UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from _________________
Commission file number 0-27803
COVOL TECHNOLOGIES, INC.
------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 87-0547337
-------- ----------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
3280 North Frontage Road, Lehi, Utah 84043
(Address of principal executive offices) (Zip Code)
(801) 768-4481
(Registrant's telephone number, including area code)
-----------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 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
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class of Stock Amount Outstanding
-------------- ------------------
$.001 par value Common Stock 10,432,192 Shares of Common Stock
at May 7, 1998
<PAGE>
COVOL TECHNOLOGIES, INC.
TABLE OF CONTENTS
Page No.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL INFORMATION (Unaudited).......................... 3
Consolidated Balance Sheets - As of March 31, 1998 and
September 30, 1997
Consolidated Statements of Operations - For the three
months ended March 31, 1998 and 1997 and for the
six months ended March 31, 1998 and 1997
Consolidated Statements of Cash Flows - For the
six months ended March 31, 1998 and 1997
Notes to Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.......................................................23
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS..........................................23
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS..................24
ITEM 3. DEFAULTS UPON SENIOR SECURITIES............................25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........25
ITEM 5. OTHER INFORMATION..........................................25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...........................25
EXHIBIT 27.1 FINANCIAL DATA SCHEDULE....................................27
Statements in this Form 10-Q, 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 which
could cause actual results to differ from expectations, please see the caption
entitled "Forward Looking Statements" in ITEM 2 hereof. There can be no
assurance that the Registrant's results of operations will not be adversely
affected by such factors.
2
<PAGE>
<TABLE>
<CAPTION>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
As of As of
March 31, September 30,
1998 1997
ASSETS --------------- ----------------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 558,682 $ 4,780,301
Receivables 396,757 12,595
Receivable - stock subscriptions 0 577,500
Inventories 1,548,083 1,818,991
Advances on inventories 1,989,772 1,086,964
Notes receivable - related parties, current 346,395 275,516
Prepaid expenses and other current assets 224,433 51,865
--------------- ----------------
Total current assets 5,064,122 8,603,732
--------------- ----------------
Property, plant and equipment, net of accumulated depreciation 29,851,003 13,619,271
--------------- ----------------
Other assets:
Notes receivable 7,757,290 0
Notes receivable - related parties, non-current 3,627,129 3,816,604
Deposits and other assets 605,607 321,207
--------------- ----------------
Total other assets 11,990,026 4,137,811
--------------- ----------------
Total assets $ 46,905,151 $ 26,360,814
=============== ================
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements
3
<PAGE>
<TABLE>
<CAPTION>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
As of As of
March 31, September 30,
1998 1997
LIABILITIES AND STOCKHOLDERS' EQUITY --------------- ----------------
Current liabilities:
<S> <C> <C>
Accounts payable $ 641,159 $ 1,045,147
Payable for coal briquetting equipment 3,121,003 1,967,686
Due to related party 454,294 1,038,667
Accrued liabilities 521,410 1,023,126
Accrued contractor liability 1,056,500 1,477,000
Advance on binder facilities 790,703 0
Convertible debentures, current 1,000,000 3,302,422
Notes payable, current 2,536,679 1,945,104
--------------- ----------------
Total current liabilities 10,121,748 11,799,152
--------------- ----------------
Long-term liabilities:
Accrued interest 329,353 204,402
Notes payable, non-current 15,028,325 2,900,000
Notes payable - related parties, non-current 146,588 489,096
Deferred revenues from advance licensing fees 1,650,000 1,650,000
Deferred compensation 229,752 223,891
--------------- ----------------
Total long-term liabilities 17,384,018 5,467,389
--------------- ----------------
Total liabilities 27,505,766 17,266,541
--------------- ----------------
Minority interest in consolidated subsidiaries 3,028,118 3,165,996
--------------- ----------------
Commitments and contingencies (Note 10)
Stockholders' equity:
Preferred stock: $0.001 par value; authorized 10,000,000 shares,
issued and outstanding, 315,882 shares at March 31, 1998 and
303,024 shares at September 30, 1997 316 303
Common stock: $0.001 par value; authorized 25,000,000 shares,
issued and outstanding, 10,256,175 shares at March 31, 1998 and
8,627,290 shares at September 30, 1997 10,256 8,627
Common stock to be issued: 63,060 shares at March 31, 1998 and
462,285 shares at September 30, 1997 63 462
Capital in excess of par value - preferred 5,184,626 5,094,634
Capital in excess of par value - common 55,104,729 41,818,549
Capital in excess of par value - common stock to be issued 417,638 3,291,783
Accumulated deficit (32,376,300) (32,191,556)
Notes and interest receivable - related parties from issuance of or
collateralized by common stock (net of allowance) (7,701,798) (7,411,278)
Deferred compensation from stock options (4,268,263) (4,683,247)
--------------- ----------------
Total stockholders' equity 16,371,267 5,928,277
--------------- ----------------
Total liabilities and stockholders' equity $ 46,905,151 $ 26,360,814
=============== ================
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements
4
<PAGE>
<TABLE>
<CAPTION>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
-------------------
Three months Three months Six months Six months
ended ended ended ended
March 31, March 31, March 31, March 31,
1998 1997 1998 1997
--------------- -------------- -------------- ---------------
Revenues:
<S> <C> <C> <C> <C>
License fees $ 3,586,000 $ 0 $ 4,586,000 $ 0
Synthetic fuel sales 4,888 20,194 4,888 124,341
Binder sales 84,602 4,017 91,605 4,017
Coal fines 1,903,553 0 1,903,553 0
Operation and maintenance fees 31,655 0 66,277 0
--------------- -------------- -------------- ---------------
Total revenues 5,610,698 24,211 6,652,323 128,358
--------------- -------------- -------------- ---------------
Operating costs and expenses:
Cost of coal briquetting operations 730,252 467,612 1,187,199 832,192
Cost of coal fines 1,903,553 0 1,903,553 0
Research and development 72,202 65,396 227,893 170,463
Selling, general and administrative 1,150,848 422,523 1,891,402 1,229,837
Compensation related to stock options
and issuance of common stock 238,556 276,239 446,047 589,198
Loss (gain) on sale of facility (78,401) 4,196 (78,401) 4,196
Write-down (write-up) of note
receivable - related parties collateralized
by common stock (270,000) 431,250 (562,500) (293,750)
--------------- -------------- -------------- ---------------
Total operating costs and expenses 3,747,010 1,667,216 5,015,193 2,532,136
--------------- -------------- -------------- ---------------
Operating income (loss) 1,863,688 (1,643,005) 1,637,130 (2,403,778)
--------------- -------------- -------------- ---------------
Other income (expense):
Interest income 180,677 50,051 302,680 177,857
Interest expense (1,179,925) (1,568,592) (2,292,432) (1,634,468)
Minority interest in net losses
of consolidated subsidiaries 52,211 342,518 137,878 360,670
Other income 15,000 3,064 30,000 4,453
--------------- -------------- -------------- ---------------
Total other income (expense) (932,037) (1,172,959) (1,821,874) (1,091,488)
--------------- -------------- -------------- ---------------
Net income (loss) $ 931,651 $ (2,815,964) $ (184,744) $ (3,495,266)
--------------- -------------- -------------- ---------------
Earnings (loss) per share:
Basic $ 0.09 $ (0.36) $ (0.03) $ (0.45)
=============== ============== ============== ===============
Diluted $ 0.08 $ (0.36) $ (0.03) $ (0.45)
Weighted average shares outstanding:
Basic 9,573,529 7,854,178 9,381,673 7,785,579
Diluted 12,031,250 7,854,178 9,381,673 7,785,579
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements
5
<PAGE>
<TABLE>
<CAPTION>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Six Months
ended ended
March 31, 1998 March 31, 1997
-------------- ---------------
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (184,744) $ (3,495,266)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 177,698 104,345
Common stock issued for services 0 40,500
Write-up of note receivable - related parties (562,500) (293,750)
Interest expense based upon issuance of convertible debt and warrants
at a discount 2,265,543 1,428,571
Amortization of deferred compensation related to stock options 446,047 548,698
Interest written off 15,151 0
Interest earned on notes receivable - related parties, collateralized by
common stock 0 (79,165)
Loss (gain) on sale of equipment (78,400) 4,196
Minority interest in net losses of consolidated subsidiaries (137,878) (360,670)
Increase (decrease) from changes in assets:
Receivables (384,162) 45,660
Inventories 270,908 (200,837)
Advances on inventory (902,808) (750,000)
Prepaid expenses and other current assets (172,568) (37,802)
Deposits and other assets (46,400) (91,368)
Accounts payable (403,988) 224,512
Due to related party, net (584,373) 0
Accrued liabilities (188,189) 184,681
Accrued contractor liability (420,500) 0
Accrued interest 124,951 0
Note payable for inventory 768,500 0
Deferred compensation 5,861 5,567
Deferred revenue from advance license fees 0 1,400,000
-------------- ---------------
Net cash (used in) provided by operating activities 8,149 (1,322,128)
-------------- ---------------
Cash flows from investing activities:
Cash paid for property, plant and equipment (21,677,713) (4,514,852)
Issuance of notes receivable (1,257,290) (49,456)
Equipment Deposit (238,000) 0
Advances on binder facility 790,703 0
Proceeds from notes receivable 0 24,728
Proceeds from notes receivable - related party 118,596 29,876
-------------- ---------------
Net cash used in investing activities (22,263,704) (4,509,704)
-------------- ---------------
Cash flows from financing activities:
Proceeds from issuance of limited partnership interests in subsidiaries 0 350,000
Distributions to limited partnership interests in subsidiaries 0 (292,000)
Proceeds from notes payable 16,338,073 4,710,721
Proceeds from notes payable - related party 0 109,470
Payments on notes payable (2,622) (260,713)
Payments on notes payable - related parties (342,508) 0
Proceeds from notes receivable - related parties, collateralized by common stock 301,829 103,000
Proceeds from issuance of preferred stock, (net) 90,005 0
Proceeds from issuance of common stock (net) 873,396 665,501
Proceeds from issuance of common stock to be issued (net) 198,263 0
Proceeds from receivable - stock subscriptions 577,500 0
-------------- ---------------
Net cash provided by financing activities 18,033,936 5,385,979
-------------- ---------------
Net decrease in cash (4,221,619) (445,853)
Total cash and cash equivalents, beginning of period 4,780,301 490,106
-------------- ---------------
Total cash and cash equivalents, end of period $ 558,682 $ 44,253
============== ===============
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements
6
<PAGE>
<TABLE>
<CAPTION>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Six Months
ended ended
March 31, 1998 March 31, 1997
-------------- ---------------
Supplemental schedule of noncash investing and financing activities:
<S> <C> <C>
Payable for briquetting facility $ 1,153,317 $ 1,402,940
Common stock issued on conversion of notes payable 7,000,000 138,396
Common stock issued for notes receivable - related party collateralized by
common stock 45,000 0
Notes receivable issued for sale of briquetting facility 6,500,000 3,500,000
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements
7
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Management Opinion:
In the opinion of management, the accompanying financial statements present
fairly the financial position of Covol Technologies, Inc. and Subsidiaries (the
"Company") as of March 31, 1998 and September 30, 1997, the results of its
operations for the three months and six months ended March 31, 1998 and March
31, 1997 and its cash flows for the six months ended March 31, 1998 and March
31, 1997. The results of operations for the periods presented are not
necessarily indicative of the results to be expected for the full year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these financial statements
be read in conjunction with the Company's Annual Report included in Form 10-K
for the year ended September 30, 1997 and the Company's Quarterly Report
included on Form 10-Q for the quarter ended December 31, 1997.
2. Earnings/Loss Per Share Calculation
During fiscal 1998 the Company adopted SFAS No. 128 "Earnings Per Share." Basic
earnings (loss) per share is computed based upon the weighted average number of
common shares outstanding. The computation of diluted earnings per common share
includes contingent issuances of securities that would have a dilutive effect on
earnings per share. Contingent issuances were antidilutive in each period for
which a net loss was reported; therefore, the amounts reported for basic and
diluted loss per share are the same for those periods. See Note 9.
3. Inventories and Advances on Inventories
Inventories and advances on inventories are stated at the lower of average cost
or market, and consist of synthetic fuel, binder materials, and coal fines.
4. Change in Estimate of Fair Value of Note Receivable
During the three and six months ended March 31, 1998, the Company decreased the
allowance for impairment on the $5,000,000 face value note receivable from two
stockholders by $270,000 and $562,500, respectively, to an adjusted loan value
of $2,152,500. During the three and six months ended March 31, 1997, the Company
increased and decreased the allowance by $(431,250) and $293,750, respectively.
The changes in the allowance were based on changes in the market value of the
Company's common stock that collateralizes the note receivable. The allowance is
subject to future fluctuations in the Company's common stock.
5. Notes Receivable
On November 14, 1997, the Company entered into a financial agreement with CoBon
Energy, L.L.C. (CoBon), relating to the purchase of equipment for a synthetic
fuel production facility. The original agreement provided that the Company will
purchase, on CoBon's behalf, up to $1 million worth of equipment for use in the
facility. Subsequently, the maximum amount of the financing was increased to
approximately $1,400,000 to provide for additional borrowings by CoBon. As
consideration for the loan, the Company will have the right to receive certain
royalties from the operations of the facility. If the facility is not completed
for any reason, the Company will retain title to the purchased equipment. The
Company has paid or incurred costs totaling $812,290 for equipment and has
loaned CoBon $445,000, bringing the total note receivable to $1,257,290 as of
March 31, 1998.
8
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Notes Receivable, continued
On February 20, 1998, the Company sold the Alabama briquetting facilities to
Birmingham Synfuel, L.L.C., a wholly-owned subsidiary of PacifiCorp. The
purchase price was $6,500,000 and resulted in a gain of approximately $78,000.
The purchase price was paid with a note receivable that bears interest at 12%
and shall be repaid in equal consecutive quarterly installments, subject to
certain provision limitations, including the net operating cash flow from the
Alabama facility. All accrued interest and unpaid principal is due and payable
on February 20, 2003.
6. Advance on Binder Facilities
During the quarter ended March 31, 1998, the Company received advances of
approximately $490,000 from A.T. Massay, PacifiCorp, and CoBon for binder
facilities under construction, bringing total advances for binder facilities to
$790,703 as March 31, 1998.
7. Notes Payable and Convertible Debentures
A.J.G. Financial Services, Inc.
During October 1997, the Company entered into an agreement with A.J.G. Financial
Services, Inc. ("AJG") to provide financing of approximately $4,300,000 for the
building of a wash plant at an interest rate of 6%. In addition, the Company
granted warrants in an amount equal to 10% of the amount financed. Half of these
warrants have a strike price of $10 and half have a strike price of $20. Based
upon the market price of the Company's common stock on the date of the
agreement, $398,222 of interest expense was recognized due to the $10 warrants.
As of March 31, 1998, the Company had borrowed $4,325,433 under this
arrangement. The Company began start-up testing of the wash plant during April,
1998.
During the quarter ended March 31, 1998, the Company entered into an additional
agreement with AJG to borrow up to $6.5 million at an interest rate of 6% per
annum to be used for construction of a briquetting facility located in West
Virginia. As of March 31, 1998 the Company had borrowed $4,698,880 under this
agreement. The loan is due in full February, 2001.
PacifiCorp Financial Services, Inc.
During December 1997, the Company executed a Convertible Loan and Security
Agreement with PacifiCorp Financial Services, Inc. ("PFS"). The agreement
modifies an agreement finalized on March 20, 1997 which provides funding for
completing construction of the Alabama project, acquiring coal fines and for
other purposes related to the project. The modification increased the amount
available from $5,000,000 to $7,000,000 with a provision that borrowings up to
the lessor of actual borrowings or $6,000,000 are convertible into common stock
under the same terms as the original March 20, 1997 agreement (at a price of
$7.00 per share). Based upon the December 1997 amendment, an interest expense of
$714,286 was recognized during the quarter ended December 31, 1997 because the
conversion price is below the market price.
Effective March 3, 1998, PFS exercised their option to convert all outstanding
borrowings under this arrangement. The conversion of the borrowings in excess of
$6,000,000 resulted in an interest charge of $714,285 during the quarter ending
March 31, 1998 because the conversion price is below the market price. PFS also
asserted that the Company sold common stock during 1997 at a price that caused
the antidilution provisions of its conversion agreement with Covol to become
applicable. This resulted in the issuance of additional common stock with a
value of approximately $220,000. This amount was charged to interest expense
during the quarter ended March 31, 1998.
9
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. Notes Payable and Convertible Debentures, continued
DTE Energy Services, Inc.
In October 1997, the Company entered into a financial agreement with DTE Energy
Services, Inc. ("DTE") relating to the purchase of equipment for up to two
synthetic fuel production facilities. The agreement allows the Company to borrow
up to $2,000,000 with interest at LIBOR plus 1.0% (LIBOR was 6.69% on March 31,
1998). The Company has drawn $1,999,719 under the agreement as of March 31,
1998. These borrowings were repaid during May 1998.
Trans Pacific Stores
On March 17, 1998, the Company entered into a loan agreement with Trans Pacific
Stores, Ltd. ("TPS") wherein TPS agreed to loan the Company up to $4,000,000.
The loan is collateralized by future earned license fees payable to the Company
from the synthetic fuel manufacturing facilities constructed by Pace Carbon
Fuels, LLC. Interest on the outstanding principal balance accrues at twelve
percent (12%) per annum. The interest rate is adjusted to thirteen percent (13%)
on September 20, 1998 and to fourteen percent (14%) on December 20, 1998. Each
time the interest rate is adjusted, a one percent (1%) renewal fee of $40,000 is
due and payable. Interest on the unused portion of the borrowing will accrue
interest at one percent (1%) per annum until the loan is paid in full. The
outstanding principal and interest is due in full before March 20, 1999. As of
March 31, 1998, $530,300 had been borrowed under this arrangement. A member of
the Company's Board of Directors is affiliated with TPS.
Fun Enterprises
On January 29, 1998, the Company entered into a loan and security agreement with
Fun Enterprises, Pty Ltd. ("Fun"), a current holder of the Company's Class B
preferred stock, relating to the development and construction of a mobile,
skid-mounted synthetic fuel production facility at a coal preparation site of an
eastern coal company. The agreement allows the Company to borrow up to
$5,800,000. The interest rate will be 12% per annum until August 31, 1998, and
15% per annum thereafter until paid in full. Fun will also have the right to
receive certain royalties after the facility is sold. As of March 31, 1998 the
Company has drawn $3,100,000 on the loan. The loan is due in full at the earlier
of the sale of the facility or August 31, 1999.
10
<PAGE>
<TABLE>
<CAPTION>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. Notes Payable and Convertible Debentures, continued
The following is a table summarizing notes payable and convertible debentures
previously discussed.
March 31, 1998 September 30, 1997
------------------- -----------------------
<S> <C> <C>
Note payable to a corporation, bearing interest at 6%
collateralized by plant and equipment. $ 4,325,433 $ 1,057,849
Note payable to a corporation, bearing interest at 6%. 50% of accrued
interest due February 26, 1999 and balance of accrued interest and principal
due February 26, 2001 4,698,880 -
Note payable to a corporation bearing interest at prime (8.5% at March
31, 1998) plus 2%. Collateralized by plant and equipment. Principal
and interest due December 20, 1999 2,813,294 2,787,255
Convertible note payable to a corporation, bearing interest at prime (8.50% at
March 31, 1998) plus 2%. Collateralized by plant, equipment and coal fines. Loan
of $6,686,473 plus accrued interest of $313,527 converted to common stock
March 20, 1997. - 3,302,422
Note payable to a corporation bearing interest at LIBOR plus 1.0%
(LIBOR was 6.69% on March 31, 1998). Amounts are due at the
earlier of the closing of alternative financing or December 31, 1998. 1,999,719 -
Note payable to a corporation. Interest on the outstanding principal balance
accrues at twelve percent (12%) per annum. The interest rate is adjusted to
thirteen percent (13%) on September 20, 1998 and to fourteen percent (14%) on
December 20, 1998. Each time the interest rate is adjusted, a one percent (1%)
renewal fee of $40,000 is due and payable. Interest on the unused portion of the
borrowing will accrue interest at one percent (1%) per annum until the loan is
paid in full. The balance and interest is due in full before March 20, 1999. The
loan is secured by future earned license fees. 530,300 -
Note payable to a corporation bearing interest at 12% per annum until August 31,
1998, and 15% per annum thereafter until paid. The loan
is due in full at the earlier of the sale of the facility or August 31, 1999 3,100,000 -
Note payable to an individual bearing interest at 9% with monthly
payments. 97,378 -
Convertible debenture to two individuals and one trust, bearing interest
at prime (8.5% at March 31, 1998) plus 2%. Principal and interest due
June 30, 1998. Convertible at $11.00 per share. 1,000,000 1,000,000
------------------- -----------------------
$18,565,004 $8,147,526
Less: current portion (3,536,679) (5,247,526)
------------------- -----------------------
Total non-current $15,028,325 $2,900,000
=================== =======================
</TABLE>
11
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. Stockholders' Equity
The table below presents the activity in stockholders' equity from January 1,
1998 through March 31, 1998.
<TABLE>
<CAPTION>
Notes and
interest
receivable
-related
parties
from
issuance
of, or Deferred
Preferred Stock Common Stock Common Stock to be issued collater- compen-
Capital in Capital in Capital in alized sation
excess of excess of excess of Accumulated by, common on stock
Shares Amount par value Shares Amount par value Shares Amount par value Deficit stock options
------ ------ --------- ------ ------ --------- ------ ------ --------- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1,
1998 315,882 $316 $5,184,626 9,210,575 $9,211 $47,058,967 0 $0 $0 ($33,307,951) ($7,701,088) ($4,475,756)
Common stock
issued for
cash from
exercise of
stock options 12,100 12 31,822
Common stock
to be issued
for cash from
exercise of
stock options 36,060 36 198,290
Conversion of
notes payable 1,000,000 1,000 6,999,000 27,000 27 219,348
Common stock
issued for
note receivable
- - related
party, collater-
alized by
common stock 30,000 30 44,970 (45,000)
Cash received in
payment on
notes receivable
- - related
parties from
issuance of
common stock 298,829
Compensation
expense
related to
issuance and
conversion of
stock options 3,500 3 36,310
Amortization of
deferred
compensation on
stock options 207,493
Interest earned
on notes
receivable
related parties
from issuance
of or collater-
alized by common
stock 15,461
Interest expense
based upon
issuance of
convertible debt
and warrants
at a discount 933,660
Write-up of note
receivable -
related parties (270,000)
Net income for
the quarter
ended March
31, 1998 931,651
------- ---- ---------- ---------- ------- ----------- ------ --- -------- ------------ ---------- ----------
Balance at
March 31, 1998 315,882 $316 $5,184,626 10,256,175 $10,256 $55,104,729 63,060 $63 $417,638 ($32,376,300)($7,701,798)($4,268,263)
======= ==== ========== ========== ======= =========== ====== === ======== =========== ========== ==========
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. Computation of Earnings (Loss) Per Share (EPS)
For the Three Months Ended March 31, 1998
Three months Six months
Basic earnings (loss) per share calculation ended ended
March 31, 1998 March 31, 1998
- ---------------------------------------------------------------- ----------------------------- ---------------------------
Basic Diluted Basic Diluted
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Net income (loss) $ 931,651 $ 931,651 $ (184,744) $ (184,744)
============= ============
Preferred stock dividends accrued (84,413) (84,413)
------------ ------------
Net income (loss) basic EPS $ 847,238 $ (269,157)
============ ============
Number of common shares outstanding 10,256,175 10,256,175 10,256,175 10,256,175
Effect of using weighted average common
shares outstanding (682,646) (682,646) (874,502) (874,502)
------------ ------------- ------------ ------------
Weighted average number of common shares 9,573,529 9,573,529 9,381,673 9,381,673
Dilutive effect:
Common stock options 1,215,985 -
Common stock warrants 500,283 -
Convertible preferred stock 741,453 -
------------- ------------
Dilutive weighted average number of common
shares outstanding 12,122,154 9,381,673
============= ============
</TABLE>
Options to purchase 1,663,500 shares of common stock at prices between $1.50 and
$11.50 per share were outstanding during the second quarter of fiscal 1998 and
were included in the computation of diluted EPS. For the quarter ended March 31,
1997, these options were not included in the computation of loss per share
because any effect would have been antidilutive.
Warrants to purchase 1,441,523 shares of common stock at prices between $7.00
and $10.00 per share were outstanding during the second quarter of fiscal 1998
and were included in the computation of diluted EPS. Additional warrants to
purchase 638,750 shares of common stock at prices between $15.00 and $30.00 per
share were outstanding during the second quarter of fiscal 1998 and were not
included in the computation of earnings per share because any effect would have
been antidilutive. For the quarter ended March 31, 1997, warrants were not
included in the computation of loss per share because any effect would have been
antidilutive.
Convertible debt of $1,000,000 was outstanding during the second quarter of
fiscal 1998. The debt is convertible into 90,909 shares of common stock and was
not included in the computation of diluted earnings per share because the effect
would have been antidiluted. For the quarter ended March 31, 1997, convertible
debt was not included in the computation of loss per share because any effect
would have been antidilutive.
13
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Preferred stock convertible into 741,453 shares of common stock at of $7.00 was
outstanding during the second quarter of fiscal 1998 and was included in the
computation of diluted EPS.
10. Contingencies
During 1996, the Company or its licensees 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. Accordingly, no liability for
failing to proceed exists with these contracts. Four contracts were entered into
jointly by Covol and its joint venture partners. The remaining eleven are Covol
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 three contracts where the facilities may not be constructed. As of September
30, 1997, the Company accrued a liability of $1,477,000 for these potential
penalties. During the first six months ended March 31, 1998, the Company paid
penalties in the amount of $102,500 and reversed $318,000 for a construction
contract where notice to proceed was subsequently given. Accordingly, as of
March 31, 1998, the remaining accrued contractor liability is $1,056,500.
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.
Accordingly, the Company believes the maximum contingent liability under these
indemnification agreements is $2,250,000. As of the date of the current filing,
the three facilities were under construction that are the subject of the
indemnificaiton agreement. These facilities are mechancially complete and on
schedule for completion prior to June 1, 1998. The Company believes that payment
of this liability is unlikely and has, therefore, not recorded a liability for
these potential penalties.
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 case is currently in discovery
and the Company believes that it will be successful in defending the suit.
11. Subsequent Event
During May 1998, the Company obtained financing from two substantial entities to
be used for the completion of construction and working capital requirements of
the Mountaineer synthetic fuel facility. There is $8,500,000 of total funds
available under this arrangement including $500,000 for an advance licensing fee
for the Company's coal briquetting technology. As of May 7, 1998, $6,250,000 had
been received or was available. These funds have been used to payoff the DTE
loan totaling $1,999,719, pay advance licensing fees, cover construction costs
on the Mountaineer facility incurred to date and to fund necessary construction
costs through June 30, 1998 to be incurred in completion of the facility.
Additional funds will be made available as needed. The lenders have the option
to apply funds advanced towards the purchase of the facility.
On April 21, 1998 the Company entered into loan agreements with each Carbon
Resources and C.C. Pace Capital, L.L.C. (the "Borrowers"), to lend, in quarterly
installments, up to an aggregate principal amount not to exceed $14,250,000
during the period from and including November 1, 1998 to and including February
1, 2008. The Company has agreed to make the initial advance on November 1, 1998
in the amount of $375,000, or such other amounts as provided for in the loan
14
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
agreement, and thereafter on the first day of each February, May, August and
November during the loan period. Interest accrues on the principle amount of the
loan outstanding at a simple annual rate of six percent (6%). Repayment of the
loan shall be paid from amounts, if any, distributed to the Borrowers by the
General Partner of Pace Carbon Synfuels, L.P., which owns 100% of the
memberships in the Project Companies discussed below.
The Company also entered into Amended and Restated License and Binder Purchase
Agreements with each PC Virginia Synthetic Fuel #1, L.L.C., PC West Virginia
Synthetic Fuel #1, L.L.C., PC West Virginia Synthetic Fuel #2, L.L.C., PC West
Virginia Synthetic Fuel #3, L.L.C., (collectively the "Project Companies") as of
February 3, 1998. The Company is entitled to receive royalties under the terms
and as described in the Licensing Agreements. The Licensing Agreements provide
for a one-time advance license fee and earned royalty on a quarterly basis at a
prescribed amount multiplied by the MM btu content per ton of each product.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
Three months ended March 31, 1998 compared to the three months ended March 31,
1997
Revenues. For the quarter ended March 31, 1998, total revenues
increased by $5,586,487 to $5,610,698 from $24,211 for the quarter ended March
31, 1997. There were $3,586,000 in advance license fees recognized during the
quarter ended March 31, 1998 while no license fees were recognized during the
quarter ended March 31, 1997. Advance license fees are normally due when
construction of the related briquetting facility begins or when certain
construction milestones or other conditions are met. Advance license fees for
the quarter ended March 31, 1998 related to five briquetting facility contracts.
The Utah Plant was placed in service in early 1997. However, production and
sales of synthetic fuel were significantly curtailed due to the high levels of
ash content in feedstock used for production at the Utah Plant. To remedy the
problem of ash content, the Company has constructed a wash plant for the Utah
Plant that is currently going through start-up procedures. Accordingly,
synthetic fuel sales of $4,888 during the quarter ended March 31, 1998 were less
than the sales of $20,194 during the quarter ended March 31, 1997. The Company
believes that as the wash plant becomes operational, it will be able to supply
sufficient quality coal fines to the Utah Plant to allow the plant to operate
profitably 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. The Company received revenues from binder sales in the amount
of $84,602 for the quarter ended March 31, 1998 as compared to sales of $4,017
that were made in the quarter ended March 31, 1997. The Company expects binder
sales to increase proportionate to future synthetic fuel production and sales
increases. The Company received revenues from the sale of coal fines in the
amount of $1,903,553 for the quarter ended March 31, 1998 under an agreement to
sell the coal fines at their cost. The Company had revenues from operation and
maintenance fees of $31,655 for the quarter ended March 31, 1998 and no such
fees for the corresponding period in 1997.
Operating Costs and Expenses. Operating costs and expenses increased
$2,079,794 to $3,747,010 for the quarter ended March 31, 1998 from $1,667,216
for the quarter ended March 31, 1997. Operating costs and expenses attributable
to the briquetting operations increased $262,640 to $730,252 for the quarter
ended March 31, 1998 from $467,612 for the quarter ended March 31, 1997. The
costs for briquetting operations for the quarter ended March 31, 1998 were more
than for the quarter ended March 31, 1997 costs due to material, labor and other
costs for the increased refinement and implementation of the briquetting process
as the Company moves into commercial production levels at the Utah and Alabama
facilities. When Utah Synfuel #1, a Delaware limited partnership ("US #1"), and
the Company sold the Utah facility 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 as it
worked through various production issues. These costs are included in the cost
of coal briquetting operations. As the wash plant moves towards normal
operational levels and efficiencies, the Company anticipates that the costs
incurred per ton of synthetic fuel produced will be more in line with the sales
value of the synthetic fuel and will reduce the net operating loss that results
from these operations. See "ITEM 1. BUSINESS--Business of Company--Utah Plant"
of the Company's Form 10-K. During the quarter ended March 31, 1998 the Company
incurred $1,903,553 in cost of coal fines sold under the arrangement discussed
in the previous paragraph.
Research and development costs increased $6,806 or 10% during the
quarter ended March 31, 1998 from $65,396 for the quarter ended March 31, 1997.
The Company expects continued research and development costs in its ongoing
efforts to refine further the Company's synthetic fuels and other technology.
Selling, general and administrative expense increased $728,325 or 172%
to $1,150,848 for the quarter ended March 31, 1998 from $422,523 for the quarter
ended March 31, 1997. The increase related to necessary personnel increases,
increased outside professional services relative to facility construction,
increased travel and transportation expenses incurred to monitor construction at
16
<PAGE>
the numerous facility locations, increased expenses incurred to pursue financing
alternatives necessary to meet the Company's needs and general infrastructure
cost increases as the Company continues to grow and expand.
For the quarter ended March 31, 1998, increased expenses were partially
offset by a decrease in compensation expense resulting from the issuance of
stock and stock options as compared to the quarter ended March 31, 1997. The
decrease of $37,683 is attributable to a reduction in the use of stock and 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 will be granted
by the Company in the future are not expected to be "in-the-money" at the date
of grant.
During the quarter ended March 31, 1998, the Company recorded a gain of
$78,401 on the sale of the Alabama facility as compared to a loss of $4,196 from
facility sales during the quarter ended March 31, 1997.
In fiscal 1996, the Company was required, under generally accepted
accounting principles, to adjust the $5 Million 6% promissory note (the "Note")
from the sale of Industrial Management and Engineering, Inc., State
Incorporated, Central Industrial Construction, Inc. and Larson Limestone
Company, Inc. (the "Construction Companies") to the ascertainable value of the
Company's common stock collateralizing the Note. This accounting treatment
resulted in a write-down of the note receivable by $2,699,575 in fiscal 1996.
For the quarter ended March 31, 1998, this adjustment resulted in a write-up of
the Note by $270,000 compared to a write-down of $431,250 for the quarter ended
March 31, 1997. 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.
Total Other Income and Expenses. For the quarter ended March 31, 1998,
the Company had other income totaling $247,888 and other expenses of $1,179,925
for net other expenses of $932,037. For the quarter ended March 31, 1997, the
Company had other income totaling $395,633 and other expenses of $1,568,592 for
net other expenses of $1,172,959. This decrease of $240,922 consisted
principally of a decrease in interest expense of $388,667 resulting from the
issuance of less convertible debt where the conversion price was "in-the-money".
The minority interest in the operations of the consolidated subsidiaries changed
by $290,307 as a result of the subsidiaries incurring smaller losses during the
quarter ended March 31, 1998 compared to the comparable period in 1997.
The Company has net operating loss carryforwards that are available to
offset future taxable income. Because the Company has not generated significant
revenues relating to the Briquetting Technology with corresponding net income,
no benefit has been recorded relative to the future utilization of the net
operating loss carryforwards. This benefit may be recorded in the near term if
the Company continues to realize net income.
Net Income. For the quarter ended March 31, 1998, the Company had net
income of $931,651 as compared with a net loss of $2,815,964 for the quarter
ended March 31, 1997 resulting in a net increase of $3,747,615 in net income.
This increase resulted primarily from a significant increase in total revenues,
and a significant decrease in interest expense offset by an increase in
operating costs and expenses, all as previously discussed.
Amended Form 10-Q. All financial information for the quarter ended and
six months ended March 31, 1997 and comparison between that period and the
corresponding period in 1998 are based upon the restarted financial statements
filed in the Company's Form 10-Q/A, Amendment No. 1 for the period ended March
31, 1997.
17
<PAGE>
Results of Operations
Six months ended March 31, 1998 compared to the six months ended March 31, 1997
Revenues. For the six months ended March 31, 1998, total revenues
increased by $6,523,965 to $6,652,323 from $128,358 for the six months ended
March 31, 1997. There were $4,586,000 in advance license fees received during
the six months ended March 31, 1998 while no license fees were received during
the comparable period during 1997. Advance license fees are normally due when
construction of the related briquetting facility begins or when certain
construction milestones or other conditions are met. The Utah Plant was placed
in service in early 1997. However, production and sales of synthetic fuel were
significantly curtailed due to the high levels of ash content in feedstock used
for production at the Utah Plant. To remedy the problem of ash content, the
Company has constructed a wash plant for the Utah Plant that is currently going
through start-up procedures. Accordingly, synthetic fuel sales of $4,888 during
the six months ended March 31, 1998 were less than the sales of $124,341 during
the corresponding period ended March 31, 1997. The Company believes that, as the
wash plant becomes operational, it will be able to supply sufficient quality
coal fines to the Utah Plant to allow the plant to operate profitably 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. The Company received revenues from binder sales in the amount of $91,605
for the six months ended March 31, 1998 as compared to sales of $4,017 that were
made during the six months ended March 31, 1997. The Company expects binder
sales to increase proportionate to future synthetic fuel production and sales
increases. The Company received revenues from the sale of coal fines in the
amount of $1,903,553 for the six months ended March 31, 1998 under an agreement
to sell the coal fines at their cost. The Company had operation and maintenance
fees of $66,277 for the six months ended March 31, 1998 and no such fees
revenues for the corresponding period in 1997.
Operating Costs and Expenses. Operating costs and expenses increased
$2,483,057 to $5,015,193 for the six months ended March 31, 1998 from $2,532,136
for the six months ended March 31, 1997. Operating costs and expenses
attributable to the briquetting operations increased $355,007 to $1,187,199 for
the six months ended March 31, 1998 from $832,192 for the six months ended March
31, 1997. The costs for briquetting operations for the six months ended March
31, 1998 increased when compared to the six months ended March 31, 1997 due to
material, labor and other costs for the increased refinement and implementation
of the briquetting process as the Company moves into commercial production
levels at the Utah and Alabama facilities. During the six months ended March 31,
1998 the Company incurred $1,903,553 in costs for coal fines sold under the
arrangement previously discussed.
Research and development costs increased $57,430 or 34% during the six
months ended March 31, 1998 from $170,463 for the six months ended March 31,
1997. The Company expects continued research and development costs in its
ongoing efforts to refine further the Company's synthetic fuels or other
technologies.
Selling, general and administrative expense increased $661,565 or 54%
to $1,891,402 for the six months ended March 31, 1998 from $1,229,837 for the
six months ended March 31, 1997. The increase related to necessary personnel
increases, increased outside professional services relative to facility
construction, increased travel and transportation expenses incurred to monitor
construction at the numerous facility locations, increased expenses incurred to
pursue financing alternatives necessary to meet the Company's needs and general
infrastructure cost increases as the Company continues to grow and expand.
For the six months ended March 31, 1998, compensation expense resulting
from the issuance of stock and stock options decreased by $143,151 as compared
to the six months ended March 31, 1997. The decrease is attributable to
reduction in the use of stock and 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 will be granted by the Company in the future are
not expected to be "in-the-money" at the date of grant.
During the six months ended March 31, 1998 the Company recognized a
gain of $78,401 on the sale of the Alabama facility as compared to a loss of
$4,196 from facility sales during the six months ended March 31, 1997.
18
<PAGE>
For the six months ended March 31, 1998, the adjustment relative to the
note received from the sale of the Construction Companies resulted in a write-up
of the Note by $562,500 compared to a write-up of $293,750 for the six months
ended March 31, 1997. The Note is guaranteed by the Buyers of the Construction
Companies and there has been no event of default or past due payment on the
Note. The Company has no reason to believe that the payments under the terms of
the Note will not be made.
Total Other Income and Expenses. For the six months ended March 31,
1997, the Company had other income totaling $542,980 and other expenses of
$1,634,468 for net other expenses of $1,091,488. For the six months ended March
31, 1998, the Company had other income totaling $470,558 and other expenses of
$2,292,432 for net other expenses of $1,821,874. This increase in expenses of
$730,386 consisted principally of an increase in interest expense of $657,964
resulting from the issuance of convertible debt where the conversion price was
"in-the-money". The minority interest in the operations of the consolidated
subsidiaries changed by $222,792 as a result of the subsidiaries having smaller
losses during the six months ended March 31, 1998 compared to the comparable
period in 1997.
Net Income. For the six months ended March 31, 1998, the Company had a
net loss of $184,744 as compared with a net loss of $3,495,266 for the six
months ended March 31, 1997 resulting in a net decrease in the loss of
$3,310,522. This decrease resulted primarily from a significant increase in
total revenues and was offset by smaller increases in operating costs and
expenses, and an increase in other expenses of $730,386.
Liquidity and Capital Resources
For the six months ended March 31, 1998, management believes the
Company made significant progress in its movement from continued development and
refinement of the Company's proprietary technology to commercial operations. The
decrease in cash used by the Company in operating activities from $(1,322,128)
for the six months ended March 31, 1997 to $(229,851) for the six months ended
March 31, 1998 was largely due to the decrease in the net loss of $3,495,266 for
the six months ended March 31, 1997 compared to $184,744 for the six months
ended March 31, 1998. This decrease was offset by $1,400,000 of advanced license
fees that were received during the six months ended March 31, 1997 that were
deferred.
The Company made cash payments for property, plant and equipment of
$21,677,713 during the six months ended March 31, 1998. These additions related
to the wash plant at the Utah facility, three synthetic fuel facilities, a
second line at the Utah facilities, binder plants and briquetting equipment.
Except for the wash plant, the Company plans on selling these assets to third
parties. This investment was funded by cash available at September 30, 1997 of
$4.8 million and proceeds from the issuance of notes payable of $16.3 million.
The Company believes it will be able to meet future cash flow needs through
additional issuances of notes payable, issuances of equity securities and from
cash generated by operations.
During December 1997, the Company executed an amendment to the
Convertible Loan and Security Agreement with PacifiCorp Financial Services, Inc.
("PFS"). The agreement modifies an agreement reached on March 20, 1997 which
provides funding for completing construction of the Alabama project and
acquiring coal fines and for other purposes related to the project. The
modification increased the amount available from $5,000,000 to $7,000,000 with a
provision that borrowings up to the lessor of actual borrowings or $6,000,000
are convertible into common stock under the same terms as the original March 20,
1997 agreement (at a price of $7.00 per share). As of March 3, 1998, PacifiCorp
exercised its option to convert the full amount owing under the loan into shares
of common stock. The Company had borrowed $6,686,473 and interest of $313,527
had been accrued. An agreement was reached between the Company and PacifiCorp
which allowed them to convert the full $7,000,000 owing under the loan into
1,000,000 shares of common stock. The Company also issued 27,000 shares to PFS
under antidilution provisions of this agreement.
On March 6, 1998 the Company and Alabama Synfuel #1 completed the sale
of a synthetic fuel briquetting plant in Birmingham, Alabama ("Alabama Plant")
to PacifiCorp under the terms of the Project Purchase Agreement dated March 20,
1997 and as subsequently amended. The purchase price for the facility was
$6,500,000 and was paid with a note that bears interest at twelve percent (12%)
per annum. The promissory note executed by PacifiCorp to the Company is
collateralized by the Alabama Plant.
19
<PAGE>
In October 1997, the Company entered into an agreement with AJG
Financial Services, Inc. ("AJG"), whereby AJG agreed to provide financing for
the wash plant being constructed by the Company to provide washed coal fines to
the Utah Plant. The financing consists of a note bearing interest at 6% per
annum with principal and interest due and payable two years from the time the
debt is incurred. As additional consideration to AJG for the financing, the
Company agreed to grant warrants to purchase Company common stock in an amount
equal to 10% of the dollar amount financed, 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.
As of March 31, 1998, the Company had a working capital deficit of
$5,057,626, compared to a working capital deficit of $3,195,420 at September 30,
1997. This increase resulted primarily from construciton financing of
briquetting facilities with short-term financing. At March 31, 1998, the Company
owned three facilities that were in various stages of construction. The Company
expects to sell the majority of these facilities and recoup its investment and
retire the related borrowings. The Company believes that additional advanced
license fees to be received, and, if necessary, 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 sufficient 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) the sale of chemical
binder to plants utilizing the Briquetting Technology; (iii) operating fees for
the operation of facilities owned by third parties; (iv) payments on notes
receivable and (v) proceeds of equity and debt offerings will be available and
used to fund working capital and other operating needs through fiscal 1998.
In the third and fourth 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 an
IRS Private Letter Ruling ("PLR") for a particular project, receipt of project
financing or the sale of a facility. Since these conditions should be met no
later than September 30, 1998, all such advance license fees, if any, will be
earned by the end of the fiscal year ending September 30, 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 during the third quarter of 1998. Accordingly, the Company
expects that there will be earned license fees payable from production and sales
from these plants beginning during the third quarter of 1998, but are not
expected to be significant until late 1998 or early 1999.
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 would 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, 63% for US #1 and 74% for AS #1.
The Company has contracted with its licensees to provide binder
materials on a cost plus basis. The Company expects to have increased sales of
binder materials to the Utah Plant and the Alabama Plant in the third 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 third quarter of the fiscal year ending September
30, 1998. The Company expects to 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 product at this facility. The Company expects that there
could be other plants for which the Company will have operational responsibility
20
<PAGE>
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 revenues in the future.
The Company intends to seek additional project specific financing for
the completion of construction for certain synthetic fuel facilities. That
financing is expected to be in the form of traditional debt financing, debt with
an interest in the cash flow attributable to the facility being financed, or
financing by a potential purchaser of the facility. 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 complete the construction of the synthetic
fuel facilities currently in process.
Existing Debt Arrangements
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 a Debenture Agreement and
Security Agreement with AJG, 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
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 AJG 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 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. A portion of the
construction is being financed through AJG. The total estimated cost for the
wash plant is approximately $7.7 Million. As of March 31, 1998, the Company had
borrowed $4,325,433 under its arrangement with AJG. The financing is evidenced
by a promissory note executed and delivered by the Company to AJG 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 AJG for the financing, the Company
agreed to grant warrants to purchase Company common stock in an amount equal to
10% of the dollar amount financed, 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.
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 March
3, 1998 the Company had drawn $6,686,473 under the Loan Agreement and interest
of $313,527 had accrued. 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
21
<PAGE>
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. 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. On March 3, 1998, PacifiCorp exercised its option to convert the full
amount of $7,000,000 owing under the loan into 1,000,000 shares of common stock
plus an additional 27,000 shares pursuant to anti-dilution provisions of the
loan agreement. Pursuant to the Registration Rights Agreement, dated as of March
20, 1997, between the Company and PacifiCorp, PacifiCorp has been granted
certain demand and piggy-back registration rights with respect to shares of
Company common stock that were acquired by PacifiCorp pursuant to the Loan
Agreement.
During the quarter ended March 31, 1998, the Company entered into an
interim construction financing agreement with DTE Energy Services, Inc. to
finance up to $2 Million for the Company's purchase of equipment and payment of
other project development costs relating to certain facilities. As of May 1998,
approximately $1,999,720 has been advanced under this financing agreement. The
Company's obligation to repay the amounts borrowed is collateralized by the
assets 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% adjusted
monthly. 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
company repaid these borrowings during May 1998. See "ITEM 1. BUSINESS--Business
of Company--Other Construction Agreements--Major Utility" of the Company's Form
10-K.
On March 20, 1998 the Company entered into a loan and security
agreement with Fun Enterprises, Pty Ltd. ("Fun"), a current holder of the
Company's Class B preferred stock, relating to the development and construction
of a mobile, skid-mounted synthetic fuel production facility at a coal
preparation site of an eastern coal company. The agreement allows the Company to
borrow up to $5,800,000. The interest rate will be 12% per annum until August
31, 1998, and 15% per annum thereafter until paid. Fun will also have the right
to receive certain royalties after the facility is sold. As of the date of this
filing the Company has drawn $5,120,000 under this arrangement. The loan is due
in full at the earlier of the sale of the facility or December 31, 1999. The
Company has entered into a letter of intent with the eastern coal company to
provide feedstock for the plant, to operate the plant, and to provide synthetic
fuel sales services. Construction of the facility has commenced.
On March 17, 1998, the Company entered into a loan agreement in which
Trans Pacific Stores, Ltd. ("TPS") agreed to loan the Company up to $4,000,000.
The loan is secured by future earned license fees payable to the Company
resulting from the synthetic fuel manufacturing facilities constructed by Pace
Carbon Fuels, LLC. Interest on the outstanding principal balance accrues at
twelve percent (12%) per annum. The interest rate is adjusted to thirteen
percent (13%) on September 20, 1998 and to fourteen percent (14%) on December
20, 1998. Each time the interest rate is adjusted, a one percent (1%) renewal
fee of $40,000 is due and payable. Interest on the unused portion of the
borrowing will accrue interest at one percent (1%) per annum until the loan is
paid in full. The balance and interest is due in full before March 20, 1999. As
of March 31, 1998, $530,300 had been borrowed under this arrangement. A member
of the Company's Board of Directors is affiliated with TPS.
22
<PAGE>
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, operating revenues and other information
presented in this Quarterly Report on Form 10-Q 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 are
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 synthetic fuel
facilities, by the placed-in-service date June 30,
1998.
(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 Internal Revenue Code of 1986, as amended
("Section 29").
(viii) The commercial feasibility of the Briquetting
Technology upon the expiration of Section 29 tax
credits.
(ix) Ability to meet financial commitments under existing
contractual arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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
23
<PAGE>
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
was filed in the Superior Court of California, County of Orange (Case No.
776083). The case is currently in discovery and the Comapny beleives that it
will be successful in defending the suit.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
The following sets forth all securities issued by the Company
within the past fiscal quarter without registering the securities under the
Securities Act of 1933, as amended. No underwriters were involved in any stock
issuances nor were any commissions or similar fees paid in connection therewith.
However, the Company did pay finders fees in the form of cash, stock or warrants
in connection with various securities issued.
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 or securities for contingency issuable common stock were exempt
from the registration requirements of the Securities Act of 1933, as amended,
pursuant to the exemption set forth in section 4(2) or 4(6) therefor and
Regulation D and the certificate for each security bears a restricted legend.
In July 1997, the Company granted unqualified options to acquire
10,000 shares to Don Danks and options to acquire 10,000 to Mike Vanderhoof as a
finders fee in connection with a private placement. The exercise price is $7.00
per share. The options were actually issued in January of 1998.
In September 1997, the Company granted unqualified options to
acquire 25,000 shares to Don Danks and 25,000 shares to Mike Vanderhoof as a
finders fee in connection with a private placement. The exercise price is $9.00
per share. The options were actually issued in January of 1998.
In February 1998, the Company granted qualified options under the
Company's Stock Option Plan to acquire 20,000 shares each to two key employees
of the company. The exercise price is $11.50 per share.
In February 1998, the Company issued 37,500 shares of the Company
common stock in exercise of options at $1.50 per share to certain officers and
directors. The consideration was paid in cash.
In February 1998, the Company granted options to acquire 3,500
shares to a former employee of the Company as compensation for past services at
$1.50 per share. Said options were exercised in the same month. Accordingly, the
Company issued 3,500 shares of the Company common stock in exercise of the
options. The consideration was paid in cash.
In February 1998, a consultant of the Company exercised options
previously granted at $1.50 per share. The Company issued 3,600 shares of the
Company common stock in exercise of these options. Subsequent to the end of the
quarter an additional 16,400 shares were issued. The consideration was paid in
cash.
24
<PAGE>
In March 1998, PacifiCorp exercised their option to convert
$7,000,000 owing under a convertible loan into shares of common stock. On March
3, 1998, 1,000,000 shares of the Company common stock were issued in
satisfaction of this loan. Subsequent to the end of the quarter, an additional
27,000 shares of the Company's common stock were issued pursuant to certain
antidilution provisions of the loan agreement.
In February 1998, the Company issued 1,000 shares of common stock
to certain accredited investors in exercise of warrants at $8.00 per share. The
consideration was paid in cash. Subsequent to the quarters end, an additional
85,117 shares of common stock were issued to certain accredited investors in
exercise of warrants at $8.00. The consideration was paid in cash. The warrants
were originally issued with units privately placed on September 30, 1997 and
October 13, 1997.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Those exhibits previously filed with the Securities and
Exchange Commission as required by Item 601 of Regulation
S-K, are incorporated herein by reference in accordance with
the provisions of Rule 12b-32.
10.50.1* Form of Amended and Restated License and Binder
Purchase Agreement dated February 3, 1998 between
PC Virginia Synthetic Fuel #1, PC West Virginia
Synthetic Fuel #1, PC West Virginia Synthetic
Fuel #2, PC West Virginia Synthetic Fuel #3 and
Covol Technologies Inc.
10.50.2* Loan Agreement between C.C. Pace Capital, L.L.C.
and Carbon Resources, Inc. and Covol
Technologies, Inc. dated April 21, 1998.
10.50.3 Security Agreement between C.C. Pace Capital,
L.L.C. and Carbon Resources, Inc. and Covol
Technologies, Inc. dated April 21, 1998.
Exhibit 27.1 Financial Data Schedule
* Exhibits contain confidential material which has been omitted
pursuant to a Confidential Treatment Request. The omitted
information has been filed separately with the Securities and
Exchange Commission.
(b) Reports on Form 8-K
A report on Form 8-K was filed on March 3, 1998.
25
<PAGE>
SIGNATURE
Pursuant to the requirements 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.
Date: May 13, 1998
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
26
Note: This Exhibit was executed in substantially the same form for PC West
Virginia Synthetic Fuel #1, L.L.C., PC West Virginia Fuel #2, L.L.C., and PC
West Virginia #3, L.L.C., each a Delaware Limited Liability Company.
FORM OF AMENDED AND RESTATED
LICENSE AND BINDER PURCHASE AGREEMENT
THIS AMENDED AND RESTATED LICENSE AND BINDER PURCHASE AGREEMENT (the
"Agreement"), is made and entered into as of February 3, 1998 by and between PC
Virginia Synthetic Fuel #1, L.L.C., a Delaware Limited Liability Company (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, pelletizing, and briquetting technology
to Licensee;
WHEREAS Licensee has entered into a form of agreement (referred to as a
"Facility Agreement") between itself as Owner and a Contractor for the
construction of one (1) agglomeration facility located near Eckman in McDowell
County, West Virginia and having production design capacity of approximately
600,000 tons per year (referred to as the "Project" or "Facility"), the
reference to production design capacity not being intended to limit the actual
production capacity of each Project.
WHEREAS Licensor and Licensee entered into that Amended and Restated
License and Binder Purchase Agreement (the "January Agreement"), dated as of
January 21, 1998, pursuant to which Licensor granted to Licensee a license for
the coal extruding and briquetting technology in connection with the Project and
agreed to sell to Licensee the Proprietary Binder Material (as defined below)
manufactured by Licensor for use in the operation of the Project.
WHEREAS Licensor and Licensee now desire to amend and restate the
January Agreement.
* This Exhibit contains confidential material which has been omitted pursuant to
a Confidential Treatment Request and replaced by asterisks. The omitted
information has been filed separately with the Securities and Exchange
Commission.
<PAGE>
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,
Licensor and Licensee each agree that from and after date hereof, the Original
License Agreement and the January Agreement are hereby amended and restated in
its entirety as follows:
Section 1. Definitions.
"Applicable Percentage" means the Licensor's Earned Royalty
rate per MM btu as set forth in Section 3.3 divided by the amount of Section 29
Tax Credit per MM btu.
"Coal Briquetting Technology" means all intellectual property,
patents (including but not limited to United States Patent Numbers *,
trademarks, inventor 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,
pellets and briquettes from waste coal dust, coal fines and other similar coal
derivatives, including all such information in existence as of December 31, 1996
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,
pellets 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 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 Internal
Revenue Code, but the failure of the synthetic coal fuel extrusions, pellets,
and briquettes to so qualify (including without limitation as a result of the
repeal of Section 29) shall not affect the grant of the license hereby.
"CoBon" means CoBon Energy, L.L.C.
* This Exhibit contains confidential material which has been omitted pursuant to
a Confidential Treatment Request and replaced by asterisks. The omitted
information has been filed separately with the Securities and Exchange
Commission.
<PAGE>
"Contractor" has the meaning set forth in the preamble.
"Developed Technology" means any inventions, or new technology
that Licensor or Licensee may make, invent, or suggest utilizing the Coal
Briquetting Technology. "Developed Technology" also means any "Improvement"
directly related to the Coal Briquetting Technology that Licensor or Licensee
may make, invent or suggest during the term of this Agreement.
"Earned Royalty" has the meaning set forth in Section 3.3.
"Effective Date" means the date of this Agreement set forth
above.
"Facility" has the meaning set forth in the preamble, and
includes any replacement facility so long as the facility being replaced no
longer produces the Product.
"Facility Agreement" has the meaning set forth in the
preamble.
"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.
"Initial Royalty" has the meaning set forth in Section 3.2.
"IRS" means the Internal Revenue Service.
"Licensee" has the meaning set forth in the preamble. The term
"Licensee" shall also apply to any successor entity or permitted assign of
Licensee.
"Licensor" has the meaning set forth in the preamble. The term
"Licensor" shall also apply to any successor entity or permitted assign of
Licensor.
"Partnership" means Pace Carbon Synfuels Investors, L.P., a
Delaware limited partnership, which is the parent of Licensee and
* This Exhibit contains confidential material which has been omitted pursuant to
a Confidential Treatment Request and replaced by asterisks. The omitted
information has been filed separately with the Securities and Exchange
Commission.
<PAGE>
is comprised of a general partner and multiple limited partners, individually
"Partner" or collectively the "Partners."
"Product" means coal-based synthetic fuel produced at the
Facility utilizing the Coal Briquetting Technology.
"Project" has the meaning set forth in the preamble.
"Proprietary Binder Material" means and refers to the binder
compound necessary for the production, by Licensee, of synthetic coal
extrusions, pellets and briquettes, which extrusions, pellets, and briquettes
are reasonably expected to constitute "qualified fuels" pursuant to the terms of
Section 29(c)(1)(C) of the Internal Revenue Code and with respect to which
Section 29 is applicable pursuant to Section 29(f) and 29(g) of the Internal
Revenue Code. The binder material shall conform in quality to the binder
described in Licensor'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. 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.
"Royalty" means the Initial Royalty and the Earned Royalty.
"Tax Credit" means tax credit for federal income tax purposes
pursuant to Section 29 of the Internal Revenue Code, as amended.
"Yearly Period" means the twelve month period beginning on
October 15th of each calendar year.
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 the Facility and to sell
or otherwise transfer products which have been manufactured with the Coal
Briquetting Technology. The license granted hereunder applies only to the
Facility, but Licensee may use, sell and otherwise transfer
* This Exhibit contains confidential material which has been omitted pursuant to
a Confidential Treatment Request and replaced by asterisks. The omitted
information has been filed separately with the Securities and Exchange
Commission.
<PAGE>
products which have been manufactured at the Facility with the Coal Briquetting
Technology at any other facility. Licensee hereby 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. Licensee shall not have the right
to sublicense the Coal Briquetting Technology. Licensee may propose the general
location for additional facilities to use the Coal Briquetting Technology, and
Licensor will then have thirty (30) days to approve or disapprove of the general
area of each such additional facility, which approval shall not unreasonably be
withheld, taking into account other facilities in the area utilizing Licensor'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; location near Eckman in McDowell County, West Virginia.
2.2. Know-How and Assistance. To enable Licensee to benefit
fully from the license of the Coal Briquetting Technology, Licensor 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; 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
Facility as qualifying for Section 29 Tax Credit. Licensor shall not be
obligated to provide Licensee with documentation and other forms of information
Licensor reasonably deems unnecessary to carry out the purposes of this
Agreement.
2.3. 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 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
* This Exhibit contains confidential material which has been omitted pursuant to
a Confidential Treatment Request and replaced by asterisks. The omitted
information has been filed separately with the Securities and Exchange
Commission.
<PAGE>
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.
2.4. Exclusive Technology. Licensee agrees to use only the
Coal Briquetting Technology at the Facility and not to use any other technology
for the production of solid synthetic fuel intended to qualify for Tax Credits
under Section 29(c)(1)(C) of the Internal Revenue Code at the Facility;
provided, however, that if notwithstanding Licensee's commercially reasonable
efforts to use the Coal Briquetting Technology or Developed Technology, the
Facility fails to produce qualifying synthetic fuel under Section 29(c)(1)(C) of
the Internal Revenue Code that can be sold to unrelated parties as set forth in
Licensor's Private Letter Ruling dated September 8, 1995 and Pace Carbon
Synfuels Investors, L.P. Private Letter Ruling dated November 7, 1997, then
Licensee may use an alternative technology at the Facility to produce qualifying
synthetic fuel under Section 29. In the event of any federal income tax audit of
the Licensee or its parent, or subsequent contest thereof, the Licensee's parent
will (i) keep the Licensor and, if requested in writing by Licensor, tax counsel
to Licensor (whose expense shall be borne solely by Licensor), reasonably
informed as to the progress of such audit or contest; (ii) give Licensor an
opportunity to review and comment in advance on all written submissions and
filings relevant to issues raised in such audit or contest; and (iii) consider
in good faith any suggestions made by Licensor or its counsel about the conduct
of such audit or contest; provided, however, that Licensee's parent shall retain
full control over the conduct of such audit including whether and in what form
to contest any proposed adjustment.
2.5. 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, pellets, and briquettes from coke
breeze, iron revert materials, and any other materials to which Licensor's
technology can be applied.
2.6. Confidentiality. Each of the parties hereby agree to
maintain the Coal Briquetting Technology confidential and not to disclose,
publish, or disseminate in any manner the Coal Briquetting Technology, or any
aspect thereof, or the Improvements, or any aspect thereof (collectively, the
"Confidential
* This Exhibit contains confidential material which has been omitted pursuant to
a Confidential Treatment Request and replaced by asterisks. The omitted
information has been filed separately with the Securities and Exchange
Commission.
<PAGE>
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, (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), or (iv)
is disclosed under requirement of law, provided that all reasonable legal
remedies are pursued to maintain the confidentiality of the Confidential
Information, shall not be subject to the terms of this Section 2.6. Any breach
of this Section 2.6 will be subject to all legal remedies, and in addition, this
Section 2.6 is specifically enforceable by temporary restraining order or other
injunctive relief. 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.
Section 3. License Fee and Royalty.
3.1. License Fee. Licensee shall pay the Initial Royalty and
Earned Royalty as a license fee to Licensor.
3.2. Initial Royalty. Licensee shall pay a one-time advance
license fee equal to $ * per ton for each ton of annual production capacity or $
* . Payment of the advance license fee described in this Section 3.2 shall be
due and payable on or before December 31, 1997. If the equity investor funding
contemplated by Licensee occurs after that date, the monies due will be paid at
financial closing for such funding, but not later than February 6, 1998.
3.3. Earned Royalty. Licensee shall pay to Licensor quarterly
earned royalty payments ("Earned Royalty") in an amount equal to the product of
(a)(i) $ * , for each ton of Product qualifying for the Section 29 Tax Credit
that was sold by Licensee during the immediately preceding quarter up to a total
of * tons
* This Exhibit contains confidential material which has been omitted pursuant to
a Confidential Treatment Request and replaced by asterisks. The omitted
information has been filed separately with the Securities and Exchange
Commission.
<PAGE>
in the then current Yearly Period, and (ii) after * tons of Product qualifying
for the Section 29 Tax Credit have been sold in the then-current Yearly Period,
$ * for each ton of such Product qualifying for the Section 29 Tax Credit that
was sold by Licensee during the immediately preceding quarter, multiplied by (b)
the MM btu content per ton of such Product. Beginning on January 1, 1997, and
each year thereafter, the amounts in clause (a) above shall be adjusted by the
percentage increase or decrease in the dollar amount of the inflation adjustment
as provided in Section 29 of the Internal Revenue Code.
3.4. Payment Terms. Earned Royalty payments shall be due
within * days after Licensee (or its parent) receives its payment for the
corresponding period, but no later than * days after the end of the quarter to
which payment relates; provided, however, that such payment shall not be due
until any disputes among the partners of Licensee's parent (or of Licensee's
parent and Pace Carbon Synfuels L.L.C.) have been resolved as provided in the
agreements among such parties. Payments shall be made by Licensee to Licensor
and shall be deemed to be paid upon receipt by Licensor. Payments after the due
date shall accrue interest at the rate of one percent per month.
3.5 *
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 the Project. 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 fifteenth
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) Licensor's direct and actual costs (direct material,
labor, and transportation costs) and a percentage of the total overhead costs of
Licensor reasonably
* This Exhibit contains confidential material which has been omitted pursuant to
a Confidential Treatment Request and replaced by asterisks. The omitted
information has been filed separately with the Securities and Exchange
Commission.
<PAGE>
reflecting the ratio of the administrative costs incurred in connection with the
manufacture and sale of the Proprietary Binder Material plus (ii) $ * per ton of
synthetic fuel product (assuming a 2% Proprietary Binder Material) or $ * per
ton of synthetic fuel product (assuming a 4% Proprietary Binder Material).
Exclusive of transportation costs which may vary because of distances and
available rates, in no event shall the amount in clause (i) above exceed the
costs charged to third parties by Licensor for the Proprietary Binder Material,
except Savage Industries. As of the date first above written, the total price
based upon the information known to Licensor is estimated to be $ * per ton for
the 2% Proprietary Binder Material and $ * per ton for 4% Proprietary Binder
Material produced at the Facility.
4.3. Representations and Warranties, Certain Covenants of
Licensor. Licensor represents, warrants and covenants to Licensee 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.
(d) There will be available at the Facility from time to time
as reasonably requested by Licensee sufficient quantities of the
Proprietary Binder Material to supply the requirements of the Licensee
for the production of up to * tons of Product per year from the date
hereof until at least December 31, 2007.
(e) The Proprietary Binder Material may be produced from
acrylonitrile and polyvinyl alcohol; other monomers, including, but not
limited to, the ETG-400 mix of monomers, may be substituted for
acrylonitrile and polyvinyl alcohol, to produce Proprietary Binder
Material that will achieve the same reaction and resulting
polymerization pursuant to Licensor's patented Coal Briquetting
Technology, that will achieve the same significant chemical change, and
that will result in an
* This Exhibit contains confidential material which has been omitted pursuant to
a Confidential Treatment Request and replaced by asterisks. The omitted
information has been filed separately with the Securities and Exchange
Commission.
<PAGE>
end product chemically indistinguishable other than for trace
substances that have an immaterial effect on the net change, in each
case compared to an end product that is produced using the Proprietary
Binder Material incorporating acrylonitrile and polyvinyl alcohol.
Prior to and as a condition to substituting other monomers (except for
ETG 400) for acrylonitrile and polyvinyl alcohol, the Licensor will
provide to the Licensee a written report of Craig N. Eatough, Ph.D., or
another third party fuels expert reasonably acceptable to the Licensor
and Licensee to the effect that (in such third party's professional
judgment) the monomers so to be substituted will achieve the results
set forth in the first sentence of this Section 4.3(e).
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. 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 terms 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.
* This Exhibit contains confidential material which has been omitted pursuant to
a Confidential Treatment Request and replaced by asterisks. The omitted
information has been filed separately with the Securities and Exchange
Commission.
<PAGE>
4.6. Binder Technology License. If Licensor's ability to
deliver the Proprietary Binder Material to Licensee will or is reasonably
expected by Licensor to 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
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
Proprietary Binder Material to manufacture the Proprietary Binder Material in
sufficient quantities to operate the 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 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
reasonably satisfactory evidence 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 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.
*. Such trustee shall agree to provide the formula to Licensee upon Licensee's
certifying to the trustee that Licensee has a right of access to such formula
pursuant to this Section 4. Licensor and Licensee shall cooperate to put in
place any necessary agreement (including without limitation a trust agreement)
to effect the foregoing safety deposit and trustee arrangement. Except to the
extent required by law, Licensee covenants to hold the formula delivered to it
by the trustee pursuant to the preceding sentence strictly confidential, and not
to study, utilize, remove, or to access the formula except in accordance with
the license granted to Licensee pursuant to this Agreement.
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
* This Exhibit contains confidential material which has been omitted pursuant to
a Confidential Treatment Request and replaced by asterisks. The omitted
information has been filed separately with the Securities and Exchange
Commission.
<PAGE>
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 Licensor. Upon the reasonable request of
Licensee, Licensor 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 Licensor in performing
services requested under Section 6.1 hereof; provided, however, that Licensor
shall obtain the prior written approval of Licensee for any expenditures in
excess of $5,000.
Section 7. 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 to 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.
Section 8. Representations and Warranties.
8.1. Authority. Each of 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.
8.2. 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
* This Exhibit contains confidential material which has been omitted pursuant to
a Confidential Treatment Request and replaced by asterisks. The omitted
information has been filed separately with the Securities and Exchange
Commission.
<PAGE>
made therewith by it for the consummation by it of the transactions contemplated
under this Agreement.
8.3. Intellectual Property Matters. Licensor warrants to its
best knowledge and good faith belief that (i) Licensor owns, free and clear of
all liens and encumbrances, intellectual property, patents (including but not
limited to United States Patent Numbers * ), 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 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
similar coal derivatives, (ii) Licensor has the right and power to grant to
Licensee the licenses granted herein, (iii) Licensor has not made and will not
make any agreement with another in conflict with the rights granted herein, and
(iv) the grant or sale to Licensee, and the use by Licensee of the rights,
Proprietary Binder Material and/or licenses granted herein as contemplated by
this Agreement will not infringe any third-party's intellectual property rights.
Licensor represents and warrants that valid technical information exists
establishing that the 2% Proprietary Binder Material works successfully with the
Coal Briquetting Technology using Eastern sub-bituminous coal fines producing a
commercially acceptable synthetic coal extrusion, pellet or briquette and that
use of the 2% Proprietary Binder Material with the Coal Briquetting Technology
is consistent with the Private Letter Ruling, dated September 6, 1995, received
by Licensor from the Internal Revenue Service that the production using the Coal
Briquetting Technology qualifies for the Section 29 Tax Credit.
8.4. Indemnification. Each party shall indemnify, defend and
hold harmless the other and its partners, members, 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
* This Exhibit contains confidential material which has been omitted pursuant to
a Confidential Treatment Request and replaced by asterisks. The omitted
information has been filed separately with the Securities and Exchange
Commission.
<PAGE>
(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 the indemnifying party of any of the
representations, warranties and/or covenants contained in this Agreement.
Licensor shall take all reasonable action necessary to defend the Coal
Briquetting Technology against claims from third parties.
Section 9. Term. This Agreement and the license granted hereunder shall
be for the primary term from December 31, 1996 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 Credit 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 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
* This Exhibit contains confidential material which has been omitted pursuant to
a Confidential Treatment Request and replaced by asterisks. The omitted
information has been filed separately with the Securities and Exchange
Commission.
<PAGE>
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:
Licensor: Covol Technologies, Inc.
3280 North Frontage Road
Lehi, Utah 84043
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. Tom McGimpsey
Licensee: PC West Virginia Synthetic Fuel #3, 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 13. Remedies Cumulative. Remedies provided under this Agreement
shall be cumulative and in addition to other remedies provided by law or in
equity.
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 to forbear from all such action, as may
be reasonably necessary or appropriate in order to more effectively carry out
the provisions of this Agreement.
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, including the January Agreement. This
* This Exhibit contains confidential material which has been omitted pursuant to
a Confidential Treatment Request and replaced by asterisks. The omitted
information has been filed separately with the Securities and Exchange
Commission.
<PAGE>
Agreement may not be amended except in writing signed by the parties.
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 each of the other parties,
which consent will 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 or Licensee, as the case
may be, and of which Licensor or Licensee, as the case may be, owns, directly or
indirectly, at least fifty percent (50%) of each class of its outstanding
securities, provided that no such assignment shall release Licensor and/or
Licensee 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 of substantially all of the assets of the Project.
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.
* This Exhibit contains confidential material which has been omitted pursuant to
a Confidential Treatment Request and replaced by asterisks. The omitted
information has been filed separately with the Securities and Exchange
Commission.
<PAGE>
Executed by the duly authorized representative of the parties on the
date and year first above written.
LICENSOR WEST VIRGINIA SYNTHETIC FUEL
#3, L.L.C.
by PACE CARBON SYNFUELS, L.L.C.,
a member
by PACE CARBON FUELS, L.L.C.,
its majority member
By: /s/ Stanley M. Kimball By: /s/ James R. Treptow
---------------------------- ---------------------------
Name: Stanley M. Kimball Name: James R. Treptow
Title: Chief Financial Officer Title: President
* This Exhibit contains confidential material which has been omitted pursuant to
a Confidential Treatment Request and replaced by asterisks. The omitted
information has been filed separately with the Securities and Exchange
Commission.
Note: Executed in substantially the same form between Carbon Resources, Inc. a
Delaware Corporation (the "Borrower") by Frederick J. Murrell, President, and
Covol Technologies, Inc. (the "Secured Party")
Execution Copy
LOAN AGREEMENT
This LOAN AGREEMENT (this "Agreement"), dated as of April 21,
1998, is by and between C.C. Pace Capital, L.L.C., a Delaware limited liability
company ("Pace Capital" or the "Borrower") and Covol Technologies, Inc. ("Covol"
or the
"Lender").
W I T N E S S E T H :
WHEREAS, each of Pace Capital and Carbon Resources, Inc.
("Carbon Resources") is a member of Pace Carbon Fuels, L.L.C., a Delaware
limited liability company which is the General Partner of Pace Carbon Synfuels
Investors, L.P., a Delaware limited partnership (the "Partnership"); and
WHEREAS, the Partnership operates pursuant to the terms of an
Amended and Restated Agreement of Limited Partnership dated as of February 5,
1998 (the "Partnership Agreement"); and
WHEREAS, the Partnership owns 100% of the membership interest
in, among other entities, PC Virginia Synthetic Fuel #1, L.L.C., PC West
Virginia Synthetic Fuel #1, L.L.C., PC West Virginia Synthetic Fuel #2, L.L.C.
and PC West Virginia Synthetic Fuel #3, L.L.C. (each a "Project Company" and,
collectively, the "Project Companies"); and
WHEREAS, the Lender has entered into Amended and Restated
License and Binder Purchase Agreements with each Project Company, each of which
agreements was made and entered into as of February 3, 1998 and each of which
agreements is herein referred to as a "Licensing Agreement;" and
WHEREAS, pursuant to each such Licensing Agreement, the Lender
is entitled to receive royalties under the terms and as described in the
Licensing Agreement (the "Royalties"); and
WHEREAS, as a condition to the execution and delivery of the
Licensing Agreements, the Lender agreed to lend funds to the Borrower and to
Carbon Resources to enable the Borrower and Carbon Resources to make capital
contributions to the General Partner; and
* This Exhibit contains confidential material which has been omitted pursuant to
a Confidential Treatment Request and replaced by asterisks. The omitted
information has been filed separately with the Securities and Exchange
Commission.
WHEREAS, by a Loan Agreement of even date herewith, the Lender
has agreed to lend funds to Carbon Resources on terms identical to those set
forth herein (the "Carbon Resources Loan Agreement").
<PAGE>
NOW, THEREFORE, in consideration of the premises and the
mutual covenants and agreements herein set forth and for other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
Borrower and the Lender, intending to be legally bound, do hereby agree as
follows:
Section 1. Definitions and Terms
1.1 Definitions. In addition to the terms defined in the preamble and
recitals above, the following capitalized terms shall have their respective
meanings as set forth below:
"Advance" means each loan to the Borrower made by the Lender under this
Agreement.
"Commitment" means the sum of $ * as provided in Section 2.1 hereof.
"Escrow Account" means the escrow account described in Section 3.6 of
each of the Licensing Agreements.
"Event of Default" has the meaning set forth in Section 5.1 hereof.
"General Partner" means Pace Carbon Fuels, L.L.C., a Delaware limited
liability company, the general partner of Pace Carbon Synfuels Investors, L.P.
"GP's Special Reserve" means the "GP's Special Reserve" as described in
Section 5.12 of the Partnership Agreement.
"Loan" means, as of any date, the aggregate amount of Advances made
hereunder on or prior to such date less amounts which have been repaid.
"Loan Advance Date" has the meaning set forth in Section 2.2 hereof.
"Loan Commitment Period" has the meaning set forth in Section 2.1
hereof.
"Loan Termination Date" means June 30, 2008.
"Maximum Available Advance" has the meaning set forth in Section 2.2
hereof.
"Note" means the promissory note described in Section 2.5 hereof.
* This Exhibit contains confidential material which has been omitted pursuant to
a Confidential Treatment Request and replaced by asterisks. The omitted
information has been filed separately with the Securities and Exchange
Commission.
<PAGE>
"Received Royalties" means Royalties paid to or at the direction of the
Lender under any one or more of the Licensing Agreements and, with respect to
Royalties paid into the Escrow Account, such amounts as are released to the
Lender.
"Released Amounts" shall have the meaning set forth in Section 2.6(a)
hereof.
"Royalties" means any and all Royalty as such term is used in the
Licensing Agreements.
1.2 Other Defined Terms; Rules of Interpretation.
(a) For purposes of this Agreement, all other capitalized
terms used herein and not otherwise defined shall have the meanings assigned to
them in the Partnership Agreement (such definitions to be equally applicable to
both the singular and plural forms of the terms defined).
(b) Except as otherwise provided herein, any term defined by
reference to an agreement, instrument or other document shall have the meaning
so assigned to it as such agreement, instrument or other document may be amended
in accordance with its terms, whether or not such document is in effect at the
time of reference to such document. A reference to any Person includes its
permitted successors and permitted assigns. The words "hereof," "herein" and
"hereunder" and words of similar import when used in this Agreement shall refer
to this Agreement as a whole and not to any particular provisions of this
Agreement, and section, schedule and exhibit references are to this Agreement
unless otherwise specified. Except as otherwise defined or provided herein,
accounting terms shall be construed, and all financial computations shall be
made, in accordance with generally accepted accounting principles consistently
applied.
Section 2. The Loan
2.1 Agreement to Lend. Subject to the terms and conditions of this
Agreement, the Lender agrees to lend to the Borrower, in quarterly installments,
an aggregate principal amount (excluding capitalized interest as described
below) not to exceed * dollars ($ * ) (the "Commitment") during the period from
and including November 1, 1998 to and including February 1, 2008 (the "Loan
Commitment Period").
2.2 Advances. The Lender agrees that it will, subject to the terms and
limitations set forth below, make an Advance to the Borrower in the amount of $
* (or such lesser amount as the Borrower shall request or, if the Maximum
Available Advance, as defined below, is greater than $ *, such greater amount as
the Borrower may request) on November 1, 1998 and on the first day of each
February, May, August and November thereafter during the Loan Commitment Period
(each a "Loan Advance Date").
* This Exhibit contains confidential material which has been omitted pursuant to
a Confidential Treatment Request and replaced by asterisks. The omitted
information has been filed separately with the Securities and Exchange
Commission.
<PAGE>
The Lender's obligation to make an Advance on any Loan Advance Date
shall be subject to the following:
(a) No Advance shall be required to the extent the amount of such
Advance would cause the amount of all Advances made under this Agreement to
exceed the lesser of (i) the Commitment, and (ii) the aggregate amount of
Received Royalties received by the Lender as of such Loan Advance Date; and
(b) The Borrower shall have delivered to the Lender a written request
for such Advance at least three (3) days prior to the Loan Advance Date, and
such request shall have stated the amount of the Advance thereby requested.
If, on any Loan Advance Date, the amount advanced by the Lender to the
Borrower is less than the Maximum Available Advance (as defined below), the
difference between the Maximum Available Advance and the actual Advance made on
such date shall be carried forward and shall be available on the next Loan
Advance Date. The "Maximum Available Advance" on each Loan Advance Date shall be
amount equal to (i) $ * multiplied by the number of Loan Advance Dates occurring
on or prior to such date, less (ii) the aggregate amount of all previous
Advances.
2.3 Purpose. Subject to the terms hereof, the proceeds of each Advance
shall be used by the Borrower solely to make capital contributions to the
General Partner.
2.4 Interest. Interest shall accrue on the principal amount of the Loan
outstanding from time to time at a simple annual rate equal to six percent (6%)
per annum. Interest shall compound on the first day of each calendar year and
shall be due and payable on the date on which the principal amount advanced
hereunder becomes due and payable. The amount of interest accrued and unpaid
shall not be considered principal for purposes of determining the amount of
Advances made hereunder.
2.5 Note.
(a) The Loan shall be evidenced by a promissory note of the
Borrower substantially in the form of Exhibit A hereto, with appropriate
insertions as to date and principal amount, payable to the order of the Lender
and in a principal amount equal to the lesser of (i) the Commitment, and (ii)
the aggregate unpaid principal amount of all Advances.
(b) The Lender is authorized to record, on the schedule
annexed to and constituting a part of the Note, or on other appropriate records
of the Lender, the date and amount of each Advance, and the date and amount of
each payment or prepayment of principal thereof, and any recordation thereof
shall constitute prima facie evidence of the accuracy of the information so
recorded; provided, however, that failure by the Lender to make any recordation
or other error therein shall not
* This Exhibit contains confidential material which has been omitted pursuant to
a Confidential Treatment Request and replaced by asterisks. The omitted
information has been filed separately with the Securities and Exchange
Commission.
<PAGE>
limit or otherwise affect the obligations of the Borrower hereunder. The Note
shall be dated the date hereof, be entitled to the benefits of this Agreement,
be stated to mature on the Loan Termination Date and provide for the accrual and
payment of interest in accordance with Section 2.4 hereof.
2.6 Repayment of the Loan.
(a) Nonrecourse Obligation. The Lender and the Borrower hereby
agree that any and all amounts due hereunder or under the Note shall be payable
solely from amounts, if any, distributed to the Borrower by the General Partner
in respect of amounts released to the General Partner from the GP's Special
Reserve as provided in the Partnership Agreement (amounts so distributed to the
Borrower, "Released Amounts"). The Lender's sole recourse for payment of amounts
due hereunder shall be to the Released Amounts, if any, and the Lender shall
have no right or recourse to payment from any other source or from any other
assets of the Borrower or any affiliate of the Borrower, and the Borrower shall
have no obligation to repay amounts advanced hereunder or the interest thereon
from any source of funds other than from the Released Amounts, if any. Borrower
shall create and maintain in favor of the Lender a first priority security
interest in the Released Amounts.
(b) Repayment. The principal amount of all amounts advanced
hereunder (except to the extent previously repaid), together with interest
accrued and compounded but unpaid, shall be due and payable on the first to
occur of (i) the Loan Termination Date and (ii) the next business day following
the date on which the Borrower receives the Released Amounts.
(c) Optional Prepayment. The Borrower, at its option, may
prepay the loan in whole or in part at any time together with accrued but unpaid
interest on the portion being prepaid to the date of such prepayment, all
without premium or penalty or other charges.
2.7 Payment Procedures. All Advances made hereunder shall be payable to
the Borrower in United States dollars by wire transfer of immediately available
funds no later than 2:00 p.m. prevailing New York City time on the Loan Advance
Date to such account as the Borrower may from time to time, by notice to the
Lender, direct, and all sums payable to the Lender hereunder shall be payable in
United States dollars by wire transfer of immediately available funds no later
than 2:00 p.m. prevailing New York City time on the day on which such sum is
due, to such account as the Lender may from time to time, by notice to the
Borrower, direct.
* This Exhibit contains confidential material which has been omitted pursuant to
a Confidential Treatment Request and replaced by asterisks. The omitted
information has been filed separately with the Securities and Exchange
Commission.
<PAGE>
Section 3. Representations and Warranties of the Borrower
Borrower hereby represents and warrants to the Lender as follows:
(a) Organization; Qualification. The Borrower is a limited
liability company duly organized and validly existing under the laws of the
State of Delaware. The Borrower is duly qualified or authorized to transact
business and is in good standing under the laws of all jurisdictions in which it
conducts business or owns property, except for jurisdictions as to which the
failure to be so qualified or authorized could not reasonably be expected to
have a material adverse effect on the Borrower or its ability to perform its
obligations hereunder.
(b) Authority; Enforceability. The Borrower has all requisite
power and authority to own its property and assets, and to conduct its business
as presently conducted, and has full power and authority to execute, deliver and
perform this Agreement and every other agreement and document to be delivered in
connection herewith and to perform all of its obligations hereunder and
thereunder. This Agreement and all other instruments to be delivered in
connection herewith by the Borrower constitute, or, upon execution thereof by
the Borrower and the other parties thereto (if any), will constitute, valid,
legal and binding obligations of the Borrower, enforceable against the Borrower
in accordance with the respective terms hereof and thereof, except as the
enforceability hereof or thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting the
rights of creditors generally or by the application of general equitable
principles.
Section 4. Conditions Precedent
The obligation of the Lender to make each Advance hereunder is subject
to (a) the receipt by the Lender from the Borrower of a written request as
provided in Section 2.03 hereof, and (b) there not then existing an Event of
Default described below.
Section 5. Default and Remedies
5.1 Events of Default. The occurrence and continuation of one or more
of the following events (whatever the reason for such event) shall be an event
of default hereunder (each, an "Event of Default"):
(a) the Borrower shall (i) apply for or consent to
the appointment of, or the taking of possession by, a receiver,
custodian, trustee or liquidator of itself or of all or a substantial
part of its property, (ii) make a general assignment for the benefit of
its creditors, (iii) commence a voluntary case under federal bankruptcy
laws (as now or hereafter in effect), or (iv) file a
* This Exhibit contains confidential material which has been omitted pursuant to
a Confidential Treatment Request and replaced by asterisks. The omitted
information has been filed separately with the Securities and Exchange
Commission.
<PAGE>
petition seeking to take advantage of any other law relating to
bankruptcy, insolvency, reorganization, winding-up, or composition or
readjustment of debts; or
(b) a proceeding or case shall be commenced, without
the application or consent of the Borrower in any court of competent
jurisdiction, seeking (i) its liquidation, reorganization, dissolution
or winding-up, or the composition or readjustment of its debts, (ii)
the appointment of a trustee, receiver, custodian, liquidator or the
like of the Borrower or of all or any substantial part of its assets or
(iii) similar relief in respect of the Borrower under any law relating
to bankruptcy, insolvency, reorganization, winding-up, or composition
or adjustment of debts, and such proceeding or case shall continue
undismissed, or an order, judgment or decree approving or ordering any
of the foregoing shall be entered and continue unstayed and in effect,
for a period of 60 or more days; or an order for relief against the
Borrower shall be entered in an involuntary case under federal
bankruptcy laws (as now or hereafter in effect); or
(c) all of the Licensing Agreements shall have
been terminated as a result of the default of the Project Companies; or
(d) the Borrower does not apply the Released Amounts
to repay the Loan and interest thereon.
5.2 Remedies.
(a) If any Event of Default as described in Section 5.1 above
has occurred and is continuing the Lender's obligation to make Advances
hereunder shall be suspended until such Event of Default is cured.
(b) If, at any time, an Event of Default shall have occurred
and be continuing, then the Lender may, without accelerating the maturity of the
loan or taking any action to realize payment from any sources other than
Released Amounts, take such actions and seek such remedies as may be available
at law or in equity to enforce the Borrower's obligations hereunder.
Section 6. Certain Covenants.
6.1 Covenant of Borrower. The Borrower covenants that it will not,
without the prior written consent of the Lender, permit the General Partner to
agree to amend Section 5.12 of the Partnership Agreement if the effect thereof
would be to expand the purposes to which amounts in the G P's Special Reserve
would be applied.
6.2 Covenant of Lender. The Lender covenants that it will not
without the prior written consent of the Borrower, amend the
* This Exhibit contains confidential material which has been omitted pursuant to
a Confidential Treatment Request and replaced by asterisks. The omitted
information has been filed separately with the Securities and Exchange
Commission.
<PAGE>
Carbon Resources Loan Agreement or grant any waivers thereunder unless this
Agreement is being amended contemporaneously in the same manner or unless the
same waiver is contemporaneously granted hereunder.
Section 7. Amendments and Miscellaneous.
7.1 Amendments in Writing. The provisions of this Agreement may not be
waived, altered, modified, amended, supplemented or terminated in any manner
whatsoever except by written instrument signed by the parties hereto.
7.2 Notices. All notices, requests, consents, approvals, elections,
demands and other communications required or permitted under the terms and
provisions hereof shall, unless otherwise specified, be in writing, and shall be
given in person or by means of registered or certified mail or by courier, in
each case addressed to the parties at the following addresses or at such other
address as each party may specify in writing to the other parties hereto from
time to time:
Borrower: C.C. Pace Capital, L.L.C.
4401 Fair Lakes Court, Suite 400
Fairfax, Virginia 22033
Telephone: (703) 818-0022
Telecopier: (703) 818-2448
Lender: Covol Technologies, Inc.
3280 North Frontage Road
Lehi, Utah 84043
Telephone: (801) 768-4481
Telecopier: (801) 768-4483
Any such communication shall become effective upon receipt.
7.3 Entire Agreement. This Agreement constitutes the entire agreement
of the parties hereto with respect to the subject matter hereof and supersedes
any prior expressions of intent or understandings with respect to such subject
matter. This Agreement may not be altered, amended, modified or otherwise
changed in any manner whatsoever except by a writing duly executed and delivered
by each of the parties hereto.
7.4 Severability of Provisions. Any provision of this Agreement that
may be determined by competent authority to be prohibited or unenforceable in
any jurisdiction shall not invalidate or render unenforceable such provision in
any other jurisdiction. To the extent permitted by Applicable Law, each of the
parties hereto hereby waives any provision of law that renders any provision
hereof prohibited or unenforceable in any respect.
7.5 Limitation of Interest. Notwithstanding anything in this Agreement
to the contrary, the obligation of the Borrower
* This Exhibit contains confidential material which has been omitted pursuant to
a Confidential Treatment Request and replaced by asterisks. The omitted
information has been filed separately with the Securities and Exchange
Commission.
<PAGE>
hereunder to pay interest on the Loan shall be subject to the limitation that no
payment of such interest shall be required to the extent that receipt of such
payment would be contrary to applicable usury laws.
7.6 GOVERNING LAW; JURISDICTION. THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF VIRGINIA, OTHER
THAN ANY PROVISION THEREOF THAT WOULD PERMIT OR REQUIRE THE APPLICATION OF THE
LAWS OF ANY OTHER JURISDICTION.
THE BORROWER AND THE LENDER EACH HEREBY IRREVOCABLY AND UNCONDITIONALLY
SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR PROCEEDING RELATING
TO THIS AGREEMENT, OR FOR RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT IN RESPECT
THEREOF, TO THE JURISDICTION OF THE COURTS OF THE COMMONWEALTH OF VIRGINIA, THE
COURTS OF THE UNITED STATES OF AMERICA FOR THE EASTERN DISTRICT OF VIRGINIA, AND
APPELLATE COURTS FROM ANY THEREOF. EACH WAIVES ANY OBJECTION TO THE VENUE OF ANY
SUCH ACTION OR ANY CLAIM IT MAY HAVE TO FORUM NON CONVENIENS. EACH PARTY HERETO
AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION MAY BE EFFECTED BY MAILING A
COPY THEREOF, REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, IN THE MANNER SET
FORTH IN SECTION 7.2 HEREOF AND THAT NOTHING HEREIN SHALL AFFECT THE RIGHT OF
EITHER PARTY TO EFFECT SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW
OR SHALL LIMIT THE RIGHT OF ANY PARTY TO SUCH IN ANY OTHER JURISDICTION.
7.7 Successors and Assigns. This Agreement shall be binding on and
inure to the benefit of each of the parties hereto and their respective
successors and permitted assigns. No party hereto may assign any of its rights
or delegate any of its obligations hereunder without the prior written consent
of the non-assigning party, which consent shall not be unreasonably withheld,
except that, with notice to but without need for the consent of the other party,
(a) if the Lender assigns all of its rights and obligations under the Licensing
Agreements, the Lender shall assign its rights and obligations hereunder (and
under the Note) to the entity that assumes all of its rights and obligations
under the Licensing Agreements, and (b) if the Borrower sells or transfers its
membership interest in the General Partner, the Borrower shall assign all of its
rights and obligations hereunder to the person assuming its membership interest
in the General Partner, and any such assignee of the Borrower shall (i) execute
and deliver to the Lender a Note in the form of Exhibit A hereto (and upon
receipt of such Note, the Lender shall cancel the Note of the Borrower and
deliver the cancelled Note to the Borrower), and (ii) such assignee shall take
such measures as may be necessary or appropriate (or as the Lender may
reasonably request) to maintain for the benefit of the Lender the security
interest in the Released Amounts.
7.8 Headings. The division of this Agreement into sections and the
insertion of headings are for convenience of reference
* This Exhibit contains confidential material which has been omitted pursuant to
a Confidential Treatment Request and replaced by asterisks. The omitted
information has been filed separately with the Securities and Exchange
Commission.
<PAGE>
only and shall not affect the construction or interpretation of this Agreement.
7.9 Counterpart Execution. This Agreement may be executed in any number
of counterparts and by each of the parties hereto in separate counterparts, all
such counterparts together constituting but one and the same instrument. This
Agreement shall be effective, and shall be binding on any party hereto, on the
date first above written.
7.10 Limitation of Liability. The repayment of the Loan and interest
thereon shall be payable solely from Released Amounts and from no other source
and, in addition, in no event shall any member in the Borrower, nor any
Affiliate thereof, nor any officer, director, employee or agent of any thereof,
nor any holder of any equity interest in the Borrower or any member or Affiliate
thereof, be personally liable or obligated for such liabilities and obligations
of the Borrower.
[REMAINDER OF PAGE IS BLANK]
* This Exhibit contains confidential material which has been omitted pursuant to
a Confidential Treatment Request and replaced by asterisks. The omitted
information has been filed separately with the Securities and Exchange
Commission.
<PAGE>
IN WITNESS WHEREOF, each of the Borrower and the Lender,
intending to be legally bound, has caused this Agreement to be duly executed by
its representative thereunto duly authorized as of the date and year first above
written.
C.C. PACE CAPITAL, L.L.C.,
as Borrower
By: /s/ James R. Treptow
-------------------------
Name: James R. Treptow
Title: President
COVOL TECHNOLOGIES, INC.,
as Lender
By: /s/ Alan D. Ayers
-------------------------
Name: Alan D. Ayers
Title: V.P. Administration
<PAGE>
EXHIBIT A TO
LOAN AGREEMENT
[FORM OF NOTE]
PROMISSORY NOTE
$ * Fairfax, Virginia
April 21, 1998
FOR VALUE RECEIVED, the undersigned, C.C. PACE CAPITAL,
L.L.C., a Delaware limited liability company (the "Borrower"), hereby
unconditionally promises to pay to the order of COVOL TECHNOLOGIES, INC. (the
"Lender"), located at 3280 North Frontage Road, Lehi, Utah 84043, in lawful
money of the United States and in immediately available funds, the principal
amount of $ *, or, if less, the aggregate unpaid principal amount of the
Advances in respect of Loan made by the Lender pursuant to the Loan Agreement
(as hereinafter defined), which sum shall be due and payable from time to time
in the amounts and on the dates specified in the Loan Agreement. The Borrower
further agrees to pay interest in like money on the unpaid principal amount
hereof from time to time outstanding (including capitalized interest as
specified in Section 2.6 of the Loan Agreement) as specified in the Loan
Agreement.
Capitalized terms used herein without definition have the
meanings assigned to them in the Loan Agreement.
The holder of this Note is authorized to record, on the schedule
annexed hereto and made a part hereof, or on other appropriate records of the
Lender, the date and amount of each Advance pursuant to Loan Agreement and the
date and amount of each payment or prepayment of principal thereof; provided,
however, that failure by the Lender to make any recordation or other error
therein shall not limit or otherwise affect the obligations of the Borrower
hereunder.
This Note is the Note referred to in the Loan Agreement, dated
as of April 21, 1998, by and between the Lender and the Borrower (as the same
may be amended, modified or supplemented from time to time, the "Loan
Agreement"). This Note is entitled to the benefits of the Loan Agreement. This
Note is subject to prepayment as provided in the Loan Agreement.
The obligation of the Borrower is absolute and unconditional
to pay the principal of and interest on this Note at the place, at the
respective times, and in the currency herein prescribed. The Borrower waives any
and all right to assert any defense (other than performance hereunder), set-off,
counterclaim or crossclaim of any nature whatsoever with respect to this Note or
the obligations of the Borrower hereunder in any action of proceeding brought by
the Lender to collect this Note, or any portion hereof. The Borrower waives
presentment, demand, notice, protest and all other demands and notices in
connection with the delivery, acceptance, performance, default or enforcement of
this Note.
<PAGE>
Recourse for the liabilities and obligations of the Borrower
under this Note and the Loan Agreement shall be limited to the Released Amounts
received by Borrower, and in no event shall any member in the Borrower, nor any
Affiliate thereof, nor any officer, director, employee or agent of any thereof,
nor any holder of any equity interest in the Borrower or any member or Affiliate
thereof, be personally liable or obligated for such liabilities and obligations
of the Borrower.
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED
IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF VIRGINIA, WITHOUT GIVING
EFFECT TO ANY PROVISIONS THEREOF THAT PERMIT OR REQUIRE THE APPLICATION OF THE
LAWS OF ANY OTHER JURISDICTION.
C.C. PACE CAPITAL, L.L.C.
By:
------------------------
Name: James R. Treptow
Title: President
<PAGE>
Scheduel 1 to
Promissory Note
SCHEDULE OF ADVANCED AND REPAYMENTS
Date of Amount
Date of Amount of Repayment of Notations
Advance Advance Made of Advances Repayment Made by
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Note: Executed in substantially the same form between Carbon Resources, Inc. a
Delaware Corporation (the "Borrower") by Frederick Murrell, President, and Covol
Technologies, Inc. (the "Secured Party")
Execution Copy
SECURITY AGREEMENT
This SECURITY AGREEMENT (this "Agreement"), dated as of April 21, 1998,
by and between C.C. Pace Capital, L.L.C., a Delaware limited liability company
(the "Borrower") and Covol Technologies, Inc. (the "Secured Party").
W I T N E S S E T H :
WHEREAS, each of Borrower and Carbon Resources, Inc. ("Carbon
Resources") is a member of Pace Carbon Fuels, L.L.C., a Delaware limited
liability company which is the general partner (the "General Partner") of Pace
Carbon Synfuels Investors, L.P., a Delaware limited partnership (the
"Partnership"); and
WHEREAS, the Partnership operates pursuant to the terms of an Amended
and Restated Agreement of Limited Partnership dated as of February 5, 1998 (the
"Partnership Agreement"); and
WHEREAS, the Secured Party has agreed, by a loan agreement dated April
21, 1998 between the Secured Party and the Borrower (the "Loan Agreement"), to
lend funds to the Borrower, such loan being evidenced by a promissory note made
pursuant to the Loan Agreement (the "Note"); and
WHEREAS, to secure amounts due under the Note, the Borrower has agreed
to create and maintain in favor of the Secured Party a first priority security
interest in certain contingent distributions from the General Partner of the
Partnership to the Borrower as set forth herein; and
WHEREAS, on terms identical to those set forth in the Loan Agreement,
the Secured Party has agreed to lend funds to Carbon Resources, which also is
executing on even date herewith a security agreement in favor of the Secured
Party on terms identical to those set forth herein.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements herein set forth and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
Borrower and the Secured Party, intending to be legally bound, do hereby agree
as follows:
1. Grant of Security Interest. The obligation to pay any amounts due
under the Note, including interest as set forth therein, owing from the Borrower
to the Secured Party is hereinafter referred to as the "Obligation."
<PAGE>
As security for payment of the Obligation, the Borrower hereby assigns,
grants, and sets over to the Secured Party, and agrees that the Secured Party
shall have a first priority security interest in, the following collateral (the
"Collateral"): all of the Borrower's right, title and interest to and in any and
all amounts, if any, distributed to the Borrower by the General Partner in
respect of amounts released to the General Partner from the GP's Special Reserve
(as defined in Section 5.12(a) of the Partnership Agreement) as provided for in
Section 5.12(d) of the Partnership Agreement, and any and all proceeds thereof.
2. Execution of Financing and Other Statements; Power of Attorney.
The Borrower, at the time of execution of this Agreement, will execute and
deliver to the Secured Party a Form UCC-1 showing the Borrower as debtor and the
Secured Party as the secured party and the security interest in the Collateral
described above and, at any time and from time to time, upon request of the
Secured Party, the Borrower will give, execute, file and/or record any notice,
financing statement, continuation statement, instrument, document or agreement
that the Secured Party may reasonably consider necessary or advisable to create,
preserve, continue, perfect or validate the security interest granted hereunder
or which the Secured Party may reasonably consider necessary or advisable to
exercise or enforce its rights hereunder with respect to such security interest.
Without limiting the generality of the foregoing, the Secured Party is
authorized to file with respect to the Collateral one or more financing
statements, continuation statements or other documents without the signature of
the Borrower and to name therein the Borrower as debtor and the Secured Party as
secured party or to correct or complete, or cause to be corrected or completed,
any financing statements, continuation statements or other such documents as
have been signed by the Borrower; provided, however, that upon final discharge
of the Obligation by the Borrower, the Secured Party shall promptly file such
termination statements and other documents as are necessary to evidence the
termination of the security interest granted hereunder.
3. Rights and Remedies.
(a) All payments received by the Borrower in respect of the
Collateral shall be received in trust for the benefit of the Secured Party,
shall be segregated from other funds of the Borrower, and shall be forthwith
paid over to the Secured Party by deposit to the account specified by the
Secured Party for payments due under the Loan Agreement.
(b) If any Event of Default (as defined in the Loan Agreement)
shall have occurred and be continuing, then the Borrower shall remain liable to
the Secured Party and any permitted transferee or pledgee of this Agreement, but
only to the extent that the Obligation may be satisfied or discharged by the
Collateral, and the Secured Party may avail itself of all rights and remedies
granted hereunder or available to a secured party under the Uniform Commercial
Code as in force in the Commonwealth of Virginia and in any event including,
without limiting the generality of the foregoing, the right to sell, assign and
deliver the Collateral or any part thereof at public or private sale wherever
<PAGE>
the Secured Party may determine in good faith and at such prices as the Secured
Party may deem best. At any such sale, the Secured Party shall have the right to
purchase the Collateral, or any part thereof. The Borrower consents to private
sales so made even though such sales may be at prices and upon other terms less
favorable than if the Collateral were sold at public sale. The Borrower agrees
that the Secured Party shall have no obligation to delay sale of the Collateral
for the period of time necessary to permit the offering and sale of the
Collateral to be registered for public sale under the Securities Act of 1933, as
amended, and applicable state or local securities or blue sky laws. The Borrower
agrees that private sales made under the foregoing circumstances will be deemed
to have been made in a commercially reasonable manner. The parties agree that
written notice mailed to the Borrower ten (10) business days prior to the date
upon which a private sale or any other disposition of the Collateral will be
made shall constitute reasonable notice (all other notices, demands, or
advertisement of any kind being hereby expressly waived), but that notice given
in any other reasonable manner or at any other reasonable time shall be
sufficient. The Borrower shall be liable for reasonable attorneys' fees and
legal and other expenses incurred by the Secured Party in enforcing any of its
rights or remedies hereunder, and without limiting the rights of the Secured
Party, the proceeds of such a disposition of the Collateral may be applied in
the Secured Party's discretion to payment of such reasonable attorneys' fees and
legal and other expenses. The Borrower waives the right to trial by jury in any
action or proceeding instituted against the Borrower in respect of the
Obligations or the enforcement of any rights granted to the Secured Party
hereunder. In addition, the Borrower hereby acknowledges that the remedies
provided herein in favor of the Secured Party shall not be deemed exclusive, but
shall be cumulative and shall be in addition to all other remedies in favor of
the Secured Party now or hereafter existing by statute, at law or in equity.
<PAGE>
4. Consent to Jurisdiction. The Borrower and Secured Party agree
that all actions or proceedings arising directly, indirectly or otherwise in
connection with, out of, related to or from this Agreement shall be litigated
only in courts located in the Commonwealth of Virginia, and the Borrower (i)
consents and submits to the personal jurisdiction of any state or federal court
located within said state solely for the purpose of any such action or
proceeding relating to this Agreement, (ii) waives any right to transfer or
change the venue of litigation brought against the Borrower in any such action
or proceeding and (iii) agrees to service of process by mail, to the extent
permitted by law.
5. Assignability. The Secured Party acknowledges that the security
interest granted hereby may not be pledged, transferred, or assigned by the
Secured Party without first obtaining the written consent of the Borrower, other
than to a permitted assignee of the Secured Party's rights and obligations under
the Loan Agreement. Any attempted pledge, transfer, or assignment in violation
of the preceding sentence shall be void and without effect.
6. Notices. Any notice, demand or other communication which any
party hereto may elect or be required to give to anyone interested hereunder
shall be sufficiently given if (i) deposited, postage prepaid, in a United
States mail box, stamped registered or certified mail, return receipt requested,
addressed to the address for that person then in effect under the Loan
Agreement, or (ii) delivered personally at such address.
7. Severability. Each provision of this Agreement is intended to be
severable from each other provision, and the validity or illegality of any
portion hereof shall not affect the validity or legality of the remainder
hereof.
<PAGE>
8. Applicable Law. This Security Agreement shall be governed by and
construed in accordance with the laws of the Commonwealth of Virginia without
giving effect to any conflicts of law principles or cases.
9. Limited Recourse. Recourse for the repayment of the Obligation
and Borrower's obligations under this Agreement shall be limited to the
Collateral, and the Borrower shall have no personal liability therefor.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first set forth above.
C.C. PACE CAPITAL, L.L.C.
as Borrower
<PAGE>
/s/ James R. Teptow
------------------------
Name: James R. Teptow
Title: President
COVOL TECHNOLOGIES, INC.
as Secured Party
/s/ Alan D. Ayers
---------------------------
Name: Alan D. Ayers
Title: V.P. Administration
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S AUDITED FINANCIAL STATEMENTS FOR THE YEAR ENDED SEPTEMBER 30, 1997 AND
UNAUDITED INTERIM FINANCIAL STATEMENTS FOR THE QUARTER ENDED March 31, 1998, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> MAR-31-1998
<CASH> 558,682
<SECURITIES> 0
<RECEIVABLES> 396,757
<ALLOWANCES> 0
<INVENTORY> 3,537,855
<CURRENT-ASSETS> 5,064,122
<PP&E> 29,851,003
<DEPRECIATION> 774,196
<TOTAL-ASSETS> 46,905,151
<CURRENT-LIABILITIES> 10,121,748
<BONDS> 0
0
316
<COMMON> 10,319
<OTHER-SE> 16,360,632
<TOTAL-LIABILITY-AND-EQUITY> 46,905,151
<SALES> 0
<TOTAL-REVENUES> 5,610,698
<CGS> 730,252
<TOTAL-COSTS> 3,747,101
<OTHER-EXPENSES> (932,037)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,179,925
<INCOME-PRETAX> 931,651
<INCOME-TAX> 0
<INCOME-CONTINUING> 931,651
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 931,651
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> 0.08
</TABLE>