tons; and (iii) as within the third block of the License Agreement if
CoBon develops and/or licenses facilities in a capacity range up to 1,000,000.
The other terms of the Agreement shall still apply.
All payments of the aforesaid consideration shall come from the first
500,000 of production capacity available from the Pace projects and shall be
paid directly to CoBon by Pace and shall not be subject to any claims or liens
of Covol or its existing or future creditors. Covol shall execute such documents
and make such legal arrangements as may be necessary to effectuate the parties'
intent to insure CoBon's right to payment shall not be subject to such claims or
liens and that the same shall be free and clear thereof. Payments to CoBon shall
be timely made as required under the Covol/Pace agreement to be executed
hereafter and as referenced in Exhibit "A".
CoBon shall waive any right it may have to the aforesaid Sub-License,
Royalty and Tax Credit Fees under the Agreement in lieu of receiving the
consideration referenced herein.
Please acknowledge your receipt and agreement to the foregoing terms in
the space provided below and return a signed copy to me immediately.
Cordially,
/s/ Steven Nash
-------------------
Steven Nash
Acknowledgement and Consent
/s/ Brent Cook
- -----------------------------
Brent M. Cook, President
CoVol Technologies, Inc.
Dated
AMENDMENT TO CONVERTIBLE LOAN AND SECURITY AGREEMENT
THIS AMENDMENT TO CONVERTIBLE LOAN AND SECURITY AGREEMENT (this
"Amendment") is made as of December 12, 1997, by and between COVOL TECHNOLOGIES,
INC., a Delaware corporation ("Borrower"), and PACIFICORP FINANCIAL SERVICES,
INC., an Oregon corporation ("Lender").
RECITALS
A. The Borrower and Lender have entered into a Convertible Loan and
Security Agreement dated as of March 20, 1997 (as the same may be further
amended, modified, extended or restated, the "Loan Agreement"), pursuant to
which the Lender has made secured credit facilities available to the Borrower.
Capitalized terms used herein and not otherwise defined shall have the meanings
assigned to them in the Loan Agreement.
B. The Borrower and the Lender desire to amend the Loan Agreement
pursuant to the terms set forth herein to increase the facility from $5,000,000
to $7,000,000.
AGREEMENTS
In consideration of the foregoing Recitals, and of the agreements made
herein, and of the Term Loans made or to be made by the Lender to the Borrower,
the Borrower and the Lender agree as follows:
1. Amendments. The Loan Agreement is hereby amended as follows:
(a) Amending and restating the definition of "Termination
Date" in Section 1.01 in its entirety as follows:
"Termination Date" means August 31, 1998.
(b) Deleting "September 30, 1997" in the second line of
Section 2.01.A and inserting "February 27, 1998" in its place.
(c) Deleting "$5,000,000" in the sixth line of Section 2.01.A
and inserting "$7,000,000" in its place.
(d) Amending and restating Section 2.01.B in its entirety as
follows:
The Term Loans shall be available in the following amounts and
for the following purposes: (i) up to $25,000 to repay the
Demand Promissory Note, dated as of February 24, 1997, of
Borrower in favor of Lender, (ii) up to $100,000 to be used as
a "good faith" deposit pursuant to the Amended and Restated
Supply Agreement, dated as of the date hereof, (iii) to
complete
<PAGE>
construction by Borrower of the Alabama Project, (iv) up to
$2,030,000 to finance the acquisition by Borrower for the
benefit of the Alabama Project of up to 70,000 tons of coal
fines to be stored at 1200 Concord Mine Road, Hueytown,
Alabama, and (v) up to an amount equal to $4,845,000 minus
such amounts as are borrowed or reasonably expected to be
borrowed by the Borrower pursuant to clause (iii) to fund the
net working capital needs of the plant operations of the
Alabama Project; provided, however, that the determination of
the amount of such net working capital needs shall be subject
to the approval of Lender in its sole discretion; provided,
further, that any amounts available to be drawn under any
letters of credit arranged by Lender or any of its Affiliates
for the purposes described in this Section 2.01.B shall not be
available to be drawn as Term Loans hereunder.
(e) Amending and restating the first sentence of Section
10.01.A in its entirety as follows:
Lender shall have the right, subject to the terms and
provisions of this ARTICLE X, at the option of the Lender, (i)
at any time, to convert, the unpaid principal amount of the
Term Loans or any portion thereof, and any accrued and unpaid
interest on such Term Loans, and (ii) at any time prior to the
Termination Date, to simultaneously advance and convert (a)
that portion of the remaining Commitment equal to the
remaining Commitment minus $1,000,000, if a positive number,
and (b) after the Commitment Period, an amount equal to that
portion of the Commitment which is not then outstanding as a
Term Loan minus $1,000,000 (it being acknowledged that this
does not extend the Commitment Period), if a positive number,
into fully paid and non-assessable shares of Borrower Common
Stock or any capital stock or other securities into which such
Borrower Common Stock shall have been changed or any capital
stock or other securities resulting from a reclassification
thereof ("Shares").
2. Conditions Precedent. The obligation of the Lender to make any Term
Loans that, together with Term Loans outstanding on the date hereof, exceed
$5,000,000 in the aggregate is subject to the fulfillment or waiver in writing
of each of the following conditions precedent.
(a) The Borrower shall have executed and delivered to the
Lender an amended and restated promissory note in the form attached hereto as
Exhibit A (the "Amended and Restated Note").
(b) The Lender shall have received an opinion of counsel to
the Borrower dated as of the date hereof and addressed to the Lender,
substantially in the form attached hereto as Exhibit B.
2
<PAGE>
(c) The Borrower and Birmingham Syn Fuel, LLC shall have
entered into an agreement in the form attached hereto as Exhibit C (the "Coal
Fines Purchase Agreement") pursuant to which Borrower shall sell certain coal
fines to Birmingham Syn Fuel, LLC.
(d) The Borrower and PacifiCorp Syn Fuel, LLC shall have
entered into an Amended and Restated Additional Facilities Agreement in the form
attached hereto as Exhibit D.
(e) The Lender shall have received a letter from the Borrower
acknowledging its obligation to indemnify the Lender and its affiliates under
Section 8.13 of the Loan Agreement for costs incurred by them in connection with
the Brandt Filtration Group v. Covol Technologies litigation, which letter shall
be acceptable to the Lender in its sole discretion.
(f) Each of the parties thereto shall have entered into a
letter amendment substantially in the form attached hereto as Exhibit E amending
the Alabama Project Purchase Agreement.
(g) The Lender, Borrower, Alabama Synfuel #1 Ltd and TIC The
Industrial Company shall have executed and delivered a letter agreement
substantially in the form attached hereto as Exhibit F.
(h) The Borrower, Alabama Synfuel #1 Ltd and Birmingham Syn
Fuel, LLC shall have entered into an Amended and Restated License and Binder
Purchase Agreement substantially in the form attached hereto as Exhibit G.
3. Representations and Warranties. (a) Except as modified by the
attached schedules, each and every representation and warranty of the Borrower
set forth in the Loan Agreement is hereby confirmed and ratified in all material
respects and such representations and warranties shall be deemed to have been
made and undertaken as of the date of this Amendment as well as at the time they
were made and undertaken.
(b) The Borrower represents and warrants that:
(i) No Event of Default now exists or will
exist immediately following the execution hereof or after giving effect to the
transactions contemplated hereby.
(ii) All necessary actions on the part of the
Borrower to authorize the execution, delivery and performance of this Amendment,
the Amended and Restated Note and all other documents or instruments required
pursuant hereto or thereto have been taken; this Amendment, the Amended and
Restated Note and each such other document or instrument have been duly and
validly executed and delivered and are legally valid and binding upon the
parties thereto and enforceable in accordance with their respective terms,
3
<PAGE>
except to the extent that the enforceability thereof may be limited by
bankruptcy, insolvency or like laws or by general equitable principles.
(iii) The execution, delivery and performance of
this Amendment, the Amended and Restated Note and all other documents and
instruments required pursuant hereto or thereto, and all actions and
transactions contemplated hereby and thereby will not (A) violate, be in
conflict with, result in a breach of or constitute (with due notice or lapse of
time or both) a default under (I) any provision of the articles of incorporation
or bylaws of the Borrower, (II) any arbitration award or any order of any court
or of any other governmental agency or authority, (III) any license, permit or
authorization granted to the Borrower or under which the Borrower operates, or
(IV) any applicable law, rule, order or regulation, indenture, agreement or
other instrument to which the Borrower is a party or by which the Borrower or
any of its properties is bound and which has not been waived or consented to, or
(B) result in the creation or imposition of any lien, charge or encumbrance of
any nature whatsoever, except as expressly permitted in the Loan Agreement, upon
any of the properties of the Borrower.
(iv) No consent, approval or authorization of,
or filing, registration or qualification with, any governmental authority or any
other Person is required to be obtained by the Borrower in connection with the
execution, delivery or performance of this Amendment, the Amended and Restated
Note or any document or instrument required in connection herewith or therewith
which has not already been obtained or completed.
4. Affirmation of the Borrower. The Borrower acknowledges that the
security interests and liens granted by the Borrower to the Lender pursuant to
the Loan Agreement and the other Security Documents shall continue to secure all
Obligations, as increased pursuant hereto.
5. Counterparts. This Amendment may be executed in as many counterparts
as may be convenient and shall become binding when the Borrower and the Lender
have executed at least one counterpart.
6. Governing Law. This Amendment shall be a contract made under and
governed by the laws of the State of Utah, without regard to the conflicts of
law provisions thereof.
7. Binding Effect. This Amendment shall be binding upon and shall inure
to the benefit of the Borrower, the Lender and their respective successors and
assigns, and in particular, any holder of the Note.
8. Reference to Loan Agreement. Except as amended hereby, the Loan
Agreement shall remain in full force and effect and is hereby ratified and
confirmed in all respects. On and after the effectiveness of the amendment to
the Loan Agreement accomplished hereby, each reference in the Loan Agreement to
"this Agreement",
4
<PAGE>
"hereunder", "hereof", "herein" or words of like import, and each reference to
the Loan Agreement in any of the Collateral Assignment of Lease, the
Construction Assignment Agreement, the Construction Assignment Agreement, the
Registration Rights Agreement, and the Security Agreement, dated as of April 15,
1997, by and between Lender and Alabama Synfuel #1 Ltd, and any of the other
Transaction Documents or any other agreement, document or instrument executed
and delivered pursuant to the Transaction Documents, shall be deemed a reference
to the Loan Agreement, as amended hereby.
9. No Other Modifications. Except as expressly provided in this
Amendment, all of the terms and conditions of the Loan Agreement shall remain
unchanged and in full force and effect.
10. Same Indebtedness. The modifications effected by this Amendment,
the Amended and Restated Note and by the other documents and instruments
contemplated hereby shall not be deemed to provide for or effect a repayment and
re-advance of any of the Obligations to the Lender now outstanding, it being the
intention of the Borrower and the Lender that the Obligation owing under the
Loan Agreement, as amended by this Amendment, be and is the same Obligation as
that owing under the Loan Agreement immediately prior to the effectiveness
hereof.
5
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment to
Convertible Loan and Security Agreement as of the date first above written.
COVOL TECHNOLOGIES, INC.
By: /s/ Brent M. Cook
--------------------
Name: Brent M. Cook
Title: President
PACIFICORP FINANCIAL SERVICES, INC.
By: /s/ Reynold Roeder
---------------------
Name: Reynold Roeder
Title: Vice President
AGREED AND ACCEPTED
WITH RESPECT TO SECTION 8
ALABAMA SYNFUEL #1 LTD.
By: /s/ Brent M. Cook
---------------------------------------
Name: Brent M. Cook
Title: Pres., Covol Technologies, Inc., G.P.
6
June 27, 1997
Alabama Synfuel #1, Ltd.
c/o Covol Technologies, Inc.
3280 North Frontage Road
Lehi, Utah 84043
Covol Technologies, Inc.
3280 North Frontage Road
Lehi, Utah 84043
Re: Letter Amendment
Gentlemen:
Reference is made to (i) the Alabama Project Purchase Agreement, dated
as of March 20, 1997 (the "Project Purchase Agreement"), by and among Alabama
Synfuel #1, Ltd. and Covol Technologies, Inc., as sellers, and Birmingham Syn
Fuel, LLC, as buyer, and (ii) the Conditional Option Agreement, dated as of
March 20, 1997 (the "Option Agreement"), by and among Birmingham Syn Fuel I,
Inc. (Birmingham Syn Fuel II, Inc. and PacifiCorp Financial Services, Inc., on
the one hand, and Alabama Synfuel #1, Ltd. and Covol Technologies, Inc., on the
other hand.
The parties to the Project Purchase Agreement hereby amend the Section
5.3(c) of the Project Purchase Agreement by deleting the language "June 30,
1997" and inserting in its place the language "November 30, 1997".
The parties to the Option Agreement hereby amend subsections 1(b)(i)
and (ii) of the Option Agreement by deleting the language "June 30, 1997" and
inserting in its place the language "November 30, 1997" for subsection 1(b)(i)
and "August 31, 1997" for subsection 1(b)(ii), respectively.
This letter agreement may be executed in one or more counterparts, all
of which shall be considered one and the same letter agreement.
Very truly yours,
BIRMINGHAM SYN FUEL I, INC.
By: /s/ Reynold Roeder
--------------------
Name: Reynold Roeder
Title:Vice President
<PAGE>
BIRMINGHAM SYN FUEL II, INC.
By: /s/ Reynold Roeder
--------------------
Name: Reynold Roeder
Title:Vice President
BIRMINGHAM SYN FUEL, LLC
By: /s/ Reynold Roeder
--------------------
Name: Reynold Roeder
Title:Vice President
PACIFICORP FINANCIAL SERVICES, INC.
By: /s/ Reynold Roeder
--------------------
Name: Reynold Roeder
Title:Vice President
ACCEPTED AND AGREED TO
AS OF THE DATE FIRST SET
FORTH ABOVE:
Alabama Synfuel #1, Ltd.
By: /s/ Brent M. Cook
-------------------------------------------------------------
Name: Brent M. Cook
Title: President of Covol Technologies, Inc., a general partner
Covol Technologies, Inc.
By: /s/ Brent M. Cook
-------------------
Name: Brent M. Cook
Title: President
2
July 7, 1997
Alabama Synfuel #1, Ltd.
c/o Covol Technologies, Inc.
3280 North Frontage Road
Lehi, Utah 84043
Covol Technologies, Inc.
3280 North Frontage Road
Lehi, Utah 84043
RE: Letter Amendment
Gentlemen:
Reference is made to the Alabama Project Purchase Agreement, dated as
of March 20, 1997 (the "Project Purchase Agreement'), by and among Alabama
Synfuel #1, Ltd. and Covol Technologies, Inc. as sellers, and Birmingham Syn
Fuel, LLC, as buyer. Capitalized terms used but not otherwise defined herein
shall have the meanings ascribed thereto in the Project Purchase Agreement.
1. Project Purchase Agreement. The parties to the Project Purchase
Agreement hereby amend the Project Purchase Agreement by:
a. deleting the language "; provided, further, Buyer shall not assume any
liability or obligation incurred by Covol under the Operation and
Maintenance Agreement" in Section 3.3 thereof;
b. deleting Sections 5.3(f) and 8.2(c) and Exhibit D in their entirety;
c. deleting the fourth paragraph of Exhibit A-1 thereto in its entirety
and deleting the number "*" in the third paragraph of Exhibit A-1 and
inserting the number "*" in place thereof;
d. deleting the language ", and all obligations of the Debtor to repay all
principal and accrued and unpaid interest not repaid prior to January
1, 2008 on amounts advanced as 'Deficit Loans' as described in Section
5.10 of the Operation and Maintenance Agreement" in Section 2 of
Exhibit A-2 thereto;
e. deleting the language ", except for transfers by Covol pursuant to and
in accordance with its duties under the Operation and Maintenance
Agreement" in Section 4(a)(1) of Exhibit A-2 thereto;
* Confidential material has been omitted from this Exhibit and filed separately
with the Commission.
<PAGE>
f. deleting the last sentence of Section 4(f) of Exhibit A-2 thereto in
its entirety;
g. deleting Section 4(g) of Exhibit A-2 thereto in its entirety;
h. deleting the language "(a) the failure of the Secured Party (or any
affiliate thereof) to perform its obligations with respect to the
application of funds under the Operation and Maintenance Agreement, or
(b)" in Sections 9(a) and (b) Exhibit A-2 thereto;
i. deleting the language "If Assignee is not the "Operator" under the
Operation and Maintenance Agreement," in the first sentence and the
entirety of the last sentence, respectively, of Section 5 of Exhibit
A-3 thereto;
j. deleting the definition "Operation and Maintenance Agreement" in
Section 1 of Exhibit E thereto;
k. deleting the numbers "*" and "*" in Section 3.2 of Exhibit E thereto
and inserting in their place the numbers "*" and "*," respectively;
l. deleting the language "; provided, however, that the amount of all
payments of Royalties due and payable but for the application of this
paragraph shall accrue and bear interest at a rate per annum equal to
the rate of interest publicly announced by Morgan Guaranty Trust
Company of New York in New York City from time to time as its "prime
rate" and be payable from net operating cash flow of Licensee;
provided, further, that all Royalties and interest accrued with respect
thereto shall be due and payable on January 1, 2008, or the
corresponding date under Section 29 of the 1986 Code in the event of an
extension of tax credits available under Section 29 of the 1986 Code"
in the second paragraph of Section 3.2 of Exhibit E thereto;
m. deleting the language "; provided, however, that the price which
Licensee shall pay for the proprietary binder material for any calendar
year during the term of this Agreement shall not increase above the
price paid for the proprietary binder material during the immediately
preceding year if the imposition of the price increase would require a
"Deficit Loan" under the Operation and Maintenance Agreement" in
Section 4.1.2 of Exhibit 2 thereto;
n. deleting the language "; provided, however, that out-of-pocket
operating costs incurred in connection with the production of
proprietary binder material by Licensee shall be included in the
calculation of "Costs" under the Operation and Maintenance Agreement"
in the last sentence of Section 4.2 of Exhibit E thereto;
o. deleting the last sentence of Section 8 of Exhibit E thereto;
p. amending and restating Section 9 of Exhibit E thereto in its entirety
to read as follows:
* Confidential material omitted Exhibit and filed separately with the
Commission.
2
<PAGE>
Payments hereunder shall be subordinate in right of
payment to amounts due under the Promissory Note. In addition
to any rights of the Licensee under the Transaction Documents
and applicable law, any amounts owing to Licensee from either
Licensor or Vendor under any of the Transaction Documents may
be offset and applied toward the payment of any amounts, or
any part thereof, owing to the Licensor or Vendor, whether or
not such amounts shall be due and payable.
q. deleting the language "January 1, 2008" in Section 1(b) of Exhibit G
thereto, and inserting in its place "January 1, 2010."
2. Capital Contributions. Upon consummation of the transaction contemplated by
the Project Purchase Agreement, each of Birmingham Syn Fuel I, Inc. and
Birmingham Syn Fuel II, Inc. hereby agrees to make capital contributions to
Birmingham Syn Fuel LLC in an amount sufficient to pay amounts due and payable
under (i) the Non-Negotiable Promissory Note attached as Exhibit A-1 thereto,
and (ii) Section 3.2 of the License and Binder Purchase Agreement attached as
Exhibit E thereto.
This letter agreement may be executed in one or more counterparts, all
of which shall be considered one and the same letter agreement.
Very truly yours,
BIRMINGHAM SYN FUEL I, INC.
By: /s/ Reynold Roeder
---------------------
Name: Reynold Roeder
Title: Vice President
BIRMINGHAM SYN FUEL II, INC.
By: /s/ Reynold Roeder
---------------------
Name: Reynold Roeder
Title: Vice President
BIRMINGHAM SYN FUEL, LLC
By: /s/ Reynold Roeder
----------------------
Name: Reynold Roeder
Title: Vice President
3
<PAGE>
PACIFICORP FINANCIAL SERVICES, INC.
By: /s/ Reynold Roeder
----------------------
Name: Reynold Roeder
Title: Vice President
ACCEPTED AND AGREED TO
AS OF THE DATE FIRST SET
FORTH ABOVE:
Alabama Synfuel #1, Ltd.
By:/s/ Brent M. Cook
-------------------
Name: Brent M. Cook
Title: President
Covol Technologies, Inc.
By:/s/ Brent M. Cook
---------------------
Name: Brent M. Cook
Title: President
4
August 28, 1997
Alabama Synfuel #1, Ltd.
c/o Covol Technologies, Inc.
3280 North Frontage Road
Lehi, Utah 84043
Covol Technologies, Inc.
3280 North Frontage Road
Lehi, Utah 84043
Re: Letter Amendment
Gentlemen:
Reference is made to the Alabama Project Purchase Agreement, dated as
of March 20, 1997, by and among Alabama Synfuel #1 Ltd. and Covol Technologies,
Inc., as sellers and Birmingham Syn Fuel, LLC, as buyer, as amended by letter
agreements dated as of June 27, July 7, and August 28, 1997, respectively, as
the same may be further amended, supplemented or otherwise modified from time to
time (the "Purchase Agreement"). Capitalized terms used herein shall have the
meanings ascribed thereto in the Purchase Agreement.
The parties hereto hereby amend the Purchase Agreement by:
a. Inserting the language "and each other Transaction Document"
immediately following the word "Agreement" in the third line
of Section 7.1(c) thereof;
b. Deleting the following language in clause (i) of Section 8.1
thereof "satisfaction or waiver of the condition set forth in
Section 7.1(i) hereto", and inserting in its place the
following language "'Date of Substantial Completion' as
defined in the Construction Contract"; and
c. Deleting Sections 8.2(d) and (e) thereof in their entirety.
<PAGE>
This letter agreement may be executed in one or more counterparts, all
of which shall be considered one and the same letter agreement.
COVOL TECHNOLOGIES, INC.
By:/s/ Stanley M. Kimball
-----------------------
Name: Stanley M. Kimball
Title: CEO
ALABAMA SYN FUEL #1 LTD.
By:/s/ Stanley M. Kimball
---------------------------------
Name: Stanley M. Kimball
Title: CEO of Covol, General Partner
BIRMINGHAM SYN FUEL, L.L.C.
By: /s/ Reynold Roeder
---------------------
Name: Reynold Roeder
Title: Vice President
2
December 12, 1997
Alabama Synfuel #1, Ltd.
c/o Covol Technologies, Inc.
3280 North Frontage Road
Lehi, Utah 84043
Covol Technologies, Inc.
3280 North Frontage Road
Lehi, Utah 84043
Re: Letter Amendment
Gentlemen:
Reference is made to the Alabama Project Purchase Agreement, dated as
of March 20, 1997, as amended by the letter agreements dated as of June 27,
1997, July 7, 1997 and August 28, 1997 (the "Project Purchase Agreement"), by
and among Alabama Synfuel #1, Ltd. and Covol Technologies, Inc., as sellers, and
Birmingham Syn Fuel, LLC, as buyer.
The parties to the Project Purchase Agreement hereby amend the Project
Purchase Agreement as follows:
(i) Section 5.3(c) of the Project Purchase Agreement is amended by
deleting the language "November 30, 1997" and inserting in its place
the language "February 27, 1998";
(ii) Section 7.3(c) of the Project Purchase Agreement is amended by
deleting the language "December 31, 1997" and inserting in its place
the language "February 27, 1998";
(iii) Section 7.3(d) of the Project Purchase Agreement is amended by
deleting the language "December 31, 1997" and inserting in its place
the language "February 27, 1998";
(iv) Section 7.3(f) of the Project Purchase Agreement is amended by
deleting the language "December 31, 1997" and inserting in its place
the language "February 27, 1998"; and
(v) Section 8.1 of the Project Purchase Agreement is amended and
restated in its entirety as follows: "The closing of the transaction
contemplated by this Agreement (the "Closing") shall be at 9:00 a.m.,
Mountain Time, on such date as the parties shall mutually agree, not
later than the earlier of (i) ten (10) business days following the
"Date of Substantial Completion" as defined in the Construction
Contract or (ii)
<PAGE>
February 27, 1998 (the "Closing Date"), at the offices of Stoel Rives
LLP, 201 South Main Street, Suite 11, Salt Lake City, Utah 84111-2215,
or at such other time or place as the parties shall mutually agree."
(vi) A new Section 8.2(k) is inserted into the Project Purchase
Agreement as follows:
(k) Sellers shall execute and deliver to Buyer an unqualified
warranty with respect to the binder facility in form and
substance acceptable to the Buyer.
(vii) Schedule 2.1 to the Project Purchase Agreement is supplemented by
the addition of the attached Schedule 2.1 of "Binder Assets."
This letter agreement may be executed in one or more counterparts, all
of which shall be considered one and the same letter agreement.
Very truly yours,
BIRMINGHAM SYN FUEL, LLC
By: /s/ Reynold Roeder
---------------------
Name: Reynold Roeder
Title: Vice President
ACCEPTED AND AGREED TO
AS OF THE DATE FIRST SET
FORTH ABOVE:
ALABAMA SYNFUEL #1, LTD.
By: /s/ Brent M. Cook
------------------------------------------
Name: Brent M. Cook
Title: President, Covol Technologies, G.P.
COVOL TECHNOLOGIES, INC.
By: /s/ Brent M. Cook
---------------------
Name: Brent M. Cook
Title: President
THIS AMENDED AND RESTATED LICENSE AND BINDER PURCHASE AGREEMENT (the
"Agreement"), is made and entered into as of December 12, 1997 by and between
Birmingham Syn Fuel, L.L.C., an Oregon limited liability company (the
"Licensee"), and Covol Technologies, Inc., a Delaware corporation (the
"Vendor"), and Alabama Synfuel #1 Ltd., a Delaware limited partnership (the
"Licensor").
WHEREAS Vendor has represented that it has developed a proprietary
process to produce synthetic coal fuel extrusions and briquettes from waste coal
dust, coal fines and other coal derivatives, and that Vendor has granted
Licensor a license to such proprietary process pursuant to which Licensor is
entitled to license the coal extruding and Briquetting Technology to Licensee.
WHEREAS Licensor and Vendor have agreed to assign to the Licensee
ownership of a coal extruding and briquetting facility located in Birmingham,
Alabama (the "Alabama Project"), pursuant to the Alabama Project Purchase
Agreement, dated as of March 20, 1997, as amended by letter agreements dated as
of June 27, July 7, August 28, 1997 and December 12, 1997, respectively, as the
same may be further amended, supplemented or otherwise modified from time to
time (the "Purchase Agreement").
WHEREAS Licensee, Licensor and Vendor wish to amend and restate the
terms of the License and Binder Purchase Agreement, dated August 28, 1997, on
the terms and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the foregoing premises, the mutual
covenants and agreements hereinafter set forth, and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged,
Licensor, Licensee and Vendor agree as follows:
Section 1 Definitions. Capitalized terms used but not otherwise defined
herein shall have the meanings ascribed thereto in the Purchase Agreement.
"Alabama Project" has the meaning set forth in the preamble.
"Coal Briquetting Technology" means all intellectual property,
inventor's certificates and applications therefor, printed and unprinted
technical data, know-how, trade secrets, copyrights and other
intellectualproperty rights, inventions,
* Confidential material has been omitted from this Exhibit and filed separately
with the Securities and Exchange Commission (the "Commission").
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discoveries, techniques, works, processes, methods, plans, software, designs,
drawings, schematics, specifications, communications protocols, source and
object code and modifications, test procedures, program cards, tapes, disks,
algorithms and all other scientific or technical information in whatever form
relating to, embodied in or used in the proprietary process to produce synthetic
coal fuel extrusions and briquettes from waste coal dust, coal fines and other
similar coal derivatives, and the proprietary binder material used in
manufacturing synthetic coal fuel extrusions and briquettes from waste coal
dust, coal fines and other similar coal derivatives, in each case owned or
controlled by Vendor or Licensor, to include such information in existence as of
the date of this Agreement as well as related information later developed by
Vendor or Licensor; provided, however, that the defined term "Coal Briquetting
Technology" shall not include the proprietary process developed by Vendor to
produce synthetic coke extrusions and briquettes from coke breeze or any
technology for other than the processing and production of synthetic coal fuel
extrusions and briquettes.
"Commercial Use" means any usage of the Coal Briquetting
Technology for commercial exploitation and any other usage to which Vendor or
Licensor grants prior written consent.
"Effective Date" means the date of this Agreement set forth
above.
"Improvements" has the meaning set forth in the Section 2.3
hereof.
"Licensee" has the meaning set forth in the preamble.
"Licensor" has the meaning set forth in the preamble.
"Purchase Agreement" has the meaning set forth in the
preamble.
"Vendor" has the meaning set forth in the preamble.
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Section 2 Sublicense Grant.
2.1 General. Subject to the terms and conditions of this
Agreement, Licensor hereby grants to Licensee, and Vendor hereby consents to
such grant by the Licensor and guarantees to Licensee, an exclusive sublicense
to use the Coal Briquetting Technology for Commercial Use, in within a one
hundred (100) mile radius of the Alabama Project, including to make, have made,
use and sell or otherwise transfer products which embody, use or have been
developed or manufactured with the Coal Briquetting Technology.
2.2 Know-How and Assistance. To enable Licensee to benefit
fully from the license of the Coal Briquetting Technology, Licensor and Vendor
shall provide access to all documentation, drawings, engineering specifications
and other know-how in either Vendor's or Licensor's possession, reasonable
access to Vendor's and Licensor's employees or agents who are familiar with the
Coal Briquetting Technology, and Improvements to the Coal Briquetting
Technology, as defined in Section 2.3, and shall provide such technical advice
with regard to the Coal Briquetting Technology as is reasonably requested by
Licensee.
2.3 Improvements. Each of Licensor and Vendor shall notify
Licensee of any improvements, variations or modifications ("Improvements") made
on or to the Coal Briquetting Technology promptly after such Improvements are
made by it. The term "Improvements" shall include changes that reduce production
costs, improve performance, broaden applicability or increase marketability.
Each of Vendor and Licensor hereby grants to Licensee an exclusive license to
utilize the Improvements made by it for Commercial Use, within a one hundred
(100) mile radius of the Alabama Project, including to make, have made, use, and
sell or otherwise transfer products that utilize any such Improvements subject
to the terms of this Agreement. It is mutually understood and agreed that all
Improvements provided to Licensee by either Vendor or Licensor shall remain the
sole and exclusive property of Vendor. This Agreement does not contemplate any
jointly developed Improvements. All rights to any jointly developed Improvements
shall be subject to the terms and conditions of a separate written agreement
between Licensee and Vendor and Licensor entered into prior to undertaking any
joint development.
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2.4 Confidentiality. Licensee hereby agrees not to disclose
the Coal Briquetting Technology, except to its agents, employees, directors or
representatives who have a need to know about such technology in connection with
the operation and maintenance of the Alabama Project and the sale of coal
briquettes/extrusions produced by the Alabama Project; provided, however,
information which (i) becomes generally available to the public other than as a
result of a disclosure by Licensee or its agents, employees, directors or
representatives, (ii) was available to Licensee on a non-confidential basis
prior to its disclosure pursuant to the terms hereof, or (iii) becomes available
to Licensee on a non-confidential basis from a source other than Licensor or
Vendee, provided that such source is not known by Licensee or its agents,
employees, directors or representatives to be prohibited from transmitting the
information to Licensee by any confidentiality agreement with Licensor or Vendor
or by any other contractual, legal or fiduciary obligation shall not be subject
to the terms of this Section 2.4.
Section 3 License Fee and Royalty.
3.1 License Fee. Licensee shall owe a base license fee to
Licensor equal to $500,000 in the event of, and $250,000 of the base license fee
shall be due and payable within five (5) Business Days of, (i) the Licensee
receives a Letter Ruling satisfactory to it (as contemplated under Section
7.1(i) of the Purchase Agreement), or (ii) the option of PacifiCorp Financial
Services, Inc. under the Conditional Option Agreement is terminated unexercised;
provided, however, that the remaining $250,000 of the base license fee shall not
be due and payable until five (5) Business Days after consummation of the
transactions under the Purchase Agreement upon "Substantial Completion" of the
Alabama Project as defined in the Construction Contract.
3.2 Royalty Amount. On or before each January 31, April 30,
July 31, and October 31 from and after the commencement of the payment of
principal pursuant to the Promissory Note, Licensee shall pay to Licensor
quarterly royalty payments ("Royalty") in an amount equal to the product of (i)
*, as adjusted pursuant to the immediately succeeding proviso, multiplied by
(ii) the MM Btu of the extrusions and briquettes produced by the Alabama Project
and sold by the Licensee during the immediately preceding quarter; provided,
however, that on each anniversary date, commencing
* Confidential material omitted and filed separately with the Commission.
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January 1, 1997, the amount set forth in clause (i) shall be adjusted by an
amount equal to thirty percent (30%) of the relative change between (y) the
"inflation adjustment factor" (as set forth in Section 29(d)(2) of the 1986
Code) calculated for the immediately preceding year and (z) the "inflation
adjustment factor" calculated for the penultimate year; provided, further, that
for any Royalty paid from and after the time the Promissory Note has been paid
in full, the royalty shall be determined by replacing the number "*" set forth
in clause (i) with "*."
Notwithstanding anything contained herein to the contrary, the
obligation of Licensee to make payments of Royalties to Licensor in any quarter
shall be limited to an amount equal to the net operating cash flow of the
Licensee (which amount shall include the funding of replacement and operating
reserves for the Alabama Project).
Section 4 Binder.
4.1 Sales of Binder.
4.1.1 Sale and Purchase. Upon the request of Licensee,
from time-to-time, Vendor shall sell to Licensee a sufficient quantity of
proprietary binder ingredients as is required to operate the Alabama Project up
to full capacity. Vendor shall deliver, or cause to be delivered, the
proprietary binder ingredients to the Alabama Project, at such times and in such
amounts as requested by Licensee. Payments for proprietary binder ingredients
delivered by Vendor during any calender month shall be due and payable to Vendor
on the last Business Day of the immediately succeeding month.
4.1.2 Price. The price which Licensee shall pay to
Vendor for the proprietary binder ingredients delivered by or on behalf of
Vendor during any calender year shall be an amount equal to (i) the Vendor's
direct and actual costs (direct material, shipping and labor costs, third-party
manufacturing and transportation costs, binder plant warranty expense, and a
percentage of the total overhead costs of Vendor reasonably reflecting the ratio
of the administrative costs incurred in connection with the delivery and sale of
the proprietary binder ingredients to the total overhead costs of Vendor)
reasonably incurred to deliver the proprietary binder ingredients during the
immediately preceding calender year,
* Confidential material omitted and filed separately with the Commission.
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plus (ii) * of the amount determined pursuant to clause (i).
4.1.3 Specifications and Warranties. Vendor represents
and warrants that all proprietary binder ingredients shall be merchantable, free
from defects, and shall conform to any other agreed to specifications. At
Licensee's option, Vendor shall replace, or refund the purchase price and cost
of shipment of, all non-conforming proprietary binder ingredients. Vendor will
bear the risk of loss of the proprietary binder ingredients while it is in
transit.
4.1.4 Acceptance and Rejection. All proprietary binder
ingredients are subject to Licensee's inspection and test before final
acceptance. Acceptance and/or inspection by Licensee shall not constitute a
waiver of any latent defect or nonconformity.
4.2 Binder Technology License. Vendor represents and warrants
that it has delivered to a safety deposit box owned by Licensee a written copy
of the formula used by it to manufacture the proprietary binder material in
sufficient quantities to operate the Alabama Project up to full capacity, and
Vendor covenants to notify Licensee of any improvements, variations or
modifications made on or to the formula used by it to manufacture the
proprietary binder material promptly after such improvements, variations or
modifications are made by it and to provide a copy of any such improved, varied
or modified formula for placement in the safety deposit box.
Section 5 Records; Inspection; Confidentiality. Each party hereto shall
keep accurate records containing all data reasonably required for the
computation and verification of the amounts to be paid by the respective parties
under this Agreement, and shall permit each other party or an independent
accounting firm designated by such other party to inspect and/or audit such
records during normal business hours upon reasonable advance notice. All costs
and expenses incurred by a party in connection with such inspection shall be
borne by it. Each party agrees to hold confidential from all third parties all
information contained in records examined by or on behalf of it pursuant to this
Section 5.
Section 6 Infringement. If during the term of this Agreement it appears
that a third party has infringed any intellectual property rights associated
with the Coal
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Briquetting Technology or otherwise misappropriated any Coal Briquetting
Technology, Vendor shall, at Vendor's expense, institute and conduct legal
actions against such third party or to enter into such agreements oraccord in
settlement as are deemed appropriate by Vendor. Licensee shall have the right to
join Vendor as a plaintiff in the prosecution of any infringement or
misappropriation action affecting the Alabama Project, provided that Licensee
shall bear up to fifty percent (50%) of all the costs and expenses of the
action. If Licensee and Vendor have jointly conducted an infringement or
misappropriation action, any sums recovered from the third party shall be
distributed to Licensee and Vendor in accordance with the percentage of the
costs and expenses borne by each, after each party has been reimbursed for costs
and expenses incurred by it in prosecuting the action. Licensee shall always
have the right to be represented by counsel of its own selection in any action.
In no event shall Vendor enter into any agreement or settlement inconsistent
with the terms of this Agreement.
Section 7 Representations and Warranties.
7.1 Authority. Each of Vendor, Licensee and Licensor
represents and warrants that (i) the execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated hereby have been
duly authorized on its behalf by all requisite action, corporate or otherwise,
(ii) it has the full right, power and authority to enter into this Agreement and
to carry out the terms of this Agreement, (iii) it has duly executed and
delivered this Agreement, and (iv) this Agreement is a valid and binding
obligation of it enforceable in accordance with its terms.
7.2 No Consent. Each of Vendor, Licensee and Licensor
represents and warrants that no approval, consent, authorization, order,
designation or declaration of any court or regulatory authority or governmental
body or any third-party is required to be obtained by it, nor is any filing or
registration required to be made therewith by it for the consummation by it of
the transactions contemplated under this Agreement.
7.3 Intellectual Property Matters. Each of Vendor and Licensor
warrants that it (i) owns, free and clear of all liens and encumbrances, all
intellectual property, inventor's certificates and applications therefor,
printed and unprinted
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technical data, know-how, trade secrets, copyrights and other intellectual
property rights, inventions, discoveries, techniques, works, processes, methods,
plans, software, designs, drawings, schematics, specifications, communications
protocols, source and object code and modifications, test procedures, program
cards, tapes, disks, algorithms and all other scientific or technical
information in whatever form relating to, embodied in or used in the proprietary
process to produce synthetic coal fuel extrusions and briquettes from waste coal
dust, coal fines and other similar coal derivatives, and, the proprietary binder
material used in manufacturing synthetic coal fuel extrusions and briquettes
from waste coal dust, coal fines and other similar coal derivatives, (ii) has
the right and power to grant to Licensee the licenses granted herein, (iii) has
not made any agreement with another in conflict with the rights granted herein,
and (iv) has no knowledge that the sale or use of the licenses granted herein as
contemplated by this Agreement would infringe any third-party's intellectual
property rights.
7.4 Physical Properties. Each of Vendor and Licensor
represents and warrants that (i) as of the date hereof, based on the current
information available to Vendor and Licensor, the cost per ton of producing coal
extrusions and briquettes at the Alabama Project, using the Coal Briquetting
Technology and the proprietary binder ingredients provided hereunder, but not
including the cost of the waste coal dust, coal fines and other coal derivatives
utilized, is approximately *; (ii) the moisture content loss occurring in the
manufacture of the coal briquettes and extrusions using the Coal Briquetting
Technology, assuming that the waste coal dust, coal fines and other coal
derivatives utilized in connection therewith has an initial moisture content of
ten percent (10%) or less, is two percent (2%) or less, as measured over the
course of a calendar year; (iii) no waste, noxious fumes or other byproducts
result from the manufacture of the coal briquettes and extrusions using the Coal
Briquetting Technology, other than waste water, packaging materials and similar
items, none of which is noxious or designated as a "hazardous waste" under any
Federal, state or local law and all of which will be disposed of in accordance
with applicable Federal, state and local law; and (iv) application of the Coal
Briquetting Technology in the Alabama Project will result in a chemical change
similar in all material respects to the chemical change described in the IRS
letter ruling received by Vendor, dated September 8, 1995.
* Confidential material omitted and filed separately with the Commission.
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Section 8 Term. This Agreement and the license granted hereunder shall
be for the period from the Effective Date to and including January 1, 2008, or
the corresponding date under Section 29 of the 1986 Code in the event of an
extension of the tax credits available under Section 29 of the 1986 Code.
Section 9 Subordination; Set off. Payments hereunder shall be
subordinate in right of payment to amounts due under the Promissory Note. In
addition to any rights of the Licensee under the Transaction Documents and
applicable law, any amounts owing to Licensee from either Licensor or Vendor
under any of the Transaction Documents may be offset and applied toward the
payment of any amounts, or any part thereof, owing to the Licensor or Vendor,
whether or not such amounts shall be due and payable.
Section 10 Waiver. The failure of any party to enforce at any time any
provision of this Agreement shall not be construed as a waiver of such provision
or the right thereafter to enforce each and every provision. No waiver by any
party, either express or implied, of any breach of any of the provisions of this
Agreement shall be construed as a waiver of any other breach of such term or
condition.
Section 11 Severability. If any provision of this Agreement shall be
held by a court of competent jurisdiction to be invalid or unenforceable in any
respect for any reason, the validity and enforceability of any such provision in
any other respect and of the remaining provisions of this Agreement shall not be
in any way impaired.
Section 12 Notices. All notices required or authorized by this
Agreement shall be given to the parties hereto at the addresses, and in
accordance with the procedures, set forth in Section 12.3 of the Purchase
Agreement.
Section 13 Entire Agreement. This Agreement, together with the other
Transaction Documents, constitutes the entire agreement of the parties relating
to the subject matter hereof. There are no promises, terms, conditions,
obligations, or warranties other than those contained herein and/or in the
Transaction Documents. The Transaction Documents supersede all prior
communications, representations, or agreements, verbal or written, among the
parties relating to the subject matter hereof. This Agreement may not be amended
except in writing signed by the parties hereto.
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Section 14 Governing Law. This Agreement shall be governed in
accordance with the laws of the State of Utah.
Executed by the duly authorized representative of the parties on the
date and year first above written.
COVOL TECHNOLOGIES, INC.
By: /s/ Brent M. Cook
------------------
Name: Brent M. Cook
Title: President
ALABAMA SYN FUEL #1 LTD.
By: /s/ Brent M. Cook
--------------------------------
Name: Brent M. Cook
Title: Pres., Covol Tech., Inc. G.P.
BIRMINGHAM SYN FUEL, L.L.C.
By: /s/ Reynold Roeder
----------------------
Name: Reynold Roeder
Title: Vice President
AMENDED AND RESTATED AGREEMENT
CONCERNING ADDITIONAL FACILITIES
THIS AMENDED AND RESTATED AGREEMENT CONCERNING ADDITIONAL FACILITIES (the
"Agreement"), is made and entered into as of December 12, 1997 by and between
PacifiCorp Syn Fuel, L.L.C., an Oregon limited liability company ("PSF"), and
Covol Technologies, Inc., a Delaware corporation ("Covol").
WHEREAS, PSF entered into six (6) separate Standard Form of Agreements,
dated as of December 31, 1996 (individually referred to as a "Facility
Agreement" and collectively referred to as the "Facility Agreements"), between
Owner and Design/Builder with a qualified contractor ("Contractor"), for the
construction of six (6) coal fines agglomeration facilities within the United
States, each to have a production capacity of up to 50,000 tons per month
(individually referred to as a "Facility" and collectively referred to as the
"Facilities").
WHEREAS, in connection with entering into the Facility Agreements,
Covol granted to PSF a license for the coal extruding and briquetting technology
in connection with each Facility on the terms and conditions set forth in the
original Agreement Concerning Additional Facilities, dated as of December 31,
1996, which was amended and restated on July 7, 1997 (the "Original Agreement")
and Covol agreed to sell to PSF the proprietary binder material manufactured by
Covol for use in the operation of each Facility.
WHEREAS, PSF and Covol desire to amend and restate the Original
Agreement pursuant and in accordance with the terms hereof.
NOW, THEREFORE, in consideration of the foregoing premises, the mutual
covenants and agreements hereinafter set forth, and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, PSF
and Covol agree as follows:
Section 1 Definitions.
"Coal Briquetting Technology" means all intellectual property,
inventor's certificates and applications therefor, printed and unprinted
technical data, know-how, trade secrets, copyrights and other intellectual
property rights, inventions, discoveries, techniques, works, processes, methods,
plans, software, designs, drawings, schematics, specifications, communications
protocols, source and object code and
* Confidential material has been omitted from this Exhibit and filed separately
with the Securities and Exchange Commission (the "Commission).
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modifications, test procedures, program cards, tapes, disks, algorithms and all
other scientific or technical information in whatever form relating to, embodied
in or used in the proprietary process to produce synthetic coal fuel extrusions
and briquettes from waste coal dust, coal fines and other similar coal
derivatives, and the proprietary binder material used in manufacturing synthetic
coal fuel extrusions and briquettes from waste coal dust, coal fines and other
similar coal derivatives, in each case owned or controlled by Covol, to include
such information in existence as of the date of this Agreement as well as
related information later developed by Covol; provided, however, that the
defined term "Coal Briquetting Technology" shall not include the proprietary
process developed by Covol to produce synthetic coke extrusions and briquettes
from coke breeze or any technology for other than the processing and production
of synthetic coal fuel extrusions and briquettes.
"Commencement Date" has the meaning set forth in the Section
3.1 hereof.
"Commercial Use" means any usage of the Coal Briquetting
Technology for commercial exploitation and any other usage to which Covol grants
prior written consent.
"Competing Project" has the meaning set forth in the Section
2.1 hereof.
"Covol" has the meaning set forth in the preamble.
"Contractor" has the meaning set forth in the preamble.
"Designation Notice" has the meaning set forth in the Section
2.1 hereof.
"Excepted Project" has the meaning set forth in the Section
2.1 hereof.
"Facility" and "Facilities" has the meaning set forth in the
preamble.
"Facility Agreement" and "Facility Agreements" has the meaning
set forth in the preamble.
"Facility Assignment" has the meaning set forth in the Section
13 hereof.
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"Improvements" has the meaning set forth in the Section 2.3
hereof.
"Notice of Competing Project" has the meaning set forth in the
Section 2.1 hereof.
"Prior Restricted Areas" has the meaning set forth in the
Section 2.1 hereof.
"PSF" has the meaning set forth in the preamble.
"Royalty" has the meaning set forth in the Section 3.2 hereof.
Section 2 License Grant.
2.1 General; Agreement Concerning Exclusivity. Subject to the
terms and conditions of this Agreement, Covol hereby grants to PSF and
guarantees to PSF a license to use the Coal Briquetting Technology for
Commercial Use with each Facility, including a license to make, have made, use
and sell or otherwise transfer products which embody, use or have been developed
or manufactured with the Coal Briquetting Technology. Set forth on attached
Schedule 2.1 is a list of those geographical areas in which Covol has limited
its ability to grant further licenses of the Coal Briquetting Technology (the
"Prior Restricted Areas"). Until the earlier of (i) December 31, 1997, or (ii)
the designation by PSF of the sites for all six of the Facilities, Covol shall
not agree to further material restrictions to its ability to grant licenses
(i.e., a restriction upon granting an exclusive site to any person or entity
within a radius of ten miles or more of any site) without retaining an exception
for projects to be developed by PSF pursuant to the terms hereof. Each time PSF
designates by written notice to Covol the specific site for a Facility (a
"Designation Notice"), Covol shall inform PSF in writing (the "Notice of
Competing Projects") within ten (10) days of the receipt of the Designation
Notice of any other coal agglomeration projects being developed, or related coal
fines acquisition programs, within a one hundred (100) mile radius of such
Facility (the "Competing Projects"). The Notice of Competing Projects shall set
forth the (i) site of the Competing Project, (ii) the operating capacity of the
Competing Project, (iii) the source of fines of the Competing Project, (iv) the
expected date of commencement of operations of the Competing Project and (v)
whether the Competing Project will be owned twenty-five percent (25%) or more by
the owner or supplier of the coal fines expected to be used in connection
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with such Competing Project (a "Source Sponsored Project"). If there are
Competing Projects being developed, PSF may, within twenty (20) days of the
receipt of notice from Covol, rescind such designation and designate a different
site on a later date. With respect to each Facility for which PSF has
irrevocably designated by written notice to Covol the specific site thereof, PSF
shall have a right of first refusal to develop any other coal agglomeration
projects proposed to be developed, or related coal fines acquisition programs,
within (i) a ten (10) mile radius of any Facility located east of the
Mississippi River, or (ii) a fifty (50) mile radius of any Facility located west
of the Mississippi River; provided however, that such right of first refusal
shall not apply to Source Sponsored Projects.
2.2 Know-How and Assistance. To enable PSF to benefit fully
from the license of the Coal Briquetting Technology, Covol shall provide access
to all relevant documentation, drawings, engineering specifications and other
know-how in its possession, reasonable access to its employees or agents who are
familiar with the Coal Briquetting Technology, and Improvements to the Coal
Briquetting Technology, as defined in Section 2.3, and shall provide such
technical advice with regard to the Coal Briquetting Technology as is reasonably
requested by PSF and relevant to the provisions of this Agreement.
2.3 Improvements. Covol shall notify PSF of any improvements,
variations or modifications ("Improvements") made on or to the Coal Briquetting
Technology promptly after such Improvements are made by it. The term
"Improvements" shall include changes that reduce production costs, improve
performance, broaden applicability or increase marketability. Covol hereby
grants to PSF a license (such license to become exclusive in accordance with
Section 2.1 hereof) to utilize the Improvements made by it for Commercial Use,
including to make, have made, use, and sell or otherwise transfer products that
utilize any such Improvements subject to the terms of this Agreement. It is
mutually understood and agreed that all Improvements provided to PSF by Covol
shall remain the sole and exclusive property of Covol. This Agreement does not
contemplate any jointly developed Improvements. All rights to any jointly
developed Improvements shall be subject to the terms and conditions of a
separate written agreement between PSF and Covol entered into prior to
undertaking any joint development.
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2.4 Confidentiality. PSF hereby agrees not to disclose the
Coal Briquetting Technology, except to its agents, employees, directors or
representatives who have a need to know about such technology in connection with
the operation and maintenance of the Facilities and the sale of coal
briquettes/extrusions produced by the Facilities; provided, however, information
which (i) becomes generally available to the public other than as a result of a
disclosure by PSF or its agents, employees, directors or representatives, (ii)
was available to PSF on a non-confidential basis prior to its disclosure
pursuant to the terms hereof, or (iii) becomes available to PSF on a
non-confidential basis from a source other than Covol, provided that such source
is not known by PSF or its agents, employees, directors or representatives to be
prohibited from transmitting the information to PSF by any confidentiality
agreement with Covol or by any other contractual, legal or fiduciary obligation
shall not be subject to the terms of this Section 2.4.
Section 3 License Fees and Royalty.
3.1 License Fees. PSF shall pay a base license fee to Covol
equal to $500,000 for each Facility as each such Facility is constructed and
commences normal production operations (after any applicable testing period
under the applicable Facility Agreement, such commencement date, the
"Commencement Date"); provided, however, that with respect to any Facility
located within a one-half mile radius of the location of either (i) the Alabama
Project (to be owned by Birmingham Syn Fuel, L.L.C.) or (ii) any other Facility
hereunder, only one base license fee shall be paid (in the case of the Alabama
Project, by Birmingham Syn Fuel, L.L.C.). PSF shall pay Covol the base license
fee for each Facility for which a base license fee is due within five (5)
Business Days after the Commencement Date of the applicable Facility. If, by
reason of the proviso in the second preceding sentence, a base license fee is
not paid for a Facility and, within five (5) years of the Commencement Date of
the most recently completed Facility at such site, one or more of the Facilities
is removed to a location outside of the original one-half mile radius for
operations under this Agreement, then PSF shall be obligated to pay the base
license fee for each Facility at such original site with respect to which it had
not previously paid a base license fee, such base license fee to be payable on
the date of such removed plant commences normal production operations at the new
site.
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3.2 Royalty Amount. As to each Facility, on or before each
January 31, April 30, July 31, and October 31 from and after the Commencement
Date applicable to such Facility, PSF shall pay to Covol quarterly royalty
payments ("Royalty") in an amount equal to the product of (i) *, multiplied by
(ii) the MM Btu of the extrusions and briquettes produced by such Facility and
sold by PSF during the immediately preceding calender quarter; provided,
however, that for all extrusions and briquettes produced by such Facility and
sold by PSF in excess of the initial 250,000 tons of extrusions and briquettes
produced and sold in any calender year, the amount set forth in clause (i) above
shall be *; provided, further, that the aggregate maximum reduction in the
Royalty payable with respect to all the Facilities pursuant to the immediately
preceding proviso shall be limited to *; provided, further, that for each
calender quarter or portion thereof from and after the occurrence of a Facility
Sublicense or a Facility Assignment (as such terms are defined in Section 13
hereof) with respect to such Facility, the Royalty payable shall be an amount
equal to the sum of (A) the product of NCF (as defined below) for the
immediately preceding calender quarter, multiplied by *, and (B) the product of
(I) *, multiplied by (II) the MM Btu of the extrusions and briquettes produced
by such Facility and sold by the operator of the Facility during the immediately
preceding quarter, multiplied by (III) the PSF Percentage Interest (as defined
below); provided, further, that on each anniversary date, commencing January 1,
1997, the amount set forth in clause (i) and (B)(I) above shall be adjusted by
an amount equal to the relative change between (y) the "inflation adjustment
factor" (as set forth in Section 29(d)(2) of the 1986 Code) calculated for the
immediately preceding year and (z) the "inflation adjustment factor" calculated
for the penultimate year. "NCF" means the cash received by PSF (which term
includes, for purposes of this paragraph, any entity included in the same
consolidated federal income tax return as PacifiCorp) with respect to a
Facility, exclusive of amounts received by PSF, either directly or indirectly,
as payment of principal, interest and penalties in connection with any deficit
loan or funding arrangement pursuant to which PSF, either directly or
indirectly, funds an operating deficit of such Facility; provided, however, to
the extent that cash used to fund any such operating deficit is generated by the
Facility and a Royalty has not previously been paid with respect thereto, the
immediately foregoing exclusion shall not apply. "PSF Percentage Interest" means
the percentage, expressed as a decimal, of PSF's equity interest, either direct
or indirect, in the Facility.
6
* Confidential material omitted and filed separately with the Commission.
<PAGE>
3.3 No Fees or Royalties Prior to Commencement Date.
Notwithstanding anything contained herein to the contrary, PSF shall have no
liability for a base license fee or Royalties as to any Facility for which a
site is not designated or, in the event a site is designated, as to any Facility
for which the Commencement Date does not occur.
Section 4 Binder.
4.1 Sales of Binder.
4.1.1 Sale and Purchase. Upon the request of PSF, from
time-to-time, Covol shall sell to PSF a sufficient quantity of proprietary
binder ingredients as is required to operate each Facility up to full capacity.
Covol shall deliver or cause to be delivered the proprietary binder ingredients
to each Facility, at such times and in such amounts as requested by PSF.
Payments for proprietary binder ingredients delivered by Covol during each three
month period ended January 31, April 30, July 31 and October 31 shall be due and
payable to Covol on the last Business Day of the immediately succeeding month.
4.1.2 Price. The price which PSF shall pay to Covol for the
proprietary binder ingredients delivered by or on behalf of Covol with respect
to each Facility during any calender year shall be an amount equal to (i)
Covol's direct and actual costs (direct material, shipping and labor costs,
third party manufacturing and transportation costs and a percentage of the total
overhead costs of Covol reasonably reflecting the ratio of the administrative
costs incurred in connection with the delivery and sale of the proprietary
binder ingredients to the total overhead costs of Covol) reasonably incurred to
deliver the proprietary binder ingredients during the immediately preceding
calender year, plus (ii) * of the amount determined pursuant to clause (i);
provided, however, that with respect to the first calender year hereunder, the
price which PSF shall pay to Covol for the proprietary binder ingredients
delivered by or on behalf of Covol shall be * per pound; provided, further, that
in the event Covol's direct and actual costs reasonably incurred to deliver the
proprietary binder ingredients delivered during the first calender year
hereunder is less than or greater than * per pound, Covol or PSF, respectively,
shall pay to the other party on or before January 31 of the next calender year
the difference between (A) such direct and actual costs, plus * of such direct
and actual costs, and (B) the amount actually paid by PSF for proprietary binder
7
* Confidential material omitted and filed separately with the Commission.
<PAGE>
ingredients delivered during the first calender year; provided, further, that in
the event that in any three month period ended January 31, April 30, July 31 and
October 31, after the payment of all other operating costs of the Facility
(excluding any license fees payable pursuant to a Facility Sublicense or
Facility Assignment), the payment of the binder purchase price would cause the
Facility to incur a net operating cash deficit during such three month period,
the amount calculated by clause (ii) above will be reduced to such amount as
would not cause the Facility to incur a net operating cash deficit for such
three month period, but not less than zero; provided, further, that on the last
day of February of each year, PSF shall pay to Covol the difference between (x)
the aggregate total quarterly binder purchase price reductions during the twelve
month period ended on the immediately preceding January 31, which reductions
result from the application of the immediately preceding proviso, minus (y) an
amount equal to reduction in the binder purchase price that would result from
the application of the calculation required by the immediately preceding proviso
for the twelve month period ended on the immediately preceding January 31, if
any.
4.1.3 Specifications and Warranties. Covol
represents and warrants that all proprietary binder ingredients shall be
merchantable, free from defects, and shall conform to any other agreed to
specifications. At PSF's option, Covol shall replace, or refund the purchase
price and cost of shipment of, all non-conforming proprietary binder
ingredients. Covol will bear the risk of loss of the proprietary binder
ingredients while it is in transit.
4.1.4 Acceptance and Rejection. All proprietary
binder ingredients are subject to PSF's inspection and test before final
acceptance. Acceptance and/or inspection by PSF shall not constitute a waiver of
any latent defect or nonconformity.
4.2 Binder Formula. Covol represents and warrants that,
simultaneous with the execution and delivery of the Original Agreement, Covol
delivered to a safety deposit box owned by PSF a written copy of the formula
used by it to manufacture the proprietary binder material in sufficient
quantities to operate each Facility up to full capacity, and Covol covenants to
notify PSF of any improvements, variations or modifications made on or to the
formula used by it to manufacture the proprietary binder material promptly after
such improvements, variations or modifications are made by it and to
8
<PAGE>
provide a copy of any such improved, varied or modified formula for placement in
the safety deposit box.
Section 5 Records; Inspection; Confidentiality. Each party hereto shall
keep accurate records containing all data reasonably required for the
computation and verification of the amounts to be paid by the respective parties
under this Agreement, and shall permit each other party or an independent
accounting firm designated by such other party to inspect and/or audit such
records during normal business hours upon reasonable advance notice. All costs
and expenses incurred by a party in connection with such inspection shall be
borne by it. Each party agrees to hold confidential from all third parties all
information contained in records examined by or on behalf of it pursuant to this
Section 5.
Section 6 Infringement. If during the term of this Agreement a third
party has infringed any intellectual property rights associated with the Coal
Briquetting Technology or otherwise misappropriated any Coal Briquetting
Technology, Covol shall, at Covol's expense, institute and conduct legal actions
against such third party or to enter into such agreements or accord in
settlement as are deemed appropriate by Covol. PSF shall have the right to join
Covol as a plaintiff in the prosecution of any infringement or misappropriation
action affecting any Facility, provided that PSF shall bear up to fifty percent
(50%) of all the costs and expenses of the action. If PSF and Covol have jointly
conducted an infringement or misappropriation action, any sums recovered from
the third party shall be distributed to PSF and Covol in accordance with the
percentage of the costs and expenses borne by each, after each party has been
reimbursed for costs and expenses incurred by it in prosecuting the action. PSF
shall always have the right to be represented by counsel of its own selection in
any action. In no event shall Covol enter into any agreement or settlement
inconsistent with the terms of this Agreement.
Section 7 Development and Construction of Facilities.
7.1 Assistance from Covol. As it is in Covol's interest that
each of the Facilities are completed, upon the reasonable request of PSF, Covol
agrees to provide assistance from time to time in the development and
construction of each of the Facilities. In addition to and not in limitation of
the foregoing, Covol shall provide from time to time upon the reasonable request
of PSF, on a priority basis, the services of Steven R. Brown, Vice President of
Covol (or his successor),
9
<PAGE>
in connection with the construction and development of the Facilities and of
George Ford, Vice President of Covol (or his successor) in connection with the
analysis and formulation of the optimal binder with respect to each identified
coal fine source.
7.2 Reimbursement of Expenses. PSF shall reimburse, on demand,
the travel and other similar out-of-pocket expenses of Covol in performing
services requested under Section 7.1; provided, however, that Covol shall obtain
the prior written approval of PSF for any expenditures in excess of $5,000.
7.3 Excess Costs for the Development of Facilities. Covol has
represented to PSF that, so long as PSF uses Lockwood Greene Engineers, Inc.,
any of its affiliates, or any other contractor approved in writing by Covol, the
cost of development and construction of each Facility should not exceed *. In
the event that the cost of development and construction of any Facility exceeds
* (excluding special improvements, if any, not included in the basic design of
the coal agglomeration facilities which have been requested by PSF), then Covol
shall be responsible for (and shall pay directly or reimburse PSF on demand) *.
Section 8 Representations and Warranties.
8.1 Authority. Each of Covol and PSF represents and warrants
that (i) the execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
on its behalf by all requisite action, corporate or otherwise, (ii) it has the
full right, power and authority to enter into this Agreement and to carry out
the terms of this Agreement, (iii) it has duly executed and delivered this
Agreement, and (iv) this Agreement is a valid and binding obligation of it
enforceable in accordance with its terms.
8.2 No Consent. Each of Covol and PSF represents and warrants
that no approval, consent, authorization, order, designation or declaration of
any court or regulatory authority or governmental body or any third-party is
required to be obtained by it, nor is any filing or registration required to be
made therewith by it for the consummation by it of the transactions contemplated
under this Agreement.
8.3 Intellectual Property Matters. Covol warrants that it (i)
owns, free and clear of all liens and encumbrances, all intellectual property,
inventor's
10
* Confidential material omitted and filed separately with the Commission.
<PAGE>
certificates and applications therefor, printed and unprinted technical data,
know-how, trade secrets, copyrights and other intellectual property rights,
inventions, discoveries, techniques, works, processes, methods, plans, software,
designs, drawings, schematics, specifications, communications protocols, source
and object code and modifications, test procedures, program cards, tapes, disks,
algorithms and all other scientific or technical information in whatever form
relating to, embodied in or used in the proprietary process to produce synthetic
coal fuel extrusions and briquettes from waste coal dust, coal fines and other
similar coal derivatives, and, the proprietary binder material used in
manufacturing synthetic coal fuel extrusions and briquettes from waste coal
dust, coal fines and other similar coal derivatives, (ii) has the right and
power to grant to PSF the licenses granted herein, (iii) has not made any
agreement with another in conflict with the rights granted herein, and (iv) has
no knowledge that the sale or use of the licenses granted herein as contemplated
by this Agreement would infringe any third-party's intellectual property rights.
8.4 Physical Properties. Covol represents and warrants that
(i) as of the date hereof, based upon the current information available to
Covol, the cost per ton of producing coal extrusions and briquettes at a
facility like the proposed Facilities, using the Coal Briquetting Technology and
the proprietary binder ingredients provided hereunder, but not including the
cost of the waste coal dust, coal fines and other coal derivatives utilized, is
approximately *; (ii) no waste, noxious fumes or other byproducts result from
the manufacture of the coal briquettes and extrusions using the Coal Briquetting
Technology, other than waste water, packaging materials, stack house emissions
and similar items, none of which is noxious or designated as a "hazardous waste"
under any Federal, state or local law and all of which will be disposed of in
accordance with applicable Federal, state and local law; and (iii) application
of the Coal Briquetting Technology in each Facility will result in a chemical
change similar in all material respects to the chemical change described in the
IRS letter ruling received by Covol, dated September 8, 1995.
Section 9 Term. This Agreement and the license granted hereunder shall
be for the period from the Closing Date to and including January 1, 2008, or the
corresponding date under Section 29 of the 1986 Code in the event of an
extension of the tax credits available under Section 29 of the 1986 Code.
11
* Confidential material has been omitted from this Exhibit and filed separately
with the Commission.
<PAGE>
Section 10 Waiver. The failure of any party to enforce at any time any
provision of this Agreement shall not be construed as a waiver of such provision
or the right thereafter to enforce each and every provision. No waiver by any
party, either express or implied, of any breach of any of the provisions of this
Agreement shall be construed as a waiver of any other breach of such term or
condition.
Section 11 Severability. If any provision of this Agreement shall be
held by a court of competent jurisdiction to be invalid or unenforceable in any
respect for any reason, the validity and enforceability of any such provision in
any other respect and of the remaining provisions of this Agreement shall not be
in any way impaired.
Section 12 Notices. All notices required or permitted to be given under
this Agreement shall be in writing. Notices may be served by certified or
registered mail, postage paid with return receipt requested; by private courier,
prepaid; by telex, facsimile, or other telecommunication device capable of
transmitting or creating a written record; or personally. Mailed notices shall
be deemed delivered five days after mailing, property addressed. Couriered
notices shall be deemed delivered when delivered as addressed, or if the
addressee refuses delivery, when presented for delivery notwithstanding such
refusal. Telex or telecommunicated notices shall be deemed delivered when
receipt is either confirmed by confirming transmission equipment or acknowledged
by the addressee or its office. Personal delivery shall be effective when
accomplished. Unless a party changes its address by giving notice to the other
party as provided herein, notices shall be delivered to the parties at the
following addresses:
Covol: Covol Technologies, Inc.
3280 North Frontage Road
Lehi, Utah 84043
Telephone: (801)768-4481
Telecopier: (801)768-4483
Attn.: Mr. Brent M. Cook
12
<PAGE>
With a copy
to: Ballard Spahr Andrews & Ingersoll
201 South Main Street, Suite 1200
Salt Lake City, Utah 84111-2215
Telephone: (801) 531-3000
Telecopier: (801) 531-3001
Attn.: Mr. William Marsh
Buyer: PacifiCorp Syn Fuel, LLC
c/o PacifiCorp Financial Services, Inc.
775 NE Multnomah
Suite 775
Portland, Oregon 97232
Telephone: (503)797-7222
Telecopier: (503)797-7246
Attn.: Mr. Reynold Roeder
With a copy
to: Stoel Rives LLP
700 NE Multnomah
Suite 950
Portland, Oregon 97232-4109
Telephone: (503)294-9100
Telecopier: (503)230-1907
Attn.: Gary R. Barnum, Esq.
Section 13 Assignment; Sublicenses. This Agreement may be assigned by
Covol to any of its wholly-owned subsidiaries; provided, however, that such
assignment will not release Covol from any of its obligations hereunder. Subject
to the foregoing, this Agreement shall not be assigned in whole or in part by
Covol without the prior written consent of PSF. Prior to the earlier of (i)
December 31, 1997, or (ii) the designation by PSF of the sites for all six of
the Facilities, PSF shall not assign this Agreement in whole without the prior
written consent of Covol. As to any Facility after the applicable site has been
designated, PSF may grant sublicenses with respect to this Agreement (a
"Facility Sublicense") and, as to any Facility after the payment of the base
license fee contemplated under Section 3.1 for such Facility, PSF may assign its
rights and obligations under this Agreement to any person or entity to the
extent they relate to such Facility (a "Facility Assignment"); provided,
however, that its rights under Section 4.2 hereof, including, without
limitation, the access to the binder formula, which may only be exercised by
PSF, PacifiCorp Financial Services, Inc. or any affiliate of either of them, and
such rights may not be assigned
13
<PAGE>
or sublicensed. In the event of a Facility Assignment, subject to the proviso in
the immediately preceding sentence, (i) Covol shall look solely to such assignee
for the performance of future obligations and, (ii) upon the request of PSF,
Covol shall enter into a separate agreement with the assignee with respect to
such Facility which shall be similar in all material respects to this Agreement
(except limited to such Facility).
Section 14 Further Assurances. Each party agrees, at the request of the
other party, at any time and from time to time, to execute and deliver all such
further documents, and to take and forbear from all such action, as may be
reasonably necessary or appropriate in order more effectively to carry out the
provisions of this Agreement.
Section 15 Set off. Any amounts owing to PSF from Covol hereunder may
be offset and applied toward the payment of any amounts, or any part thereof,
owing to Covol pursuant to Section 3.2 hereof, whether or not such amounts shall
be due and payable.
Section 16 Entire Agreement. This Agreement constitutes the entire
agreement of the parties relating to the subject matter hereof. There are no
promises, terms, conditions, obligations, or warranties other than those
contained herein. This Agreement supersedes all prior communications,
representations, or agreements, verbal or written, among the parties relating to
the subject matter hereof. This Agreement may not be amended except in writing
signed by the parties hereto.
Section 17 Governing Law. This Agreement shall be governed in
accordance with the laws of the State of Utah.
Section 18 Counterparts. This Agreement may be executed in two or more
counterparts, each which shall be deemed an original, but all of which together
shall constitute one and the same agreement.
14
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement by
their duly authorized representatives the day and year first above written.
COVOL TECHNOLOGIES, INC.
By: /s/ Brent M. Cook
----------------------
Name: Brent M. Cook
Title:President
PACIFICORP SYN FUEL, LLC
By: /s/ Reynold Roeder
---------------------
Name: Reynold Roeder
Title:President
15
<PAGE>
SCHEDULE 2.1
* Prior Restricted Areas
* Confidential material omitted and filed separately with the Commission.
LEASE AGREEMENT
This commercial lease is entered into between Industrial Management &
Engineering, Inc. ("Landlord") and Covol Technologies, Inc., ("Tenant"). The
Landlord hereby leases the below described commercial property to the Tenant.
The Tenant hereby accepts the lease. The terms of the lease are as follows:
1. The lease pertains to the property, including the building and the adjacent
paved parking area located at 3280 North Frontage Road, Lehi, Utah 84043, but
excluding the currently fenced off portion on the north of the property (the
"Premises").
2. The initial term of the lease shall be for a period of three years,
commencing on the 1st day of August, 1997 and ending on the 31st day of July
2000. Thereafter, the lease shall automatically extend for successive one-year
periods unless prior to the end of any lease year, Tenant shall give Landlord
60-days written notice of it intent to terminate the lease.
3. The Tenant shall pay Landlord, the monthly rent of $5,000.00 payable on the
first day of every month. There will be a late fee of $100 if the rent is not
paid by the 5th of the month, plus $10 for each additional day until paid. After
the initial term of the lease, the amount of the rent will increase by 5% per
annum. If Landlord builds additional commercial rental space on the fenced
portion of the Premises and Tenant desires to lease those structures, the terms
for such additional space shall be agreed upon by the parties.
4. The Tenant shall be responsible for providing all utilities, property taxes,
and maintenance of the Premises.
5. The Landlord shall provide such additional parking space as Tenant may
require, at no additional cost to the Tenant.
6. The Tenant agrees to return possession of the Premises at the conclusion of
the lease in its present condition, except for normal wear and tear.
7. The Premises shall be used for the purpose of conducting the proper business
activities of Tenant which include but are not limited to the development and
world-wide commercialization of its patented agglomeration technology.
8. The Tenant shall not assign or sublease the Premises without written
permission of the Landlord.
9. No material or structural alterations of the Premises will be made without
the prior written permission of the Landlord.
10. The Tenant will comply with all zoning, health, environmental and use
ordinances.
<PAGE>
11. In the event that legal action is necessary to enforce any provisions of
this contract, attorney fees may be recovered by the prevailing party.
12. This lease is subject to the formal transfer of ownership of the Premises
from Tenant to Landlord.
Signed this 7th day of November, 1997.
Landlord Tenant
IME COVOL TECHNOLOGIES, INC.
By: /s/ Gerald Larson By:/s/ Stanley Kimball
----------------------- ---------------------
Its: Director Its: CFO
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into
as of the 1st day of January, 1997 (the "Effective Date") by and between COVOL
TECHNOLOGIES, INC., a Delaware corporation (the "Company"), and ("Employee").
The Company and Employee are sometimes STANLEY M. KIMBALL later in this
Agreement collectively referred to as the "Parties."
RECITALS
This Agreement is entered into with reference to the following facts,
definitions, and objectives:
A. Employee is a Certified Public Accountant and immediately prior to
the Effective Date, was employed by Huntsman Corporation, a Utah corporation, as
Vice President, Administration.
B. Employee's services are deemed to be of value to the Company and it
is recognized that inducements must be offered to Employee in order that the
Company may retain Employee's services.
1
<PAGE>
NOW, THEREFORE, in consideration of this Agreement and of the covenants
and conditions contained in this Agreement, the Parties agree as follows:
1. Employment and Positions.
(a) Positions. The Company employs Employee and Employee
accepts employment by the Company as a Vice President and as the Chief Financial
Officer of the Company for the Period of Employment specified in Paragraph 3
("Period of Employment").
2. Services to be Rendered. Employee shall, during the Period of
Employment, serve the Company in the positions set forth in Paragraph 1
("Employment and Positions") diligently, competently, and in conformance with
the corporate policies of the Company. Employee shall be free to conduct
personal business and investment activities that do not conflict or interfere
with the performance of his duties under this Agreement.
In fulfilling his duties and responsibilities under this Agreement,
Employee shall report to the President and Chief Executive Officer of the
Company.
3. Period of Employment. Employee's employment by the Company pursuant
to this Agreement shall, unless sooner
2
<PAGE>
terminated as provided in this Agreement, be for a term of three (3) years,
commencing as of the 1st day of January 1997, and ending with the close of
business on the 31st day of December, 1999 (the "Period of Employment").
4. Base Salary. At the commencement of the Period of Employment,
Employee shall be paid a yearly base salary ("Base Salary") of Eighty Thousand
Dollars ($80,000). It is recognized by the Company and Employee that a Base
Salary of Eighty Thousand Dollars ($80,000) is less than the amount that should
be paid to Employee as his Base Salary considering Employee's past experience
and his responsibilities as a Vice President and the Chief Financial Officer of
the Company. Therefore, (i) as soon as possible under the circumstances, the
Company shall cause Employee's Base Salary to be in line with the base salary or
other comparable compensation paid by the Company to the Company's President and
Chief Executive Officer, (ii) throughout the Period of Employment the Company
shall exercise its best efforts to cause Employee's Base Salary to be in line
with the base salary or other comparable compensation paid to the President and
Chief Executive Officer of the Company, (iii) Employee's Base Salary shall not
be less than Eighty Thousand Dollars ($80,000), and (iv) Employee's Base Salary
shall be in addition to all other amounts or benefits to which Employee is or
shall be entitled under this Agreement or otherwise as a result
3
<PAGE>
of his employment by the Company. Base Salary shall be paid in bi-weekly
installments during the Period of Employment. Employee's Base Salary shall be
reviewed on or before April 1, 1997 and thereafter on or before the end of each
calendar year during the Period of Employment. The review shall be conducted by
the President and Chief Executive Officer of the Company and Employee's Base
Salary may be increased as a result of any such review, but not decreased The
increase, if any, in Employee's Base Salary resulting from such review shall
take effect as of the date determined in good faith by the Company's President
and Chief Executive Officer.
5. Stock Option. As soon as practical following the completion of such
steps as may be required to qualify the issuance of the stock option described
in this Paragraph 5 (the "Option") and the shares of the Company's Common Stock
to be issued in connection with the exercise, if any, of the Option under or
pursuant to the securities laws of the State of Utah and the United States of
America, but in any case not later than , 1997, the Company shall grant to
Employee the Option to purchase shares of the Company's Common Stock on the
following terms and conditions:
(a) Purchase Price. The purchase price per share for the
shares subject to the Option shall be One Dollar and 50/100 ($1.50) per share.
4
<PAGE>
(b) Number of Shares. The Option shall be for Fifty Thousand
(50,000) shares of the Company's Common Stock (the "Optioned Shares").
(c) Exercise Periods. The Option shall vest as follows: (i) on
the date on which this Agreement is executed by the Parties as to twenty-five
thousand (25,000) of the Optioned Shares, (ii) on March 1, 1997, as to an
additional two thousand (2,000) of the Optioned Shares, (iii) on the first day
of each and every of the next following twenty-three (23) calendar months
commending with the month of April, 1997 and ending with the month of February,
1999, as to an additional one thousand (1,000) of the remaining Optioned Shares,
and (iv) anything in this Agreement notwithstanding, on April 1, 1999 as to all
of the Optioned Shares.
(d) Full Venting in Event of Death, Disability, or Certain
Terminations. If Employees employment with the Company is terminated (i) as a
result of Employees death, (ii) as a result of Employees disability, determined
as set forth in Paragraph 7(a) ('[Termination of Employment By the Company
- -Disability"), (iii) by the Company pursuant to Paragraph 7(c) ("Termination of
Employment by the Company - Notice, Without Cause"), or (iv) by Employee
pursuant to Paragraph 8(b)
5
<PAGE>
("Termination of Employment by Employee - With Good Reasons), the Option shall
vest in its entirety and Employee (if he is capable of acting under the
circumstances) or the guardian, heirs, or estate of Employee, as the case may
be, may exercise the Option at any time within one hundred-eighty (180) days of
the effective date of the termination of Employees employment.
(e) Additional Stock Options. The Option shall be in addition
to and not in lieu of such other or additional stock options as Employee may be
entitled or eligible to receive during the Period of Employment pursuant to any
plans or policies of the Company that from time to time during the Period of
Employment may be in effect.
6. Other Benefits. In addition to the benefits previously set forth in
this Agreement, Employee shall, during the Period of Employment, be entitled to
the benefits described below, and as concerns all such benefit programs where
years of service are a factor, to the fullest extent permitted by law, Employee
shall be given credit for his years of service with Huntsman Corporation:
(a) Car Allowance. Employee shall be paid a monthly car
allowance in the amount of Five Hundred Fifty Dollars ($550.00).
6
<PAGE>
(b) Entertainment Expenses. Employee shall be reimbursed for
Employees reasonable entertainment and business expenses that are consistent
with the Company's written policies and procedures, as the said policies and
procedures may be changed, modified, or terminated for all officers of the
Company from time to time.
(c) Vacation. During the Period of Employment, Employee shall
be entitled to the greater of (i) four (4) weeks of paid vacation during each
full calendar year occurring during the Period of Employment and (ii) that
amount of vacation provided or made available to other senior executive officers
of the Company. Should Employee desire additional time off during the Period of
Employment, that time will be without pay and the amount of time off will be
negotiated with the Company's President and Chief Executive Officer. Upon
termination of Employee's employment under this Agreement other than by the
Company for Cause or by Employee without Good Reason, Employee shall be paid for
any unused vacation to which he was entitled.
(d) Sick Leave. Sick leave time that is reasonable under the
circumstances and that is consistent with the Company's policies and procedures,
as the same may be changed, modified, or terminated from time to time for all
senior
7
<PAGE>
executive officers of the Company.
(e) Insurance. Participation in the group insurance program of
the Company as concerns life, disability, medical, and dental insurance
currently available to other senior executive officers of the Company as the
same may be changed, modified, or terminated for all participants from time to
time. Employee shall be required to pay that portion of the premiums for
coverage under such insurance that is payable by other senior executive officers
of the Company for their insurance coverage. Provided, however, that anything in
this Agreement to the contrary notwithstanding, if the insurance carrier or
company that is providing health insurance coverage to or for employees of the
Company shall at the time the eligibility of Employee or Employee's dependents
for such coverage is first determined refuse or decline to provide health
insurance coverage for Employee or any of Employee's dependents with respect to
any condition or circumstance and Employee shall determine that it is in his or
such dependent's best interests to maintain health insurance coverage on himself
or such dependent through Huntsman Corporation pursuant to Employee's COBRA
rights, the Company shall reimburse Employee for the actual cost to Employee of
maintaining such COBRA coverage for the shorter of (i) the duration of the
denial or refusal by the Company's insurance carrier or company to provide
insurance coverage and (ii) the
8
<PAGE>
duration of COBRA coverage available to Employee
or the involved dependent.
(f) Retirement Plans. Participation in the Company's
retirement plans, including, but not limited to, any 401(K) Plan, that may be
adopted or implemented by the Company and any time during the Period of
Employment. Any such participation, shall be in accordance with the terms and
provisions of the plan and applicable law, as the same may be changed, amended,
or terminated from time to time.
(g) Other Miscellaneous Benefits. The Company shall pay,
reimburse Employee for, or extend to Employee the following miscellaneous
benefits:
(i) annual dues for association memberships including
the American Institute of Certified Public Accountants and the Utah
Association of Certified Public Accounts;
(ii) time off with pay while traveling to and from
and while attending and reimbursement for all reasonable program fees
and travel, lodging, and other reasonable expenses incurred by Employee
in connection with all continuing professional education required of
Employee to maintain his license as a certified public accountant; and
(iii) the cost to Employee to subscribe to or
purchase books, journals, or publications that relate to or
9
<PAGE>
discuss accounting, finance, cash management, compensation, fringe
benefits, insurance, and/or other relevant business issues.
7. Termination of Employment By the Company. Anything in this Agreement
to the contrary notwithstanding, the Company shall have the following rights
with respect to the termination of Employee's employment:
(a) Disability. The Company may terminate Employee's
employment under this Agreement if Employee shall become unable to fulfill his
duties under this Agreement, as measured by the Company's usual business
activities, by reason of any medically determinable physical and/or mental
disability.
(b) Cause. Employee's employment may be terminated by the
Company for Cause. For purposes of this Agreement, "Cause" shall mean and refer
to a determination made in good faith by the Company's Board of Directors that:
(i) Employee has been convicted of or has entered of
a plea of guilty or nolo contendere to a felony or to any other crime,
which other crime is punishable by incarceration for a period of one
(1) year or longer, or which is a crime involving moral turpitude)
10
<PAGE>
(ii) there has been a theft, embezzlement, or other
criminal misappropriation of funds by Employee, whether from the
Company or any other person; or
(iii) Employee has willfully failed or refused in a
material respect to follow reasonable written policies or directives
established by the Board of Directors or the President and Chief
Executive Officer of the Company, or Employee has willfully failed to
attend to material duties or obligations of his office (other than any
such failure resulting from Employee's incapacity due to physical or
mental illness which is a cause or manifestation of Employee's
disability) which failure or refusal continues for thirty (30) days
following delivery of a written demand from the Company's President and
Chief Executive Officer for performance to Employee identifying the
manner in which Employee has failed to follow such policies or
directives or to perform such duties.
Termination pursuant to this Paragraph 7(b) shall be effective as of
the effective date of the notice by the Board of Directors to Employee that it
has made the required determination, or at such other subsequent date, if any,
specified in such notice.
(c) Notice, Without Cause. The Company may also terminate
Employee's employment under this Agreement on not less than thirty (30) days
notice without Cause (which notice shall
11
<PAGE>
specify the effective date of any such termination).
8. Termination of Employment BY Employee.
(a) Disability. Employee may terminate his employment under
this Agreement if Employee shall become unable to fulfill his duties under this
Agreement, as measured by the Company's usual business activities, by reason of
any medically determinable physical and/or mental disability.
(b) With Good Reason. Employee shall have the right to
terminate his employment under this Agreement at any time for Good Reason,
provided Employee has delivered a written notice to the Company that briefly
describes the facts underlying Employee's belief that "Good Reason" exists and
the Company has failed to cure such situation within thirty (30) days after the
effective date of such notice. For purposes of this Agreement, "Good Reason"
shall mean and consist of:
(iv) a material breach by the Company of its
obligations under this Agreement, including, but not limited to, a
failure to maintain or increase Employee's Base Salary at or to the
level required by Paragraph 4 ("Base Salary");
(v) without Employee's prior written consent, the
assignment to Employee of duties that are materially inconsistent with,
or that constitute a material alteration in
12
<PAGE>
the status of his responsibilities set forth in this Agreement, as an
Vice President and/or the Chief Financial Officer of the Company;
(iii) without Employee's prior written consent, the
relocation of the Company's chief executive office outside of the Salt
Lake City/Provo metropolitan area;
(iv) without Employee's prior written consent, the
transfer or relocation of Employee's place of employment to any place
other than the Salt Lake City/Provo metropolitan area, except for
reasonable travel on the business of the Company; or
(v) upon the consummation of a sale of all or
substantially all of the assets of the Company not in the usual or
regular course of the business of the Company in which sale the
acquiring company did not assume all of the obligations of the Company
under this Agreement.
(c) Notice, Without Good Reason. With not less than ninety (90)
day's prior written notice (which notice shall specify the effective date of the
termination), Employee shall have the right to terminate his employment under
this Agreement without Good Reason.
9. Termination of Employment by Death. If Employee dies during the
Period of Employment, Employee's employment shall
13
<PAGE>
be thereby terminated effective as of the end of the calendar month during which
Employee died.
10. Determination of Disability. If in the opinion of the Company or
Employee, Employee is disabled, then the following shall occur:
(i) the Company or Employee shall promptly so notify
(by dated written notice) the insurance company or carrier that, at
that time, insures the employees of the Company against long-term
disability and request a determination as to whether Employee is
disabled pursuant to the terms of the Company's long-term disability
plan; and
(ii) the matter of Employee's disability shall be
resolved and Employee and the Company shall abide by the decision of
the insurance company or carrier that, at such time, is insuring
employees of the Company against long-term disability.
11. Effect of Termination.
(a) Termination of Employment Due to Employees Disability or
Death. If Employee's employment is terminated by the Company or Employee,
pursuant to Paragraph 7(a) ("Termination of Employment By the Company
Disability") or Paragraph 8(a) ("Termination of Employment by Employee
Disability"), as the
14
<PAGE>
case may be, due to Employee's disability or if Employee's employment is
terminated by his death, pursuant to Paragraph 9 (~'Termination of Employment by
Death"), in either situation:
(i) all cash compensation described in this Agreement
shall be computed and paid to the effective date of such termination
and shall cease upon such effective date of termination;
(ii) Employee shall receive all compensation and
employee benefits accrued through the effective date of the
termination, and all benefits provided through the Company~s insurance
plans pursuant to the terms and conditions of such insurance plans; and
(iii) except as expressly provided in this Paragraph
11(a), Employee shall not be entitled to any additional cash
compensation following the effective date of the termination.
In the event of Employee's death, the provisions of this Paragraph
11(a) shall not affect the entitlements, if any, of the heirs, executors,
administrators, beneficiaries, or assigns of Employee with respect to the Option
or any benefit plan, fund, or program of the Company that provides benefits to
one or more of them as a result or in connection with the death of Employee.
(b) Termination of Employment By the Company for Cause or by
Employee Without Good Reason. If Employee's
15
<PAGE>
employment shall be terminated by the Company for Cause pursuant to Paragraph
7(b) ("Termination of Employment By the Company -Cause"), or by Employee without
Good Reason pursuant to Paragraph 8(c) ("Termination of Employment By Employee
Notice, Without Good Reason"), then in any such event:
(i) the Company shall pay Employee all compensation
and benefits described in this Agreement through the effective date of
such termination, together with all benefits, if any, to which Employee
had accrued or vested rights through the effective date of the
termination, including, but not limited to, any such accrued or vested
rights to any benefits available, pursuant to Company-wide policies
then in effect, to an employee of the Company whose employment is
terminated by the Company, and thereupon all rights to such
compensation and benefits shall cease;
(ii) Employee shall be paid all bonuses, if any,
payable to Employee for the year(s) prior to the year in which
Employee's employment is so terminated, but not then paid; and
(iii) anything in this Paragraph 12(b) to the
contrary notwithstanding, except as expressly provided in subparts (ii)
and (iii) of this Paragraph 12(b), Employee shall not be entitled to or
be paid any unpaid compensation or benefit under any bonus plan for the
year in which Employee's employment is terminated by the Company for
Cause or by Employee without
16
<PAGE>
Good Reason.
(c) Termination of Employment By the Company Without Cause or
by Employee For Good Reason. If the Company terminates Employee's employment
without Cause or if Employee terminates his employment with Good Reason:
(i) the Company shall continue to pay Employee the
Base Salary provided for by Paragraph 5 ("Base Salary") at the rate in
effect on the effective date of the notice of termination through the
effective date of the termination;
(ii) within thirty (30) days following the effective
date of the termination, the Company shall pay Employee a severance
payment equal to two hundred percent (200~) of Employee's yearly Base
Salary in effect on the effective date of the notice of termination;
(iii) Employee shall receive all benefits available,
pursuant to Company-wide policies then in effect, to an employee of the
Company whose employment is terminated by the Company; and
(iv) thereupon all rights of Employee to such
compensation and benefits shall cease.
(d) Certain Insurance Benefits. If the employment of Employee
(i) is terminated by the Company without Cause, (ii) is terminated due to the
death or disability of
17
<PAGE>
Employee, or (iii) is terminated by Employee With Good Reason, the Company shall
pay the insurance premium payable by Employee or his heirs, as the case may be,
for continued insurance coverage under the insurance policies or programs of the
Company pursuant to COBRA for or with respect to the duration of such COBRA
coverage.
12. Confidential Information.
(a) Definition. The term "Confidential Information" shall mean
trade secrets and any other information, matter, or thing of a secret,
confidential, or private nature connected with the business of the Company.
Included within Confidential Information are matters of a technical nature
(including know-how, computer programs, software, accounting methods, and
documentation), matters of a business nature (such as information about contract
forms, costs, profits, promotional methods, markets, market or marketing plans,
sales, client accounts, plans for further development, and any other information
not generally available to the public. Confidential Information shall also
include information developed by Employee for the Company while an employee of
the Company. "Confidential information" does not include (i) information that is
in the public domain at the time the information is acquired by Employee, (ii)
information that later becomes public through no act or omission of Employee, or
(iii) information generally known
18
<PAGE>
in the industry or industries in which the Company does business.
(b) Nondisclosure of Confidential Information. Employee shall
not, now or in the future, and whether or not then an employee of the Company,
use any Confidential Information for any purpose whatsoever other than the
pursuit of the Company~s business or in the performance of his duties as an
employee of the Company. Employee shall further refrain at all times from
disclosing any Confidential Information to any third party without the prior
written consent of the Company, such consent to be given or withheld by the
Company in the exercise of its absolute discretion. Employee shall take all
reasonable steps to prevent unauthorized disclosure of Confidential Information
to third parties, intentionally or negligently, by Employee or persons acting
pursuant to Employee's directions.
Except as expressly otherwise provided in this Agreement, the
provisions of this Paragraph 12 shall survive and continue in full force and
effect after the end of the Period of Employment.
13. Notices and Payments. All notices, requests, demands, and other
communications under this Agreement shall be in writing and shall be delivered
(i) personally, (ii) by first class mail, certified, return receipt requested,
postage prepaid, or (iii) by facsimile transmission followed by delivery by
first
19
<PAGE>
class mail, in the manner provided for in this Paragraph 13, and properly
addressed as follows:
If to the Company, to:
COVOL Technologies, Inc.
3280 North Frontage Road
Lehi, Utah 84043
Attention: General Counsel
If to Employee to:
Stanley M. Kimball
9943 North Meadow Lane
Highland, Utah 84003
or to such other address as a party to this Agreement may indicate to the other
party in the manner provided for by this Paragraph 13. Notices, etc. given by
mail shall be deemed effective and complete two (2) business days following the
date of the posting and mailing thereof in accordance with this Paragraph 13,
notices by facsimile transmission shall be deemed effective upon receipt, unless
receipt thereof shall be disputed in which case receipt shall be deemed
effective as of the effective date of the follow-up notice called for by this
Paragraph 13 with respect to such facsimile transmitted notice, and notices,
etc. delivered personally shall be deemed effective and complete at the time of
the delivery of the notice and the obtaining of a signed receipt for the notice,
unless a party shall refuse to provide a signed receipt, in which case the
notice shall be effective upon the completion of personal delivery of the notice
in such a way as to insure the ability to
20
<PAGE>
establish personal delivery. All payments to Employee provided for in this
Agreement shall be deemed made, whether so stated or not, on the date of the
first to occur of (i) actual delivery thereof by the Company to Employee, (ii)
the mailing thereof to Employee by regular United States mail to the address
specified in or in accordance with this Paragraph 13, or (iii) when made by
direct deposit as authorized by Employee.
14. Additional Agreements.
(a) Parties in Interest. All of the terms of this Agreement
shall be binding upon and inure to the benefit of and be enforceable by the
Parties and their respective successors, permitted assigns, heirs, and legal
representatives, and nothing in this Agreement is intended to confer any right,
remedy, or benefit upon any other person.
(b) No Assignments or Delegation. No assignment or delegation
of this Agreement or of any of the rights or obligations under this Agreement by
either of the Parties shall be valid without the written consent of the other
party.
(c) Integration. This Agreement supersedes all prior
agreements or understandings of the Parties on the subject matter of this
Agreement. Any prior negotiations,
21
<PAGE>
correspondence, agreements, proposals, or understandings relating to the subject
matter of this Agreement shall be deemed to be merged into this Agreement and to
the extent inconsistent with this Agreement, such negotiations, correspondence,
agreements, proposals, or understandings shall be deemed to be of no force or
effect. There are no representations, warranties, or agreements, whether express
or implied, or oral or written, with respect to the subject matter of this
Agreement, except as set forth in this Agreement.
(d) Modification; Amendment. This Agreement shall not be
modified by any oral agreement, either express or implied, and all amendments or
modifications of this Agreement shall be in writing and be signed by both of the
Parties. The provisions of this and the immediately preceding sentence
themselves may not be amended or modified, either orally or by conduct, either
express or implied, and it is the declared intention of the Parties that no
provision of this Agreement, including said two sentences, shall be modifiable
in any way or manner whatsoever other than through a written document signed by
both of the Parties.
(e) Headings. The paragraph headings in this Agreement are for
the purpose of convenience only and shall not limit or otherwise affect any of
the terms of this Agreement.
22
<PAGE>
(f) No Waiver. The failure of either of the Parties to insist,
in any one or more instances, upon strict performance of any of the terms or
conditions of this Agreement shall not be construed to constitute a waiver or
relinquishment of any right granted under this Agreement or of the future
performance of any such term, covenant, or condition, and the obligations of the
appropriate party with respect to any such term or condition shall continue in
full force and effect.
(g) Construction. Where the context requires, the singular
shall include the plural, the plural shall include the singular, and any gender
shall include all other genders.
(h) Attorneys' Fees. Should either the Company or Employee
default in any of the covenants contained in this Agreement, or in the event a
dispute shall arise as to the meaning of any term of this Agreement, the
defaulting or nonprevailing party shall pay all costs and expenses, including
reasonable attorneys' fees, that may arise or accrue from enforcing this
Agreement, securing an interpretation of any provision of this Agreement, or in
pursuing any remedy provided by applicable law whether such remedy is pursued or
interpretation is sought by the filing of a lawsuit, an appeal, or otherwise.
23
<PAGE>
(i) Governing Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of Utah, which
internal laws exclude any provision or interpretation of such laws that would
call for, or permit, the application of the laws of any other state or
jurisdiction, and any dispute arising therefrom and the remedies available shall
be determined solely in accordance with such internal laws. Any actions under or
with respect to this Agreement shall be filed only in the state courts located
in Utah County, Utah, in the federal courts located in Salt Lake County, Utah,
or in such courts located nearest to such other county in which Employee then is
primarily rendering services to the Company, and the Parties consent to the
jurisdiction and venue of such courts.
(j) Injunctive Relief. Employee acknowledges that it is
impossible to measure in money the damage that will accrue to the Company by
reason of Employee's failure to abide by the provisions of Paragraph 12
("Confidential Information"). Therefore, if the Company shall institute any
action or proceeding to enforce the provisions of said Paragraph 12, in addition
to any other relief, the court in such action or proceeding may grant injunctive
relief against Employee and Employee waives the claim or defense in any such
action or proceeding that the Company has an adequate remedy at law, and
24
<PAGE>
Employee shall not argue in any such action or proceeding the claim or defense
that such remedy at law exists.
(k) Bluelininq. Should any portion of Paragraph 12
("Confidential Information") be declared by a court of competent jurisdiction to
be unreasonable, unenforceable, or void for any reason or reasons, the involved
court shall modify the applicable provision(s) of the said Paragraph 12, so as
to be reasonable or as is otherwise necessary to make Paragraph 12 enforceable
and, valid and to protect the interests of the Company intended to be protected
by Paragraph 12 to the maximum extent possible.
(l) Recitals. Recitals A and B to this Agreement are by this
reference incorporated into and made a part of this Agreement.
IN WITNESS WHEREOF, the Company and Employee have executed and
delivered this Agreement this 14th day of February, 1997 effective as of the
Effective Date.
COVOL Technologies, Inc., a Delaware
corporation (the "Company")
By: /s/ Brent M. Cook
------------------------
Its: CEO/President
25
<PAGE>
/s/ Stanley M. Kimball
-------------------------------
Stanley M. Kimball ("Employee")
26
LICENSE AGREEMENT
THIS LICENSE AND BINDER PURCHASE AGREEMENT (the "Agreement"), is made
and entered into as of December 4, 1997 by and between Appalachian Synfuel, LLC,
a West Virginia limited liability company (the "Licensee"), and Covol
Technologies, Inc., a Delaware corporation (the "Licensor").
WHEREAS Licensor entered into Design and Construction Agreements with a
Design/Builder for the construction of coal agglomeration facilities within the
United States;
WHEREAS Licensor assigned certain Design and Construction Agreements to
Licensee pursuant to an Assignment Agreement of even date herewith;
WHEREAS Licensee wishes to obtain and Licensor wishes to grant to
Licensee a license for the coal extruding and briquetting technology in
connection with a project to be constructed in proximity to the coal preparation
plant of Marfork Coal Company, Inc. in Raleigh County, West Virginia and
containing two Production Lines on the terms and conditions set forth in this
Agreement (the "Facility"), and Licensee wishes to obtain and Licensor wishes to
sell to Licensee the Proprietary Binder Material (as defined below) manufactured
by Licensor for use in applying Licensor's proprietary binding technology in the
operation of the Facility.
NOW, THEREFORE, in consideration of the foregoing premises, the mutual
covenants and agreements hereinafter set forth, and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged,
Licensor and Licensee each agree as follows:
Section 1. Definitions.
"Coal Briquetting Technology" means all intellectual property,
patents (including but not limited to United States Patent Numbers 5,599,361,
5,487,764 and 5,453,103) and applications therefor, printed and unprinted
technical data, know-how, trade secrets, copyrights and other intellectual
property rights, inventions, discoveries, techniques, works, processes, methods,
plans, software, designs, drawings, schematics, specifications, communications
protocols, source and object code and modifications, test procedures, program
cards, tapes, disks, algorithms and all other scientific or technical
information in whatever form relating to, embodied in or used in the proprietary
process to produce synthetic coal fuel extrusions and briquettes from waste coal
dust, coal fines and other similar coal derivatives, including all such
information in
* Confidential material has been omitted from this Exhibit and filed with the
Securities and Exchanges Commission (the "Commission").
<PAGE>
existence as of the date of this Agreement as well as related information later
developed by Licensor; provided however, that the defined term "Coal Briquetting
Technology" shall not include either (i) Licensee Technology or (ii) the
proprietary process developed by Licensor to produce synthetic coke extrusions
and briquettes from coke breeze, iron revert materials, or any technology for
other than the processing and production of synthetic coal fuel extrusions and
briquettes. Nothing in this Agreement is intended to grant to Licensee the right
to apply the Coal Briquetting Technology to produce anything other than
synthetic coal fuel extrusions and briquettes intended to qualify for tax
credits under Section 29(c)(1)(C) of the Code and then only at the Facility.
"Code" means the Internal Revenue Code of 1986, as amended.
"Developed Technology" means any inventions, "Improvement," or
new technology that Licensor may conceive, make, invent, or suggest in
connection with Licensor's disclosure to Licensee of the Coal Briquetting
Technology. "Developed Technology" also means any inventions, "Improvement," or
new technology directly related to the Coal Briquetting Technology that Licensor
may conceive, make, invent or suggest relating to the Coal Briquetting
Technology during the Term of this Agreement. "Improvement" means an alteration
or addition to an invention or discovery which enhances, to some extent,
performance or economics without changing or destroying a product's, device's or
method's basic identity and essential character. An Improvement may comprise
alterations or additions to either patented or unpatented inventions,
discoveries, technology or devices, and may or may not be patentable.
"Earned Royalty" has the meaning set forth in Section 3.4.
"Effective Date" means the date of this Agreement set forth
above.
"Extension Royalty" has the meaning set forth in Section 7.
"Facility" has the meaning set forth in the preamble.
"Fixed Royalty" has the meaning set forth in Section 3.3.
"Initial Royalty" has the meaning set forth in Section 3.2.
"IRS" means the Internal Revenue Service.
2
<PAGE>
"Licensee" has the meaning set forth in the preamble.
"Licensee Technology" means all intellectual property of any
kind or nature developed by Licensee or any affiliate or sublicensee of
Licensee, whether before or after the date of this Agreement and whether in
connection with the use of the Coal Briquetting Technology or otherwise,
including patents and applications therefor, printed and unprinted technical
data, know-how, trade secrets, copyrights, inventions, discoveries, techniques,
works, processes, methods, plans, software, designs, drawings, schematics,
specifications, communications protocols, source and object code and
modifications, test procedures, program cards, tapes, disks, and all other
scientific or technical information in whatever form, including any Improvement.
"Licensor" has the meaning set forth in the preamble.
"Production Line" means an arrangement of equipment designed
to use the Coal Briquetting Technology and having the capacity to produce
approximately 360,000 tons of synthetic coal fuel extrusions and briquettes per
year.
"Proprietary Binder Material" means and refers to the binder
compound necessary for the production, by Licensee, of synthetic coal extrusions
and briquettes and which extrusions and briquettes are reasonably expected to
constitute "qualified fuels" pursuant to the terms of Section 29(c)(1)(C) of the
1986 Internal Revenue Code and with respect to which Section 29 is applicable
pursuant to Section 29(f) and 29(g) of the Code.
"Royalty" means the Initial Royalty, the Fixed Royalty, the
Earned Royalty and the Extension Royalty.
"Ruling" means a private letter ruling by the IRS that the
owner of the Facility will be entitled to claim Tax Credits for the production
and sale of synthetic coal fuel extrusions and briquettes.
"Tax Credits" mean the tax credits available under Section 29
of the Code with respect to the production of "qualified fuels" as defined
thereunder.
Section 2. License Grant.
2.1. General. Subject to the terms and conditions of this
Agreement, Licensor hereby grants to Licensee, for the full and entire term
hereof, a non-exclusive
3
<PAGE>
license to use the Coal Briquetting Technology for commercial exploitation (and
not for research development purposes), including the non-exclusive right to
make, have made or use at the Facility and to offer to sell, to sell or
otherwise transfer products which have been manufactured with the Coal
Briquetting Technology. Licensee hereby accepts the license on the terms hereof
and agrees to make and have made products using the Coal Briquetting Technology
at the Facility only under this License Agreement. Licensee shall not make or
have made products using the Coal Briquetting Technology except at the Facility,
but Licensee may use, sell and otherwise transfer at any other facility products
which have been manufactured at the Facility with the Coal Briquetting
Technology. Licensee shall have no obligation to commence or continue operation
of the Facility or to achieve any particular level of production at the
Facility, all such matters being within Licensee's sole discretion.
2.2. Developed Technology. Licensee shall have the right and
is hereby granted a non-exclusive license to use all Developed Technology
relating to the Coal Briquetting Technology at the Facility without payment of
any additional compensation to Licensor, throughout the term of this Agreement,
subject to the restrictions and limitations in this Section 2. All Developed
Technology shall become Licensor's absolute property. Licensee shall at any time
during the term of this Agreement and thereafter, at Licensor's reasonable
request, execute any patent papers covering such Developed Technology as well as
any other documents that Licensor may consider necessary or helpful in the
prosecution of applications for a patent thereon or in connection with any
litigation or controversy related thereto; provided, however, that all expenses
incident to the filing of such applications and the prosecution thereof and the
conduct of such litigation shall be borne by Licensor.
2.3. Licensee Technology. All Licensee Technology shall, as
between Licensor and Licensee, remain the sole property of Licensee, and nothing
in this Agreement or its performance shall grant to Licensor any right in the
Licensee Technology or restrict the ability of Licensee to use the Licensee
Technology as Licensee elects in its sole discretion.
2.4. Non-licensed Technology. Licensor retains the absolute
right to fully exploit its proprietary technology and processes, including but
not limited to the application of such technology embodied in the Coal
Briquetting Technology together with any improvements thereto, to produce,
market and use synthetic coke extrusions and briquettes from coke breeze, iron
revert materials and any other materials to which Licensor's technology can be
applied.
4
<PAGE>
2.5. Confidentiality. Each of the parties hereby agree to
maintain the Coal Briquetting Technology confidential and not to disclose the
Coal Briquetting Technology, or any aspect thereof, or the Improvements, or any
aspect thereof (collectively, the "Confidential Information"). Furthermore,
disclosure by the Licensee of the Proprietary Binder Material formula to its
personnel may be only on a bona fide need to know basis to persons who have
signed a written confidentiality agreement. Notwithstanding the foregoing,
information which (i) is or becomes generally available to the public other than
as a result of an unauthorized disclosure by the parties or their respective
agents, employees, directors or representatives, (ii) was available to the party
receiving disclosure on a non-confidential basis prior to its receiving
disclosure hereunder, or (iii) lawfully becomes available to the party receiving
disclosure on a non-confidential basis from a third party source (provided that
such source is not known by the party receiving disclosure or its agents,
employees, directors or representatives to be prohibited from transmitting the
information), shall not be subject to the terms of this Section 2.5. At the
termination of this Agreement, all copies of any Confidential Information
(including without limitation any reports or memoranda) shall be returned by the
party receiving disclosure, and the duties of confidentiality set forth above
shall continue for five years thereafter. Nothing in this Agreement shall
prohibit Licensee from disclosing the Confidential Information to others as may
be reasonably necessary for Licensee to exploit Licensee's rights under this
Agreement; provided that the recipient of any such Confidential Information
executes a Confidentiality Agreement restricting further disclosure of the
Confidential Information. Nothing in this Agreement shall prohibit Licensor from
licensing the Coal Briquetting Technology to third parties.
Section 3. License Fee and Royalty.
3.1. License Fee. Licensee shall pay the Initial Royalty, the
Fixed Royalty and Earned Royalty as a license fee to Licensor.
3.2. Initial Royalty. Upon the execution and delivery of this
Agreement, Licensee shall pay * to Licensor in immediately available funds (the
"Initial Royalty") as an initial royalty payment.
3.3. Fixed Royalty. Within ten (10) days after the later of
(i) the first shipment of product from the Facility to a customer ("Commercial
Production"), excluding any test shipments not to exceed 10,000 tons in the
aggregate, or (ii) Licensee's obtaining a Ruling or, if Licensee elects not to
pursue a Ruling, then the filing of any quarterly estimated tax payment by an
owner of the Facility that takes into
5
* Confidential material omitted and filed separately with the Commission.
<PAGE>
account Tax Credits with respect to product produced at the Facility, Licensee
shall pay to Licensor * as additional royalty (the "Fixed Royalty"). During the
pendency of a request for a Ruling or if such a Ruling has been refused or the
IRS has otherwise indicated, either formally or informally, its intention to
deny Tax Credits with respect to the Facility, and such adverse decision has not
been subsequently reversed, but the owner of the Facility elects to claim Tax
Credits notwithstanding the position of the IRS, the Fixed Royalty shall be paid
into escrow as described in Section 3.7 below.
3.4. Earned Royalty. After satisfaction of and pursuant to the
conditions for the payment of the Fixed Royalty, Licensee shall thereafter pay
to Licensor quarterly earned royalty payments ("Earned Royalty") in an amount
equal to * (subject to adjustment as set forth below) per million British
thermal units of heat content ("mmbtu") for the first * tons of product produced
and sold at the Facility during any contract year and * (subject to adjustment
as set forth below) per mmbtu with respect to product in excess of * tons up to
a maximum of * tons at the Facility during any contract year, minus * per ton of
product produced and sold up to * tons in any contract year and * per ton
thereafter, but in no event shall such deductions apply to more than * tons
during any contract year or * tons produced during any contract year. In no
event shall Licensee owe any royalty with respect to sales at the Facility
during any contract year * tons. An example of the Earned Royalty calculation is
attached hereto as Exhibit A. A "contract year" shall consist of the 12 calendar
months beginning on the first day of the month after the Facility begins
Commercial Production and each twelve month period thereafter. The royalty
amounts per mmbtu stated above shall be adjusted with respect to production in
calendar year 1998 by the increase or decrease in the inflation adjustment
factor (set forth in Code Section 29(d)(2)) applicable to calendar year 1998
over the inflation adjustment factor applicable to calendar year 1996, and shall
thereafter be adjusted annually to reflect further annual increases or decreases
in such inflation adjustment factor. For purposes of this section, the number of
btu with respect to which payment is due shall equal the btu reported by
Licensee to the IRS for purposes of claiming Tax Credits, including any
subsequent adjustments thereto, and the number of tons shall be conclusively
determined by railroad weights if the product is shipped unmixed with other
material and by belt scales at or adjacent to the Facility if the product is
mixed with other material before being shipped. Earned Royalty shall be
applicable to production at the Facility as to which Tax Credits are claimed
(subject to Section 3.7 below) regardless of whether such production resulted
from the use of the Coal Briquetting Technology or Licensee Technology or any
combination thereof.
6
* Confidential material omitted and filed separtely with the Commission.
<PAGE>
3.5. Payment Terms. Earned Royalty payments shall be due
within thirty (30) days after the end of each quarter, together with a report
showing tons shipped and btu content with respect to which Earned Royalty is
due. The parties acknowledge that the applicable inflation adjustment factor
will typically not be available at the time payment of Earned Royalty is due.
Therefore, Licensee shall pay initially the Earned Royalty calculated under the
latest inflation adjustment factor available, and then any subsequent adjustment
shall be reflected in the first quarterly Earned Royalty payment due after the
correct inflation adjustment factor becomes available. Similarly, the per ton
deductions described in Section 3.4 shall be taken against the first * tons (*
amount as Licensee estimates in good faith to be * expected production) of
production to which Earned Royalty is applicable during any contract year, and
any necessary subsequent adjustment shall be reflected in the Earned Royalty
payment for the final quarter of such contract year.
3.6. Royalty Buyout. After payment of the Initial Royalty and
the Fixed Royalty, in lieu of and notwithstanding Section 3.4 above, Licensee
shall have the option at any time during the term of this Agreement to
extinguish any obligation to pay further royalties to Licensor with respect to
production at the Facility by making a one-time payment equal to the present
value, based on a * annual discount rate, of future royalties expected with
respect to production at the Facility and assuming the following for purposes of
such calculation: (a) annual production of * tons, (b) Earned Royalty (in lieu
of any amount calculated under Section 3.4) of * per ton, without any adjustment
for inflation, (c) expiration of the Earned Royalty on December 31, 2007, if the
option is exercised before 2003, or expiration of the Earned Royalty on the date
set for expiration of all Tax Credits according to any Section 29 extension in
effect or proposed by a bill in Congress if the option is exercised during 2003
or thereafter, with the amount of the Earned Royalty applicable to such extended
term in the case only of a Section 29 extension actually enacted into law
increased or decreased proportionately to reflect any increase or decrease in
the Tax Credits applicable to such extended term, and (d) exercise by Licensee
of its option to extend the term of this Agreement and pay the annual royalty
provided therefor. Licensee shall be entitled to a one-time credit in the amount
of the Initial Royalty and Fixed Royalty paid by the Licensee against the amount
otherwise due with respect to the buyout of the royalty obligation at the
Facility.
3.7. Royalty Escrow and Repayment. If the IRS rules that
either the product to be produced at the Facility does not qualify for Tax
Credits or that the Tax Credits are unavailable to Licensee as the owner of the
Facility, whether by declining to issue a Ruling, issuing an adverse ruling, or
by disallowing Tax Credits claimed by
7
* Confidential material omitted and filed separately with the Commission.
<PAGE>
the owner(s) of the Facility (an "Adverse Decision"), the obligation of Licensee
to pay Royalty hereunder shall immediately cease pending exhaustion of
Licensee's right to appeal the Adverse Decision. Licensee shall have the
absolute right, in its sole discretion, to elect whether and in what manner to
appeal an Adverse Decision and on what terms any such Adverse Decision or its
appeal shall be settled. If, notwithstanding the position of the IRS, Licensee
elects to claim Tax Credits, the Royalty otherwise payable hereunder shall be
deposited in escrow into an interest bearing account with a financial
institution reasonably acceptable to Licensor. If an Adverse Decision is
reversed on appeal, Licensee's obligation to pay Royalty shall resume, including
Royalty previously placed in escrow, together with the amount, if any, by which
the accumulated interest on such funds exceeds Licensee's costs incurred in
contesting the Adverse Decision. If an Adverse Decision becomes final without
any further right of appeal, then (a) Royalty previously placed in escrow shall
be released from such escrow to Licensee, and (b) Licensor shall refund to
Licensee within thirty (30) days thereafter any Royalty previously paid
hereunder, together with interest thereon at the prime rate, if the Adverse
Decision is caused, in whole or in part, by (i) the failure of the Coal
Briquetting Technology to produce a synthetic fuel qualified under Section 29 or
(ii) any breach by Licensor of any representation, warranty or covenant
contained herein. Notwithstanding any other provision of this Agreement,
although the obligation to refund Royalty already paid to Licensor is subject to
the conditions set forth in the preceding sentence, in no event shall any Earned
Royalty be due or payable with respect to any production as to which Licensee
has not claimed Tax Credits (other than as a result of a lack of income tax
liability against which to apply the Tax Credits) or such Tax Credits have been
disallowed for any reason whatever. It is understood that the Royalty is not
contingent upon Licensee's ability to use the Tax Credits, but rather solely on
the availability of the Tax Credits to Licensee. In no event shall Licensee have
any liability to Licensor by reason of the failure by Licensee for any reason to
obtain the Tax Credits as available for its use. In the event of an Adverse
Decision, Licensee shall have the option to retain the right to use the Coal
Briquetting Technology throughout the term of this Agreement in return for the
payment of an annual royalty of One Hundred Thousand Dollars ($100,000), pro
rated for any partial contract years.
3.8. Royalty Setoff. If any person (a "Claimant") asserts a
claim that all or any part of the Coal Briquetting Technology is not the
property of Licensor and is instead the property of Claimant, Licensee may,
pending resolution of such claim, withhold from Royalty otherwise due Licensor
hereunder amounts equal to such license fees as the Claimant may demand for the
use by Licensee of the Coal Briquetting Technology allegedly owned by Claimant.
Any amounts so withheld will be placed in
8
<PAGE>
escrow by Licensee. Upon entrance of a final non-appealable order by a court of
competent jurisdiction that the Coal Briquetting Technology is the property of
Licensor or upon receipt of a release of Licensee from liability by the
Claimant, Licensee shall pay to Licensor any amounts withheld pursuant to this
Section 3.8. If a court of competent jurisdiction enters a final non-appealable
order that all or any portion of the Coal Briquetting Technology is the property
of Claimant, Licensee may pay to Claimant a reasonable license fee and set off
any amounts so paid against any amount withheld pursuant to this Section 3.8
and/or any other Royalty otherwise due Licensor without any further liability
with respect thereto. Nothing in this Section 3.8 shall be construed as limiting
in any respect Licensee's rights and remedies related to a breach by Licensor of
the representations and warranties contained in Section 6.3.
Section 4. Sale of Binder.
4.1. Sale and Purchase. Licensor shall sell to Licensee, and
Licensee shall purchase from Licensor, Licensee's requirements of Proprietary
Binder Material required to operate the Facility. Licensor shall deliver the
Proprietary Binder Material at such times and in such amounts as requested by
Licensee. Payments for Proprietary Binder Material delivered by Licensor during
any calendar month shall be due and payable to Licensor on the tenth Business
Day of the immediately succeeding month.
4.2. Price. The price which Licensee shall pay for the
Proprietary Binder Material delivered by Licensor during the first contract year
(the "Binder Base Price") shall be an amount equal to (i) Licensor's direct and
actual costs (direct material, labor and transportation costs) incurred in
connection with the manufacture and sale of the Proprietary Binder Material plus
(ii) * of the amount determined pursuant to clause (i) exclusive of
transportation costs, but in no event shall the Binder Base Price for such first
contract year exceed * per ton of product produced at the Facilities. The Binder
Base Price shall be subject to adjustment annually to reflect any actual
increase in Licensor's cost, but no such annual adjustment shall exceed *. If
Licensor elects to have such binder material produced by a third party, Licensee
shall have the right to contact such third party directly to monitor the
appropriateness of reported costs. If Licensee can obtain binder material from a
third party at a cost less than Licensor's cost plus * of Licensor's
non-transportation costs, Licensee shall have the right to do so, but Licensee
shall pay Licensor * of Licensee's cost (exclusive of transportation costs) from
such third party supplier. Notwithstanding anything herein to the contrary,
Licensor shall have no obligation to sell binder material to Licensee at a price
below Licensor's actual out-of-pocket cost, provided that Licensor uses its best
reasonable efforts to minimize
9
* Confidential material omitted and filed separately with the Commission.
<PAGE>
such costs.
4.3. Representations and Warranties. Licensor represents and
warrants as follows:
(a) Licensor shall convey to Licensee good title to all
Proprietary Binder Material purchased by Licensee from Licensor
hereunder, free and clear of any and all liens, claims and encumbrances
of any type whatsoever.
(b) No Proprietary Binder Material shall contain any hazardous
material in violation of currently applicable laws and governmental
regulations.
(c) At Licensee's option, Licensor shall replace, or refund
the purchase of, all non-conforming Proprietary Binder Material.
4.4. Order Procedure. Licensee shall deliver all purchase
orders for Proprietary Binder Materials at least thirty (30) days in advance of
the first day of the month in which delivery of such Proprietary Binder Material
is required under such purchase order, and all such purchase orders received by
Licensor during the term of this Agreement shall be deemed to have been accepted
by Licensor. (For example, Licensee shall deliver a purchase order for December
delivery by no later than November 1st). Each such purchase order shall be
delivered either (i) in writing, or (ii) orally by telephone by an authorized
agent of Licensee (subject to the condition that it is followed by a written
purchase order within 24 hours). Such purchase orders shall be sent to Licensor
at such address as Licensor shall direct.
4.5. Delivery and Acceptance. All Proprietary Binder Material
purchased hereunder shall be delivered F.O.B. the Facility. Licensor shall
arrange for transportation of the Proprietary Binder Material to the Facility.
Licensee shall bear the expense of unloading the trucks or railroad cars. The
weight of Proprietary Binder Material in each delivery shall be determined by a
comparison of the weight, on Licensee's scales, of the delivery truck
immediately prior to unloading and its weight, on Licensee's scales, immediately
following unloading, as reflected in customary weighing certificates. Licensee
represents that it will use its best efforts to maintain its scales correctly
calibrated. At Licensor's request and expense from time to time, Licensor shall
have the right to inspect Licensee's scales for accuracy. Licensee shall have a
reasonable opportunity to sample Proprietary Binder Material delivered to it
hereunder to confirm that such Proprietary Binder Material conforms to the terms
and requirements hereof, and Licensee shall not be deemed or required to accept
any such
10
<PAGE>
Proprietary Binder Material prior to the completion of such sampling.
4.6. Binder Technology License. If Licensor's ability to
deliver the Proprietary Binder Material to Licensee will be interrupted or
terminated for any reason, Licensor shall give not less than ninety (90) days
notice to Licensee. Subject to giving notice of its inability to deliver the
Proprietary Binder Material to Licensee (or, in the absence of such notice, the
actual failure to deliver the Proprietary Binder Material for at least ten days
after Licensee gives written notice of non-delivery to Licensor). Licensor
hereby grants to Licensee a non-exclusive license for the term of this Agreement
(or such shorter period as provided in the proviso hereto) to use the technology
used to manufacture the Proprietary Binder Material to manufacture the
Proprietary Binder Material in sufficient quantities to operate the Facility up
to full capacity, and such technology shall be deemed "Coal Briquetting
Technology" for the purposes of this Agreement; provided, however, that the
license granted to the Licensee under this section shall end and sales of
Proprietary Binder Material under the terms of this Agreement shall be
reinstated, so long as Licensor gives notice of reinstatement no longer than 90
days after the interruption or termination of delivery, together with reasonable
evidence that Licensor is able to resume delivery in accordance with this
Agreement and Licensor agrees to reimburse Licensee for any increased cost of
the Proprietary Binder Material to Licensee during the period it was not
provided by Licenesor. No additional fee or royalty shall be payable to Licensor
in connection with the license granted pursuant to this Section and Licensee
shall be responsible for its own direct out-of-pocket operating costs incurred
in connection with the production of Proprietary Binder Material pursuant to
this Section.
Section 5. Records: Inspection: Confidentiality. Each party hereto
shall keep accurate records containing all data reasonably required for the
computation and verification of the amounts to be paid by the respective parties
under this Agreement, and shall permit each other party or an independent
accounting firm designated by such other party to inspect and/or audit such
records during normal business hours upon reasonable advance notice. All costs
and expenses incurred by a party in connection with such inspection shall be
borne by it. Each party agrees to hold confidential from all third parties all
information contained in records examined by or on behalf of it pursuant to this
Section 5 and Section 3.5 above.
Section 6. Representations and Warranties.
6.1. Authority. Each of Licensee and Licensor represents and
warrants that (i) the execution, delivery and performance of this Agreement and
the
11
<PAGE>
consummation of the transactions contemplated hereby have been duly authorized
on its behalf by all requisite action, corporate or otherwise, (ii) it has the
full right, power and authority to enter into this Agreement and to carry out
the terms of this Agreement, (iii) it has duly executed and delivered this
Agreement, and (iv) this Agreement is a valid and binding obligation of it
enforceable in accordance with its terms.
6.2. No consent. Each of Licensee and Licensor represents and
warrants that no approval, consent, authorization, order, designation or
declaration of any court or regulatory authority or governmental body or any
third party is required to be obtained by it, nor is any filing or registration
required to be made therewith by it for the consummation by it of the
transactions contemplated under this Agreement.
6.3. Intellectual Property Matters. Licensor warrants that (i)
to its best knowledge and good faith belief, it owns, free and clear of all
liens and encumbrances, intellectual property, patents (including but not
limited to United States Patent Numbers 5,599,361, 5,487,764 and 5,453,103) and
applications therefor, printed and unprinted technical data, know-how, trade
secrets copyrights and other intellectual property rights and all other
scientific or technical information in whatever form relating to, embodied in or
used in the proprietary process to produce synthetic coal fuel extrusions and
briquettes from waste coal dust, coal fines and other similar coal derivatives,
and the right to freely use, sell and exploit Proprietary Binder Material used
in manufacturing synthetic coal fuel extrusions and briquettes from waste coal
dust, coal fines and other similar coal derivatives, (ii) has the right and
power to grant to Licensee the licenses granted herein, (iii) has not made and
will not make any agreement with another in conflict with the rights granted
herein, and (iv) has no knowledge that the sale or use of the rights,
Proprietary Binder Material and/or licenses granted herein as contemplated by
this Agreement would infringe any third party's intellectual property rights.
6.4. Tax Matters. Licensor warrants that (i) the Coal
Briquetting Technology licensed hereunder is substantially the same technology
described in Private Letter Ruling 103439-97 issued on August 26, 1997, and the
related facts and circumstances provided therein remain accurate and complete,
(ii) the contracts with Centerline Engineering Corporation dated December 20,
1996, Nos. CL-004JW and CL-005JW to construct the Facility are, in all material
respects, substantially the same as the The Industrial Company contract dated
December 20, 1996 cited in Private Letter Ruling 103439-97 issued on August 26,
1997, and are "binding written contracts" for purposes of Section 29(g)(1)(A) of
the Code, and (iii) all information supplied by Licensor to Licensee in
connection with Licensee's request for a Ruling shall, to Licensor's best
knowledge and good faith belief, be accurate and not
12
<PAGE>
misleading and shall not fail to include any information necessary to prevent
the information supplied from being misleading.
6.5. Indemnification. Licensor shall indemnify, defend and
hold harmless Licensee and its partners, directors, officers, agents,
representatives, subsidiaries and affiliates from and against any and all
claims, demands or suits (by any party, including any governmental entity),
losses, liabilities, damages, obligations, payments, costs and expenses
(including the costs and expenses of defending any and all actions, suits,
proceedings, demands and assessments which shall include reasonable attorneys'
fees and court costs) resulting from, relating to, arising out of, or incurred
in connection with any breach by Licensor of any of the representations,
warranties and/or covenants contained in this Agreement. Licensee shall
indemnify, defend and hold harmless Licensor and its partners, directors,
officers, agents, representatives, subsidiaries and affiliates from and against
any and all claims, demands or suits (by any party, including any governmental
entity), losses, liabilities, damages, obligations, payments, costs and expenses
(including the costs and expenses of defending any and all actions, suits,
proceedings, demands and assessments which shall include reasonable attorneys'
fees and court costs) resulting from, relating to, arising out of, or incurred
in connection with any breach by Licensee of any of the representations,
warranties and/or covenants contained in this Agreement.
Section 7. Term. The initial term of this Agreement is for the period
commencing on the effective date of this Agreement and ending on December 31,
2007. Licensee shall have the option to extend the term of the Agreement until
December 31, 2015 or for the full life of the last U. S. Patents to expire which
disclose and claim Licensor's proprietary Coal Briquetting Technology, defined
above, whichever date is earlier. During any such extended term, if Tax Credits
under Section 29 are applicable to production at the Facility, Licensee shall
continue to pay to Licensor the Earned Royalty described in Section 3.4, except
that the Earned Royalty shall be adjusted proportionately to reflect any
increase or decrease in the Tax Credits applicable to such extended term. During
any such extended term, if Tax Credits under Section 29 are not applicable to
production at the Facility, Licensee shall pay to Licensor, in lieu of the
Earned Royalty described in Section 3.4, an annual royalty (the "Extension
Royalty") of * for the use of the Coal Briquetting Technology at the Facility.
Notice of Licensee's intent to effect such extension of this Agreement must be
in writing and given prior to December 31, 2007.
Section 8. Termination. This Agreement shall terminate upon the
termination date set forth in Section 7, unless the Agreement is terminated
sooner pursuant to this
13
* Confidential material omitted and filed separately with the Commission.
<PAGE>
Section 8.
8.1. Termination for Cause. Either party may terminate this
Agreement for cause (i.e., in the event either party commits a material breach
of any provision of this Agreement) at any time by giving the other party at
least sixty (60) days prior written notice of such termination unless such
default or breach is cured within said sixty (60) days. Solely for purposes of
this Section 8.1, a material breach of this Agreement by Licensee shall be
deemed to consist solely of a failure to pay Royalty as to which no good faith
dispute exists. A good faith dispute concerning the amount of Royalty due shall
not excuse the failure of Licensee to pay in a timely manner any Royalty as to
which no such good faith dispute exists. If Licensor terminates this Agreement
pursuant to this Section 8, Licensee shall promptly return and cause all agents
of Licensee to promptly return to Licensor all Confidential Information and all
Coal Briquetting Technology then in Licensee's possession, and Licensee shall
not thereafter use for its own commercial benefit or disclose to any third party
any Confidential Information or Coal Briquetting Technology during the period
ending five (5) years from the date of such termination.
8.2. Noticed Termination. This Agreement may be terminated
upon thirty days written notice, if not cured, if:
(a) Licensee is unable to pay its debts as they fall due
continuously for ninety (90) days or longer, seeks
protection voluntarily or involuntarily under any law
relating to bankruptcy, receivership, insolvency,
administration, liquidation, dissolution or similar
law or any jurisdiction (other than for the purposes
of a reorganization with a view to continuing the
business as a going concern under relevant bankruptcy
or insolvency proceedings) or enters into a general
assignment or arrangement or a composition with or
for the benefit of its creditors; or
(b) Licensee takes any step (including the filing or
presentation of a petition, the convening of a
meeting or the filing of an application or consent)
in any jurisdiction for, or with a view to, the
appointment of an administrator, liquidator,
receiver, trustee, custodian or similar official
(other than for the purposes of a reorganization with
a view to continuing the business as a going concern
under relevant bankruptcy or insolvency proceedings)
for Licensee and/or the whole or any part of the
business, undertaking,
14
<PAGE>
property, assets, receiver or uncalled capital of
Licensee or any such person is appointed.
8.3. Effect of Termination. Upon termination of this
Agreement, all rights granted to and obligations of 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 Licensee may have to pay Licensor) which has not been
fulfilled, and all representations, warranties, obligations and confidentiality
agreements made herein shall survive termination of this Agreement.
Section 9. Waiver. The failure of any party to enforce at any time any
provision of this Agreement shall not be construed as a waiver of such provision
or the right thereafter to enforce each and every provision. No waiver by any
party, either express or implied, of any breach of any of the provisions of this
Agreement shall be construed as a waiver of any other breach of such term or
condition.
Section 10. Severability. If any provision of this Agreement shall be
held by a court of competent jurisdiction to be invalid or unenforceable in any
respect for any reason, the validity and enforceability of any such provision in
any other respect and of the remaining provisions of this Agreement shall not be
in any way impaired.
Section 11. Notices. All notices required or authorized by this
Agreement shall be given in writing. Notices may be served by certified or
registered mail, postage paid with return receipt requested; by private courier,
prepaid; by facsimile or other telecommunication device capable of transmitting
or creating a written record; or personally. Mailed notices shall be deemed
delivered five days after mailing, properly addressed. Couriered notices shall
be deemed delivered when delivered as addressed, or if the addressee refuses
delivery, when presented for delivery notwithstanding such refusal.
Telecommunicated notices shall be deemed delivered when receipt is either
confirmed by confirming transmission equipment or acknowledged by the addressee
or its office. Personal delivery shall be effective when accomplished. Unless a
party changes its address by giving notice to the other party as provided
herein, notices shall be delivered to the parties at the following addresses:
Licensor: Mr. Brent M. Cook
Covol Technologies, Inc.
3280 North Frontage Road
Lehi, UT 84043
15
<PAGE>
Telephone: (801) 768-4481
Facsimile: (801) 768-4483
With a copy to: Mr. William Marsh
Ballard Spahr Andrews & Ingersoll
201 South Main Street, Suite 1200
Salt Lake City, UT 84111-2215
Telephone: (801) 531-3000
Facsimile: (801) 531-3001
Licensee: Appalachian Synfuel, LLC
c/o Fluor Daniel, Inc.
3353 Michelson Drive
Irvine, California 92698
Attn: General Counsel
Telephone: (714) 975-6995
Facsimile: (714) 975-5454
Section 12. Remedies Cumulative. Remedies provided under this
Agreement shall be cumulative and in addition to other remedies provided by law
or in equity.
Section 13. Entire Agreement. This Agreement constitutes the entire
agreement of the parties relating to the subject matter hereof. There are no
promises, terms, conditions, obligations or warranties other than those
contained herein. This Agreement supersedes all prior communications,
representations or agreements, verbal or written, among the parties relating to
the subject matter hereof. This Agreement may not be amended except in writing
signed by the parties hereto.
Section 14. Governing Law. This Agreement shall be governed in
accordance with the laws of the State of Delaware, exclusive of its conflict of
laws rules.
Section 15. Assignment. This Agreement may not be assigned, in whole or
in part, by any party without the written consent of each of the other parties,
which consent may not be unreasonably withheld, except that (i) Licensor and/or
Licensee shall have the right to assign its rights and obligations under this
Agreement to any entity which is controlled by Licensor and/or Licensee and of
which Licensor and/or Licensee owns, directly or indirectly, at least fifty
percent (50%) of each class of its outstanding securities or any entity which is
wholly owned by Licensee's parent corporation, (ii) Licensee shall have the
right to assign its rights and obligations to
16
<PAGE>
Licensor in connection with any sale by Licensee to Licensor of substantially
all of the assets of the Facility and (iii) Licensee shall have the right at any
time to assign any portion of its rights and/or obligations under this Agreement
and sublicense the Coal Briquetting Technology to one or more third parties,
whether or not affiliated with Licensee, in connection with the acquisition of
an ownership interest in the Facility or in an entity having an ownership
interest in the Facility. No such assignment and/or sublicense permitted
hereunder shall release the assigning or sublicensing party of its obligations
hereunder.
Section 16. Cooperation. Licensor recognizes that Licensee and/or its
sublicensee(s) intend to request a Ruling by the IRS with respect to the
Facility. Licensor agrees to cooperate as reasonably requested in efforts to
obtain the Ruling, including any appeals of an Adverse Decision. Licensor
further recognizes that it is critically important that the Facility be placed
in service no later than June 30, 1998 in order to qualify for the Tax Credits.
Licensor agrees to use its best efforts to cooperate with Licensee to make
possible the construction and operation of the Facility by that date, including
without limitation assisting as reasonably requested in equipment procurement,
permitting, sampling and testing of feedstock, and test runs of material through
Licensor prototypes of the Coal Briquetting Technology.
Section 17. Relocation of Facility. Licensee shall have the right to
relocate the Facility to any location of its choosing in Boone, Raleigh, Logan,
Mingo, Nicholas or McDowell counties, West Virginia or Pike or Martin counties,
Kentucky, or any other site with respect to which Licensor has not previously
conveyed a conflicting exclusive territorial license to a third party. Royalty
shall continue to be due under this Agreement after such relocation on the same
terms as if such relocation had not occurred. The Binder Base Price shall be
adjusted to reflect any increase or decrease in the cost of transporting
Proprietary Binder Material to the new location as compared to the Marfork
Facility.
Section 18. Right of First Refusal. In the event Licensee elects to
discontinue using the Coal Briquetting Technology and sell the equipment used in
the Facility (other than to an assignee or sublicensee of Licensee), Licensor
shall have the right to purchase the equipment proposed to be sold by agreeing
to match the proposed purchase price from a third party. Licensor shall have
thirty (30) days after notice of such a proposed sale to exercise its rights
hereunder. If Licensor elects to purchase such equipment, Licensor shall be
responsible for the costs of relocation.
Section 19. Counterparts. This License Agreement may be executed in
two or
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<PAGE>
more original counterparts, and all such counterparts shall constitute
one and the same instrument.
Executed by the duly authorized representatives of the parties as of
the date and year first above written.
COVOL TECHNOLOGIES, INC. APPALACHIAN SYNFUEL, LLC
By Fluor Daniel, Inc. as its
sole member
By: /s/ Stanley M. Kimball By: /s/ James O. Rollans
-------------------------- ---------------------------
Its: CFO Its: Chief Administrative Officer
18
FINANCING AGREEMENT
THIS AGREEMENT is made and entered into this 14th day of November 1997,
by and between Covol Technologies, Inc., a Delaware corporation, whose address
is 3280 No. Frontage Road, Lehi, Utah 84043, ("Covol"), and CoBon Energy,
L.L.C., a Utah limited liability company, whose address is 1145 East South Union
Avenue, Midvale, Utah 84047, hereinafter referred to as ("CoBon"). Covol and
CoBon are sometimes referred to herein as the "parties."
WITNESSETH:
Whereas, Covol and CoBon are parties to that certain "License
Agreement" dated September 10, 1996, in which Covol agreed to grant to CoBon the
rights to develop up to 1.5 million tons of annual production capacity using
Covol's patented Coal Technology, and are also parties to that certain "Project
Development Agreement" dated December 30, 1996, which modifies the License
Agreement (collectively the "CoBon Agreements"), and
Whereas, pursuant to the License Agreement, CoBon has identified a
potential project for the development of synthetic fuel manufacturing,
briquetting or extruding facilities and related product marketing operations
that will use Covol's patented Coal Technology, and
Whereas, CoBon has entered into a construction agreement (the
"Construction Agreement"), pursuant to which, after due inquiry and research, it
has specified certain equipment for its projects, and
Whereas, Covol is willing and able to provide supplemental financing
for the equipment specified by CoBon.
Now, therefore, in consideration of the mutual covenants and conditions
contained herein, and for other good and valuable consideration, the sufficiency
and receipt of which are hereby acknowledged, the parties, intending to be
legally bound, hereby agree as follows:
TERMS:
1. Covol or Covol's financier will issue purchase orders for the
pelletizer and dryer equipment in a total amount not to exceed $1,000,000, and
for such other mutually agreeable long lead time equipment required pursuant to
CoBon's Construction Agreement (the "Equipment"). Within the $1,000,000 limit,
Covol will accept full and primary responsibility for the purchase price of the
Equipment. CoBon will pay any portion of the purchase price exceeding
$1,000,000. CoBon will assist Covol or Covol's financier with the negotiation of
all remaining purchase order terms and with the placement of the purchase orders
for the Equipment. Except for the purchase price of the Equipment, all other
aspects of the purchase order, including but not limited to, negotiation of
terms, expediting the order and administration and execution of any claims
thereunder, shall be the full and primary responsibility and liability of CoBon,
notwithstanding any participation or lack of participation in such other aspects
by Covol or its financier.
Page 1
*Confidential material has been omitted from this Exhibit and filed separately
with the Securities and Exchange Commission (the "Commission").
<PAGE>
2. In addition to any other payments and royalties to which Covol is
entitled for CoBon's projects under the CoBon Agreements, Covol will have the
right to receive payments in the amount of * of Section 29 tax credits generated
by the facility employing the Equipment (the "Facility"). CoBon will cause such
payments to be made to Covol from CoBon's interest in the Section 29 tax
credits, as specified in paragraph 3 below, regardless of the amount of CoBon's
interest, and in accord with the same timetable as corresponding royalty
payments are made by the Tax Oriented Investor (TOI) who purchases the Facility.
3. Covol or Covol's financier will have the exclusive right through
January 27, 1998, to identify and negotiate a letter of intent, acceptable to
the parties, for the purchase of the Facility by a TOI on terms including
Section 29 tax credit royalty payments to CoBon in an amount not less than * per
$1.00 of Section 29 tax credits generated by the Facility. CoBon's payment to
Covol as referenced in paragraph 2 will be made from the proceeds received by
CoBon as a result of CoBon's interest in the Section 29 tax credits. The
exclusivity provision set forth in this paragraph notwithstanding, CoBon has the
right to hold discussions and negotiate with other TOI's including *, prior to
January 27, 1998 as a contingent or back-up to TOI or Covol's efforts.
4. If Covol or Covol's financier succeeds in negotiating an acceptable
letter of intent with a TOI under paragraph 3 above, then in addition to the
payments specified in paragraph 2 above, Covol and Covol's financier, as the
case may be, shall be entitled to all Section 29 tax credit royalty payments *
$1.00 interest in the total Section 29 tax credits generated by the Facility.
5. If Covol fails to negotiate an acceptable letter of intent with a
TOI under paragraph 3 above, then CoBon may proceed in its efforts to negotiate
with its prospective TOI. However, Covol will retain the right, without the
exclusivity set forth in paragraph 3, to identify and negotiate with a TOI on
terms set forth in paragraphs 3 and 4.
6. If the project for which the Equipment is ordered and purchased by
Covol fails for any reason, Covol will assume responsibility for payments due,
if any, by CoBon relating to the Equipment and Covol shall, as its sole remedy
hereunder, take possession of and retain all rights, title and interest in and
to the Equipment.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by a duly authorized officer and the Agreement shall be effective as of
the date first above written.
COBON ENERGY, L.L.C. COVOL TECHNOLOGIES, INC.
By:/s/ Steven Nash By: /s/ Brent M. Cook
------------------ -------------------
Its: President Its: President
Date: 11/14/97 Date: 11/14/97
Page 2
* Confidential material omitted and filed separately with the Commission.
PELLETCO Corporation
A Palmer Affiliate
13 Elm Street 605 Willowglen Rd. 920 E. Deerpath 60 E. 88th Street
Cohasset, MA Santa Barbara, CA Lake Forest, IL New York, NY
02025-1828 93105 60045 10128
Tel: 781/383-3200 Tel: 805/587-2315 Tel: 347/234-0832 Tel: 212/876-6060
Fax: 781/383-3205 Fax: 805/587-2795 Fax: 347/234-3397 Fax: 212/289-3490
November 20, 1997
Covol Technologies, Inc. By Facsimile to: 801-768-4483
3820 North Frontage Road
Lehi, Utah 84043
Attn: Brent M. Cook, Chief Executive Officer
Gentlemen:
Pelletco Corporation ("Pelletco") entered into a License Agreement dated as of
August 5, 1997 (the "License Agreement") with Covol Technologies, Inc.
("Covol"). Under the definition of "Project" in Section 1 of the License
Agreement, a facility located at one of the first five (5) sites listed on
Exhibit A thereto is included in such definition of "Projects" for the purposes
of the License Agreement and the License Agreement applies to such site only if
two conditions are satisfied. Those two conditions are as follows: (i) Pelletco
has given Covol written notice of its intention to have the License Agreement
apply to such facility, and (ii) such notice, if given, is given within 120 days
of the execution and delivery of the License Agreement. This 120-day period will
expire on or about December 3, 1997.
Pelletco respectfully requests Covol to extend this period in the foregoing
provision by an additional 60 days so that Pelletco would be entitled to give
such notice for the purposes of this provision at any time prior to February 5,
1998. The granting of such extension by this letter will constitute an amendment
of the License Agreement but only to the extent of such extension. Please
indicate your consent and agreement to such extension by signing in the space
provided below.
Very truly yours,
PELLETCO CORPORATION
By: /s/ Donald R. Logan
------------------------------
Donald R. Logan, Vice President
AGREED AND ACCEPTED
ON NOVEMBER 24, 1997
COVOL TECHNOLOGIES, INC.
By: /s/ Alan D. Ayers
--------------------
Name/Title:
Alan D. Ayers
Chief Operating Officer
<PAGE>
LICENSE AGREEMENT
THIS LICENSE AND BINDER PURCHASE AGREEMENT (the "Agreement'), is made
and entered into as of August 5, 1997 by and between Pelletco Corporation, a
Massachusetts corporation (the "Licensee"), and Covol Technologies, Inc., a
Delaware corporation (the "Licensor").
WHEREAS Licensor has represented that it has developed a proprietary
process to produce synthetic coal fuel extrusions, pellets and briquettes from
waste coal dust, coal fines and other coal derivatives, and that Licensor has
sufficient rights to such proprietary process pursuant to which Licensor is
entitled to license the coal extruding and Briquetting technology to Licensee;
WHEREAS Licensee intends to develop a facility to produce synthetic
coal fuel extrusions, pellets and/or briquettes or substantially similar
products from waste coal dust, coal fines and other coal derivatives at one or
more of the locations set forth on Exhibit A attached hereto and made a part
hereof (individually, a "Project" and collectively, the "Projects"); and
WHEREAS Licensee wishes to obtain and Licensor wishes to grant to
Licensee a license for the Coal Briquetting Technology (as defined below) in
connection with each Project on the terms and conditions set forth in this
Agreement, and Licensee wishes to obtain and Licensor wishes to sell to Licensee
the Proprietary Binder Material (as defined below) manufactured by Licensor for
use in the operation of each Project.
NOW, THEREFORE, in consideration of the foregoing premises, the mutual
covenants and agreements hereinafter set forth, and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged,
Licensor and Licensee each agree as follows:
Section 1. Definitions.
"Coal Briquetting Technology" means all intellectual property, patents
(including but not limited to United States Patent Numbers 5,487,764 and
5,453,103) and applications therefor, printed and unprinted technical data,
know-how, trade secrets, copyrights and other intellectual property rights,
inventions, discoveries, techniques, works, processes, methods, plans, software,
designs, drawings, schematics, specifications, communications protocols, source
and object code and modifications, test procedures, program cards, tapes, disks,
algorithms and all other scientific or technical information in whatever form
relating to, embodied in or used in the proprietary process to produce synthetic
coal fuel extrusions, pellets and briquettes from waste coal dust, coal fines
and other similar coal derivatives, including all such information in existence
as of the date of this Agreement as well as related information later developed
by Licensor; provided, however, that the defined term "Coal Briquetting
Technology" shall not include the proprietary process developed by Licensor to
produce synthetic coke extrusions and briquettes from coke breeze, iron revert
materials, or any technology for other than the processing and production of
synthetic coal fuel extrusions, pellets and briquettes. Nothing in this
Agreement is intended to grant to Licensee the right to apply the Coal
Briquetting Technology to
<PAGE>
produce anything other than synthetic coal fuel extrusions, pellets and
briquettes intended to qualify for tax credits under Section 29(c)(1)(C) of the
1986 Internal Revenue Code. This definition is intended to cover only
information and documents which are proprietary and confidential to Licensor and
otherwise covered by Section 7.3(i) hereof.
"Code" means the Internal Revenue Code of 1986, as amended.
"Developed Technology" means any inventions, "Improvement," or new
technology that Licensor may conceive, make or invent in connection with
Licensor's disclosure to Licensee of the Coal Briquetting Technology, or
Licensee's efforts to market products manufactured using the Coal Briquetting
Technology under this Agreement or which are conceived by Licensor as a
consequence of opportunity or knowledge afforded to Licensee by this Agreement.
"Developed Technology" also means any inventions, "Improvement, " or new
technology directly related to the Coal Briquetting Technology that Licensor may
conceive, make or invent relating to the Coal Briquetting Technology during the
Term of this Agreement. "Improvement" means an alteration or addition to an
invention or discovery which (i) directly relates to the Coal Briquetting
Technology, (ii) is conceived, made or invented by Licensor and (iii) enhances,
to some extent, performance or economics without changing or destroying a
product's, device's, or method's basic identity and essential character. An
Improvement may comprise alterations or additions to either patented or
unpatented inventions, discoveries, technology, or devices, and may or may not
be patentable.
"Earned License Fee" has the meaning set forth in Section 3.3.
"Elective Date" means the date of this Agreement set forth above.
"Initial License Fee" has the meaning set forth in Section 3.2.
"License Fee" means the Initial License Fee and the Earned License Fee.
"Licensee" has the meaning set forth in the preamble.
"License has the meaning set forth in the preamble.
"Net Cash Flow" means, with respect to any calendar quarter, all cash
receipts of Licensee (excluding any capital contributions made by the equity
owners of Licensee and any loan proceeds from any source) less (a) all cash
disbursements of Licensee during such quarter and all such cash disbursements
during any prior quarter which have not previously been offset by cash receipts,
and (b) such amounts as are set aside to maintain reasonable working capital and
contingency reserves, from time to time, in an amount to be mutually agreed upon
but in no event less than the projected reasonable operating costs and expenses
for the immediately succeeding calendar quarter for all Projects developed. Cash
disbursements may include payments at market rates to Licensor or affiliates of
Licensee or Licensor for the furnishing of goods and services or the lending of
funds to Licensee, including without limitation, the Proprietary Binder Material
at the price agreed upon pursuant to Section 4.2
2
<PAGE>
below, the operation and maintenance of each Project, and the management and
administration of Licensee with respect to each Project. The calculation and
distribution of "Net Cash Flow" shall not take into account and shall be made
after the payment of the Initial License Fee, and (y) the reimbursement of all
capital contributions made, from time to time, by the current four equity owners
of Licensee. The calculation of "Net Cash Flow" shall include as a "cash receipt
of Licensee" the pre-tax equivalent of any credits under Section 29 of the Code
which the four current equity owners of Licensee shall claim directly and
currently for Federal income tax purposes as a result of the production from the
Projects, provided, however, that such credits shall not be included for the
purpose of such calculation to the extent they arise from an equity ownership
which, in the aggregate, is not in excess of five percent (5%) of the total
equity ownership of Licensee or its assignee(s), as the case may be. However, if
Licensee is not taxed as a partnership for Federal income tax purposes, any
credits under Section 29 of the Code which Licensee shall claim directly and
currently for Federal income tax purposes shall be included in "cash receipts of
Licensee" but only on a basis to be mutually agreed upon as reflecting in a fair
and reasonable manner the purposes of this Agreement.
"Project' has the meaning set forth in the preamble, provided however,
a facility located at one of the sites listed on Exhibit A hereto shall be
included within the definition of ~Projects" for the purposes of this Agreement
and this Agreement shall apply to such Project, in each case only when (i)
Licensee has given Licensor written notice of its intention to have this
Agreement apply to such facility, and (ii) in the case of the first five (5)
sites listed on Exhibit A hereto, such notice, if given, is given within 120
days of the execution and delivery of this Agreement.
"Proprietary Binder Materials means and refers to the binder compound
developed by Licensor and necessary for the production, by Licensee, of
synthetic coal extrusions, pellets and briquettes and which extrusions, pellets
and briquettes satisfy the chemical change and other conditions of IRS Private
Letter Rulings No. 9701041 and No. 9549025 in order to constitute requalified
feels" pursuant to the terms of Section 29(c)(1)(C) of the 1986 Internal Revenue
Code and with respect to which Section 29 is applicable pursuant to Section
29(f) and 29(g) of the 1986 Code. The parties acknowledge that the Proprietary
Binder Material is not a staple article of commerce suitable for substantial
non-infringing uses, but rather is an integral and inseparable part of the Coal
Briquetting Technology.
Section 2. License Grant.
2.1 General. Subject to the terms and conditions of this Agreement,
Licensor hereby grants to Licensee, for the full and entire term hereof, a
non-exclusive license to use the Coal Briquetting Technology for commercial
exploitation (and not for research development purposes), including the
non-exclusive right to make, have made or use at each Project and to sell or
otherwise transfer products which have been manufactured with the Coal
Briquetting Technology. Licensee hereby accepts the license on the terms hereof
and agrees to make and have made products using the Coal Briquetting Technology
only at each Project under this License Agreement. Licensee shall not make or
have made products using the Coal Briquetting Technology or
3
<PAGE>
similar technology except at each Project, but Licensee may use, sell and
otherwise transfer products, which have been manufactured at each Project with
the Coal Briquetting Technology, at or to any location. Licensee shall not have
the right to sublicense the Coal Briquetting Technology, except as provided in
Section 17 hereof.
2.2 Developed Technology. Licensee shall have the right and is hereby
granted a non-exclusive license to use all Developed Technology relating to the
Coal Briquetting Technology without payment of any additional compensation to
Licensor, throughout the Term of this Agreement, subject to the restrictions and
limitations in this Section 2. All Developed Technology shall become Licensor's
absolute property. Licensee shall at any time during the Term of this Agreement,
at Licensor's reasonable request, execute any patent papers covering such
Developed Technology as well as any other documents that Licensor may consider
necessary or helpful in the prosecution of applications for a patent thereon or
in connection with any litigation or controversy related thereto; provided,
however, that all expenses incident to the filing of such applications and the
production thereof and the conduct of such litigation shall be borne by
Licensor.
2.3 Exclusive Technology. As long as the Coal Briquetting Technology,
the equipment necessary for its implementation and continued use at each
Project, and the Proprietary Binder Material are readily available to Licensee,
Licensee agrees to use the Coal Briquetting Technology for the production at
each Project of solid synthetic fuel intended to qualify for tax credits under
Section 29(c)(1)(C) of the Code. However, subject always to the foregoing
sentence, Licensee shall be permitted at any Project to use any other technology
or equipment for such production in addition to (or as a substitute for a
portion of) the Coal Briquetting Technology, and in the case of such additional
or partial substitute use at a Project where Licensee continues to use the Coal
Briquetting Technology and the Proprietary Binder Material, Licensee shall
continue to pay to Licensor the License Fee set forth in Section 3 below in
respect of such Project. Licensee agrees to use the Coal Briquetting Technology
only under authority of this License Agreement with Licensor. Licensee will not
engage in any action which could reasonably be construed as competitive to
Licensor's interest in this Agreement. Licensor agrees that neither it nor any
of its affiliates shall (i) use for development purposes independent of
Licensee, or disclose to any third party, including any existing or future
licensee, developer, or joint venturer, the name or location of any of the
Projects identified on Exhibit A hereto or any other information concerning the
Projects learned by Licensor from Licensee without the written consent of
Licensee, or (ii) subsequent to the date hereof, knowingly license lo any party
the Coal Briquetting Technology or the Proprietary Binder Material with respect
to any of the Projects listed, from time to time, on Exhibit A hereto.
2.4 Non-licensed Technology. Licensor retains the absolute right to fully
exploit its proprietary technology and processes, including but not limited to
the application of such technology embodied in the Coal Briquetting Technology
together with any Improvements thereto, to produce, market and use synthetic
coke extrusions and briquettes from coke breeze, iron revert materials, and any
other materials to which Licensor's technology can be applied.
4
<PAGE>
2.5 Confidentiality. Each of the parties hereby agree to maintain the Coal
Briquetting Technology confidential and not to disclose the Coal Briquetting
Technology, or any aspect thereof, or the Improvements, or any aspect thereof
(collectively, the "Confidential Information"). Notwithstanding the foregoing,
information which (i) is or becomes generally available to the public other than
as a result of an unauthorized disclosure by the parties or their respective
agents, employees, directors or representatives, (ii) was available to the party
receiving disclosure on a non-confidential basis prior to its receiving
disclosure hereunder, or (iii) lawfully becomes available to the party receiving
disclosure on a non-confidential basis from a third party source (provided that
such source is not known by the party receiving disclosure or its agents,
employees, directors or representatives to be prohibited from transmitting the
information), shall not be subject to the terms of this Section 2.5. At the
termination of this Agreement, all copies of any Confidential Information
(including without limitation any reports or memoranda) shall be returned by the
party receiving disclosure. Nothing in this Agreement shall prohibit Licensee
from disclosing the Confidential Information to others as may be reasonably
necessary for Licensee to exploit Licensee's rights under this Agreement;
provided that the recipient of any such Confidential Information executes a
Confidentiality Agreement restricting further disclosure of the Confidential
Information.
2.6 Know-How and Assistance. To enable Licensee to benefit fully from
the license of the Coal Briquetting Technology, Licensor shall provide (i)
reasonable access to technical information, relevant documentation, drawings,
engineering specifications and other know-how in Licensor's possession relating
to the Coal Briquetting Technology and the Proprietary Binder Material, ~'ii)
reasonable access to Licensor's employees or agents who are familiar with the
Coal Briquetting Technology or the Proprietary Binder Material, and (iii)
technical advice necessary to exploit the Coal Briquetting Technology or the
Proprietary Binder Material, in each case, as is reasonably requested by
Licensee and relevant to the purposes of this Agreement, including without
limitation, advice and assistance in connection with any applications for a
Private Letter Ruling with respect to Section 29 of the Code. No such access
shall be required to be provided by Licensor to Licensee if such access would be
harmful to Licensor's business, except as may be otherwise required for Licensor
to meet its other obligations under this Agreement.
Section 3. License Fee.
3.1 License Fee. Licensee shall pay the Initial License Fee and Earned
License Fee as a license fee to Licensor in consideration of Licensor granting a
license of the Coal Briquetting Technology hereunder.
3.2 Initial License Fee. Licensee shall pay * to Licensor in
immediately available funds (the "Initial License Fee") within twenty (20)
business days after the later of (a) the commencement of construction of a
Project, and (b) the obtaining of third-party construction financing in respect
of such Project. An Initial License Fee is payable in respect of each Project.
5
* Confidential material omitted and filed separately with the Commission.
<PAGE>
3.3 Earned License Fee. Licensee shall pay to Licensor quarterly earned
license fee payments ("Earned License Fee") in an amount equal to * of
Licensee's "Net Cash Flow" for the immediately preceding quarter. No License Fee
shall be payable in respect of a calendar quarter during which Licensor was
unwilling to supply Licensee with Proprietary Binder Material in accordance with
this Agreement or was otherwise in breach of this Agreement.
3.4 Payment Terms. Earned License Fee payments shall be due within
twenty (20) business days after the end of each calendar quarter. Payments shall
be made by Licensee to Licensor and shall be deemed to be: paid upon receipt by
Licensor. Payments after the due dates above shall accrue interest at the rate
of one percent per month.
Section 4. Sales of Binder.
4.1 Sale and Purchase. Licensor shall sell to Licensee, and Licensee
shall purchase from Licensor, Licensee's requirements of Proprietary Binder
Material required to operate each Project developed by Licensee. Licensor shall
deliver the Proprietary Binder Material at such times and in such amounts as
requested by Licensee. Payments for Proprietary Binder Material delivered by
Licensor during any calendar month shall be due and payable to Licensor on the
tenth business day of the immediately succeeding month. Payments after the
applicable due dates shall accrue interest at the rate of one percent per month.
4.2 Price. The price which Licensee shall pay for the Proprietary
Binder Material delivered by Licensor during any calendar year shall be an
amount equal to (i) Covol's reasonable direct and actual costs (direct material,
labor, and transportation costs) and a percentage of the total overhead costs of
Covol reasonably reflecting the ratio of the administrative costs incurred in
connection with the manufacture and sale of the Proprietary Binder Material to
Licensee to Covol's aggregate administrative costs, plus (ii) * of the amount
determined pursuant to clause (i). For the purposes of this Section 4.2, if
Covol incurs any capital expenditures to construct a facility at or near any
Project for the purpose of producing and storing its Proprietary Binder Material
to be used specifically at such Project, then such capital expenditures shall be
included in the term "Covol's reasonable direct and actual costs" in the amount
of 2.5% of such expenditures for each of the first 40 months of the Project's
operations.
4.3 Representations and Warranties. Licensor represents, warrants,
covenants and agrees as follows:
(a) Licensor shall convey to Licensee good title to all
Proprietary Binder Material purchased by Licensee from Licensor
hereunder, free and clear of any and all liens, claims and encumbrances
of any type whatsoever.
(b) No Proprietary Binder Material shall contain any hazardous
material to an extent or in a manner which would cause its production,
6
* Confidential material omitted and filed separately with the Commission.
<PAGE>
delivery or storage by Licensor or its intended use by Licensee for the
purposes of this Agreement to be in violation of applicable laws and
governmental regulations.
(c) At Licensee's option, Licensor shall replace, or refund the
purchase of, all non-conforming Proprietary Binder Material.
(d) All Proprietary Binder Material delivered to Licensee
hereunder shall satisfy the binder requirements and effects set forth
in the various IRS Private Letter Rulings and Revenue Procedures
issued, from time to time, with respect to Licensor's Proprietary
Binder Material in respect of Section 29 of the Code.
4.4 Order Procedure. Licensee shad deliver all purchase orders for
Proprietary Binder Materials at least thirty (30) days in advance of the first
day of the month in which delivery of such Proprietary Binder Material is
required under such purchase order, and all such purchase orders received by
Licensor during the term of this Agreement shad be deemed to have been accepted
by Licensor. (For example, Licensee shall deliver a purchase order for December
delivery by no later than November 1st). Each such purchase order shad be
delivered either (i) in writing, or (ii) orally by telephone by an authorized
agent of Licensee (subject to the condition that it is followed by a written
purchase order within 24 hours). Such purchase orders shad be sent to Licensor
at such address as Licensor shall direct.
4.5 Delivery and Acceptance. All Proprietary Binder Material purchased
hereunder shall be delivered F.O.B. the Project. Licensor shad arrange for
transportation of the Proprietary Binder Material to the designated Project.
Licensee shall bear the expense of unloading the trucks. The weight of
Proprietary Binder Material in each delivery shall be determined by a comparison
of the weight, on Licensee's scales, of the delivery truck immediately prior to
unloading and its weight, on Licensee's scales, immediately following unloading,
as reflected in customary weighing certificates. At Licensor's request and
expense from: time to time, Licensor shall have the right to inspect Licensee's
scales for accuracy. Licensee shall have a reasonable opportunity to sample
Proprietary Binder Material delivered to it hereunder to confirm that such
Proprietary Binder Material conforms to the teems and requirements hereof, and
Licensee shall not be deemed or required to accept any such Proprietary Binder
Material prior to the completion of such sampling.
4.6 Binder Technology License. If Licensor's ability to deliver the
Proprietary Binder Material to Licensee (in the amounts required by Licensee or
otherwise in accordance with the terms of this Agreement), will be interrupted
or terminated for any reason, Licensor shall give not less than ninety (90) days
prior notice to Licensee. Subject to giving notice of its inability to deliver
the Proprietary Binder Material to Licensee (or, in the absence of such notice,
the actual failure to deliver the Proprietary Binder Material for at least
twenty days after Licensee gives written notice of non-delivery to Licensor),
Licensor hereby grants to Licensee a nonexclusive license for the term of this
Agreement (or such shorter period as provided in the proviso hereto) to use the
technology used to manufacture the
7
<PAGE>
Proprietary Binder Material to manufacture the Proprietary Binder Material in
sufficient quantities to operate each Project up to full capacity, and such
technology shall be deemed "Coal Briquetting Technology" for the purposes of
this Agreement; provided, however, that the license granted to Licensee under
this Section 4.6 shall cease (subject to reinstatement upon the reoccurrence of
the events contemplated above) and sales of Proprietary Binder Material under
the terms of this Agreement shall be reinstated, in each case, on a date not
less than ninety (90) days after Licensor gives notice to Licensee, together
with evidence reasonably satisfactory to Licensee that Licensor is able to
deliver the Proprietary Binder Material in accordance with this Agreement. No
additional fee or royalty shall be payable to Licensor in connection with the
license granted pursuant to this Section 4.6 and Licensee shall be responsible
for its own direct out-of-pocket operating costs incurred in connection with the
production of Proprietary Binder Material pursuant to this Section. Licensor
represents and warrants that, simultaneously with the execution and delivery of
this Agreement, Licensor has delivered to a safety deposit box designated and
owned by Licensee a written copy of the formula used by Licensor to manufacture
the Proprietary Binder Material in sufficient quantities to operate each Project
to full capacity, and an officer of Licensor shall deliver to Licensee a sworn
affidavit stating that such delivery by Licensor has been made. Licensor
covenants to notify Licensee of any improvements, variations or modifications
made on or to the formula used by Licensor to manufacture the Proprietary Binder
Material promptly after such improvements, variations or modifications are made
by Licensor and to provide a copy of any such improved, varied or modified
formula for placement in the safety deposit box. Licensee covenants to hold the
formula delivered to it by Licensor pursuant to the immediately preceding
sentence as confidential and not to utilize the formula except in accordance
with the license granted to Licensee pursuant to this Section 4.6. In addition,
in the event Licensee uses the license granted pursuant to this Section 4.6,
Licensor hereby covenants to lease to Licensee for no additional fee or royalty
any binder manufacturing facility of Licensor adjacent to such Project.
4.7 Certification. At Licensee's request and at Licensee's reasonable
expense, Licensor shall conduct periodic field audits of each Project and its
operations, and (a) shall certify in writing, from time to time, that the
Proprietary Binder Material delivered to Licensee hereunder satisfies the binder
requirements and effects set forth in the various IRS Private Letter Rulings and
Revenue Procedures issued, from time to time, with respect to Licensor's
Proprietary Binder Material in respect of Section 29 of the Code, and (b) shall
cause periodic testing of the production from each Project by a reputable
independent third party to determine the occurrence of a chemical change
satisfying the chemical change and other conditions of IRS Private Letter
Rulings No. 9549025 and No. 9701041 dated September 8, 1995 and October 4, 1996,
respectively, in order to constitute "qualified fuels" pursuant to the terms of
Section 29(c)(1)(C) of the Code. Such binder certification shall be based upon
independent, random sample testing conducted at the time of binder production.
Section 5. Records: Inspection: Confidentiality.. Each party hereto
shall keep accurate records containing all data reasonably required for the
computation and verification of the amounts to be paid by the respective parties
under this Agreement, and shall permit each other party or an independent
accounting firm designated by such other party to inspect and/or audit
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<PAGE>
such records during normal business hours upon reasonable advance notice. All
costs and expenses incurred by a party in connection with such inspection shall
be borne by it. Each party agrees to hold confidential from all third parties
all information contained in records examined by or on behalf of it pursuant to
this Section 5.
Section 6. Infringement. If during the term of this Agreement a third
party has infringed any intellectual property rights associated with the Coal
Briquetting Technology or otherwise misappropriated any Coal Briquetting
Technology, Licensor may, at Licensor's expense, institute and conduct legal
actions against such third party or enter into such agreements or accord in
settlement as are deemed appropriate by Licensor, in which case Licensor shall
be entitled to any sums recovered from third parties. If Licensor does not take
any action, Licensee shall have the right to take action as a plaintiff in the
prosecution of any infringement or misappropriation action affecting any
Project, and Licensee shall be entitled to any sums recovered from the third
party. If Licensee and Licensor have jointly conducted an infringement or
misappropriation action, after each party has been reimbursed for costs and
expenses incurred by it in prosecuting the action, any sums recovered from the
third party shall be distributed to Licensee and Licensor based on the
proportionate amount of damages suffered by Licensee and Licensor as a result of
the actions by the third party from whom damages were recovered. Licensee shall
always have the right to be represented at its expense by counsel of its own
selection in any action. In no event shall Licensor enter into any agreement or
settlement inconsistent with the terms of this Agreement.
Section 7. Representations and Warranties.
7.1 Authority. Each of Licensee and Licensor represents and warrants
that (i) the execution, delivery and performance of this Agreements and the
consummation of the transactions contemplated hereby have been duly authorized
on its behalf by all requisite action, corporate or otherwise, (ii) it has the
full right, power and authority to enter into this Agreement and to carry out
the terms of this Agreement, (iii) it has duly executed and delivered this
Agreement, and (iv) this Agreement is a valid and binding obligation of it
enforceable in accordance with its terms.
7.2 No Consent. Each of Licensee and Licensor represents and warrants
that no approval, consent, authorization order, designation or declaration of
any court or regulatory authority or governmental body or any third-party is
required to be obtained by it, nor is any filing or registration required to be
made therewith by it for the consummation by it of the transactions contemplated
under this Agreement.
7.3 Intellectual Property Matters. Licensor warrants and covenants that
it (i) owns, free and clear of all liens and encumbrances, intellectual
property, patents (including but not limited to United States Patent Numbers
5,487,764 and 5,453,103) and applications therefor, printed and unprinted
technical data, know-how, trade secrets, copyrights and other intellectual
property rights and all other scientific or technical information in whatever
form relating to, embodied in or used in the proprietary process to produce
synthetic coal fuel extrusions, pellets and briquettes from waste coal dust,
coal fines and other similar coal derivatives, and, the right to freely use,
sell and exploit Proprietary Binder Material used in manufacturing synthetic
coal fuel extrusions, pellets and briquettes from waste coal dust, coal fines
and other
9
<PAGE>
similar coal derivatives, (ii) has the right and power to grant to Licensee the
licenses granted herein, (iii) has not made and will not make any agreement with
another in conflict with the rights granted herein, and (iv) has no knowledge
that the sale or use of the rights, Proprietary Binder Material and/or licenses
granted herein as contemplated by this Agreement would infringe any
third-party's intellectual property rights. Licensor agrees that it is a
"licenser" Section 365(n) of the United States Bankruptcy Code.
7.4 Indemnification. Licensor shall indemnify, defend and hold harmless
Licensee and its partners, directors, officers, agents, representatives,
subsidiaries and affiliates from and against any and all claims, demands or
suits (by any party, including any governmental entity), losses, liabilities,
damages, obligations, payments, costs and expenses (including the costs and
expenses of defending any and all actions, suits, proceedings, demands and
assessments which shall include reasonable attorneys' fees and court costs)
resulting from, relating to, arising out of, or incurred in connection with any
breach by Licensor of any of the representations, warranties and/or covenants
contained in this Agreement.
Section 8. Term. The Term of this Agreement is (a) for the period
commencing on the effective date of this Agreement and ending on 31 December
2015 or (b) for the full life of the last U.S. Patents to expire which disclose
and claim Covol's proprietary Coal Briquetting Technology, defined above,
whichever date is earlier. Any extension of this Agreement must be in writing,
signed by both parties.
Section 9. Termination. This Agreement shall terminate upon the
termination date set forth in Section 8, unless the Agreement is terminated
sooner pursuant to this Section 9.
9.1 Termination for Cause. Either party may terminate this Agreement
for cause (i.e., in the event either party commits a material breach of any
provision of this Agreement) at any time by giving the other party at least
sixty (60) days prior written notice of such termination unless such default or
breach is cured within said sixty (60) days. If either party terminates this
Agreement pursuant to this Section 9, Licensee shall promptly return and cause
all agents of Licensee to promptly return to Licensor all Confidential
Information and all Coal Briquetting Technology then in Licensee's possession,
and Licensee shall not thereafter use for its own commercial benefit or disclose
to any third person any Confidential Information or Coal Briquetting Technology
during the period ending three (3) years from the date of such termination.
9.2 Automatic Termination. This Agreement shall automatically terminate
if:
(a) Licensee becomes insolvent or is unable to pay its debts as they
fall due, seeks protection voluntarily or involuntarily under any law relating
to bankruptcy, receivership, insolvency, administration, liquidation,
dissolution or similar law of any jurisdiction (other than for the purposes of a
reorganization with a view to continuing the business as a going concern under
relevant bankruptcy or insolvency proceedings) or enters into a
10
<PAGE>
general assignment or arrangement or a composition with or for the benefit of
its creditors; or
(b) Licensee takes any step (including the filing or presentation of a
petition, the convening of a meeting or the filing of an application or consent)
in any jurisdiction for, or with a view to, the: appointment of an
administrator, liquidator, receiver, trustee, custodian or similar official
(other than for the purposes of a reorganization with a view to continuing the
business as a going concern under relevant bankruptcy or insolvency proceedings)
for Licensee and/or the whole or any part of the business, undertaking,
property, assets, receiver or uncalled capital of Licensee or any such person is
appointed; or
(c) Licensee ceases to carter on its business relating to the Coal
Briquetting Technology.
9.3 Effect of Termination. Upon termination of this Agreement, all
rights granted 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 Licensee may
have to pay Licensor) which has not been fulfilled, and all representations,
warranties, and confidentiality agreements made herein shall survive termination
of this Agreement.
Section 10. Set-Off. If at any time any compensation under Section 5 of
Restated Exclusive Financial Advisor Agreement made as of December 13, 1996
between Licensor and Coalco Corporation ("Coalco"), an affiliate of Licensee
(the "Restated Agreement") or under any provision of First Amendment to Restated
Exclusive Financial Advisor Agreement made as of even date herewith between
Licensor and Coalco (the "Amendment") is due and payable by Licensor or any
affiliate thereof to Coalco or any affiliate thereof, Licensee shall be
entitled, upon giving Licensor seven (7) business days' notice thereof, to set
off such amount (the "Set Off Amount") against any and all payments due under
this Agreement. If Licensee exercises such right of set off, then the Set Off
Amount shall be applied, until exhausted, first against any and all payments due
to Licensor by Coalco under the Amendment, and then once no such payments are
then due, against any and all payments due to Licensor under this Agreement. If
at any time any amounts under the Amendment or any provision of this Agreement
are due and payable by Coalco or Licensee to Licensor, Licensor shall be
entitled, upon giving Coalco and Licensee seven (7) business days' notice
thereof) to set off such amount against any and all compensation payments due to
Coalco under any provision of the Restated Agreement or the Amendment.
Section 11. Waiver. The failure of any party to enforce at any time any
provision of this Agreement shall not be construed as a waiver of such provision
or the right thereafter to enforce each and every provision. No waiver by any
party, either express or implied, of any breach of any of the provisions of this
Agreement shall be construed as a waiver of any other breach of such term or
condition.
Section 12. Severability. If any provision of this Agreement shall be
held by a court of competent jurisdiction to be invalid or unenforceable in any
respect for any reason, the validity
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<PAGE>
and enforceability of any such provision in any other respect and of the
remaining provisions of this Agreement shall not be in any way impaired.
Section 13. Notices. All notices required or authorized by this
Agreement shall be given to the parties hereto at the addresses, and in
accordance with the procedures, set forth in Section 11 of the Restated
Financial Advisor Agreement made as of December 13, 1996 between Licensor and
Coalco Corporation an affiliate of Licensee as if Licensee, instead of Coalco
Corporation was referenced in such provision.
Section 14. Remedies Cumulative. Remedies provided under this Agreement
shall be cumulative and in addition to other remedies provided by law or in
equity.
Section 15. Entire Agreement. This Agreement constitutes the entire
agreement of the parties relating to the subject matter hereof There are no
promises, terms, conditions, obligations, or warranties other than those
contained herein. This Agreement supersedes all prior communications,
representations, or agreements, verbal or written among the parties relating to
the subject matter hereof This Agreement may not be amended except in writing
signed by the parties hereto.
Section 16. Governing Law. This Agreement shall be governed in
accordance with the laws of the State of Utah, exclusive of its conflict of laws
rules.
Section 17. Assignment. This Agreement may not be assigned, in whole or
in part, by any party without the written consent of the other party, which
consent may be withheld by any party for any reason or for no reason in its sole
discretion except that (i) each party shall have the right to assign its rights
and obligations under this Agreement to any entity which is controlled by, or is
in common control with, such party or in which such party owns, directly or
indirectly, at least fifty percent (50%) of each class of its outstanding
securities, provided that no such assignment shall release the assigning party
from its obligations hereunder, and (ii) Licensee shall have the right to assign
its rights and obligations to Licensor in connection with any sale by Licensee
to Licensor of substantially all of the assets of any Project. Notwithstanding
the foregoing exceptions set forth in clause (i) and (ii) above, Licensee shall
not be entitled to assign any of its rights or obligations hereunder to any
entity in which Cotton Energy, L.L.C. or an affiliate thereof has any ownership
interest.
Executed by the duly authorized representative of the parties on the
date and year firs above written.
COVOL TECHNOLOGIES, INC. PELLETCO CORPORATION
By: /s/ Brent M. Cook By: /s/ Gordon L. Deane
------------------- ---------------------
Name: Brent M. Cook Name: Gordon L. Deane
Title: President Title: President
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EXHIBIT A
PROJECTS PROJECTED CAPACITY
1. Homer City (OPT Energy), 360,000 tons per year
Line 1 - Homer City, PA
2. Homer City (GPU Energy), 360,000 tons per year
Line 2 - Homer City, PA
3. Keystone Coal Mining 360,000 tons per year
(Rochester & Pittsburgh Coal Company)
- Elderton, PA
4. Eighty-Four Mining (Rochester & 360,000 tons per year
Pittsburgh Coal Company)
- Eighty-Four, PA
5. Buckeye Industrial Mining - 360,000 tons per year
Kensington Prep Plant -
Columbia County, Lisbon, OH
6. Site Location to be designated 360,000 tons per year
by Licensee at a later date
13
PREPARATION PLANT AND FINES PONDS LEASE
WELLINGTON UTAH
THIS PREPARATION PLANT AND FINES PONDS LEASE AGREEMENT ("Lease") is
made and entered into as of the 21 day of February, 1997, by and between
EARTHCO, a Nevada corporation/ and Covol Technologies, Inc., a Delaware
corporation, ("Covol").
RECITALS
A. EARTHCO owns the real property located in Carbon County, Utah, as
further identified on Exhibit A (the "Property").
B. Covol desires to lease the Property from EARTHCO and to conduct coal
fines extraction, screening, washing, handling and other recovery, processing,
and preparation operations (collectively "Preparation Operations") on the
Property
C. EARTHCO wishes to grant to Covol the exclusive right (1) to occupy
the Property, and (2) to conduct Preparation Operations on the Property, all in
accordance with the terms hereof.
AGREEMENT
NOW, THEREFORE, in consideration of the recitals set forth above and
the mutual benefits and promises contained herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
EARTHCO and Covol covenant and agree as follows:
1. Grant of Lease. EARTHCO hereby leases the Property, together with
all coal fines and refuse located on, in or under the Property, to Covol for the
purpose of conducting coal fines and refuse removal, extraction, mixing,
processing, storage, handling, screening, washing, and other coal fines and
refuse Preparation Operations on the Property, and EARTHCO hereby grants to
Covol for the term hereof the exclusive right to occupy the Property, remove or
extract coal fines and refuse, and to conduct Preparation Operations from and on
the Property, subject to and in accordance with the terms hereof.
2. Property. The leased property shall consist of two (2) parcels.
Parcel A shall be referred to as the Preparation Plant Site ("PPS") and shall
contain approximately thirty (30) acres (more or less) and shall be located
adjacent to the fines ponds. Parcel ]L is more fully defined by the drawing and
legal description attached hereto and made a part hereof as Exhibit A.
*Confidential material has been omitted from the Exhibit and filed separately
with the Securities and Exchange Commission (the "Commission").
<PAGE>
Parcel B shall be referred to as the Fines Pond Site ("FPs't)
and shall contain approximately three hundred fifty-seven (357) acres (more or
less) and shall include the property upon which is located the "upper fines
pond" and the "lower fines pond" and the property immediately surrounding these
ponds. Parcel B is more fully defined by the drawing and legal description
attached hereto and made a part hereof as Exhibit A.
3. Lease Payments.
a. Base Lease Payments. Covol agrees to pay EARTHCO *. The Base
Lease Payments shall be paid by Covol as follows:
i. * paid on February 12,1997, and receipt thereof is
hereby acknowledged by EARTHCO;
ii. * paid concurrent with the execution of this Lease
which shall be on or before February 21, 1997; and
iii. * shall be paid on August 21, 1997, and the same amount
shall be paid on the 21st day of every third month thereafter
until a total of twelve (12) payments of * have been made,
(i.e., twelve (12) quarterly payments of * each for a total of
*.
b. Adjustment for Excess Fines Recovery. Covol agrees to pay
EARTHCO * for each net saleable ton of coal fines from the fines ponds in excess
of two (2) million tons, up to two and one half (2.5) million tons. Any tonnage
in excess of two and one half (2.5) million net saleable tons shall be at no
additional price to Covol. Payments due under this provision, if any, shall be
paid by Covol on the last day of the month immediately following the calendar
qlarter in which the coal fines are removed from the Property. The requirement
to make payments pursuant to this paragraph shall remain in full force and
effect, even if Covol extends the Lease term or exercises its option to purchase
Parcel B.
2
* Confidential material has been omitted from this Exhibit and filed separately
with the Commission.
<PAGE>
4. Term of Lease and Options to Extend. The term of the Lease on Parcel
A shall be fifteen (15) years from the date hereof, expiring on February 21,
2012. All Lease Payments for the fifteen tl5) year lease term are included in
the total Base Lease Payments paragraph defined herein (Section 3. a.). Covol
may extend the term of the Lease on Parcel A by two (2) five (5) year periods by
notifying EARTHCO, in writing at least six (6) months prior to the expiration of
the existing term, of its intention to extend and tendering payment of Five
Thousand Dollars ($5,000.00) as prepayment for the next five (5) year term.
The term of the Lease on Parcel B shall be five (5) years from
the date hereof, expiring on Fe} wary 21, 2002. All Lease Payments for the five
(5) year base term are included in the Base Lease Payments and the Adjustment
for Excess Fines Recovery paragraphs defined herein (Section 3 a. and b.). Covol
may extend the term of the Lease on Parcel B by one (1) five (5) year term
period by:
a. Notifying EARTHCO, in writing prior to August 21, 2001, of
its intention to extend the term of the Lease;
b. Tendering payment to EARTHCO in the amount of Ten Thousand
Dollars ($10,000.00) which shall constitute full prepayment for the next five
(5) years; and
c. Assuming the portion of reclamation permit (ACT/007/012)
which pertains to Parcel B and the posting of a bond which is acceptable in
form, substance and amount to DOGM relative to Parcel B and assuming the
reclamation responsibilities for Parcel B.
5. Option to Purchase. Covol shall have the option to purchase Parcel
A and/or Parcel B at any time during the Base Lease term of either parcel by:
a. Giving EARTHCO thirty (30) days written notice of its intent
to purchase at any time after all of the payments pursuant to Section 3. a.
herein have been fully paid; and
b. Assuming the portion of the reclamation permit (ACT/007/012)
which pertains to the parcel being purchased, assuming the reclamation
responsibility for the parcel(s) being purchased and the posting of a bond which
is acceptable in form, substance and amount to DOGM relative to the purchased
parcel, at or prior to the closing of the purchase. Said assumption and
activities shall be the total consideration for the purchase.
6. Access Easements. EARTHCO further leases and grants to Covol for
the term hereof non-exclusive easements upon
3
<PAGE>
EARTHCO's surrounding lands for ingress, egress, water andother utility access
to the Property. Covol shall have the right to improve, pave, and maintain any
roads used by Covo1.
7. Water Rights. EARTHCO shall provide Covol with water rights of ____
acre feet to be used by Covol in its processing operations. If Covol exercises
its right to purchase Parcel A as described in Section 5 herein, EARTHCO shall
deed ___________ acre feet of water rights to Covol without additional
consideration.
8. Warranty of Title. EARTHCO hereby, warrants and agrees to defend
title to the Property and further covenants that EARTHCO has the lawful right,
power and authority to lease and utilize the Property in the manner herein
provided. Covol, at its option, may discharge any tax, mortgage or other lien
upon the Property and, in the event Covol does so, it shall be subrogated to
such lien with the right to enforce the same and apply Lease Payments accruing
to EARTHCO hereunder toward satisfying the same.
9. Liens and Encumbrances. Covol shall keep the Property free from all
mechanics' liens and other encumbrances arising from Covol's possession and
operations provided that Covol shall have the right voluntarily to mortgage,
pledge or otherwise encumber its equipment, improvements and leasehold estate
hereunder and provided further that Covol shall not be required prematurely to
discharge any lien which it disputes in good faith.
10. Commingling Measurement and Records.. Covol shall have the right
to transport, store, mix, process and sell on the Property coal fines produced
or removed from other lands, and to commingle such materials with materials
produced or removed from the Property; provided, however, that Covol shall
measure and record the amounts of materials produced from the Property and the
amounts which are produced from other lands. No Lease Payment shall be payable
hereunder on materials produced from lands other than the Property. Covol shall
keep accurate records of the coal fines processed from the Property and make
such records available for inspection and copying by EARTHCO upon request during
normal business hours.
11. Covol's Equipment. Fixtures and Improvements. Covol shall have the
right, in Covol's discretion and at its sole risk, to place, use, maintain and
remove such equipment, fixtures and improvements upon the Property as Covol may
reasonably require to conduct its operations on the Property from time to time.
All such equipment, fixtures and improvements shall be and remain the exclusive
property and responsibility of Covol, and shall be removed by Covol upon the
termination of this Lease.
4
<PAGE>
12. Permits. Laws and Regulations. Covol shall obtain all necessary
permits required for the conduct of its operations hereunder, and Covol shall
conduct all operations on or relating to the Property in full compliance with
all applicable federal, state and local laws, regulations, permits and
ordinances.
Notwithstanding the preceding paragraph, EARTHCO will allow
Covol to operate its Preparation Operations on Parcel A under the existing
mining permit until September 1, 1998. EARTHCO and Covol shall cooperate to
apply for any mining permit modifications necessary for Covol's operations.
Covol will be responsible for the payment of any incremental increase in bond
costs, if any, caused by Covol's operations on Parcel A.
Covol further agrees to apply to DOGM to have the portion of
the mining permit relative to Parcel A and Covol's operations on Parcel A
transferred to Covol on or before September 1, 1998. Covol shall also be
responsible to post its bond with DOGM relating to Parcel A on or before
September 1, 1998, thereby releasing the bond of EARTHCO relative to Parcel A.
Notwithstanding the first paragraph of Section 12 above,
EARTHCO will allow Covol to operate its fines recovery and removal operations on
Parcel B under the existing permit until February 21, 2002. EARTHCO and Covol
shall cooperate to apply for any permit modifications necessary for Covol's
operations on Parcel B. Covol will be responsible for the payment of any
incremental increase in bond costs, if any, caused by Covol's operations on
Parcel B.
Covol further agrees to apply to DOGM to have the portion of
the permit relative to Parcel B transferred to Covol and Covol agrees to post
its bond relative to Parcel B (releasing and replacing EARTHCO's bond on Parcel
B) upon the occurrence of any of the following events:
i. Covol notifies EARTHCO of its intent to purchase Parcel B. or
ii. Covol has not removed all of the economically recoverable coal
fines from Parcel B by February 21, 2002, or
iii. Covol notifies EARTHCO of its intent to extend the Lease on
Parcel B.
13. Reclamation. Upon the termination of this Lease, Covol shall
reclaim those areas of Parcel A disturbed, from and after the date hereof, by
Covol's operations only to the
5
<PAGE>
extent required by the mining permit then in force. EARTHCO shall be responsible
for any required reclamation arising from use of, or operations on, the Property
before the date of this Lease. EARTHCO expressly acknowledges and agrees that
the use of the Property consistent with the terms hereof shall not constitute
waste or other degradation of the Property, even though such may change the
appearance, terrain or condition of the Property. Covol may expand its
reclamation responsibilities to include Parcel B pursuant to Section 12 above.
14. Environmental Issues. Covol shall not conduct activities upon the
Property or bring materials or substances onto the Property which require
remediation or removal according to the federal Environmental Protection Agency
or the State of Utah Department of Environmental Protection rules, regulations
or statutes (the "Environmental Laws"). If Covol shall violate any of the
Environmental Laws during its occupancy and use of the Property, then Covol
shall be solely liable for the costs of correcting and abating such violations
and shall indemnify EARTHCO and hold EARTHCO harmless against any and all claims
arising therefrom.
15. Indemnitv and Insurance. Covol agrees to indemnify EARTHCO and
hold it harmless against any and all claims of any nature arising from or
related to Covol's activities, from and after the date hereof, on the Property,
other than claims arising out of EARTHCO's reclamation responsibilities or other
EARTHCO activities. EARTHCO agrees to indemnify Covol and hold it harmless
against any and all claims arising from or related to pre-existing conditions,
including environmental and reclamation liabilities and ongoing EARTHCO
activities. Covol shall maintain comprehensive general liability insurance
covering il:s operations hereunder, and EARTHCO shall be named as an additional
insured under such policy.
16. Taxes. From and after the date hereof, Covol shall pay when due
real property taxes for the Property and all taxes on Covol's equipment and
improvements on the Property.
17. Default. In the event of any material default by either party, in
addition to any other remedy available to the non-defaulting party, if such
default is not cured within thirty (30) days following written notice ore such
default, the non-defaulting party may terminate the Lease; provided that in the
event of a default which cannon reasonably be cured within thirty (30) days, the
defaulting party shall have a reasonable time to cure, provided that immediate
actions to cure such default are initiated within said thirty (30) days and
diligently prosecuted to completion.
6
<PAGE>
In the event of a default by Covol in tendering a payment in
the amount or upon the due date according to Sections 3. a. and b. herein, in
addition to any other available legal remedies, EARTHCO, at its option, shall
have the right to select one of the following remedies after giving Covol
fifteen (IS) days written notice specifying the default and describing EARTHCO's
intention to exercise its rights under this Section:
a. EARTHCO shall charge a late fee equal to five percent (5%)
of the defaulted payment.
b. EARTHCO may terminate this Lease and commence an action for
damages. Covol shall immediately vacate and relinquish possession and occupancy
of the Property.
Any waiver of a default in payment by Covol must be in writing.
18. Assignment. Each party reserves the right to assign its rights and
obligations under this Lease to an unaffiliated entity upon the consent of the
non-assigning party, which consent shall not be unreasonably withheld. In the
event that a party desires to assign its rights and obligations to an entity
affiliated with that party, it may do so without the consent of the
non-assigning party. EARTHCO shall have the right to assign the proceeds of this
Lease to third parties as collateral for any financing that EARTHCO may arrange
for its own corporate purposes. Covol will consent in writing to such
assignment.
19. Notices. Any notices or other communications required or permitted
hereunder will be in writing and will be delivered by hand or sent by prepaid
telecopy or sent by postage paid registered, certified, or express mail, or by
overnight courier service and shall be deemed given when so delivered by hand or
telecopy, or if mailed, three days after mailing (one business day in the case
of express mail or overnight courier service) as follows:
To Covol: Brent M. Cook, President
Covol Technologies, Inc.
3280 North Frontage Road
Lehi, Utah 84043
Phone: 801/768-4481
Fax: 801/768-4483
To EARTHCO: James W. Scott, President
EARTHCO
4118 North Meridian Street
Indianapolis, Indiana 46208
Phone: 317/283-4631
Fax: 317/283-4866
7
<PAGE>
Or to such other address as the addressee may have specified in a notice duly
given to the sender as provided herein.
20. Effect of Headings. The subject headings of the sections of this
Lease are included for convenience only and shall not affect the construction or
interpretation of any of its provisions.
21. Force Mature. The obligations of each party shall be suspended to
the extent and for the period that performance is prevented by any cause beyoncL
its reasonable control; however, any such suspension shall not apply to payments
required by Section 3. a. and b. herein. The affected party shall promptly give
notice to the other party of the suspension of performance, stating therein the
nature of the suspension, the reasons thereof, and the expected duration
thereof. Abatement shall end as soon as it is reasonably practicable for the
affected party to resume performance.
22. Governing Law. This Lease shall be governed by and interpreted in
accordance with the laws of the State of Utah.
23. Specific Performance. The terms and obligations contained herein
may be specifically enforced.
24. Construction. This Lease shall be deemed to have been drafted
jointly by the parties. Any uncertainty or ambiguity shall not be construed for
or against any party based on attribution of drafting to that party.
25. Severability. Provided that no party is deprived of a material
right under this Lease, if any provision of this Lease is held invalid or
unenforceable, it is the intent of the parties that all other provisions be
construed to remain binding on the parties.
26. Counterparts. This Lease may be executed simultaneously in two or
more counterparts, any one of which need not contain the signatures of more than
one party, but all such counterparts taken together shall constitute one and the
same Lease. A telecopy or reproduction of this Lease may be executed by one or
more parties hereto, and a copy of this Lease may be delivered by one or more
parties hereto by telecopy or similar instantaneous electronic transmission
device pursuant to which the signature of, or on behalf of, such party can be
seen, and such execution and delivery shall be considered valid, binding and
effective for all purposes. At the request of any party hereto, all parties
agree to execute an original of this Lease as well as any telecopy or other
reproduction thereof.
8
<PAGE>
27. Entire Agreement. This Lease constitutes the entire understanding
of the parties relating to the subject matter hereof and supersedes all prior
and contemporaneous agreements and understandings, whether oral or written,
relating to the subject matter hereof. No amendment or modification of the terms
of this Lease shall be binding or effective unless expressed in writing and
signed by each party.
28. Non-waiver. No election or failure to exercise, delay in
exercising, or waiver of any right or remedy hereunder on any occasion by either
party shall be deemed to be an election or waiver of the same or of any other
remedy on the same or any other occasion.
29. Confidentiality. This Lease, its terms and all communications,
documents, data or other information generated as a part of this transaction are
strictly confidential. Neither party shall disclose such information to a third
person or entity without the consent of the other, except (1) as is essential
for bona fide business purposes of which this Lease is a part, or (2) as
compelled by legal proceedings.
30. Successors and Assigns. This Lease shall be binding on the parties
hereto and upon their respective heirs, representatives, successors and
permitted assigns.
IN WITNESS WHEREOF, EARTHCO and Covol have executed this Lease as of
the day and year first above written.
EARTHCO
By: /s/ James W. Scott
------------------
James W. Scott
Title: President
COVOL TECHNOLOGIES, INC.
By: /s/ Brent M. Cook
-----------------
Brent M. Cook
Title: President
9
AGREEMENT CONCERNING ADDITIONAL FACILITIES
This Agreement concerning additional facilities ("the Agreement"), is
made and entered into as of December 27, 1996 by and between AJG Financial
Services, Inc., a Delaware corporation ("AJG"), and Covol Technologies, Inc., a
Delaware corporation ("Covol").
Whereas, Covol has represented that it has developed a proprietary
process to produce synthetic coal fuel extrusions and briquettes from waste coal
dust, coal fines, and other coal derivatives.
Whereas, AJG proposes to enter into four (4) separate standard Form of
Agreements (individually referred to as a "Facility Agreement" and collectively
referred to as the "Facility Agreements") between Owner and Design/Builder with
Gencor Industries, Inc. ("Contractor") for the construction of four (4)
agglomeration facilities within the United States, each to have a production
capacity of approximately 30,000 tons per month (individually referred to as a
"Facility" and collectively referred to as the "Facilities").
Now, therefore, in consideration of the foregoing premises, the mutual
covenants and agreements hereinafter set forth, and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, AJG
and Covol agree as follows:
Section 1 Definitions.
"Coal Briquetting Technology" means intellectual property, inventor's
certificates and applications therefor, printed and unprinted technical data,
know-how, trade secrets, copyrights and other intellectual property rights,
inventions, discoveries, techniques, works, processes, methods, plans, software,
designs, drawings, schematics, specifications, communications protocols, source
and object code and modifications, test procedures, program cards, tapes, disks,
algorithms and other scientific or technical information relating to or used in
the proprietary process to produce synthetic coal fuel extrusions and briquettes
from waste coal dust, coal fines, and other similar coal derivatives, and the
proprietary binder material used in manufacturing synthetic coal fuel extrusions
and briquettes from waste coal dust, coal fines and other similar coal
derivatives, in each case owned or controlled by Covol; provided, however, that
the defined term "Coal Briquetting Technology" shall not include the proprietary
process developed by Covol to produce synthetic coke extrusions and briquettes
from coke breeze or any technology other than the processing and production of
synthetic coal fuel extrusions or briquettes.
"Commercial Use" means any usage of the Coal Briquetting Technology for
commercial exploitation and any other usage to which Covol grants prior written
consent.
"Covol" has the meaning set forth in the preamble.
"Contractor" has the meaning set forth in the preamble.
"Facility" and "Facilities" have the meanings set forth in the
preamble.
"Facility Agreement" and "Facility Agreements" have the meanings set
forth in the preamble.
"Facility Assignment" has the meaning set forth in section 12 hereof.
"Improvements" has the meaning set forth in section 2.3 hereof.
"AJG" has the meaning set forth in the preamble.
1
* Confidential material has been omitted from this Exhibit and filed separately
with the Securities and Exchange Commission (the "Commission").
<PAGE>
"Royalty" has the meaning set forth in section 3.2 hereof.
Section 2 License Grant.
2.1 General. Subject to the terms and conditions of this
Agreement, Covol hereby grants to AJG a license to use the Coal Briquetting
Technology for Commercial Use with each Facility, including a license to make,
have made, use, and sell or otherwise transfer products which embody, use, or
have been developed or manufactured with the Coal Briquetting Technology. AJG
may propose the general location for each Facility, and Covol will then have
thirty (30) days to approve or disapprove of the general area for each Facility,
which approval shall not unreasonably be withheld, taking into account other
facilities in the area utilizing Covol's technology, any noncompetition
agreements, and like factors.
2.2 Know-How and Assistance. To enable AJG to benefit fully
from the license of the Coal Briquetting Technology, Covol shall provide
reasonable access to documentation, drawings, engineering specifications, and
other know-how in its possession that Covol determines is necessary to carry out
the purposes of this Agreement; reasonable access to its employees or agents who
are familiar with the Coal Briquetting Technology and Improvements to the Coal
Briquetting Technology, as defined in section 2.3; and technical advice with
regard to the Coal Briquetting Technology as is reasonably requested by AJG.
Covol reserves the right to deny access to documentation and other forms of
information it deems unnecessary to carry out the purposes of this Agreement.
2.3 Improvements. Covol may develop improvements, variations,
or modifications ("Improvements") to the Coal Briquetting Technology. The term
"Improvements" shall include changes that reduce production costs, improve
performance, or increase marketability. Covol hereby grants to AJG a license to
utilize the Improvements made by it for Commercial Use, including to make, have
made, use, and sell or otherwise transfer products that utilize any such
Improvements subject to the terms of this Agreement. It is mutually understood
and agreed that all Improvements provided to AJG by Covol shall remain the sole
and exclusive property of Covol.
2.4 Confidentiality. AJG hereby agrees not to disclose the
Coal Briquetting Technology except to its agents, employees, directors, or
representatives that have a need to know about the Coal Briquetting Technology
in connection with the operation and maintenance of the Facilities and the sale
of coal briquettes or extrusions produced by the Facilities.
Section 3 License Fees and Royalty.
3.1 License Fees. AJG shall pay a base license fee to Covol
equal to * for each Facility at the commencement of construction of each
Facility.
3.2 Royalty Amount. As to each Facility, on or before the 15th
of the month following the end of each fiscal quarter, AJG shall pay to Covol
royalty payments ("Royalty") in an amount equal to the product of (i) *
multiplied by (ii) the MM Btu of the extrusions and briquettes sold by AJG
during the immediately preceding quarter. If unpaid by the date due, the Royalty
shall accrue simple interest at the rate of one (1) percent per month. Beginning
on January 1, 1997 and each year thereafter, the Royalty shall be adjusted by *
of the increase or decrease in the inflation adjustment provided in Section 29
of the Internal Revenue Code.
Section 4 Binder.
4.1 Sales of Binder.
4.1.1 Sale and Purchase. Upon the request of AJG,
from time-to-time, Covol shall sell to AJG a sufficient quantity of proprietary
binder material manufactured by Covol as is required to operate
2
* Confidential material omitted and filed separately with the Commission.
<PAGE>
each Facility. Covol shall deliver the proprietary binder material to each
Facility, at such times and in such amounts as reasonably requested by AJG.
Payments for proprietary binder material delivered by Covol during any calender
month shall be due and payable to Covol on the 10th business day of the
immediately succeeding month. If unpaid by the due date, the payment shall
accrue simple interest at the rate of one (1) percent per month.
4.1.2 Price. The price which AJG shall pay for the
proprietary binder material delivered by Covol during any calender year shall be
an amount equal to (i) Covol's direct and actual costs (direct material and
labor costs and a percentage of the total overhead costs of Covol reasonably
reflecting the ratio of the administrative costs incurred in connection with the
manufacture and sale of the proprietary binder material to the total overhead
costs of Covol) reasonably incurred to manufacture the proprietary binder
material plus (ii) * of the amount determined pursuant to clause (i).
Section 5 Records; Inspection; Confidentiality. Each party hereto shall
keep accurate records containing all data reasonably required for the
computation and verification of the amounts to be paid by the respective parties
under this Agreement, and shall permit each other party or an independent
accounting firm designated by such other party to inspect and/or audit such
records during normal business hours upon reasonable advance notice. All costs
and expenses incurred by a party in connection with such inspection shall be
borne by it. Each party agrees to hold confidential from all third parties all
information contained in records examined by or on behalf of it pursuant to this
section 5.
Section 6 Development and Construction of Facilities.
6.1 Assistance from Covol. Upon the reasonable request of AJG,
Covol agrees to provide assistance from time to time in the development and
construction of each of the Facilities. Covol shall also provide, from time to
time upon the reasonable request of AJG, assistance to AJG in connection with
presentations to potential investors in any of the Facilities.
6.2 Reimbursement of Expenses. AJG shall reimburse, on demand,
the travel and other similar out-of-pocket expenses of Covol in performing
services requested under Section 6.1; provided, however, that Covol shall obtain
the prior written approval of AJG for any expenditures in excess of $5,000.
Section 7 Representations and Warranties.
7.1 Authority. Each of Covol and AJG represents and warrants
that (i) the execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby have been or will be duly
authorized on its behalf by all requested action, corporate or otherwise, (ii)
it has the full right, power and authority to enter into this Agreement and to
carry out the terms of this Agreement, (iii) it has duly executed and delivered
this Agreement, and (iv) this Agreement is a valid and binding obligation of it
enforceable in accordance with its terms.
7.2 No Consent. Each of Covol and AJG represents and warrants
that no approval, consent, authorization, order, designation or declaration of
any court or regulatory authority or governmental body or any third-party is
required to be obtained by it, nor is any filing or registration required to be
made therewith by it for the consummation by it of the transactions contemplated
under this Agreement.
7.3 Intellectual Property Matters. Covol warrants that it (i)
owns intellectual property, inventor's certificates and applications therefor,
printed and unprinted technical data, know-how, trade secrets, copyrights and
other intellectual property rights, inventions, discoveries, techniques, works,
processes, methods, plans, software, designs, drawings, schematics,
specifications, communications protocols, source and object code and
modifications, test procedures, program cards, tapes, disks, algorithms, and
other scientific or technical information relating to or used in the proprietary
process to produce synthetic coal fuel extrusions and briquettes from waste coal
dust, coal fines, and other similar coal derivatives, and, the proprietary
binder material used
3
* Confidential material omitted and filed separately with the Commission.
<PAGE>
in manufacturing synthetic coal fuel extrusions and briquettes from waste coal
dust, coal fines and other similar coal derivatives, and (ii) has the right and
power to grant to AJG the licenses granted herein.
Section 8 Term. This Agreement and the license granted hereunder shall
be for the period from the Closing Date to and including January 1, 2008, or the
corresponding date under Section 29 of the 1986 Code in the event of an
extension of the tax credits available under Section 29 of the 1986 Code.
Section 9 Waiver. The failure of any party to enforce at any time any
provision of this Agreement shall not be construed as a waiver of such provision
or the right thereafter to enforce each and every provision. No waiver by any
party, either express or implied, of any breach of any of the provisions of this
Agreement shall be construed as a waiver of any other breach of such term or
condition.
Section 10 Severability. If any provision of this Agreement shall be
held by a court of competent jurisdiction to be invalid or unenforceable in any
respect for any reason, the validity and enforceability of any such provision in
any other respect and of the remaining provisions of this Agreement shall not be
in any way impaired.
Section 11 Notices. All notices required or permitted to be given under
this Agreement shall be in writing. Notices may be served by certified or
registered mail, postage paid with return receipt requested; by private courier,
prepaid; by telex, facsimile, or other telecommunication device capable of
transmitting or creating a written record; or personally. Mailed notices shall
be deemed delivered five days after mailing, property addressed. Couriered
notices shall be deemed delivered when delivered as addressed, or if the
addressee refuses delivery, when presented for delivery notwithstanding such
refusal. Telex or telecommunicated notices shall be deemed delivered when
receipt is either confirmed by confirming transmission equipment or acknowledged
by the addressee or its office. Personal delivery shall be effective when
accomplished. Unless a party changes its address by giving notice to the other
party as provided herein, notices shall be delivered to the parties at the
following address:
Covol: Covol Technologies, Inc.
3280 North Frontage Road
Lehi, Utah 84084
Telephone: (801) 768-4481
Telecopier: (801) 768-4483
Attn.: Mr. Brent M. Cook
With a copy to: Ballard Spahr Andrews & Ingersoll
201 South Main Street, Suite 1200
Salt Lake City, Utah 84111-2215
Telephone: (801) 531-3000
Telecopier: (801) 531-3001
Attn.: Mr. William Marsh
Buyer: AJG Financial Services, Inc.
The Gallagher Centre
Two Pierce Place
Itasca, IL 60143-3141
Telephone: (312) 285-3500
Telecopier: (312) 285-3483
Attn.: Mr. David R. Long
With a copy to: Rudnick & Wolfe
203 North LaSalle Street
Chicago, IL 60601-1293
4
<PAGE>
Telephone: (312) 368-4000
Telecopier: (312) 236-7516
Attn.: Mr. John R. Mannix, Jr.
Section 12 Assignment; Sublicenses. This Agreement may be assigned by
Covol to any of its wholly-owned subsidiaries. After the payment of the base
license fee contemplated under section 3.1 for a Facility, AJG may assign its
rights under this Agreement relating to that Facility to persons or entities
approved by Covol (a "Facility Assignment").
Section 13 Further Assurances. Each party agrees, at the request of the
other party, at any time and from time to time, to execute and deliver all such
further documents, and to take and forbear from all such action, as may be
reasonably necessary or appropriate in order more effectively to carry out the
provisions of this Agreement.
Section 14 Entire Agreement. This Agreement constitutes the entire
agreement of the parties relating to the subject matter hereof. There are no
promises, terms, conditions, obligations, or warranties other than those
contained herein. This Agreement supersedes all prior communications,
representations, or agreements, verbal or written, among the parties relating to
the subject matter hereof. This Agreement may not be amended except in writing
signed by the parties hereto.
Section 15 Governing Law. This Agreement shall be governed in
accordance with the laws of the State of Utah.
Section 16 Counterparts. This Agreement may be executed in two or more
counterparts, each which shall be deemed an original, but all of which together
shall constitute one and the same agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement by
their duly authorized representatives the day and year first above written.
COVOL TECHNOLOGIES, INC.
By: /s/ Brent M. Cook
-------------------------
Name: Brent M. Cook
Title: President
AJG FINANCIAL SERVICES, INC.
By: /s/ Mark Strauch
----------------------
Name: Mark Strauch
Title: Treasurer
5
FORM OF
AGREEMENT FOR TECHNOLOGY LICENSING OF FACILITIES
This Agreement For Technology Licensing Of Facilities ("this
Agreement") is made and entered into as of December 31st, 1996 by and between PC
West Virginia Synthetic Fuel #1, L.L.C., a Delaware limited liability company
("Licensee"), and Covol Technologies, Inc., a Delaware corporation ("Covol").
Licensee and Covol are sometimes hereinafter referred to as, individually
"Party" and, collectively "Parties".
Whereas, Covol has represented that it has developed a proprietary
process to produce synthetic coal fuel extrusions and briquettes from waste coal
dust, coal fines, and other coal derivatives.
Whereas, Licensee proposes to enter into a form of agreement (referred
to as a "Facility Agreement") between itself as Owner and with a Contractor for
the construction of one (1) agglomeration facility within the United States, to
have a production design capacity of approximately 500,000 tons per year
(referred to as a "Facility"), the reference to production design capacity not
being intended to limit the actual production capacity of each Facility.
Now, therefore, in consideration of the foregoing premises, the mutual
covenants and agreements hereinafter set forth, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Licensee and Covol agree as follows:
Section 1 Definitions.
"Coal Briquetting Technology" means the intellectual property
(including patents and trademarks), inventor's certificates and applications
therefor, printed and unprinted technical data, know-how, trade secrets,
copyrights and other intellectual property rights, inventions, discoveries,
techniques, works, processes, methods, plans, software, designs, drawings,
schematics, specifications, communications protocols, source and object code and
modifications, test procedures, program cards, tapes, disks, algorithms and
other scientific or technical information relating to or used in the proprietary
process to produce synthetic coal fuel extrusions and briquettes from waste coal
dust, coal fines, and other similar coal derivatives, and the proprietary binder
material used in manufacturing synthetic coal fuel extrusions and briquettes
from waste coal dust, coal fines and other similar coal derivatives, in each
case owned or controlled by Covol; provided, however, that the defined term
"Coal Briquetting Technology" shall not include the proprietary process
developed by Covol to produce synthetic coke extrusions and briquettes from coke
breeze or any technology other than technology for the processing and production
of synthetic coal fuel extrusions or briquettes.
"Commercial Use" means any usage of the Coal Briquetting Technology for
(1) commercial exploitation and (2) any other usage to which Covol grants prior
written consent which consent shall not be unreasonably withheld.
"Covol" has the meaning set forth in the preamble.
"Contractor" has the meaning set forth in the preamble.
"Facility" has the meaning set forth in the preamble.
"Facility Agreement" has the meaning set forth in the preamble.
"Improvements" has the meaning set forth in section 2.3 hereof.
"Licensee" has the meaning set forth in the preamble.
Page 1
* Confidential material has been omitted from this Exhibit and filed separately
with the Securities and Exchange Commission (the "Commission").
<PAGE>
"Royalty" has the meaning set forth in section 3.2 hereof.
Section 2 License Grant.
2.1 General. Subject to the terms and conditions of this
Agreement, Covol hereby grants to Licensee a licensee to use the Coal
Briquetting Technology for Commercial Use with the Facility, including a license
to make, have made, use, and sell or otherwise transfer products which embody,
use, or have been developed or manufactured with the Coal Briquetting
Technology. Licensee may propose the general location for additional facilities
to use the Coal Briquetting Technology, and Covol will then have thirty (30)
days to approve or disapprove of the general area for each such additional
facility, which approval shall not unreasonably be withheld, taking into account
other facilities in the area utilizing Covol's technology, any noncompetition
agreements, and like factors; provided that the following sites are approved and
not subject to the 30-day review of this Section 2.1: Marmet Pool, near
Chesapeake, Kanawha County, WV.
2.2 Know-How and Assistance. To enable Licensee to benefit
fully from the license of the Coal Briquetting Technology, Covol shall provide
reasonable access to documentation, drawings, engineering specifications,
operating facilities under its control, and other know-how in its possession
that Licensee reasonably requires to carry out the purposes of this Agreement;
reasonable access to its employees or agents who are familiar with the Coal
Briquetting Technology and Improvements to the Coal Briquetting Technology, as
defined in section 2.3 hereof; technical advice with regard to the Coal
Briquetting Technology as is reasonably requested by Licensee; and assistance in
accumulating the data, technical descriptions, test results, etc. necessary to
apply for a Private Letter Ruling from the Internal Revenue Service regarding
the production for the Facilities as qualifying for Section 29 tax credit. Covol
shall not be obligated to provide Licensee with documentation and other forms of
information Covol reasonably deems unnecessary to carry out the purposes of this
Agreement.
2.3 Improvements. Covol may develop improvements, variations,
or modifications ("Improvements") to the Coal Briquetting Technology. The term
"Improvements" shall include changes that reduce production costs, improve
performance, or increase marketability. Covol hereby grants to Licensee a
license to utilize the Improvements made by it for Commercial Use, including to
make, have made, use, and sell or otherwise transfer products that utilize any
such Improvements subject to the terms of this Agreement. It is mutually
understood and agreed that all Improvements provided to Licensee by Covol shall
remain the sole and exclusive property of Covol.
2.4 Confidentiality. Licensee hereby agrees not to disclose
the Coal Briquetting Technology except to its affiliates, agents, employees,
directors, vendors, suppliers, contractors or representatives that have a need
to know about the Coal Briquetting Technology in connection with the operation
and maintenance of the Facility and the sale of coal briquettes or extrusions
produced by the Facility.
Section 3 License Fees and Royalty.
3.1 License Fees. Licensee shall pay a one time advance
license fee equal to * per ton for each ton of annual production capacity.
Payment of the advance license fee described in this Section 3.1 shall be due
and payable at the commencement of actual on-site construction of the Facility.
3.2 Royalty Amount. On or before the 15th of the month
following the end of each fiscal quarter, Licensee shall pay to Covol royalty
payments ("Royalty") in an amount equal to the product of (i) * multiplied by
(ii) the total MM Btu of the extrusions and briquettes produced from the
Facility and sold by Licensee during the immediately preceding quarter that
qualify for the Section 29 tax credit. If unpaid by the date due, the Royalty
shall accrue simple interest at the rate of one (1) percent per month. Beginning
on January 1, 1997 and each year thereafter, the Royalty shall be adjusted by
the increase or decrease in the dollar amount of the inflation adjustment as
provided in Section 29 of the Internal Revenue Code.
Page 2
* Confidential material has been omitted from this Exhibit and filed separately
with the Commission.
<PAGE>
Section 4 Sales of Binder.
4.1 Sale and Purchase. Upon the request of Licensee, from
time-to-time, Covol shall sell to Licensee a sufficient quantity of proprietary
binder material manufactured by Covol as is required to operate the Facility.
The binder material shall conform in quality to the binder described in Covol's
Section 29 tax credit Private Letter Ruling dated September 6, 1995, subject to
any improvement in the binder material that still satisfies the Section 29 tax
credit qualification requirements. Covol shall deliver the proprietary binder
material to the Facility, at such times and in such amounts as reasonably
requested by Licensee. Payments for proprietary binder material delivered by
Covol during any calender month shall be due and payable to Covol on or before
the 15th of the immediately succeeding month. If unpaid by the due date, the
payment shall accrue simple interest at the rate of one (1) percent per month.
4.2 Price. The price which Licensee shall pay for the
proprietary binder material delivered by Covol during any calender year shall be
an amount equal to (i) Covol's direct and actual costs (direct material and
labor costs and a percentage of the total overhead costs of Covol reasonably
reflecting the ratio of the administrative costs incurred in connection with the
manufacture and sale of the proprietary binder material to the total overhead
costs of Covol) reasonably incurred to manufacture the proprietary binder
material plus (ii) * of the amount determined pursuant to *.
4.3 Licensee Production of Binder. If Covol's ability to
deliver the proprietary binder material to Licensee is interrupted for at least
twenty days or terminated, Covol hereby grants to Licensee a nonexclusive
license for the term of this Agreement (or such shorter period as provided in
the proviso hereto) to use Covol's technology to manufacture the proprietary
binder material in sufficient quantities to operate the Facility up to full
capacity for the purposes of this Agreement; provided however, that the license
granted to Licensee under this section 4.3 shall cease and sales of the
proprietary binder material shall be reinstated at any time after Covol is able
to deliver the proprietary binder material in accordance with section 4. Covol
will deliver to a safety deposit box owned jointly by Covol and Licensee at the
Bank of American Fork, Main Branch, a written copy of the formula used by Covol
to manufacture the proprietary binder material. Except to the extent required by
law, Licensee covenants to hold the formula delivered to it by Covol pursuant to
the preceding sentence strictly confidential, and not to study, utilize, remove,
or access the formula except in accordance with the license granted to Licensee
pursuant to this section 4.3.
Section 5 Records; Inspection; Confidentiality. Each Party shall keep
accurate records containing all data reasonably required for the computation and
verification of the amounts to be paid by the Parties under this Agreement, and
shall permit the other Party or an independent accounting firm designated by the
other Party to inspect and/or audit such records during normal business hours
upon reasonable advance notice. All costs and expenses incurred by a Party in
connection with such inspection shall be borne by it. Except to the extent
required by law, each Party agrees to hold confidential from all third parties
all information contained in records examined by or on behalf of it pursuant to
this section 5.
Section 6 Development and Construction of Facilities.
6.1 Assistance from Covol. Upon the reasonable request of
Licensee, Covol agrees to provide assistance from time to time in the
development and construction of the Facility.
6.2 Reimbursement of Expenses. Licensee shall reimburse the
travel and other similar out-of-pocket expenses of Covol in performing services
requested under section 6.1 hereof; provided, however, that Covol shall obtain
the prior written approval of Licensee for any expenditures in excess of $5,000.
Section 7 Representations and Warranties.
Page 3
* Confidential material has been omitted from this Exhibit and filed separately
with the Commission.
<PAGE>
7.1 Authority. Each of Covol and Licensee represents and
warrants that (i) the execution, delivery and performance of this Agreement and
the consummation of the transactions contemplated hereby have been or will be
duly authorized on its behalf by all requested action, corporate or otherwise,
(ii) it has the full right, power and authority to enter into this Agreement and
to carry out the terms of this Agreement, (iii) it has duly executed and
delivered this Agreement, and (iv) this Agreement is a valid and binding
obligation of it enforceable in accordance with its terms.
7.2 No Consent. Each of Covol and Licensee represents and
warrants that no approval, consent, authorization, order, designation or
declaration of any court or regulatory authority or governmental body or any
third-party is required to be obtained by it, nor is any filing or registration
required to be made therewith by it for the consummation by it of the
transactions contemplated under this Agreement.
7.3 Intellectual Property Matters. Covol warrants that it (i)
owns intellectual property, inventor's certificates and applications therefor,
printed and unprinted technical data, know-how, trade secrets, copyrights and
other intellectual property rights, inventions, discoveries, techniques, works,
processes, methods, plans, software, designs, drawings, schematics,
specifications, communications protocols, source and object code and
modifications, test procedures, program cards, tapes, disks, algorithms, and
other scientific or technical information relating to or used in the proprietary
process to produce synthetic coal fuel extrusions and briquettes from waste coal
dust, coal fines, and other similar coal derivatives, and, the proprietary
binder material used in manufacturing synthetic coal fuel extrusions and
briquettes from waste coal dust, coal fines and other similar coal derivatives,
as defined in section 1 hereof, and (ii) has the right and power to grant to
Licensee the licenses granted herein. *.
7.4 Indemnification. Each Party agrees and shall indemnify,
defend and hold harmless the other Party, its members, officers, agents,
successors and permitted assigns from and against all claims, disputes, losses,
damages, liabilities, costs and expenses (including attorneys' fees) of any kind
arising from any claims or other actions relating to a breach by the first Party
of its representations and warranties made in this Agreement.
Section 8 Term. This Agreement and the license granted hereunder shall
be for the primary term from the date first above written to and including
January 1, 2008, or the corresponding date under Section 29 of the Internal
Revenue Code, as amended, in the event of an extension of the tax credits
available under Section 29 of the Internal Revenue Code, as amended, whichever
is later. Licensee shall have the right to renew this Agreement upon terms that
the Parties may later agree.
Section 9 Waiver. The failure of any party to enforce at any time any
provision of this Agreement shall not be construed as a waiver of such provision
or the right thereafter to enforce each and every provision. No waiver by any
party, either express or implied, of any breach of any of the provisions of this
Agreement shall be construed as a waiver of any other breach of such term or
condition.
Section 10 Severability. If any provision of this Agreement shall be
held by a court of competent jurisdiction to be invalid or unenforceable in any
respect for any reason, the validity and enforceability of any such provision in
any other respect and of the remaining provisions of this Agreement shall not be
in any way impaired.
Section 11 Notices. All notices required or permitted to be given under
this Agreement shall be in writing. Notices may be served by certified or
registered mail, postage paid with return receipt requested; by private courier,
prepaid; by telex, facsimile, or other telecommunication device capable of
transmitting or creating a written record; or personally. Mailed notices shall
Page 4
* Confidential material has been omitted from this Exhibit and filed separately
with the Commission.
<PAGE>
be deemed delivered five days after mailing, property addressed. Couriered
notices shall be deemed delivered when delivered as addressed, or if the
addressee refuses delivery, when presented for delivery notwithstanding such
refusal. Telex or telecommunicated notices shall be deemed delivered when
receipt is either confirmed by confirming transmission equipment or acknowledged
by the addressee or its office. Personal delivery shall be effective when
accomplished. Unless a party changes its address by giving notice to the other
party as provided herein, notices shall be delivered to the parties at the
following address:
Covol: Covol Technologies, Inc.
3280 North Frontage Road
Lehi, Utah 84084
Telephone: (801) 768-4481
Telecopier: (801) 768-4483
Attn.: Mr. Brent M. Cook
With a copy to: Ballard Spahr Andrews & Ingersoll
201 South Main Street, Suite 1200
Salt Lake City, Utah 84111-2215
Telephone: (801) 531-3000
Telecopier: (801) 531-3001
Attn.: Mr. William Marsh
Licensee: PC West Virginia Synthetic Fuel #1, L.L.C.
4401 Fair Lakes Court
Suite 400
Fairfax, VA 22033
Telephone: (703) 818-9100
Telecopier: (703) 818-9108
Attn.: Mr. James R. Treptow
Section 12 Assignment. This Agreement may be assigned by Covol to any
of its wholly-owned subsidiaries and by Licensee to any affiliate(s) owning a
Facility; otherwise, this Agreement may not be assigned by either Party without
the other Party's prior written consent, which consent shall not be unreasonably
withheld.
Section 13 Further Assurances. Each Party agrees, at the request of the
other Party, at any time and from time to time, to execute and deliver all such
further documents, and to take and forbear from all such action, as may be
reasonably necessary or appropriate in order more effectively to carry out the
provisions of this Agreement.
Section 14 Entire Agreement. This Agreement constitutes the entire
agreement of the Parties relating to the subject matter hereof. There are no
promises, terms, conditions, obligations, or warranties other than those
contained herein. This Agreement supersedes all prior communications,
representations, or agreements, verbal or written, among the Parties relating to
the subject matter hereof. This Agreement may not be amended except in writing
signed by the Parties.
Section 15 Governing Law. This Agreement shall be governed in
accordance with the laws of the State of Utah.
Section 16 Counterparts. This Agreement may be executed in two or more
counterparts, each which shall be deemed an original, but all of which together
shall constitute one and the same agreement.
Page 5
<PAGE>
IN WITNESS WHEREOF, the Parties have executed this Agreement by their
duly authorized representatives the day and year first above written.
COVOL TECHNOLOGIES, INC.
By: /s/ Brent M. Cook
-----------------------
Name: Brent M. Cook
Title: President
PC WEST VIRGINIA SYNTHETIC FUEL #1, L.L.C.
by C.C. PACE CAPITAL, L.L.C.,
one of its members
By: /s/ James R. Treptow
--------------------------
Name: James R. Treptow
Title: Managing Director
Page 6
Employment Agreement
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into
as of the 20 day of March, 1997 (the "Effective Date") by and between COVOL
Technologies, Inc., a Delaware corporation (the "Company"), and Max E. Sorenson
("Employee"). The Company and Employee are sometimes later in this Agreement
collectively referred to as the "Parties."
RECITALS
This Agreement is entered into with reference to the following facts,
definitions and objectives:
NOW, THEREFORE, in Consideration of this Agreement and of the covenants
contained in this Agreement, the Parties agree as follows:
1. Employment and Positions.
(a) Position. The Company employs Employee and the Employee
accepts employment by the Company as Vice President of the Company for the
Period of Employment specified in Paragraph 4 ("Period of Employment").
2. Services to be Rendered. Employee shall, during the period of
Employment, serve the Company in the position set forth in Paragraph 1
("Employment") diligently, competently and in conformance with the corporate
policies of the Company. Employee shall be free to conduct investment activities
that do not conflict or interfere with the performance of his duties under this
Agreement including but not limited to those contained in Paragraph 13.
Performance of the required services will in no way require Employee to use
confidential information obtained from his previous employer.
In fulfilling his duties and responsibilities under this Agreement,
Employee shall report to the President and Chief Executive Officer of the
Company.
3. Period of Employment. Employee's employment by the Company pursuant
to this Agreement shall, unless sooner terminated as provided in this Agreement,
be for a term of three (3) years, commencing as of the 1 day of April 1997, and
ending with the close of "business on the 1 day of April, 2000 (the "Period of
Employment").
1
<PAGE>
4. Base Salary. During the first twelve months of this Agreement, the
Employee's regular salary, before all customary and proper taxes, shall be no
less than $6,667.00 per month payable bi-weekly. During the second twelve months
of this Agreement, the Employee's regular salary, before all customary and
proper taxes, shall be no less than $10,833.00 per month payable bi-weekly.
During the last twelve months of this Agreement, the Employee's regular salary,
before all customary and proper taxes, shall be no less than $10,833.00 per
month payable bi-weekly. The car allowance and cost of term life insurance shall
be added to the base salary.
5. Incentive Bonus. During the Period of Employment, Employee shall be
entitled to receive a bonus pursuant to the Company's bonus plan as in effect
from time to time.
6. Stock Options. Stock Options shall be issued pursuant and subject to
the provisions outlined below or as otherwise mutually agreed to.
(a) Purchase Price. The purchase price per share for the
shares subject to the Stock Option will be One Dollar and Fifty Cents ($1.50)
per share.
(b) Number of Shares. The Stock Options will be for Fifty
Thousand (50,000) shares of the Company's Common Stock (the "Optioned Shares").
(c) Exercise Periods. The Optioned Shares will vest and be
exercisable as follows: (1) Twenty Five Thousand (25,000) Optioned Shares will
be vested on April 1, 1997. Twelve Thousand Five Hundred (12,500) on the first
anniversary date of Employment, and Twelve Thousand Five Hundred (12,500) on the
second anniversary date of Employment. Once vested, the Optioned Shares may be
exercised in whole or in part at any time, subject to the limitations within
which the exercise of the Options must occur.
(d) Vesting of Options in Event of Disability or Death. In the
event of disability or death of the employee any nonvested Stock Options shall
vest effective as of the date of the disability or the death of employee. In the
event of Employee's disability or death, the Employee, heirs or estate of
Employee, as the case may be, may exercise any unexecuted options at any time
subject to the time limitations within which exercise of options must occur.
(e) Additional Stock Options. Employee shall also be eligible
to receive additional stock options during the Period of Employment pursuant to
a stock option bonus plan as may from time to time be in effect.
7. Other Benefits. In addition to the benefits previously set forth in
this Agreement, Employee shall, during the Period of Employment, be entitled to
the benefits described below, and as concerns all such benefit programs where
years of service are a factor, to the extent permitted by law, Employee shall be
given credit for his years of service with the Steel Industry.
2
<PAGE>
(a) Car Allowance. Employee shall be paid a monthly car
allowance in the amount of Five Hundred and Fifty Dollars ($550).
(b) Vacation. During the Period of Employment, Employee shall
be entitled to not less than Four (4) weeks of paid vacation during each
calendar year occurring during the Period of Employment and that amount of
vacation provided to other senior executive officers of the Company. Upon
termination of Employee's employment under this Agreement, Employee shall be
paid for any unused vacation in the year in which the termination occurred.
(c) Sick Leave. Sick leave time that is reasonable under the
circumstances and that is consistent with the Company's policies and procedures,
as the same may be changed, modified or terminated for all participants from
time to time.
(d) Insurance. The Company shall pay the premium for and
provide life, disability, medical, and dental benefits for the Employee and his
family. Said insurance shall be provided with no lapse in coverage between the
time Employee's insurance benefits with prior employer terminate and the time
Employee's insurance benefits from the Company begin. All preexisting conditions
are be covered to the extent that they are not covered by the prior employer.
Life insurance \ Disability insurance will be provided as is typical for
Officers in the Steel Industry.
(e) Retirement Plan. Participation in the Company's Retirement
Plans in accordance with the terms and provisions and applicable law, as the
same may be implemented, changed, amended, or terminated from time to time.
Employee shall become eligible to participate in the Company's Retirement Plans
as of April 1, 1997 or as the effective date of implementation of such plans
whichever as later.
(f) Other Miscellaneous Benefits. The Company shall pay or
reimburse Employee for the following miscellaneous benefits:
(i) annual dues for association membership for
relevant professional groups; and
(ii) subscription and purchase of books, journals,
and publications which relate to job duties and responsibilities.
8. Termination of Employment By the Company. Anytime in this Agreement
to the contrary notwithstanding, the Company shall have the following rights
with respect to termination of Employee's employment:
(a) Cause. Employee's employment may be terminated for Cause.
For purpose of this Agreement, "Cause" shall mean and refer to a determination
made in good faith by the Company's Board of Directors that:
3
<PAGE>
(i) Employee has been convicted of or has entered
a plea of guilty or nolo contendere to a felony or to any other crime, which
other crime is punishable by incarceration for a period of one (1) year or
longer, or which is a crime involving moral turpitude:
(ii) There has been a theft, embezzlement, or
other criminal misappropriation of funds by Employee, whether from Company or
any other person;
(iii) Employee has willfully failed or refused to
follow reasonable written policies or directives established by the Board of
Directors or the Chief Executive Officer of the Company, or Employee has
willfully failed to attend to material duties or obligations of his office
(other than any such failure resulting from Employee's incapacity due to
physical or mental illness which is a cause or manifestation of Employee's
disability), which failure or refusal continues for thirty (30) days following
delivery of a written demand from the Company's Chief Executive Officer for
performance to Employee identifying the manner in which Employee has failed to
follow such policies or directives or to preform such duties.
Termination pursuant to this Paragraph 8(a) shall be effective as of the
effective date of the notice by the Board of Directors to Employee that it has
made the required determination, or at such other subsequent date, if any,
specified in such notice.
(b) Death. If Employee 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.
9. Termination of Employment by Employee.
(a) With Good Reason. Employee shall have the
right to terminate his employment under this Agreement at any time for Good
Reason, provided Employee has delivered written notice to the Company which
briefly describes the facts underlying Employee's belief that "Good Reason"
exists and the Company has failed to cure such situation within thirty (30) days
after effective date of such notice. For purposes of this Agreement, "Good
Reason" shall mean and consist of:
(i) a material breach by the Company of
its obligations under this Agreement;
(ii) without Employee's prior written
consent, the assignment to Employee of duties that are materially inconsistent
with, or that constitute a material alteration in the status of his
responsibilities set forth in this Agreement, as a Vice President of the
Company;
(iii) a reduction by the Company of
Employee's Base Salary below the Base Salary set forth in Paragraph 4 ("Base
Salary")'
4
<PAGE>
(iv) without Employee's prior written
consent, the transfer or relocation of Employee pace of employment to any place
other than the Salt Lake City/Provo metropolitan area, except for reasonable
travel on the business of the Company; or
(v) upon the consummation of a sale of
all or substantially all of the assets of the Company not in the usual or
regular course of the business of the Company in which sale the acquiring
company did not assume all of the obligations of the Company under this
Agreement.
(b) Without Good Reason. With not less than
sixty (60) days prior written notice (which notice shall specify the date of
termination), Employee shall have the right to terminate his employment under
this Agreement without Good Reason.
10. Effect of Termination.
Certain Insurance Benefits. If the employment of Employee is
terminated by the Company without Cause, or due to the death or disability of
Employee, or by Employee With Good Reason, the Company shall pay the insurance
premium payable by Employee or his heirs, as the case may be, for continued
insurance coverage under the insurance policies or programs of the Company
pursuant to COBRA for or with respect to the first twelve (12) months of such
COBRA coverage.
11. Severance Pay. If the Employee does not continue in the employ of
the Company after the termination of this Agreement, whether or not the Employee
is offered continued employment by the Company, Company shall pay to the
Employee, no later than April 1, 2000, the sum of one years annual wages. The
Employee 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 Employee as
the result of employment by another employer after termination or otherwise.
12. Signing Bonus. The Employee shall be entitled to a Signing Bonus at
$50,000 to be paid in four (4) equal installments of $12,500 beginning with the
first paycheck in April 1997. The remaining installments shall be paid in the
first pay check in July, October and December 1997.
13. Outside Interests. It is recognized that the Employee has
outside interests in Ferro Resources LLC which previously entered into joint
venture agreements with Covol for two coal fines processing facilities. Employee
is also involved in activities related to limestone and iron ore processing in
Utah and processing of hot rolled coils . Covol is aware of these activities and
does not wish to pursue them. Such activities will not materially detract from
the Employee meeting his obligations sited in Paragraph 2.
5
<PAGE>
Employee: COVOL TECHNOLOGIES,INC.
By:__________________ By:__________________
Max E. Sorenson Brent M. Cook, President
6
COVOL TECHNOLOGIES, INC.
List of Subsidiaries
Jurisdiction of
Name Organization
---- ------------
Utah Synfuel #1, Ltd. Delaware limited partnership
Alabama Synfuel #1, Ltd. Delaware limited partnership
Flat Ridge Corporation Utah corporation
Covol Australia, Ltd. Australian corporation
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 4,780,301
<SECURITIES> 0
<RECEIVABLES> 590,095
<ALLOWANCES> 0
<INVENTORY> 1,818,991
<CURRENT-ASSETS> 8,603,732
<PP&E> 14,215,769
<DEPRECIATION> (596,498)
<TOTAL-ASSETS> 8,772,072
<CURRENT-LIABILITIES> (11,799,152)
<BONDS> 0
0
5,094,937
<COMMON> 45,119,421
<OTHER-SE> (44,286,081)
<TOTAL-LIABILITY-AND-EQUITY> 26,360,814
<SALES> (250,677)
<TOTAL-REVENUES> (250,677)
<CGS> 335,216
<TOTAL-COSTS> (11,164,577)
<OTHER-EXPENSES> (81,180)
<LOSS-PROVISION> 0
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<INCOME-PRETAX> (10,913,900)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,995,080)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,995,080)
<EPS-PRIMARY> (1.38)
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